Microeconomics Study Guide

Oligopoly firms may produce either standardized or differentiated products.
True False
True
Which of the following is correct as it relates to cost curves?

Marginal cost intersects average total cost at the latter's minimum point.
The law of diminishing marginal utility states that

beyond some point additional units of a product will yield less and less extra satisfaction to a consumer.
Answer the next question s! on the "asis of the following cost data#
$efer to the a"ove data. The marginal cost of producing the sixth unit of output is#
$8
The long run is characterized "y

he ability of the firm to change its plant size
%uppose that& when producing '( units of output& a firm)s A*+ is ,--& its AF+ is ,.& and its /+ is ,0(. This
firm's total cost is $2 !
The law of diminishing marginal utility explains why

demand curves slope downward
The theory of consumer "ehavior assumes that#

consumers behave rationally" attempting to maximize their satisfaction
An industry comprised of four firms& each with a"out -. percent of the total mar1et for a product is an example of
oligopoly.
The total output of a firm will "e at a maximum where#

M# is zero.
The "asic characteristic of the short run is that

the firm does not have sufficient time to change the size of its plant.
Firms see1 to maximize#

total profit.
Which of the following is not a characteristic of pure competition?

price strategies by firms
$efer to the a"ove diagram. The vertical distance "etween AT+ and A*+ reflects#
the average fixed cost at each level of output.
$efer to the a"ove data. 2n the long run the firm should use plant size 3A3 for#
$! to %! units of output.
$efer to the a"ove information. The marginal cost of the third unit of output is
$$&.
$efer to the a"ove data. The value for 4 is

$&
$efer to the a"ove short5run production and cost data. 2n Figure 6 curve 0! is
M' and curve ()* is +,'.
Accounting profits equal total revenue minus

total explicit costs.
$efer to the a"ove information. The average total cost of 0 units of output is#
$%&.
When diseconomies of scale occur#

the long-run average total cost curve rises.
$efer to the a"ove short5run production and cost data. The curves of Figures A and 6 suggest that#
marginal cost reaches a minimum where marginal product is at its maximum.
$efer to the a"ove data. The value for W is#

2!.
The marginal utility of the last unit of apples consumed is '- and the marginal utility of the last unit of "ananas consumed is 7. What set of prices for apples and "ananas& respectively& would "e consistent with consumer equili"rium?
$. and $)
A consumer who has a limited "udget will maximize utility or satisfaction when the#
ratios of the marginal utility of each product purchased divided by its price are e/ual.
2f a firm increases all of its inputs "y '( percent and its output increases "y '( percent& then#
it is encountering constant returns to scale.
The %unshine +orporation finds that its costs are ,8( when it produces no output. 2ts total varia"le costs T*+! change with output as shown in the accompanying ta"le. 9se this information to answer the following question s!.
$efer to the a"ove information. The average fixed cost of 0 units of output is#
$$%.%%.
An industry comprised of a very large num"er of sellers producing a standardized product is 1nown as#
pure competition.
Answer the next question s! on the "asis of the following information#
$efer to the a"ove information. Average total cost is#

T0'1T,'23
$efer to the a"ove data. The value for : is#

)&.
The short run is characterized "y#

fixed plant capacity.
The first ;epsi yields +raig '7 units of utility and the second yields him an additional '- units of utility. <is total utility from three ;epsis is 07 units of utility. The marginal utility of the third ;epsi is#
8 units of utility.
2f total utility is increasing& marginal utility#

is positive" but may be either increasing or decreasing.
2n the a"ove diagram curves '& -& and 0 represent the#

marginal" average" and total product curves respectively.
As the firm in the a"ove diagram expands from plant size =0 to plant size =.& it experiences#
economies of scale.
9se the following data to answer the next question s!. The letters A& 6& and + designate three successively larger plant sizes.
$efer to the a"ove data. 2n the long run the firm should use plant size 3+3 for#
all units of output greater than 8!.
>conomies of scale are indicated "y#

the declining segment of the long-run average total cost curve.
To maximize utility a consumer should allocate money income so that the#

marginal utility obtained from the last dollar spent on each product is the same.
The theory of consumer "ehavior assumes that consumers attempt to maximize#

total utility.
A purely competitive seller is#

a 4price ta5er.4
When a consumer shifts purchases from product 4 to product : the marginal utility of#
6 rises and the marginal utility of 7 falls.
$efer to the a"ove data. The average total cost of producing 0 units of output is#
$$..
$efer to the a"ove data. The average fixed cost of producing 0 units of output is#
$8.
The %unshine +orporation finds that its costs are ,8( when it produces no output. 2ts total varia"le costs T*+! change with output as shown in the accompanying ta"le. 9se this
information to answer the following question s!.
$efer to the a"ove information. The total cost of producing 0 units of output is#
$$!&.
6en is exhausting his money income consuming products A and 6 in such quantities that /9a?;a@ . and /9"?;"@ 7. 6en should purchase#
more of 8 and less of +.
Average fixed cost#

declines continually as output increases.
An industry comprised of 8( firms& none of which has more than 0 percent of the total mar1et for a differentiated product is an example of#
monopolistic competition.
$efer to the a"ove diagram. At output level A total varia"le cost is#
!893.
Where total utility is at a maximum& marginal utility is#

zero.
$efer to the a"ove diagram. At output level A total cost is#

!893 plus 8':9.
>conomies and diseconomies of scale explain#

why the firm's long-run average total cost curve is ;-shaped.
2n the a"ove figure& curves '& -& 0& and 8 represent the#
M'" +T'" +,'" and +0' curves respectively.
2n which of the following industry structures is the entry of new firms the most difficult?
pure monopoly
/arginal cost is the#

change in total cost that results from producing one more unit of output.
2f /9a?;a@ '((?,0. @ /9"?;"@ 0((?? @ /9c?;c@ 8((??& the prices of products " and c in consumer equili"rium#
are $$!& and $$)! respectively.
/arginal product is#

the increase in total output attributable to the employment of one more wor5er.
2f a firm decides to produce no output in the short run& its costs will "e#
its fixed costs.
$efer to the a"ove diagram. At output level A total fixed cost is#
8':9.
%uppose that /9x?;xexceeds /9y?;y. To maximize utility the consumer who is spending all her money income should "uy#
more of 6 and less of 7.
%uppose you have a limited money income and you are purchasing products A and 6 whose prices happen to "e the same. To maximize your utility you should purchase A and 6 in such amounts that#
their marginal utilities are the same.
The "asic difference "etween the short run and the long run is that#
at least one resource is fixed in the short run" while all resources are variable in the long run.
Fixed cost is#

any cost which does not change when the firm changes its output.
$efer to the a"ove data. The value for B is#

-&
2n the long run#

all costs are variable costs.
To economists& the main difference "etween the short run and the long run is that#
in the long run all resources are variable" while in the short run at least one resource is fixed.
$efer to the a"ove data. The total varia"le cost of producing . units is#
$%
>conomic profits are calculated "y su"tracting#

explicit and implicit costs from total revenue.
$efer to the a"ove short5run production and cost data. 2n Figure A curve '! is#
average product and curve (2* is marginal product.
2f a firm increases all of its inputs "y '( percent and its output increases "y '. percent& then#
it is encountering economies of scale.
2f a firm dou"les its output in the long run and its unit costs of production decline& we can conclude that#
economies of scale are being realized.


consumers behave rationally" attempting to maximize their satisfaction.
$8.
!893.
2n the long run#

'. )>conomies of scale) refers to# A. the notion that small firms are less "ureaucratic and& therefore& more efficient than corporations. 6. pu"lic investments in highways& schools& utilities etc. +. the fact that large producers may "e a"le to use more efficient technologies. C. the reallocation of la"our from less productive to more productive uses.
'
-. >conomic cost can "est "e defined as# A. any contractual o"ligation which results in a flow of money expenditures from an enterprise to resource suppliers. 6. any contractual o"ligation to la"our& or material suppliers. +. compensations which must "e received "y resource owners to ensure their continued supply. C. all costs& exclusive of payments to fixed factors of production.
'
0. Which of the following constitutes an implicit cost to the Dac1son /anufacturing +ompany? A. ;ayments of wages to its office wor1ers. 6. ;roperty taxes. +. $ent paid for the use of equipment owned "y the %chultz /achinery +ompany. C. Cepreciation charges on company5owned equipment.
:
8. %uppose that a "usiness incurred implicit costs of ,-(( ((( and explicit costs of ,' million in a specific year. 2f the firm sold 8((( units of its output at ,0(( per unit& its accounting profits were# A. ,'(( (((& and its economic profits were zero. 6. ,-(( (((& and its economic profits were zero.
+. ,'(( (((& and its economic profits were ,'(( (((. C. zero& and its economic loss was ,-(( (((.
8
.. >conomic profits are calculated "y su"tracting# A. explicit costs from total revenue. 6. implicit costs from total revenue. +. implicit costs from normal profits. C. explicit and implicit costs from total revenue.
:
E. Formal profit is# A. determined "y su"tracting implicit costs from total revenue. 6. determined "y su"tracting explicit costs from total revenue. +. the return to the entrepreneur when economic profits are zero. C. the average profita"ility of an industry over the preceding '( years.
'
G. Which of the following definitions is correct? A. Accounting profit H economic profit @ normal profit. 6. >conomic profit 5 accounting profit @ explicit costs. +. >conomic profit @ accounting profit 5 implicit costs. C. >conomic profit 5 implicit costs @ accounting profits.
'
7. The "asic characteristic of the short run is that# A. )"arriers to entry) prevent new firms from entering the industry. 6. the firm does not have sufficient time to change the size of its plant. +. the firm does not have sufficient time to cut its rate of output to zero. C. the firm does not have sufficient time to change the amounts of any of the resources it employs.
8
I. To economists& the main difference "etween )the short run) and )the long run) is that# A. the law of diminishing returns applies in the long run& "ut not in the short run. 6. in the long run& all resources are varia"le while& in the short run& at least one resource is fixed. +. fixed costs are more important to decision ma1ing in the long run than they are in the short run. C. in the short run all resources are fixed& while in the long run& all resources are varia"le.
8
'(. The law of diminishing returns indicates that# A.as extra units of a varia"le resource are added to a fixed resource& the extra or marginal product will decline "eyond some point. 6. "ecause of economies and diseconomies of scale& a competitive firm)s long5run average cost curve will "e 95shaped. +. the demand for goods produced "y purely competitive industries is down sloping. C. "eyond some point& the extra utility derived from additional units of a product will yield for the consumer smaller and smaller extra amounts of satisfaction.
''. Which of the following statements concerning the relationships "etween total product T;!& average product A;! and marginal product /;! is not correct? A. A; continues to rise so long as T; is rising. 6. A; reaches a maximum "efore T; reaches a maximum. +. T; reaches a maximum when the /; of the varia"le input "ecomes zero. C. /; cuts A; at the maximum A;.
+
'-. The following is output data for a firm. Assume that the amounts of all non5la"our resources are fixed. Fum"er of wor1ers 9nits of output (( ' 8( - I( 0 '-E 8 '.( . 'E. E '7( $efer to the a"ove information. Ciminishing returns "ecome evident with the addition of# A. the fourth wor1er. 6. the third wor1er. +. the second wor1er. C. the first wor1er.
8
'0. The following is the total and marginal product for a firm. Fum"er of wor1ers Total product /arginal product ((J '77 - '( 0 -. 8 0( .0 E 08 $efer to the a"ove information. When two wor1ers are employed# A. total product is -(. 6. total product is '7. +. average product is '(. C. total product cannot "e determined from the information given.
8
'8. Which of the following is most li1ely to "e a fixed cost? A. %hipping charges. 6. ;roperty insurance premiums. +. Wages for uns1illed la"our. C. >xpenditures for raw materials.
8
'.. The cost of any output is minimised when# A. the marginal product per dollar)s worth of each resource used is the same. 6. the marginal product of each resource used is the same. +. the price of each resource used is the same. C. none of the a"ove.
+
'E. Which of the following is most li1ely to "e a varia"le cost? A. Fuel and power payments. 6. 2nterest on "onded inde"tedness. +. $ental payments on 26/ equipment. C. $eal estate taxes.
+
'G. /arginal cost may "e defined as the# A. rate of change in total fixed cost which results from producing one more unit of output. 6. change in total cost which results from producing one more unit of output. +. change in average varia"le cost which results from producing one more unit of output. C. change in average total cost which results from producing one more unit of output.
8
'7. Average fixed cost# A. is intersected "y marginal cost at its minimum point. 6. may "e found for any output "y adding average varia"le cost and average total cost. +. graphs as a 95shaped curve. C. declines so long as output increases.
:
'I. The vertical distance "etween AT+ and A*+ reflects# A. the average fixed cost at each level of output. 6. marginal cost at each level of output. +. the presence of economies of scale. C. implicit costs.
+
-(. Assume that in the short run& a firm which is producing '(( units of output has average total costs of ,-(( and average varia"le costs of ,'.(. The firm)s total fixed costs are# A. ,.(((. 6. ,.((. +. ,(..(. C. ,.(.
+
-'. The following is the total output and cost data for a firm. Total Output Total +ost ,! ( -8 ' 00 0 8' 0 87 8 .8
. E' E EI $efer to the a"ove cost data. The average total cost of producing 0 units of output# A. is ,'8.((. 6. is ,'E.((. +. is ,'0..(. C. cannot "e determined from the information given.
8
--. The following is the total output and cost data for a firm. Total Output Total +ost ,! ( -8 ' 00 0 8' 0 87 8 .8 . E' E EI $efer to the a"ove cost data. The marginal cost of producing the sixth unit of output# A. is ,-8. 6. is ,'E. +. is ,7. C. cannot "e determined from the information given.
'
-0. 2f a technological advance reduces the amount of varia"le resources needed to produce any given level of output& this will cause# A. the A*+ curve to shift downward. 6. the /+ curve to shift downward. +. the AT+ curve to shift downward. C. all of the a"ove.
:
-8. The %unshine +orporation finds that its costs are ,8( when it produces no output. 2ts total varia"le costs T*+! change with output as shown in the ta"le "elow. Output T*+ ,! ' 0( - .( 0 E. 8 7. . ''( $efer to the a"ove information. This firm# A. is ma1ing an economic profit of ,-E(. 6. is realising a loss of ,'-.. +. may "e either realising a profit or a loss. C. is selling its output in a competitive mar1et.
'
-.. >conomies and diseconomies of scale explain# A. the profit5maximising level of production. 6. why the firm)s long5run average cost curve is 95shaped. +.why the firm)s short5run marginal cost curve cuts the short5run average varia"le cost curve at its minimum point. C. the distinction "etween fixed and varia"le costs.
8
-E. 2n the long run# A. all costs are varia"le costs. 6. all costs are fixed costs. +. varia"le costs equal fixed costs. C. fixed costs are greater than varia"le costs.
+
-G. The long5run average cost curve# A. will rise if diminishing returns are encountered. 6. will fall if diminishing returns are encountered. +. will rise if economies of scale are incurred. C. is "ased on the assumption that all resources are varia"le.
:
-7. 2f a firm dou"les its output in the long run and its unit costs of production decline& we can conclude that# A. technological progress has occurred. 6. economies of scale are "eing realised. +. the firm is encountering diminishing returns. C. diseconomies of scale are "eing encountered.
8
-I. The minimum efficient scale of a firm# A. is realised somewhere in the range of diseconomies of scale. 6. occurs where marginal product "ecomes zero. +. is in the middle of the range of constant returns to scale. C. is the smallest level of output at which long5run average cost is minimised.
:
0(. 2f an industry)s long5run average cost curve has an extended range of constant returns to scale& this implies that# A. technology precludes "oth economies and diseconomies of scale. 6. the industry will "e a natural monopoly. +. "oth relatively small and relatively large firms can "e via"le in the industry. C. the industry will "e comprised of a very large num"er of small firms.
'
0'. 2f a firm increases all of its inputs "y '(K and its output increases "y '.K& we can say that# A. it is encountering diseconomies of scale. 6. it is encountering economies of scale.
+. the law of diminishing returns is ta1ing hold. C. the firm)s long5run AT+ curve will "e rising.
8
0-. As successive units of la"our are applied to a set of fixed resources& the marginal product of la"our# A. diminishes at all levels of production. 6. may initially increase& then diminish& "ut will never "ecome negative. +. may initially increase& then diminish& and ultimately "ecome negative. C. is always less than average product.
'
00. The short run is a period of time during which all costs are fixed costs. A. True 6. False
...
08. The law of diminishing returns accounts for the fact that the long5run average cost curve is 95shaped. A. True 6. False
...
0.. Ciseconomies of scale stem& primarily& from the difficulties in managing and coordinating a large5scale "usiness enterprise. A. True 6. False
...
0E. At zero units of output& a firm)s varia"le costs are zero. A. True 6. False
...
0G. Average fixed costs diminish so long as output increases. A. True 6. False
...
07. 2f marginal cost lies "elow average varia"le cost& average varia"le cost must "e falling. A. True 6. False
...
0I. When economic profits equal zero& normal profits are negative or equal zero. A. True 6. False
...
8(. 2n the long run& all resource inputs are fixed instead of varia"le. A. True 6. False
...
8'. The law of diminishing marginal utility explains why short5run production costs increase directly with a firm)s level of output. A. True 6. False
...
8-. The short5run marginal5cost curve is upward sloping "ecause of the law of diminishing marginal returns. A. True 6. False
...
80. >conomies of scale are generally in evidence over an entire range of output. A. True 6. False
...
88. >conomies of scale are generally in evidence over low to medium levels of output. A. True 6. False
...
8.. 2f economies of scale are quic1ly exhausted& and diseconomies of scale set in at a low level of output relative to the mar1et& the industry will have a small num"er of large firms. A. True 6. False
...
8E. >xplicit costs are resources for which the firm does not pay& "ut which have an opportunity cost& while implicit costs are resource for which direct monetary payment is made. A. True 6. False
...
8G. An example of an explicit cost of production would "e# A. the cost of forgone la"our earnings for an entrepreneur. 6. the lost opportunity to invest in other capital mar1ets when the money is invested in one)s "usiness. +. the cost of flour for a "a1er. C. Fone of the a"ove is correct.
...
87. An example of an implicit cost of production would "e# A.the income an entrepreneur could have earned wor1ing for someone else. 6. the cost of raw materials for producing "read in a "a1ery. +. the cost of a delivery truc1 in a "usiness that rarely ma1es deliveries. C. All of the a"ove are correct.
...
8I. Which of these assumptions is often realistic for a firm in the short run? A. The firm can vary "oth the size of its factory and the num"er of wor1ers it employs. 6. The firm can vary the size of its factory& "ut not the num"er of wor1ers it employs. +.The firm can vary the num"er of wor1ers it employs& "ut not the size of its factory. C. The firm can vary neither the size of its factory nor the num"er of wor1ers it employs.
...
.(. The marginal product of an input in the production process is the increase in# A. total revenue o"tained from an additional unit of that input. 6. profit o"tained from an additional unit of that input. +. total revenue o"tained from an additional unit of that input. C. quantity of output o"tained from an additional unit of that input.
...
.'. Fixed costs can "e defined as costs that# A. vary inversely with production. 6. vary in proportion with production. +. are incurred only when production is large enough. C. are incurred even if nothing is produced.
...
.-. When marginal cost is less than average total cost# A. marginal cost must "e falling. 6. average varia"le cost must "e falling. +. average total cost is falling. C. average total cost is rising.
...
.0. /arginal cost is equal to average total cost when# A. average varia"le cost is falling. 6. average fixed cost is rising. +. marginal cost is at its minimum. C. average total cost is at its minimum.
...
.8. 2f marginal product is rising# A. marginal cost will "e falling. 6. marginal cost will "e increasing. +. marginal cost will "e constant. C. There is no relationship "etween marginal product and marginal cost.
...
Oligopoly firms may produce either standardized or differentiated products. True False
True
Which of the following is correct as it relates to cost curves?

Marginal cost intersects average total cost at the latter's minimum point.
The law of diminishing marginal utility states that

beyond some point additional units of a product will yield less and less extra satisfaction to a consumer.
$8
The long run is characterized "y

he ability of the firm to change its plant size
%uppose that& when producing '( units of output& a firm)s A*+ is ,--& its AF+ is ,.& and its /+ is ,0(. This
firm's total cost is $2 !
The law of diminishing marginal utility explains why

demand curves slope downward

consumers behave rationally" attempting to maximize their satisfaction
An industry comprised of four firms& each with a"out -. percent of the total mar1et for a product is an example of
oligopoly.
The total output of a firm will "e at a maximum where#

M# is zero.
The "asic characteristic of the short run is that

the firm does not have sufficient time to change the size of its plant.
Firms see1 to maximize#

total profit.
Which of the following is not a characteristic of pure competition?

price strategies by firms
$efer to the a"ove diagram. The vertical distance "etween AT+ and A*+ reflects#
the average fixed cost at each level of output.
$efer to the a"ove data. 2n the long run the firm should use plant size 3A3 for#
$! to %! units of output.
$efer to the a"ove information. The marginal cost of the third unit of output is
$$&.
$efer to the a"ove data. The value for 4 is

$&
$efer to the a"ove short5run production and cost data. 2n Figure 6 curve 0! is
M' and curve ()* is +,'.
Accounting profits equal total revenue minus

total explicit costs.
$efer to the a"ove information. The average total cost of 0 units of output is#
$%&.
When diseconomies of scale occur#

the long-run average total cost curve rises.
$efer to the a"ove short5run production and cost data. The curves of Figures A and 6 suggest that#
marginal cost reaches a minimum where marginal product is at its maximum.
$efer to the a"ove data. The value for W is#

2!.
The marginal utility of the last unit of apples consumed is '- and the marginal utility of the last unit of "ananas consumed is 7. What set of prices for apples and "ananas& respectively& would "e consistent with consumer equili"rium?
$. and $)
A consumer who has a limited "udget will maximize utility or satisfaction when the#
ratios of the marginal utility of each product purchased divided by its price are e/ual.
2f a firm increases all of its inputs "y '( percent and its output increases "y '( percent& then#
it is encountering constant returns to scale.
$efer to the a"ove information. The average fixed cost of 0 units of output is#
$$%.%%.
An industry comprised of a very large num"er of sellers producing a standardized product is 1nown as#
pure competition.
Answer the next question s! on the "asis of the following information#
$efer to the a"ove information. Average total cost is#

T0'1T,'23
$efer to the a"ove data. The value for : is#

)&.
The short run is characterized "y#

fixed plant capacity.
The first ;epsi yields +raig '7 units of utility and the second yields him an additional '- units of utility. <is total utility from three ;epsis is 07 units of utility. The marginal utility of the third ;epsi is#
8 units of utility.
2f total utility is increasing& marginal utility#

is positive" but may be either increasing or decreasing.
2n the a"ove diagram curves '& -& and 0 represent the#

marginal" average" and total product curves respectively.
As the firm in the a"ove diagram expands from plant size =0 to plant size =.& it experiences#
economies of scale.
9se the following data to answer the next question s!. The letters A& 6& and + designate three successively larger plant sizes.
$efer to the a"ove data. 2n the long run the firm should use plant size 3+3 for#
all units of output greater than 8!.
>conomies of scale are indicated "y#

the declining segment of the long-run average total cost curve.
To maximize utility a consumer should allocate money income so that the#

marginal utility obtained from the last dollar spent on each product is the same.
The theory of consumer "ehavior assumes that consumers attempt to maximize#

total utility.
A purely competitive seller is#

a 4price ta5er.4
When a consumer shifts purchases from product 4 to product : the marginal utility of#
6 rises and the marginal utility of 7 falls.
$efer to the a"ove data. The average total cost of producing 0 units of output is#
$$..
$efer to the a"ove data. The average fixed cost of producing 0 units of output is#
$8.
$efer to the a"ove information. The total cost of producing 0 units of output is#
$$!&.
6en is exhausting his money income consuming products A and 6 in such quantities that /9a?;a@ . and /9"?;"@ 7. 6en should purchase#
more of 8 and less of +.
Average fixed cost#

declines continually as output increases.
An industry comprised of 8( firms& none of which has more than 0 percent of the total mar1et for a differentiated product is an example of#
monopolistic competition.
!893.
Where total utility is at a maximum& marginal utility is#

zero.
$efer to the a"ove diagram. At output level A total cost is#

!893 plus 8':9.
>conomies and diseconomies of scale explain#

why the firm's long-run average total cost curve is ;-shaped.
2n the a"ove figure& curves '& -& 0& and 8 represent the#
M'" +T'" +,'" and +0' curves respectively.
2n which of the following industry structures is the entry of new firms the most difficult?
pure monopoly
/arginal cost is the#

change in total cost that results from producing one more unit of output.
2f /9a?;a@ '((?,0. @ /9"?;"@ 0((?? @ /9c?;c@ 8((??& the prices of products " and c in consumer equili"rium#
are $$!& and $$)! respectively.

2f a firm decides to produce no output in the short run& its costs will "e#
its fixed costs.
$efer to the a"ove diagram. At output level A total fixed cost is#
8':9.
%uppose that /9x?;xexceeds /9y?;y. To maximize utility the consumer who is spending all her money income should "uy#
more of 6 and less of 7.
%uppose you have a limited money income and you are purchasing products A and 6 whose prices happen to "e the same. To maximize your utility you should purchase A and 6 in such amounts that#
their marginal utilities are the same.
The "asic difference "etween the short run and the long run is that#
at least one resource is fixed in the short run" while all resources are variable in the long run.
Fixed cost is#

any cost which does not change when the firm changes its output.
$efer to the a"ove data. The value for B is#

-&
2n the long run#

To economists& the main difference "etween the short run and the long run is that#
in the long run all resources are variable" while in the short run at least one resource is fixed.
$efer to the a"ove data. The total varia"le cost of producing . units is#
$%
>conomic profits are calculated "y su"tracting#

explicit and implicit costs from total revenue.
$efer to the a"ove short5run production and cost data. 2n Figure A curve '! is#
average product and curve (2* is marginal product.
2f a firm increases all of its inputs "y '( percent and its output increases "y '. percent& then#
it is encountering economies of scale.
2f a firm dou"les its output in the long run and its unit costs of production decline& we can conclude that#
economies of scale are being realized.


consumers behave rationally" attempting to maximize their satisfaction.
$8.
!893.
2n the long run#

1. The basic formula for the price elasticity of demand coefficient is: A. absolute decline in quantity demanded/absolute increase in price. B. percentage change in quantity demanded/percentage change in price. C. absolute decline in price/absolute increase in quantity demanded. D. percentage change in price/percentage change in quantity demanded.
AACSB: Analytic Blooms: Level 1 Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss price elasticity of demand and how it can be applied. McConnell - Chapter 04 #2 Topic: Price elasticity of demand
2. In which price range of the accompanying demand schedule is demand elastic?
A. $4-$3 B. $3-$2 C. $2-$1 D. below $1
AACSB: Analytic Blooms: Level 4 Analyze Difficulty: 3 Hard Learning Objective: 04-01 Discuss price elasticity of demand and how it can be applied. McConnell - Chapter 04 #39 Topic: Price elasticity of demand Type: Table
3. Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by 10 percent, the quantity demanded will increase by: A. 2 percent and total expenditures on bread will rise. B. 2 percent and total expenditures on bread will fall. C. 20 percent and total expenditures on bread will fall. D. 20 percent and total expenditures on bread will rise.
AACSB: Analytic Blooms: Level 2 Understand Difficulty: 2 Medium Learning Objective: 04-02 Explain the usefulness of the total revenue test for price elasticity of demand. McConnell - Chapter 04 #50 Topic: Total revenue test
4. Suppose that the price of peanuts falls from $3 to $2 per bushel and that, as a result, the total revenue received by peanut farmers changes from $16 to $14 billion. Thus: A. the demand for peanuts is elastic. B. the demand for peanuts is inelastic. C. the demand curve for peanuts has shifted to the right. D. no inference can be made as to the elasticity of demand for peanuts.
AACSB: Reflective Thinking Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 04-02 Explain the usefulness of the total revenue test for price elasticity of demand. McConnell - Chapter 04 #65 Topic: Total revenue test
5. The elasticity of demand for a product is likely to be greater: A. if the product is a necessity, rather than a luxury good. B. the greater the amount of time over which buyers adjust to a price change. C. the smaller the proportion of one's income spent on the product. D. the smaller the number of substitute products available.
AACSB: Analytic Blooms: Level 1 Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss price elasticity of demand and how it can be applied. McConnell - Chapter 04 #74 Topic: Determinants of price elasticity
6. An antidrug policy which reduces the supply of heroin might: A. increase street crime because the addict's demand for heroin is highly inelastic. B. reduce street crime because the addict's demand for heroin is highly elastic. C. reduce street crime because the addict's demand for heroin is highly inelastic. D. increase street crime because the addict's demand for heroin is highly elastic.
AACSB: Reflective Thinking Blooms: Level 4 Analyze Difficulty: 3 Hard Learning Objective: 04-01 Discuss price elasticity of demand and how it can be applied. McConnell - Chapter 04 #118 Topic: Applications of price elasticity
7. The main determinant of elasticity of supply is the: A. number of close substitutes for the product available to consumers. B. amount of time the producer has to adjust inputs in response to a price change. C. urgency of consumer wants for the product. D. number of uses for the product.
AACSB: Analytic Blooms: Level 1 Remember Difficulty: 1 Easy Learning Objective: 04-03 Describe price elasticity of supply and how it can be applied. McConnell - Chapter 04 #85 Topic: Elasticity of supply
McConnell - Chapter 04
8. Refer to the above diagram and assume that price decreases from $10 to $2. The coefficient of the price elasticity of supply (midpoint formula) relating to this price change is about: A. 4 and supply is elastic. B. 1 and supply is unit elastic. C. .5 and supply is inelastic. D. .25 and supply is inelastic.
AACSB: Analytic Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 04-03 Describe price elasticity of supply and how it can be applied. McConnell - Chapter 04 #98 Topic: Elasticity of supply Type: Graph
9. If the supply of product X is perfectly elastic, an increase in the demand for it will increase: A. equilibrium quantity but reduce equilibrium price. B. equilibrium quantity but equilibrium price will be unchanged. C. equilibrium price but reduce equilibrium quantity. D. equilibrium price but equilibrium quantity will be unchanged.
AACSB: Reflective Thinking Blooms: Level 4 Analyze Difficulty: 3 Hard Learning Objective: 04-03 Describe price elasticity of supply and how it can be applied. McConnell - Chapter 04 #103 Topic: Elasticity of supply
10. Supply curves tend to be: A. perfectly elastic in the long run because consumer demand will have sufficient time to adjust fully to changes in supply. B. more elastic in the long run because there is time for firms to enter or leave the industry. C. perfectly inelastic in the long run because the law of scarcity imposes absolute limits on production. D. less elastic in the long run because there is time for firms to enter or leave an industry.
AACSB: Reflective Thinking Blooms: Level 2 Understand Difficulty: 2 Medium Learning Objective: 04-03 Describe price elasticity of supply and how it can be applied. McConnell - Chapter 04 #105 Topic: Elasticity of supply
11. Suppose the income elasticity of demand for toys is +2.00. This means that: A. a 10 percent increase in income will increase the purchase of toys by 20 percent. B. a 10 percent increase in income will increase the purchase of toys by 2 percent. C. a 10 percent increase in income will decrease the purchase of toys by 2 percent. D. toys are an inferior good.
AACSB: Analytic Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 04-04 Apply cross elasticity of demand and income elasticity of demand. McConnell - Chapter 04 #127 Topic: Cross and income elasticity
12. We would expect the cross elasticity of demand between Pepsi and Coke to be: A. positive, indicating normal goods. B. positive, indicating inferior goods. C. positive, indicating substitute goods. D. negative, indicating substitute goods.
AACSB: Reflective Thinking Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 04-04 Apply cross elasticity of demand and income elasticity of demand. McConnell - Chapter 04 #132 Topic: Cross and income elasticity
13. The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three Pepsis is 38 units of utility. The marginal utility of the third Pepsi is: A. 26 units of utility. B. 6 units of utility. C. 8 units of utility. D. 38 units of utility.
AACSB: Analytic Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 06-01 Define and explain the relationship between total utility; marginal utility; and the law of diminishing marginal utility. McConnell - Chapter 06 #13 Topic: Law of diminishing marginal utility
14. If total utility is increasing, marginal utility: A. is positive, but may be either increasing or decreasing. B. must also be increasing. C. may be either positive or negative. D. will be increasing at an increasing rate.
AACSB: Reflective Thinking Blooms: Level 2 Understand Difficulty: 2 Medium Learning Objective: 06-01 Define and explain the relationship between total utility; marginal utility; and the law of diminishing marginal utility. McConnell - Chapter 06 #23 Topic: Law of diminishing marginal utility
15. Where total utility is at a maximum, marginal utility is: A. negative. B. positive and increasing. C. zero. D. positive but decreasing.
AACSB: Analytic Blooms: Level 2 Understand Difficulty: 2 Medium Learning Objective: 06-01 Define and explain the relationship between total utility; marginal utility; and the law of diminishing marginal utility. McConnell - Chapter 06 #24 Topic: Law of diminishing marginal utility
16. Suppose you have a limited money income and you are purchasing products A and B whose prices happen to be the same. To maximize your utility you should purchase A and B in such amounts that: A. their marginal utilities are the same. B. their total utilities are the same. C. their marginal and total utilities are proportionate. D. the income and substitution effects associated with each are equal.
AACSB: Reflective Thinking Blooms: Level 2 Understand Difficulty: 2 Medium Learning Objective: 06-02 Describe how rational consumers maximize utility by comparing the marginal utility-to-price ratios of all the products they could possibly purchase. McConnell - Chapter 06 #37 Topic: Theory of consumer behavior
17. Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $2 and $4 respectively. The marginal utility of the last units of A and B are 16 and 24 respectively. These data suggest that Ms. Thomson: A. has preferences that are at odds with the principle of diminishing marginal utility. B. considers A and B to be complementary goods. C. should buy less A and more B. D. should buy less B and more A.
AACSB: Analytic Blooms: Level 4 Analyze Difficulty: 3 Hard Learning Objective: 06-02 Describe how rational consumers maximize utility by comparing the marginal utility-to-price ratios of all the products they could possibly purchase. McConnell - Chapter 06 #39 Topic: Theory of consumer behavior
Answer the question on the basis of the following marginal utility data for products X and Y. Assume that the prices of X and Y are $4 and $2 respectively and that the consumer's income is $18.
18. Refer to the above data. What quantities of X and Y should be purchased to maximize utility? A. 2 of X and 1 of Y B. 4 of X and 5 of Y C. 2 of X and 5 of Y D. 2 of X and 6 of Y
AACSB: Analytic Blooms: Level 5 Evaluate Difficulty: 3 Hard Learning Objective: 06-02 Describe how rational consumers maximize utility by comparing the marginal utility-to-price ratios of all the products they could possibly purchase. McConnell - Chapter 06 #54 Topic: Utility maximization and the demand curve Type: Table
19. Refer to the above data. What level of total utility will the utility-maximizing consumer realize? A. 96 utils B. 108 utils C. 72 utils D. 142 utils
AACSB: Analytic Blooms: Level 5 Evaluate Difficulty: 3 Hard Learning Objective: 06-02 Describe how rational consumers maximize utility by comparing the marginal utility-to-price ratios of all the products they could possibly purchase. McConnell - Chapter 06 #55 Topic: Utility maximization and the demand curve Type: Table
20. Refer to the above data. If the price of X decreases to $2, then the utility-maximizing combination of the two products is: A. 2 of X and 5 of Y. B. 4 of X and 6 of Y. C. 6 of X and 3 of Y. D. 4 of X and 5 of Y.
AACSB: Analytic Blooms: Level 5 Evaluate Difficulty: 3 Hard Learning Objective: 06-03 Explain how a demand curve can be derived by observing the outcomes of price changes in the utility-maximization model. McConnell - Chapter 06 #56 Topic: Utility maximization and the demand curve Type: Table
21. To the economist, total cost includes: A. explicit and implicit costs, including a normal profit. B. neither implicit nor explicit costs. C. implicit, but not explicit, costs. D. explicit, but not implicit, costs.
AACSB: Analytic Blooms: Level 1 Remember Difficulty: 1 Easy Learning Objective: 07-01 Explain why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs. McConnell - Chapter 07 #6 Topic: Economic costs
22. If you owned a small farm, which of the following would most likely be a fixed cost? A. harvest labor B. hail insurance C. fertilizer D. seed
AACSB: Reflective Thinking Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 07-03 Describe the distinctions between fixed and variable costs and among total; average; and marginal costs. McConnell - Chapter 07 #61 Topic: Short-run production costs
23. Marginal cost is the: A. rate of change in total fixed cost that results from producing one more unit of output. B. change in total cost that results from producing one more unit of output. C. change in average variable cost that results from producing one more unit of output. D. change in average total cost that results from producing one more unit of output.
AACSB: Analytic Blooms: Level 1 Remember Difficulty: 1 Easy Learning Objective: 07-03 Describe the distinctions between fixed and variable costs and among total; average; and marginal costs. McConnell - Chapter 07 #64 Topic: Short-run production costs
24. Other things equal, if the fixed costs of a firm were to increase by $100,000 per year, which of the following would happen? A. Marginal costs and average variable costs would both rise. B. Average fixed costs and average variable costs would rise. C. Average fixed costs and average total costs would rise. D. Average fixed costs would rise, but marginal costs would fall.
AACSB: Reflective Thinking Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 07-03 Describe the distinctions between fixed and variable costs and among total; average; and marginal costs. McConnell - Chapter 07 #78 Topic: Short-run production costs
25. As output increases, total variable cost: A. increases more rapidly than does total cost. B. increases continuously at a decreasing rate. C. increases at a decreasing rate and then at an increasing rate. D. increases at a constant rate.
AACSB: Reflective Thinking Blooms: Level 2 Understand Difficulty: 2 Medium Learning Objective: 07-03 Describe the distinctions between fixed and variable costs and among total; average; and marginal costs. McConnell - Chapter 07 #109 Topic: Short-run production costs
Answer the question on the basis of the accompanying table that shows average total costs (ATC) for a manufacturing firm whose total fixed costs are $10:
26. Refer to the above data. The total cost of producing 4 units of output is: A. $31. B. $87. C. $127. D. $134.
AACSB: Analytic Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 07-03 Describe the distinctions between fixed and variable costs and among total; average; and marginal costs. McConnell - Chapter 07 #134 Topic: Short-run production costs Type: Table
27. Refer to the above data. The average variable cost of 4 units of output is: A. $33.50. B. $28.50. C. $19.00. D. $21.00.
28. Refer to the above data. The marginal cost of the fourth unit of output is: A. $2. B. $12. C. $37. D. $16.
29. In the long run: A. all costs are variable costs. B. all costs are fixed costs. C. variable costs equal fixed costs. D. fixed costs are greater than variable costs.
AACSB: Analytic Blooms: Level 1 Remember Difficulty: 1 Easy Learning Objective: 07-04 Use economies of scale to link a firms size and its average costs in the long run. McConnell - Chapter 07 #144 Topic: Long-run production costs
30. The above diagram shows the short-run average total cost curves for five different plant sizes of a firm. If in the long run the firm should produce output 0x, it should do it with a plant of size: A. #4. B. #3. C. #2. D. #1.
AACSB: Reflective Thinking Blooms: Level 4 Analyze Difficulty: 3 Hard Learning Objective: 07-04 Use economies of scale to link a firms size and its average costs in the long run. McConnell - Chapter 07 #149 Topic: Long-run production costs Type: Graph
31. If an industry's long-run average total cost curve has an extended range of constant returns to scale, this implies that: A. technology precludes both economies and diseconomies of scale. B. the industry will be a natural monopoly. C. both relatively small and relatively large firms can be viable in the industry. D. the industry will be comprised of a very large number of small firms.
AACSB: Reflective Thinking Blooms: Level 2 Understand Difficulty: 2 Medium Learning Objective: 07-04 Use economies of scale to link a firms size and its average costs in the long run. McConnell - Chapter 07 #163 Topic: Long-run production costs
32. Diseconomies of scale arise primarily because: A. the short-run average total cost curve rises when marginal product is increasing. B. of the difficulties involved in managing and coordinating a large business enterprise. C. firms must be large both absolutely and relative to the market to employ the most efficient productive techniques available. D. beyond some point marginal product declines as additional units of a variable resource (labor) are added to a fixed resource (capital).
AACSB: Analytic Blooms: Level 2 Understand Difficulty: 2 Medium Learning Objective: 07-04 Use economies of scale to link a firms size and its average costs in the long run. McConnell - Chapter 07 #165 Topic: Long-run production costs
33. Refer to the above diagram. Economies of scale: A. are evident over the entire range of output. B. occur over the 0Q1 range of output. C. begin at output Q3. D. occur only over the Q1Q3 range of output.
AACSB: Reflective Thinking Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 07-04 Use economies of scale to link a firms size and its average costs in the long run. McConnell - Chapter 07 #167 Topic: Long-run production costs Type: Graph
34. Refer to the above diagram. Minimum efficient scale: A. occurs at some output greater than Q3. B. is achieved at Q1. C. is achieved at Q3. D. cannot be identified in this diagram.
AACSB: Reflective Thinking Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 07-04 Use economies of scale to link a firms size and its average costs in the long run. McConnell - Chapter 07 #169 Topic: Long-run production costs Type: Graph
35. The long-run average total cost curve: A. displays declining unit costs so long as output is increasing. B. indicates the lowest unit costs achievable when a firm has had sufficient time to alter plant size. C. has a shape which is the inverse of the law of diminishing returns. D. can be derived by summing horizontally the average total cost curves of all firms in an industry.
AACSB: Reflective Thinking Blooms: Level 2 Understand Difficulty: 2 Medium Learning Objective: 07-04 Use economies of scale to link a firms size and its average costs in the long run. McConnell - Chapter 07 #171 Topic: Long-run production costs
Answer the question on the basis of the following cost data:
36. Refer to the above data. The total variable cost of producing 5 units is: A. $61. B. $48. C. $37. D. $24.
37. Refer to the above data. The marginal cost of producing the sixth unit of output is: A. $24. B. $12. C. $16. D. $8.
38. The total output of a firm will be at a maximum where: A. MP is at a maximum. B. AP is at a minimum. C. MP is zero. D. AP is at a maximum.
AACSB: Reflective Thinking Blooms: Level 2 Understand Difficulty: 2 Medium Learning Objective: 07-02 Relate the law of diminishing returns to a firms short-run production costs. McConnell - Chapter 07 #49 Topic: Short-run production relationships
Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed.
39. Refer to the above data. Diminishing marginal returns become evident with the addition of the: A. sixth worker. B. fourth worker. C. third worker. D. second worker.
AACSB: Analytic Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 07-02 Relate the law of diminishing returns to a firms short-run production costs. McConnell - Chapter 07 #36 Topic: Short-run production relationships Type: Table
40. Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were: A. $100,000 and its economic profits were zero. B. $200,000 and its economic profits were zero. C. $100,000 and its economic profits were $100,000. D. zero and its economic loss was $200,000.
AACSB: Analytic Blooms: Level 3 Apply Difficulty: 2 Medium Learning Objective: 07-01 Explain why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs. McConnell - Chapter 07 #14 Topic: Profits
$. The demand for a product is inelastic with respect to price if< A. consumers are largely unresponsive to a per unit price change. 8. the elasticity coefficient is greater than $. '. a drop in price is accompanied by a decrease in the /uantity demanded. :. a drop in price is accompanied by an increase in the /uantity demanded. 2. =f a firm can sell %"!!! units of product + at $$! per unit and &"!!! at $8" then< +. the price elasticity of demand is !.)). 8. + is a complementary good. '. the price elasticity of demand is 2.2&. :. + is an inferior good. %. =n which of the following instances will total revenue decline>
+. price rises and supply is elastic 8. price falls and demand is elastic '. price rises and demand is inelastic :. price rises and demand is elastic ). ?igantic @tate ;niversity raises tuition for the purpose of increasing its revenue so that more faculty can be hired. ?@; is assuming that the demand for education at ?@; is< +. decreasing. 8. relatively elastic. '. perfectly elastic. :. relatively inelastic. &. 0or a linear demand curve< +. elasticity is constant along the curve. 8. elasticity is unity at every point on the curve. '. demand is elastic at low prices. :. demand is elastic at high prices. .. =f a demand for a product is elastic" the value of the price elasticity coefficient is< +. zero. 8. greater than one. '. e/ual to one. :. less than one. . #rice elasticity of demand is generally< +. greater in the long run than in the short run. 8. greater in the short run than in the long run. '. the same in both the short run and the long run. :. greater for 4necessities4 than it is for 4luxuries.4 8. @uppose that a 2! percent increase in the price of normal good 7 causes a $! percent decline in the /uantity demanded of normal good 6. The coefficient of cross elasticity of demand is< +. negative and therefore these goods are substitutes. 8. negative and therefore these goods are complements. '. positive and therefore these goods are substitutes. :. positive and therefore these goods are complements. A. 'onsumer surplus< +. is the difference between the maximum prices consumers are willing to pay for a product and the lower e/uilibrium price. 8. the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept. '. the difference between the minimum prices producers are willing to accept for a product and the higher e/uilibrium price. :. rises as e/uilibrium price rises. $!. Be would expect the cross elasticity of demand between dress shirts and ties to be< +. positive" indicating normal goods. 8. positive" indicating inferior goods. '. negative" indicating substitute goods. :. negative" indicating complementary goods. $$. Be would expect the cross elasticity of demand between #epsi and 'o5e to be< +. positive" indicating normal goods. 8. positive" indicating inferior goods.
'. positive" indicating substitute goods. :. negative" indicating substitute goods. $2. )&. =f a $C increase in fees for legal services leads to a &C increase in total revenue for lawyers" the price elasticity of demand for legal services must be< +. elastic. 8. of unitary elasticity. '. inelastic. :. perfectly inelastic. $%. The Dincidence of a taxE is the term used to indicate< +. Fesponsibility for collecting the tax. 8. Bho actually bears the economic tax burden. '. Bho the tax is initially levied on. :. The regressive rate structure of the tax.
$). +pproximately )! luxury boats (price $$!!"!!! or more* are produced each year. Gow much revenue could the government expect to raise from a $$"!!! excise tax on luxury boats> +. 9xactly e/ualed to $)!"!!!. 8. Hess than $)!"!!!. '. More than $)!"!!!. :. +pproximately $)!!"!!!. $&. @ally recently got a raise from $&!! per wee5 to $&&! per wee5. +s a result" she now purchases six stea5s per wee5 rather than five. This indicates that< +. @tea5 is an inferior good for @ally. 8. @tea5 is a normal good for @ally. '. @ally has an inelastic demand for stea5. :. @ally has an elastic demand for stea5. Lesson G 5 The Theory of +onsumer 6ehavior $. ;tility< +. is synonymous with usefulness. 8. is want-satisfying power. '. is easy to /uantify. :. rarely varies from person to person. 2. The ability of a good or service to satisfy wants is called< +. utility maximization. 8. opportunity cost. '. revenue potential. :. utility. %. The first #epsi yields 'raig $8 units of utility and the second yields him an additional $2 units of utility. Gis total utility from three #epsis is %8 units of utility. The marginal utility of the third #epsi is< +. 2. units of utility. 8. . units of utility. '. 8 units of utility. :. %8 units of utility. ). Total utility may be determined by<
+. multiplying the marginal utility of the last unit consumed by the number of units consumed. 8. summing the marginal utilities of each unit consumed. '. multiplying the marginal utility of the last unit consumed by product price. :. multiplying the marginal utility of the first unit consumed by the number of units consumed. &. To maximize utility a consumer should allocate money income so that the< +. elasticity of demand on all products purchased is the same. 8. marginal utility divided by its mar5et price is the same for all products. '. total utility derived from each product consumed is the same. :. marginal utility of the last unit of each product consumed is the same. .. @uppose that M;x2#x exceeds M;y2#y. To maximize utility the consumer who is spending all her money income should buy< +. less of 6 only if its price rises. 8. more of 7 only if its price rises. '. more of 7 and less of 6. :. more of 6 and less of 7. . @uppose you have a limited money income and you are purchasing products + and 8 whose prices happen to be the same. To maximize your utility you should purchase + and 8 in such amounts that< +. their marginal utilities divided by its mar5et price are the same. 8. their total utilities are the same. '. their marginal and total utilities are proportionate. :. the income and substitution effects associated with each are e/ual. 8. + consumer is maximizing her utility with a particular money income when< +. the total utility derived from each product consumed is the same. 8. M;a2#a I M;b2#b I M;c2#c I ... I M;n2#n. '. M;a I M;b I M;c I ... I M;n. :. #a I #b I #c I ... I #n. A. The theory of consumer behavior assumes that consumers attempt to maximize< +. the difference between total and marginal utility. 8. total utility. '. average utility. :. marginal utility. $!. Bhen a consumer shifts purchases from product 6 to product 7 the marginal utility of< +. 6 falls and the marginal utility of 7 rises. 8. 6 rises and the marginal utility of 7 falls. '. both 6 and 7 rises. :. both 6 and 7 falls. $$. Bhich of the following has been a significant factor in :,:s replacing video cassettes (,'s* in the retail home video mar5et> +. :,:s are now less than one-half the price of ,'s. 8. + scarcity of production capacity has curtailed the manufacture of ,'s. '. Most consumers perceive :,: sound and video reproduction to be of higher /uality. :. The price of :,: players has increased dramatically.
$2. The diamond-water paradox arises because< +. essential goods may be cheap while nonessential goods may be expensive. 8. the marginal utility of certain products increases" rather than diminishes.
'. essential goods are always higher priced than nonessential goods. :. we sometimes fail to use money as a standard of value. $%. +ll of the following would reduce property crime by increasing its 4price"4 except< +. imposing greater penalties for those who are caught and convicted. 8. using more sophisticated security systems. '. enhancing the legitimate earnings of potential criminals. :. cutting out the middlemen (4fences4* by selling stolen goods via =nternet auction sites. $). Gigh-wage consumers are over-represented among airline and taxi passengers because< +. They pay lower money prices for these services than do low-wage consumers. 8. These commodities have income elasticities less than zero. '. The opportunity cost of spending more time on time-consuming transportation is higher for highwage consumers. :. The price elasticity of demand for airline and taxi services is /uite high. $&. =f you receive a gift whose mar5et price is $2!" but you consider it to be worth only $$!" then< +. there is a $$! or &! percent value gain. 8. there may or may not be a value loss. '. there is a $$! or &! percent value loss. :. you can be relatively certain the giver was a sibling or other close relative. Lesson 7 5 +osts and %upply of Moods $. Bhich of the following constitutes an implicit cost to the Johnston Manufacturing 'ompany> +. payments of wages to its office wor5ers 8. rent paid for the use of e/uipment owned by the @chultz Machinery 'ompany '. depreciation charges on company-owned e/uipment :. economic profits resulting from current production 2. =mplicit costs are< +. regarded as costs by accountants but not by economists. 8. payments that a firm ma5es to other firms or individuals who supply resources to it. '. nonexpenditure costs. :. costs that vary proportionately with output. %. +ccounting profits are typically< +. greater than economic profits because the former do not ta5e explicit costs into account. 8. e/ual to economic profits because accounting costs include all opportunity costs. '. smaller than economic profits because the former do not ta5e implicit costs into account. :. greater than economic profits because the former do not ta5e implicit costs into account. ). Kormal profit is< +. determined by subtracting implicit costs from total revenue. 8. determined by subtracting explicit costs from total revenue. '. the return to the entrepreneur when economic profits are zero. :. the average profitability of an industry over the preceding $! years. &. Bhich of the following is a short-run adLustment> +. + local ba5ery hires two additional ba5ers. 8. @ix new firms enter the plastics industry. '. The number of farms in the ;nited @tates declines by & percent. :. 8MB constructs a new assembly plant in @outh 'arolina. .. +verage fixed cost<
+. e/uals marginal cost when average total cost is at its minimum. 8. may be found for any output by adding average variable cost and average total cost. '. graphs as a ;-shaped curve. :. declines continually as output increases. . Marginal cost< +. e/uals both average variable cost and average total cost at their respective minimums. 8. is the difference between total cost and total variable cost. '. rises for a time" but then begins to decline when diminishing returns set in. :. declines continuously as output increases. 8. =f a technological advance increases a firm's labor productivity" we would expect its< +. average total cost curve to rise. 8. average total cost curve to fall. '. total cost curve to rise. :. average total cost curve to be unaffected. A. 9conomies and diseconomies of scale explain< +. the profit-maximizing level of production. 8. why the firm's long-run average total cost curve is ;-shaped. '. why the firm's short-run marginal cost curve cuts the short-run average variable cost curve at its minimum point. :. the distinction between fixed and variable costs. $!. =n the long run< +. all costs are variable costs. 8. all costs are fixed costs. '. variable costs e/ual fixed costs. :. fixed costs are greater than variable costs. $$. (Hast Bord* + cost that cannot be partly or fully recovered through any subse/uent action is 5nown as a< +. variable cost. 8. fixed cost. '. marginal cost. :. sun5 cost. $2. Mther things e/ual" if the prices of a firm's variable inputs were to fall< +. one could not predict how unit costs of production would be affected. 8. marginal cost" average variable cost" and average fixed cost would all fall. '. marginal cost" average variable cost" and average total cost would all fall. :. average variable cost would fall" but marginal cost would be unchanged.
$%. =n the diagram below" curves $" 2" and % represent< +. average variable cost" marginal cost" and average fixed cost respectively. 8. total variable cost" total fixed cost" and total cost respectively. '. total fixed cost" total variable cost" and total cost respectively. :. marginal product" average variable cost" and average total cost respectively.
$). =n the figure below" curves $" 2" %" and ) represent the< +. +T'" M'" +0'" and +,' curves respectively. 8. +0'" M'" +,'" and +T' curves respectively. '. M'" +T'" +,'" and +0' curves respectively. :. +T'" +,'" +0'" and M' curves respectively.
$&. Fefer to the diagram below. The vertical distance between +T' and +,' reflects< +. the law of diminishing returns. 8. the average fixed cost at each level of output. '. marginal cost at each level of output. :. the presence of economies of scale.
Lesson I 5 +ompetitive /ar1ets $. Bhich of the following industries most closely approximates pure competition> +. agriculture 8. farm implements '. clothing :. steel 2. Bhich of the following is not a basic characteristic of pure competition> +. considerable nonprice competition 8. no barriers to the entry or exodus of firms '. a standardized or homogeneous product
:. a large number of buyers and sellers %. =f a firm in a purely competitive industry is confronted with an e/uilibrium price of $&" its marginal revenue< +. may be either greater or less than $&. 8. will also be $&. '. will be less than $&. :. will be greater than $&. ). 0irms see5 to maximize< +. per unit profit. 8. total revenue. '. total profit. :. mar5et share. &. + competitive firm will maximize profits at that output at which< +. total revenue exceeds total cost by the greatest amount. 8. total revenue and total cost are e/ual. '. price exceeds average total cost by the largest amount. :. the difference between marginal revenue and price is at a maximum. .. + purely competitive firm's short-run supply curve is< +. perfectly elastic at the minimum average total cost. 8. upsloping and e/ual to the portion of the marginal cost curve that lies above the average variable cost curve. '. upsloping and e/ual to the portion of the marginal cost curve that lies above the average total cost curve. :. upsloping only when the industry has constant costs. . @uppose you find that the price of your product is less than minimum +,'. 7ou should< +. minimize your losses by producing where # I M'. 8. maximize your profits by producing where # I M'. '. close down because" by producing" your losses will exceed your total fixed costs. :. close down because total revenue exceeds total variable cost. 8. =f a purely competitive firm shuts down in the short run< +. its loss will be zero. 8. it will realize a loss e/ual to its total variable costs. '. it will realize a loss e/ual to its total fixed costs. :. it will realize a loss e/ual to its total costs. A. =n the short run a purely competitive firm will always ma5e an economic profit if< +. # I +T'. 8. # N +,'. '. # I M'. :. # N +T'. $!. =n a purely competitive industry< +. there will be no economic profits in either the short run or the long run. 8. economic profits may persist in the long run if consumer demand is strong and stable. '. there may be economic profits in the short run" but not in the long run. :. there may be economic profits in the long run" but not in the short run. $$. Hong-run competitive e/uilibrium< +. is realized only in constant-cost industries.
8. will never change once it is realized. '. is not economically efficient. :. results in zero economic profits. $2. + constant-cost industry is one in which< +. resource prices fall as output is increased. 8. resource prices rise as output is increased. '. resource prices remain unchanged as output is increased. :. small and large levels of output entail the same total costs. $%. + purely competitive firm is precluded from ma5ing economic profit in the long run because< +. it is a 4price ta5er.4 8. its demand curve is perfectly elastic. '. of unimpeded entry to the industry. :. it produces a differentiated product. $). + decreasing-cost industry is one in which< +. contraction of the industry will decrease unit costs. 8. input prices fall or technology improves as the industry expands. '. the long-run supply curve is perfectly elastic. :. the long-run supply curve is upsloping. $&. +llocative efficiency is achieved when the production of a good occurs where< +. # I minimum +T'. 8. # I M'. '. # I minimum +,'. :. total revenue is e/ual to T0'.
Lesson '( 5 /onopolies $. Bhich of the following is correct> +. 8oth purely competitive and monopolistic firms are 4price ta5ers.4 8. 8oth purely competitive and monopolistic firms are 4price ma5ers.4 '. + purely competitive firm is a 4price ta5er"4 while a monopolist is a 4price ma5er.4 :. + purely competitive firm is a 4price ma5er"4 while a monopolist is a 4price ta5er.4 2. #ure monopolists may obtain economic profits in the long run because< +. of advertising. 8. marginal revenue is constant as sales increase. '. of barriers to entry. :. of rising average fixed costs. %. Bhich of the following is not a barrier to entry>
+. patents 8. 6-inefficiency '. economies of scale :. ownership of essential resources ). + natural monopoly occurs when< +. long-run average costs decline continuously through the range of demand. 8. a firm owns or controls some resource essential to production. '. long-run average costs rise continuously as output is increased. :. economies of scale are obtained at relatively low levels of output. &. The pure monopolist's demand curve is< +. identical with the industry demand curve. 8. of unit elasticity throughout. '. perfectly inelastic. :. perfectly elastic. .. #rice exceeds marginal revenue for the pure monopolist because the< +. law of diminishing returns is inapplicable. 8. demand curve is downsloping. '. monopolist produces a smaller output than would a purely competitive firm. :. demand curve lies below the marginal revenue curve.
. +n unregulated pure monopolist will maximize profits by producing that output at which< +. # I M'. 8. # I +T'. '. MF I M'. :. M' I +'. 8. The supply curve for a monopolist is< +. perfectly elastic. 8. upsloping. '. that portion of the marginal cost curve lying above minimum average variable cost. :. nonexistent. A. 9conomic profit in the long run is< +. possible for both a pure monopoly and a pure competitor. 8. possible for a pure monopoly" but not for a pure competitor. '. impossible for both a pure monopolist and a pure competitor. :. only possible when barriers to entry are nonexistent. $!. 6-inefficiency refers to a situation in which a firm< +. is not as technologically progressive as it might be. 8. encounters diseconomies of scale. '. fails to realize all existing economies of scale. :. fails to achieve the minimum average total costs attainable at each level of output. $$. #rice discrimination refers to< +. selling a given product for different prices at two different points in time. 8. any price above that which is e/ual to a minimum average total cost. '. the selling of a given product at different prices that do not reflect cost differences. :. the difference between the prices a purely competitive seller and a purely monopolistic seller would charge.
$2. Bhich of the following conditions is not re/uired for price discrimination> +. 8uyer with different elasticities must be physically separate from each other. 8. The good or service cannot be resold by original buyers. '. The seller must be able to segment the mar5et" that is" to distinguish buyers with different elasticities of demand. :. The seller must possess some degree of monopoly power. $%. Bhich government price control lets a regulated monopoly set two prices< + fixed charge and a rate charge> +. Famsey #ricing 8. Marginal 'ost #ricing '. +verage 'ost #ricing :. 6-inefficiency $). Bhat is it called when a monopoly uses its wealth and power to influence the government in its favor> +. Famsey #ricing 8. Fent see5ing behavior '. +verage 'ost #ricing :. 6-inefficiency $&. =f a regulatory commission wants to provide a natural monopoly with a fair return" it should establish a price that is e/ual to< +. minimum average fixed cost. 8. average total cost. '. marginal cost. :. marginal revenue.
Lesson '' 5 Oligopolies and /onopolistic +ompetition $. Monopolistic competition means< +. a mar5et situation where competition is based entirely on product differentiation and advertising. 8. a large number of firms producing a standardized or homogeneous product. '. many firms producing differentiated products. :. a few firms producing a standardized or homogeneous product. 2. Konprice competition refers to< +. competition between products of different industries" for example" competition between aluminum and steel in the manufacture of automobile parts. 8. price increases by a firm that are ignored by its rivals. '. advertising" product promotion" and changes in the real or perceived characteristics of a product. :. reductions in production costs that are not reflected in price reductions. %. =f the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes< +. the li5elihood of realizing economic profits in the long run would be enhanced. 8. individual firms would now be operating at outputs where their average total costs would be higher. '. the industry would more closely approximate pure competition. :. the li5elihood of collusive pricing would increase. ). Konprice competition refers to<
+. low barriers to entry. 8. product development" advertising" and product pac5aging. '. the differences in information which consumers have regarding various products. :. an industry or firm in long-run e/uilibrium. &. Bhen a monopolistically competitive firm is in long-run e/uilibrium< +. # I M' I +T'. 8. MF I M' and minimum +T' N #. '. MF N M' and # I minimum +T'. :. MF I M' and # N minimum +T'. .. #roduct variety is li5ely to be greater in< +. monopolistic competition than in pure competition. 8. pure competition than in monopolistic competition. '. homogenous oligopoly than in monopolistic competition. :. homogenous oligopoly than in differentiated oligopoly. . The term oligopoly indicates< +. a one-firm industry. 8. many producers of a differentiated product. '. a few firms producing either a differentiated or a homogeneous product. :. an industry whose four-firm concentration ratio is low. 8. The mutual interdependence that characterizes oligopoly arises because< +. the products of various firms are homogeneous. 8. the products of various firms are differentiated. '. a small number of firms produce a large proportion of industry output. :. the demand curves of firms are 5in5ed at the prevailing price. A. The copper" aluminum" cement" and industrial alcohol industries are examples of< +. interproduct competition. 8. homogeneous oligopoly. '. monopolistic competition. :. differentiated oligopoly. $!. Mutual interdependence means that each oligopolistic firm< +. faces a perfectly elastic demand for its product. 8. must consider the reactions of its rivals when it determines its price policy. '. produces a product identical to those of its rivals. :. produces a product similar but not identical to the products of its rivals. $$. 'oncentration ratios measure the< +. geographic location of the largest corporations in each industry. 8. degree to which product price exceeds marginal cost in various industries. '. percentage of total sales accounted for by the four largest firms in the industry. :. number of firms in an industry. $2. The Gerfindahl index for a pure monopolist is< +. $!!. 8. $!"!!!. '. $!!"!!!. :. $!. $%. =nterindustry competition means that< +. in oligopolistic industries a few large firms compete with one another in bidding down product
price. 8. in some mar5ets the producers of a particular product might face competition from products produced by other industries. '. firms that sell a product at one stage of production are faced with firms that buy the product at the next stage of production. :. in most industries there are usually a number of firms producing identical products. $). M#9' provides an example of< +. a tacit understanding. 8. noncollusive oligopoly. '. an international cartel. :. a monopolistically competitive industry. $&. @uppose the Gerfindahl =ndexes for industries +" 8" and ' are $"2!!" &"!!!" and "&!! respectively. These data imply that< +. mar5et power is greatest in industry +. 8. mar5et power is greatest in industry 8. '. mar5et power is greatest in industry '. :. industry + is more monopolistic than industry '.
1. The demand for airline pilots results from the demand for air travel. This fact is an example of: A. resource substitutability. B. rising marginal resource cost. C. elasticity of resource demand. D. the derived demand for labor. 2. The demand for a resource depends primarily on: A. the supply of that resource. B. the demand for the product or service that it helps produce. C. the price of that input. D. the elasticity of supply of substitute inputs. . The !"# curve for labor:
A. intersects the firm$s labor demand curve from above. B. is the firm$s labor demand curve. C. lies belo% the firm$s labor demand curve. D. lies above the firm$s labor demand curve. &. !arginal product is: A. the output of the least s'illed %or'er. B. a %or'er$s output multiplied by the price at %hich each unit can be sold. C. the amount an additional %or'er adds to the firm$s total output. D. the amount any given %or'er contributes to the firm$s total revenue. (. Assume that a restaurant is hiring labor in an amount such that the !"C of the last %or'er is )1* and her !"# is )12. +n the basis of this information %e can say that: A. profits %ill be increased by hiring additional %or'ers. B. profits %ill be increased by hiring fe%er %or'ers. C. marginal revenue product must exceed average revenue product. D. the restaurant is maximi,ing profits. *. The !"# curve is the resource demand curve for: A. neither the purely competitive nor the imperfectly competitive seller. B. the imperfectly competitive seller- but not the purely competitive seller. C. the purely competitive seller- but not the imperfectly competitive seller. D. both the purely competitive and imperfectly competitive seller. .. /f t%o resources are highly substitutable for one another: A. a decrease in the price of one %ill increase unit costs of production. B. an increase in the price of one %ill increase the demand for the other. C. an increase in the price of one %ill reduce the demand for the other. D. a decline in the price of one %ill increase the demand for the other. 0. 1lasticity of resource demand is measured by the: A. absolute change in resource 2uantity demanded divided by the absolute change in resource price. B. percentage change in resource 2uantity demanded divided by the percentage change in resource price. C. absolute change in resource price divided by the absolute change in resource 2uantity demanded. D. percentage change in resource price divided by the percentage change in resource 2uantity demanded. 3. The labor demand curve of a purely competitive seller: A. slopes do%n%ard because the elasticity of demand is al%ays less than unity. B. slopes do%n%ard because of diminishing marginal productivity. C. is perfectly elastic at the going %age rate. D. slopes do%n%ard because of diminishing marginal utility.
14. !arginal resource cost is: A. the increase in total resource cost associated %ith the production of one more unit of output. B. the increase in total resource cost associated %ith the hire of one more unit of the resource. C. total resource cost divided by the number of inputs employed. D. the change in total revenue associated %ith the employment of one more unit of the resource. 11. 1conomists refer to expenditures on training- education- and s'ill development designed to increase the productivity of an individual as: A. +verhead expenditures. B. /nvestments in human capital. C. 5on6exhaustive expenditures. D. 7ocial capital.
12. An unexpected decrease in the demand for accountants %ill lead to a8n9: A. /ncrease in the earnings of accountants. B. /ncrease in the incentive of students to prepare for a career in accounting. C. "eduction in the future supply of accountants. D. /ncrease in the employment opportunities of accountants. 1 . /f businesses found that changing economic conditions made it attractive for them to hire a larger number of economics ma:ors- %e %ould expect: A. 1conomics ma:ors to receive a greater return on their human capital investment. B. An increase in the employment opportunities for economics ma:ors. C. ;igher %ages for economics ma:ors. D. All of the above. 1&. /f a construction boom leads to an increase in the price of lumber- ho% %ill the higher prices influence the %ood furniture mar'et< A. The demand for %ood furniture %ill decline and furniture prices %ill fall. B. There %ill be a shortage of %ood furniture. C. There %ill be a surplus of %ood furniture. D. The supply of %ood furniture %ill decline and furniture prices %ill increase. 1(. /f the firm has a !# = ( and a !" = )(- ho% much revenue %ill one more unit of labor contribute if this firm hires another employee< A. The !"# = )1. B. The !"# = )(. C. The !"# = )2(. D. 5ot enough information is given. Ans%ers: 1. D .. B 1 .D 2. B 0. B 1&. D .B 3. B 1(. C &. C 14. B (. B 11. B *. D 12. >C
?esson 1 6 The ?abor !ar'et 1. /ncreases in the productivity of labor result partly from: A. the la% of diminishing returns. B. improvements in technology. C. reductions in %age rates. D. increases in the 2uantity of labor. 2. The real %age %ill rise if the nominal %age: A. falls more rapidly than the general price level. B. increases at the same rate as labor productivity. C. increases more rapidly than the general price level. D. falls more rapidly than the general price level.
. The economic term for a sole employer in a nonunion community is: A. monopsonist. B. monopolist. C. bilateral competitor. D. bilateral monopolist. &. @hich of the follo%ing is most li'ely to be an example of monopsony< A. the mar'et for fast6food %or'ers in a large summer resort to%n.
B. the mar'et for card dealers in ?as Aegas. C. the mar'et for ma:or league baseball umpires. D. the mar'et for retail sales cler's in a ma:or city. (. +ther things e2ual- the monopsonistic employer %ill pay a: A. lo%er %age rate and hire fe%er %or'ers than %ill a purely competitive employer. B. higher %age rate but hire fe%er %or'ers than %ill a purely competitive employer. C. lo%er %age rate but hire a larger number of %or'ers than %ill a purely competitive employer. D. higher %age rate and hire a larger number of %or'ers than %ill a purely competitive employer. *. A monopsonist pays a %age rate that is: A. less than the !"# of labor. B. e2ual to the firm$s marginal resource 8labor9 cost. C. e2ual to the !"# of labor. D. greater than the !"# of labor. .. /n a labor mar'et characteri,ed by bilateral monopoly the %age rate %ill: A. be logically indeterminate. B. be established at the level desired by the union. C. be established at the level desired by the employer. D. al%ays be established at the competitive level. 0. @age differentials can arise from: A. both the demand6side and supply6side of labor mar'ets. B. the demand6side of labor mar'ets only. C. the supply6side of labor mar'ets only. D. neither the demand6side or supply6side of labor mar'ets. 3. Compensating differences in %ages: A. compensate %or'ers for differences in their human capital. B. are %age differences that compensate for differences in the desirability of :obs. C. describe the tendency for the %ages of all occupations to ad:ust to the median level. D. do not exist if :obs have different nonmonetary characteristics. 14. Data on education and earnings reveal: A. negative age6earnings profiles for male %or'ers. B. no relationship bet%een the t%o. C. a positive relationship bet%een the t%o. D. a negative relationship bet%een the t%o. 11. The principal6agent problem arises in labor mar'ets because: A. a firm may reali,e excessively large profits. B. %or'ers may provide less6than6expected %or' effort. C. compensating %age differences do not pay for differences in the nonmonetary aspects of :obs. D. human capital investments vary among %or'ers. 12. @hich one of the follo%ing best exemplifies the principal6agent problem in the employer6employee relationship< A. A %or'er ta'es 24 minute coffee6brea's although the employer allots only 1( minutes for this purpose. B. A %or'er is on the :ob (4 hours per %ee' although only &4 hours are re2uired for promotion. C. A %or'er opts for early retirement in response to the firm$s incentive plan. D. A %or'er$s productivity is independent of the %age paid. 1 . Author Boe @riter receives )2 per boo' sold. This payment is a8n9: A. piece rate. B. royalty. C. bonus. D. example of profit6sharing. 1&. A firm might choose to pay its employees a %age higher than that %hich %ould clear the mar'et because:
A. the higher %age raises the opportunity cost of shir'ing. B. the higher %age may shift the labor demand curve to the left. C. the firm %ill have higher turnover- allo%ing Cne% bloodC to invigorate older %or'ers %ho have a greater tendency to shir'. D. this policy reduces the proportion of experienced to inexperienced %or'ers- resulting in a lo%er overall %age bill. 1(. Benefits mandated by the government are most li'ely paid for by: A. The government through direct subsidies. B. The employer in the form of lo%er profits. C. The %or'er through reductions in other components of the %age pac'age. D. !aterial suppliers in the forms of lo%er resource prices. Ans%ers: 1. B .. A 1 .B 2. C 0. A 1&. A .A 3. B 1(. C &. C 14. C (. A 11. B *. A 12. A
?esson 1& 6 !ar'et Dailure and Eovernment /ntervention 1. Fnli'e a private good- a public good: A. has no opportunity costs. B. has benefits available to all- including nonpayers. C. produces no positive or negative externalities. D. is characteri,ed by rivalry and excludability. 2. @hich of the follo%ing is an example of a public good< A. a %eather %arning system B. a television set C. a sofa D. a bottle of soda . The mar'et system does not produce public goods because: A. there is no need or demand for such goods. B. private firms cannot stop consumers %ho are un%illing to pay for such goods from benefiting from them. C. public enterprises can produce such goods at lo%er cost than can private enterprises. D. their production seriously distorts the distribution of income. &. Because of the free6rider problem: A. the mar'et demand for a public good is overstated. B. the mar'et demand for a public good is nonexistent or understated. C. government has increasingly yielded to the private sector in producing public goods. D. public goods often create moral ha,ard and adverse selection problems. (. A demand curve for a public good is determined by: A. summing vertically the individual demand curves for the public good. B. summing hori,ontally the individual demand curves for the public good. C. combining the amounts of the public good that the individual members of society demand at each price. D. multiplying the per6unit cost of the public good by the 2uantity made available.
*. A positive externality or spillover benefit occurs %hen: A. product differentiation increases the variety of products available to consumers. B. the benefits associated %ith a product exceed those accruing to people %ho consume it. C. a firm produces at the # = !C output. D. economic profits are ,ero in the long run.
.. The Coase theorem: A. applies only to circumstances in %hich externalities are extensive and bargaining costs are high. B. holds that the median voter %ill decide the outcome of elections. C. states that in some circumstances ma:ority voting can yield inconsistent results. D. suggests that in some circumstances government intervention is not needed to resolve externality problems. 0. The tendency for society to overuse and therefore abuse common resources is called the: A. la% of conservation of matter and energy. B. la% of diminishing returns. C. tragedy of the commons. D. the Coase theorem. 3. The Clean Air Act of 1334: A. places taxes on utilities emitting sulfur dioxide- the ma:or cause of acid rain. B. sets aside billions of dollars to promote recycling. C. allo%s utilities to buy and sell sulfur dioxide emission credits provided by government. D. places taxes on producers %ho emit toxic chemicals. 14. As it applies to insurance- the adverse selection problem is the tendency for: A. those most li'ely to collect on insurance to buy it. B. those %ho buy insurance to ta'e less precaution in avoiding the insured ris'. C. sellers to price discriminate. D. sellers to restrict output and charge high prices. 11. As it applies to insurance- the moral ha,ard problem is the tendency for: A. those most li'ely to collect on insurance to buy it. B. those %ho buy insurance to ta'e less precaution in avoiding the insured ris'. C. sellers to price discriminate. D. sellers to restrict output and charge high prices. 12. #rofessional buyers of anti2ues often have more information about the value of anti2ue ob:ects than do the sellers. This illustrates: A. the Coase theorem. B. the moral ha,ard problem. C. the free6rider problem. D. asymmetric information. 1 . Alex- Gara- and ?ucian are the only three people in a community and Alex is %illing to pay )24 for the (th unit of a public good> Gara- )1(- and ?ucian- )2(. Eovernment should produce the (th unit of the public good if the marginal cost is less than: A. )2(. B. )1(. C. )*4. D. ) 44. 1&. /f the marginal benefit for government to build a ne% high%ay is )( million- but the ne% high%ay %ould cost )14 million- %hat should government do< A. government should build the high%ay. B. government should not build the ne% high%ay. C. government should build the high%ay and raise taxes on people %ho %ill use the high%ay. D. not enough information is given.
1(. @hat is global %arming< A. The earth is becoming %armer- because of the buildup of greenhouse gases in the atmosphere. B. The earth is becoming cooler- because greenhouse gases are accumulating in the atmosphere.
C. The earth is becoming %armer- because the amount of greenhouse gases in the atmosphere is decreasing. D. The belief that the earth %ill enter another ice age. Ans%ers: 1. B .. D 1 .C 2. A 0. C 1&. B .B 3. C 1(. A &. B 14. A (. A 11. B *. B 12. D
?esson 1( 6 Eross Domestic #roduct 8ED#9 1. 5ational income accountants can avoid multiple counting by: A. including transfer payments in their calculations. B. counting both intermediate and final goods. C. only counting final goods. D. only counting intermediate goods. 2. Eross domestic product 8ED#9 measures and reports output: A. as an index number. B. in percentage terms. C. in dollar amounts. D. in 2uantities of physical units 8for example- pounds- gallons- and bushels9. . Tom Atoe gro%s tomatoes for home consumption. This activity is: A. excluded from ED# in order to avoid double counting. B. excluded from ED# because an intermediate good is involved. C. productive but is excluded from ED# because no mar'et transaction occurs. D. included in ED# because it reflects production. &. 5et exports are: A. that portion of consumption and investment goods sent to other countries. B. exports plus imports. C. exports less imports. D. imports less exports. (. ED# differs from 5D# in that: A. ED# is based on gross exports- %hile 5D# is based on net exports. B. ED# includes- but 5D# excludes- taxes on production and imports. C. net investment is used in calculating ED# and gross investment is used in calculating 5D#. D. gross investment is used in calculating ED# and net investment is used in calculating 5D#. *. /f depreciation exceeds gross investment: A. the economy$s stoc' of capital may be either gro%ing or shrin'ing. B. the economy$s stoc' of capital is shrin'ing. C. the economy$s stoc' of capital is gro%ing. D. net investment is ,ero. .. "eal ED# measures: A. current output at current prices. B. current output at base year prices. C. base year output at current prices. D. base year output at current exchange rates.
0. /f nominal ED# rises: A. real ED# may either rise or fall.
B. %e can be certain that the price level has risen. C. real ED# must fall. D. real ED# must also rise. 3. A large underground economy results in an: A. understated ED#. B. overstated ED#. C. understated ED# price index. D. overstated ED# price index. 14. The gro%th of ED# may understate changes in the economy$s economic %ell6being over time if the: A. distribution of income becomes increasingly une2ual. B. 2uality of products and services improves. C. environment deteriorates because of pollution. D. amount of leisure decreases. 11. As defined in national income accounting- investment includes: A. business expenditures on machinery and e2uipment. B. all consumption. C. imports- but not exports. D. all nonfood items. 12. The concept of net domestic investment refers to: A. the amount of machinery and e2uipment used up in producing the ED# in a specific year. B. the difference bet%een the mar'et value and boo' value of outstanding capital stoc'. C. gross domestic investment less net exports. D. total investment less the amount of investment goods used up in producing the year$s output. 1 . The amount of after6tax income received by households is measured by: A. discretionary income. B. national income. C. disposable income. D. personal income. 1&. @hat is a problem %ith the ED# measure< A. ED# accounts for environmental pollution but the estimate is not accurate B. ED# assumes ED# is shared e2ually in the economy C. ED# includes 2uality improvements- but it is not accurate D. ED# does not include the hidden economy 1(. Approximately ho% large 8by economists$ best guess9 is the hidden economy in the Fnited 7tates< A. 14H B. 2(H C. (4H D. 144H Ans%ers: 1. C 2. C .. B 0. A 1 . C 1&. D .C 3. A 1(. A &. C 14. B (. D 11. A *. B 12. D
?esson 1* 6 1conomic Ero%th
1. Ero%th is advantageous to a nation because it: A. promotes faster population gro%th. B. lessens the burden of scarcity. C. eliminates the economi,ing problem. D. slo%s the gro%th of %ants. 2. Eiven the annual rate of economic gro%th- the Crule of .4C allo%s one to: A. determine the accompanying rate of inflation. B. calculate the si,e of the ED# gap. C. calculate the number of years re2uired for real ED# to double. D. determine the gro%th rate of per capita ED#. . /f the economy$s real ED# doubles in 10 years- %e can: A. not say anything about the average annual rate of gro%th. B. conclude that its average annual rate of gro%th is about (.( percent. C. conclude that its average annual rate of gro%th is about 2 percent. D. conclude that its average annual rate of gro%th is about & percent. &. "ecurring ups%ings and do%ns%ings in an economy$s real ED# over time are called: A. recessions. B. business cycles. C. output yo6yos. D. total product oscillations. (. During a severe recession- %e %ould expect output to fall the most in: A. the health6care industry. B. the clothing industry. C. agriculture. D. the construction industry. *. The phase of the business cycle in %hich real ED# is at a minimum is called: A. the pea'. B. a recession. C. the trough. D. the pits. .. !ar'et economies have been characteri,ed by: A. occasional instability of employment and price levels. B. uninterrupted economic gro%th. C. persistent full employment. D. declining populations. 0. Gara voluntarily 2uit her :ob as an insurance agent to return to school full6time to earn an !BA degree. @ith degree in hand she is no% searching for a position in management. Gara presently is: A. cyclically unemployed. B. structurally unemployed. C. frictionally unemployed. D. not a member of the labor force. 3. The unemployment rate of: A. %omen greatly exceeds that of men. B. %hites is roughly e2ual to that of African6Americans. C. %hite6collar %or'ers exceeds that of blue6collar %or'ers. D. teenagers is much higher than that of adults.
14. The natural rate of unemployment:
A. is fixed over time. B. is found by adding the cyclical and structural unemployment rates. C. may change from one decade to another. D. cannot be influenced by public policy. 11. Assuming the total population is 144 million- the civilian labor force is (4 million- and &. million %or'ers are employed- the unemployment rate is: A. percent. B. * percent. C. . percent. D. ( percent. 12. Assume the natural rate of unemployment in the F.7. economy is ( percent and the actual rate of unemployment is 3 percent. According to +'un$s la%- the negative ED# gap as a percent of potential ED# is: A. & percent. B. 0 percent. C. 14 percent. D. 2 percent. 1 . Cost6push inflation: A. is caused by excessive total spending. B. shifts the nation$s production possibilities curve left%ard. C. moves the economy in%ard from its production possibilities curve. D. is a mixed blessing because it has positive effects on real output and employment. 1&. @ho is least li'ely to be hurt by unanticipated inflation< A. a disabled laborer %ho is living off accumulated savings B. an o%ner of a small business C. a secretary D. a pensioned steel%or'er 1(. A burst stoc' mar'et bubble might adversely affect the economy by: A. causing rapid inflation. B. greatly reducing net exports. C. causing a severe negative %ealth effect and engendering pessimism about the economy$s future. D. raising interest rates. Ans%ers: 1. B 2. C .. A 0. C 1 . C 1&. B .D 3. D 1(. C &. B 14. C (. D 11. B *. C 12. B
?esson 1( 6 !acroeconomic "elationships 1. @ith an !#7 of .&- the !#C %ill be: A. 1.4 minus .&. B. .& minus 1.4. C. the reciprocal of the !#7. D. .&. 2. The consumption schedule sho%s: A. that the !#C increases in proportion to ED#. B. that households consume more %hen interest rates are lo%. C. that consumption depends primarily on the level of business investment. D. the amounts households intend to consume at various possible levels of aggregate income.
. A decline in disposable income: A. increases consumption by moving up%ard along a specific consumption schedule. B. decreases consumption because it shifts the consumption schedule do%n%ard. C. decreases consumption by moving do%n%ard along a specific consumption schedule. D. increases consumption because it shifts the consumption schedule up%ard. &. @hich of the follo%ing is correct< A. A#C I A#7 = 1. B. A#C I !#7 = 1. C. A#7 I !#C = 1. D. A#7 I !#7 = 1. (. The investment demand curve portrays an inverse 8negative9 relationship bet%een: A. investment and real ED#. B. the real interest rate and investment. C. the nominal interest rate and investment. D. the price level and investment. *. A high rate of inflation is li'ely to cause a: A. high nominal interest rate. B. lo% nominal interest rate. C. lo% rate of gro%th of nominal ED#. D. decrease in nominal %ages. .. /nvestment spending in the Fnited 7tates tends to be unstable because: A. expected profits are highly variable. B. capital goods are durable. C. innovation occurs at an irregular pace. D. all of these contribute to the instability. 0. The multiplier is: A. 1J!#C. B. 1J81 I !#C9. C. 1J!#7. D. 1J81 6 !#79. 3. /f the !#C is ..4 and gross investment increases by ) billion- the e2uilibrium ED# %ill: A. increase by )14 billion. B. increase by )2.14 billion. C. decrease by )&.23 billion. D. increase by )&.23 billion. 14. The practical significance of the multiplier is that it: A. e2uates the real interest rate and the expected rate of return on investment. B. magnifies initial changes in spending into larger changes in ED#. C. 'eeps inflation %ithin tolerable limits. D. helps to stabili,e the economy. 11. The actual multiplier effect in the F.7. economy is less than the multiplier effect in the text examples because: A. the real6%orld !#7 is larger than the !#7 in the examples. B. in addition to saving- households use some of any increase in income to buy imported goods and to pay additional taxes. C. the gap bet%een the nominal interest rate and the real interest rate %idens as the economy expands or contracts. D. the !#C in the Fnited 7tates is greater than 1. 12. The multiplier is useful in determining the: A. full6employment unemployment rate.
B. level of business inventories. C. rate of inflation. D. change in ED# resulting from a change in spending. 1 . /n annual percentage terms- investment spending in the Fnited 7tates is: A. less variable than real ED#. B. less variable than consumption spending. C. less variable than the price level. D. more variable than real ED#. 1&. @hen consumption and saving are graphed relative to real ED#- an increase in personal taxes %ill shift: A. both the consumption and saving schedules do%n%ard. B. both the consumption and saving schedules up%ard. C. the consumption schedule up%ard and the saving schedule do%n%ard. D. the consumption schedule do%n%ard and the saving schedule up%ard. 1(. The greater is the marginal propensity to consume- the: A. smaller is the marginal propensity to save. B. higher is the interest rate. C. lo%er is the average propensity to consume. D. lo%er is the price level. Ans%ers: 1. A 2. D .. D 0. C 1 . D 1&. A .C 3. A 1(. A &. A 14. B (. B 11. B *.A 12. D
+ leftward shift in the supply curve of product 6 will increase e/uilibrium price to a greater extent the< +. more inelastic the demand for the product. 8. more elastic the supply curve. '. larger the elasticity of demand coefficient. :. more elastic the demand for the product. 2* =n a competitive mar5et economy firms will select the least-cost production techni/ue because< +. 4dollar voting4 by consumers mandates such a choice. 8. such choices will result in the full employment of available resources. '. to do so will maximize the firms' profits. :. this will prevent new firms from entering the industry. %* =f the demand for farm products is price inelastic" a good harvest will cause farm revenues to< +. decrease 8. increase '. either increase or decrease" depending on what happens to supply. :. be unchanged. )* 'amille's 'reations and Julia's Jewels both sell beads in a competitive mar5et. =f at the mar5et price of $&" both are running out of beads to sell (they can't 5eep up with the /uantity demanded at that price*" then we would expect both 'amille's and Julia's to< +. raise their price and increase their /uantity supplied. 8. raise their price and reduce their /uantity supplied. '. lower their price and increase their /uantity supplied.
:. lower their price and reduce their /uantity supplied. &* @ince their introduction" prices of :,: players have fallen and the /uantity purchased has increased. This statement< +. suggests that the demand for :,: players has increased. 8. suggests that the supply of :,: players has increased. '. constitutes an exception to the law of supply in that they suggest a downward sloping supply curve. :. constitutes an exception to the law of demand in that they suggest an upward sloping demand curve. .* =f price is above the e/uilibrium level" competition among sellers to reduce the resulting< +. shortage will decrease /uantity demanded and increase /uantity supplied. 8. surplus will increase /uantity demanded and decrease /uantity supplied. '. shortage will increase /uantity demanded and decrease /uantity supplied. :. surplus will decrease /uantity demanded and increase /uantity supplied. * + firm that is motivated by self interest should< +. hire each input so the productivity of each is e/ual at the margin. 8. employ the combination of resources that will produce the profit-maximizing output at the minimum cost. '. always use large amounts of cheap inputs and small amounts of expensive inputs in producing its output. :. always use large amounts of the most productive inputs and small amounts of the least productive inputs in producing its output. 8* =f technology dictates that labor and capital must be used in fixed proportions" an increase in the price of capital will cause a firm to use< +. more labor as a conse/uence of the output effect. 8. more labor as a conse/uence of the substitution effect. '. less labor as a conse/uence of the output effect. :. less labor as a conse/uence of the substitution effect. A* =f a firm is selling in an imperfectly competitive product mar5et" then< +. the marginal products of successive wor5ers can be sold at a constant price. 8. +. average product will be less than marginal product for any number of wor5ers hired. '. the marginal products of successive wor5ers must be sold at lower prices. :. the marginal products of successive wor5ers can be sold at higher prices. $!* Bhich of the following represents a long-run adLustment> +. a supermar5et hires four additional cler5s 8. a farmer uses an extra dose of fertilizer on his corn crop '. unable to meet foreign competition" a ;.@. watch manufacturer sells one of its branch plants :. a steel manufacturer cuts bac5 on its purchases of co5e and iron ore $$* =n the short run the @ure-@creen T-@hirt 'ompany is producing &!! units of output. =ts average variable costs are $2.!! and its average fixed costs are $.&!. The firm's total costs< +. are $$"$!!. 8. are $2.&!. '. are $$"2&!. :. are $ &!.
$2* =n which of the following industries are economies of scale exhausted at relatively low levels of output> +. newspaper printing 8. aircraft production '. automobile manufacturing :. concrete mixing $%* + firm can hire six wor5ers at a wage rate of $8 per hour but must pay $A per hour to all of its employees to attract a seventh wor5er. The marginal wage cost of the seventh wor5er is< +. $2$. 8. $A. '. $$!. :. $$&. $)* 'onstruction wor5ers fre/uently sponsor political lobbying in support of greater public spending on highways and public buildings. Mne reason they do this is to< +. increase the price of substitute inputs. 8. restrict the supply of construction wor5ers. '. increase the elasticity of demand for construction wor5e
1. Marginal utility can be: A. positive, but not negative. B. positive or negative, but not zero. C. positive, negative, or zero. D. decreasing, but not negative.
2. Refer to the above data. The value for X is: A. 15. B. 5. C. 55. D. 10. 3. Marginal utility is the: A. sensitivity of consumer purchases of a good to changes in the price of that good. B. change in total utility obtained by consuming one more unit of a good. C. change in total utility obtained by consuming another unit of a good divided by the change in the price of that good. D. total utility associated with the consumption of a certain number of units of a good divided by the number of units consumed.
4. Refer to the above diagram. The marginal utility of the third unit of X is: A. 5. B. 4. C. 2. D. 15. 5. Where total utility is at a maximum, marginal utility is: A. negative. B. positive and increasing. C. zero. D. positive but decreasing.
6. To maximize utility a consumer should allocate money income so that the: A. elasticity of demand on all products purchased is the same. B. marginal utility obtained from the last dollar spent on each product is the same. C. total utility derived from each product consumed is the same. D. marginal utility of the last unit of each product consumed is the same. 7. The marginal utility of the last unit of apples consumed is 12 and the marginal utility of the last unit of bananas consumed is 8. What set of prices for apples and bananas, respectively, would be consistent with consumer equilibrium? A. $4 and $6 B. $6 and $4 C. $8 and $12 D. $16 and $9 8. If a rational consumer is in equilibrium, which of the following conditions will hold true? A. MUa = MUb = MUc = ... = MUn. B. The marginal utility of each good purchased will be zero. C. The marginal utility of the last dollar spent on each good purchased will be the same. D. The total utility obtained from each good purchased will be the same. 9. A consumer's demand curve for a product is downsloping because: A. total utility falls below marginal utility as more of a product is consumed. B. marginal utility diminishes as more of a product is consumed. C. time becomes less valuable as more of a product is consumed. D. the income and substitution effects precisely offset each other. Answer the question on the basis of the following marginal utility data for products X and Y. Assume that the prices of X and Y are $4 and $2 respectively and that the consumer's income is $18.
10. Refer to the above data. What quantities of X and Y should be purchased to maximize utility? A. 2 of X and 1 of Y B. 4 of X and 5 of Y C. 2 of X and 5 of Y D. 2 of X and 6 of Y 11. An explicit cost is: A. omitted when accounting profits are calculated. B. a money payment made for resources not owned by the firm itself. C. an implicit cost to the resource owner who receives that payment. D. always in excess of a resource's opportunity cost.
The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 12. Refer to the above data. Creamy Crisp's accounting profit is: A. $150,000. B. $380,000. C. $230,000. D. $294,000. 13. Refer to the above data. Creamy Crisp's economic profit is: A. $150,000. B. $80,000. C. $230,000. D. $94,000. 14. Refer to the above data. If, other things equal, Creamy Crisp's revenue fell to $286,000: A. its implicit costs, including a normal profit, would exceed its explicit costs. B. it would earn a normal profit but not an economic profit. C. it would suffer an economic loss. D. its accounting profit would fall to zero. Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed.
15. Refer to the above data. The marginal product of the sixth worker is: A. 180 units of output. B. 30 units of output. C. 15 units of output. D. negative. 16. Refer to the above data. Average product is at a maximum when: A. five workers are hired. B. four workers are hired. C. three workers are hired. D. two workers are hired.
17. To economists, the main difference between the short run and the long run is that: A. the law of diminishing returns applies in the long run, but not in the short run. B. in the long run all resources are variable, while in the short run at least one resource is fixed. C. fixed costs are more important to decision making in the long run than they are in the short run. D. in the short run all resources are fixed, while in the long run all resources are variable.
18. In the above diagram the range of diminishing marginal returns is: A. 0Q3. B. 0Q2. C. Q1Q2. D. Q1Q3. Use the following data to answer the question:
19. Refer to the above data. The average product (AP) when two units of labor are hired is: A. 8. B. 9. C. 10. D. 18. 20. Refer to the above data. Diminishing returns begin to occur with the hiring of the _________ unit of labor. A. first B. second C. third D. seventh
21. Refer to the above data. Marginal product becomes negative with the hiring of the __________ unit of labor. A. third B. fourth C. sixth D. seventh 22. Fixed cost is: A. the cost of producing one more unit of capital, for example, machinery. B. any cost which does not change when the firm changes its output. C. average cost multiplied by the firm's output. D. usually zero in the short run. 23. If a firm decides to produce no output in the short run, its costs will be: A. its marginal costs. B. its variable costs. C. its fixed costs. D. zero. 24. A purely competitive seller is: A. both a "price maker" and a "price taker." B. neither a "price maker" nor a "price taker." C. a "price taker." D. a "price maker." 25. The demand curve in a purely competitive industry is _____, while the demand curve to a single firm in that industry is _____. A. perfectly inelastic, perfectly elastic B. downsloping, perfectly elastic C. downsloping, perfectly inelastic D. perfectly elastic, downsloping 26. A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating: A. price and average total cost. B. price and average fixed cost. C. marginal revenue and marginal cost. D. price and marginal revenue. 27. When a firm is maximizing profit it will necessarily be: A. maximizing profit per unit of output. B. maximizing the difference between total revenue and total cost. C. minimizing total cost. D. maximizing total revenue.
28. Suppose you find that the price of your product is less than minimum AVC. You should: A. minimize your losses by producing where P = MC. B. maximize your profits by producing where P = MC. C. close down because, by producing, your losses will exceed your total fixed costs. D. close down because total revenue exceeds total variable cost.
Answer the question on the basis of the following data confronting a firm:
29. Refer to the above data. If the firm's minimum average variable cost is $10, the firm's profit-maximizing level of output would be: A. 2. B. 3. C. 4. D. 5. 30. If a firm is confronted with economic losses in the short run, it will decide whether or not to produce by comparing: A. marginal revenue and marginal cost. B. price and minimum average variable cost. C. total revenue and total cost. D. total revenue and total fixed cost. 31. A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should: A. shut down in the short run. B. produce because the resulting loss is less than its TFC. C. produce because it will realize an economic profit. D. liquidate its assets and go out of business.
32. Refer to the above diagram for a purely competitive producer. The firm will produce at a loss at all prices: A. above P1. B. above P3. C. above P4. D. between P2 and P3.
33. The primary force encouraging the entry of new firms into a purely competitive industry is: A. normal profits earned by firms already in the industry. B. economic profits earned by firms already in the industry. C. government subsidies for start-up firms. D. a desire to provide goods for the betterment of society.
34. If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then: A. the selling price for this firm is above the market equilibrium price. B. new firms will enter this market. C. some existing firms in this market will leave. D. there must be price fixing by the industry's firms. 35. Long-run competitive equilibrium: A. is realized only in constant-cost industries. B. will never change once it is realized. C. is not economically efficient. D. results in zero economic profits. 36. A purely competitive firm: A. must earn a normal profit in the short run. B. cannot earn economic profit in the long run. C. may realize either economic profit or losses in the long run. D. cannot earn economic profit in the short run. 37. When LCD televisions first came on the market, they sold for at least $1,000, and some for much more. Now many units can be purchased for under $400. These facts imply that: A. the LCD television industry was once competitive, but is now monopolistic. B. fewer firms produce LCD televisions than was the case five or ten years ago. C. the demand curve for LCD televisions has shifted leftward. D. the LCD television industry is a decreasing-cost industry. 38. The MR = MC rule applies: A. in the short run, but not in the long run. B. in the long run, but not in the short run. C. in both the short run and the long run. D. only to a purely competitive firm.
39. Refer to the above diagrams which pertain to a purely competitive firm producing output q and the industry in which it operates. In the long run we should expect: A. firms to enter the industry, market supply to rise, and product price to fall. B. firms to leave the industry, market supply to rise, and product price to fall. C. firms to leave the industry, market supply to fall, and product price to rise. D. no change in the number of firms in this industry.
40. Creative destruction is: A. the process by which large firms buy up small firms. B. the process by which new firms and new products replace existing dominant firms and products. C. a term coined many years ago by Adam Smith. D. is applicable to planned economies, but not to market economies. $. 9xplicit costs are payments to a. hourly employees. b. insurance companies. c. utility companies. d. all of the above. +K@< d. 9xplicit costs are payments to non owners of a firm. 2. =mplicit costs are the opportunity costs of using the resources of a. outsiders. b. owners. c. ban5s. d. retained earnings. +K@< b. =mplicit costs are opportunity costs that a business owner incurs when using resources owned by the firm. %. Bhich of the following e/ualities is true> a. 9conomic profit I total revenue O accounting profit. b. 9conomic profit I total revenue - explicit costs - accounting profit. c. 9conomic profit I total revenue - implicit costs - explicit costs. d. 9conomic profit I opportunity costs 1 accounting costs. +K@< c. The difference between accounting profit and economic profit is that economic profit is total revenue minus both explicit and implicit costs. +ccounting profit is total revenue minus explicit costs only. ). 0ixed inputs are factors of production that a. are determined by a firmPs plant size. b. can be increased or decreased /uic5ly as output changes. c. cannot be increased or decreased as output changes. d. none of the above. +K@< c. =n the short run" there are two types of inputs" fixed and variable. 8ecause a firm cannot change its plant capacity" some of its inputs are fixed. =n the long run" all costs are variable. &. +n example of a variable input is a. raw materials. b. energy. c. hourly labor.
d. all of the above. +K@< d. +s a firm produces more" it will use more raw materials" energy" and labor. Therefore" all are variable costs. .. @uppose a car wash has 2 washing stations and & wor5ers and is able to wash $!! cars per day. Bhen it adds a third station" but no more wor5ers" it is able to wash $&! cars per day. The marginal product of the third washing station is a. $!! cars per day. b. $&! cars per day. c. & cars per day. d. &! cars per day. +K@< d. &! cars is how many extra cars can be washed by adding a new machine" ceteris paribus. . =f the units of variable input in a production process are $" 2" %" )" and & and the corresponding total outputs are $!" 22" %%" )2" and )8" respectively" the marginal product of the fourth unit is a. 2. b. .. c. A. d. )2. +K@< c. The difference between )2 and %% is A" the extra output when producing ) units instead of %. 8. The total fixed cost curve is a. upward sloping. b. downward sloping. c. upward sloping" and then downward sloping. d. unchanged with the level of output. +K@< d. 0ixed costs never change regardless of the units of outputQ therefore its curve has to be horizontal at a fixed cost dollar value. A. +ssuming that the marginal cost curve is a smooth J-shaped curve" the corresponding total cost curve has a (an* a. linear shape. b. @-shape. c. ;-shape. d. reverse @-shape. +K@< d. Marginal cost decreases as output increases from zero" and then increases beyond a certain output level. + reverse @-@hape total cost curve corresponds to the changes in its slope (M'* as output expands.
$!. =f both the marginal cost and the average variable cost curves are J-shaped" at the point of minimum average variable cost" the marginal cost must be a. greater than the average variable cost. b. less than the average variable cost. c. e/ual to the average variable cost. d. at its minimum. +K@< c. =f the margin is above the average" the average will increase. =f the margin is less than the average" the average will decrease. =f the margin e/uals the average" average does not change" that is" it is a horizontal curve. $$. Bhich of the following is true at the point where diminishing returns set in> a. 8oth marginal product and marginal cost are at a maximum. b. 8oth marginal product and marginal cost are at a minimum. c. Marginal product is at a maximum" and marginal cost at a minimum. d. Marginal product is at a minimum" and marginal cost at a maximum. +K@< c. The rising portion of the M# curve corresponds to the declining portion of the M' curve" and vice versa.
>xhi"it '( Total +ost +urve
T+
'&(((
Total cost dollars!
G.( .(( -.(
.(
'(( '.(
-((
-.(
Auantity of output
$%
$2. +s shown in 9xhibit $!" total fixed cost for the firm is a. zero. b. $2&!. c. $&!!. d. $ &!. e. $$"!!!. +K@< b. $2&! is the answer because total cost is ! when output is zero. These are costs that have to be paid even when output is zero. $%. +s shown in 9xhibit $!" the total cost of producing $!! units of output per day is a. zero. b. $2&!.
c. $&!!. d. $ &!. e. $$"!!!. +K@< c. + vertical line drawn at $!! units crosses the total cost curve at $&!!. $). =n 9xhibit $!" if the total cost of producing AA units of output per day is $) &" the marginal cost of producing the $!!th unit of output per day is approximately a. zero. b. $2&. c. $) &. d. $&!!. +K@< b. Bhen total cost at AA units is $) & and total cost at $!! units is $&!!" the cost of producing the $!!th unit is $2&. $&. 9ach potential short-run average total cost curve is tangent to the long-run average cost curve at a. the level of output that minimizes short-run average total cost. b. the minimum point of the average total cost curve. c. the minimum point of the long-run average cost curve. d. a single point on the short-run average total cost curve. +K@< d. +s shown in the next slide" the long-run average cost curve is derived from all possible @F+' curves. ?eometrically" the only way to draw this is to connect all the curves by a smooth curveQ thus" the HF+' curve touches each @F+' curve at only one place. $.. @uppose a typical firm is producing 6 units of output per day. ;sing any other plant size" the long-run average cost would increase. The firm is operating at a point which a. its long-run average cost curve is at a minimum. b. its short-run average total cost curve is at a minimum. c. both (a* and (b*are true. d. neither (a* nor (b* is true. +K@< c. Bhen a firm is producing at the minimum points of the long-run average cost curve" it is operating at the most efficient level possible. $ . The downward-sloping segment of the long-run average cost curve corresponds to a. diseconomies of scale. b. both economies and diseconomies of scale. c. the decrease in average variable cost. d. economies of scale. +K@<
d. +s shown in the next slide" economies of scale ta5e place when a firm increases its efficiency by producing more units of output. $8. Hong-run diseconomies of scale exist when the a. short-run average total cost curve falls. b. long-run marginal cost curve rises. c. long-run average cost curve falls. d. short-run average cost curve rises. e. long-run average cost curve rises. +K@< e. :iseconomies of scale are evident when increasing output leads to inefficiencies. $A. Hong-run constant returns to scale exist when the a. short-run average total cost curve is constant. b. long-run average cost curve rises. c. long-run average cost curve is flat. d. long-run average cost curve falls. +K@< c. 'onstant returns to scale are evident when there is no change in costs as output increases. 2!. Bhich of the following is not a source of economies of scale> a. :ivision and specialization of labor b. =ncrease in output c. More efficient use of capital d. +ll of the above e. 'entralized mar5eting +K@< d. 'entralized mar5eting is not one of the reasons for economies of scale.
40. Creative destruction is: A. the process by which large firms buy up small firms. B. the process by which new firms and new products replace existing dominant firms and products. C. a term coined many years ago by Adam Smith. D. is applicable to planned economies, but not to market economies. )$. Bhich of the following is correct> +. 8oth purely competitive and monopolistic firms are 4price ta5ers.4 8. 8oth purely competitive and monopolistic firms are 4price ma5ers.4 +. + purely competitive firm is a 4price ta5er"4 while a monopolist is a 4price ma5er.4 :. + purely competitive firm is a 4price ma5er"4 while a monopolist is a 4price ta5er.4 )2. Bhich of the following is a characteristic of pure monopoly> +. close substitute products 6. barriers to entry '. the absence of mar5et power :. 4price ta5ing4 )%. The nondiscriminating pure monopolist's demand curve< A. is the industry demand curve. 8. shows a direct or positive relationship between price and /uantity demanded. '. tends to be inelastic at high prices and elastic at low prices. :. is identical to its marginal revenue curve. )). Bhen a firm is on the inelastic segment of its demand curve" it can< +. increase total revenue by reducing price. 8. decrease total costs by decreasing price. +. increase profits by increasing price. :. increase total revenue by more than the increase in total cost by increasing price. +nswer the /uestion on the basis of the demand schedule shown below<
)&. Fefer to the above data. The marginal revenue obtained from selling the third unit of output is< +. $.. 8. $$. +. $%. :. $&.
).. 0or a pure monopolist marginal revenue is less than price because< +. the monopolist's demand curve is perfectly elastic. 8. the monopolist's demand curve is perfectly inelastic. +. when a monopolist lowers price to sell more output" the lower price applies to all units sold. :. the monopolist's total revenue curve is linear and slopes upward to the right. ) . + pure monopolist should never produce in the< +. elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price. 6. inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price. '. inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price. :. segment of its demand curve where the price elasticity coefficient is greater than one. +nswer the /uestion on the basis of the following table showing the demand schedule facing a nondiscriminating monopolist<
)8. Fefer to the above table. The monopolist will select its profit-maximizing level of output somewhere within the< +. %-& unit range of output. 6. $-% unit range of output. '. $-) unit range of output. :. 2-) unit range of output.
)A. Bhich of the above diagrams correctly portray a nondiscriminating pure monopolist's demand (D* and marginal revenue (MF* curves> +. + 6. 8 '. ' :. :
&!. Bhich of the above diagrams correctly portray the demand (D) and marginal revenue (MF* curves of a purely competitive seller> +. + 8. 8 +. ' :. : &$. @uppose that a pure monopolist can sell & units of output at $) per unit and . units at $%.A! per unit. The monopolist will produce and sell the sixth unit if its marginal cost is< +. $) or less. 8. $%.A! or less. '. $%.&! or less. C. $%.)! or less.
&2. Fefer to the above data for a nondiscriminating monopolist. This firm will maximize its profit by producing< +. % units. 6. ) units. '. & units. :. . units. &%. Fefer to the above data for a nondiscriminating monopolist. +t its profit-maximizing output" this firm's price will exceed its marginal cost by RRRR and its average total cost by RRR. +. $2!Q $2 .%% 8. $$!Q $$!.)! '. $2)Q $2 .%% C. $%!Q $2!.&! &). Fefer to the above data for a nondiscriminating monopolist. +t its profit-maximizing output" this firm's total costs will be< +. $%!!. 8. $2)8. +. $$A8. :. $$2.. &&. Fefer to the above data. +t its profit-maximizing output" this firm's total revenue will be< +. $%!!. 8. $$A8. '. $$8!. C. $28!.
&.. Fefer to the above data for a nondiscriminating monopolist. +t its profit-maximizing output" this firm's total profit will be< A. $82. 8. zero. '. $&). :. $2 . 1. For economists, the word "utility" means: A. versatility and flexibility. B. rationality. C. pleasure or satisfaction. D. purposefulness.
2. Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any money on my financial investment." His economist friend points out that in effect he did lose money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of: A. opportunity costs. B. marginal benefits that exceed marginal costs. C. imperfect information. D. normative economics. 3. The assertion that "There is no free lunch" means that: A. there are always tradeoffs between economic goals. B. all production involves the use of scarce resources and thus the sacrifice of alternative goods. C. marginal analysis is not used in economic reasoning. D. choices need not be made if behavior is rational. 4. The budget line shows: A. the amount of product A that a consumer is willing to give up to obtain one more unit of product B. B. all possible combinations of two goods that can be purchased, given money income and the prices of the goods. C. the minimum amount of two goods that a consumer can purchase with a given money income. D. all possible combinations of two goods that yield the same level of utility to the consumer.
5. Refer to the budget line shown in the diagram above. If the consumer's money income is $20, the: A. prices of C and D cannot be determined. B. price of C is $2 and the price of D is $4. C. consumer can obtain a combination of 5 units of both C and D. D. price of C is $4 and the price of D is $2. 6. Any point inside the production possibilities curve indicates: A. the presence of technological change. B. that resources are imperfectly substitutable among alternative uses. C. the presence of inflationary pressures. D. that more output could be produced with available resources.
7. Command systems are also known as: A. market systems. B. pure capitalism. C. laissez-faire capitalism. D. communism. 8. The two basic markets shown by the simple circular flow model are: A. capital goods and consumer goods. B. free and controlled. C. product and resource. D. household and business. 9. The law of demand states that, other things equal: A. price and quantity demanded are inversely related. B. the larger the number of buyers in a market, the lower will be product price. C. price and quantity demanded are directly related. D. consumers will buy more of a product at high prices than at low prices. 10. The income and substitution effects account for: A. the upward sloping supply curve. B. the downward sloping demand curve. C. movements along a given supply curve. D. shifts in the demand curve. 11. Which of the following would not shift the demand curve for beef? A. a widely publicized study that indicates beef increases one's cholesterol B. a reduction in the price of cattle feed C. an effective advertising campaign by pork producers D. a change in the incomes of beef consumers 12. If the demand curve for product B shifts to the right as the price of product A declines, then: A. both A and B are inferior goods. B. A is a superior good and B is an inferior good. C. A is an inferior good and B is a superior good. D. A and B are complementary goods. 13. If X is a normal good, a rise in money income will shift the: A. supply curve for X to the left. B. supply curve for X to the right. C. demand curve for X to the left. D. demand curve for X to the right. 14. A decrease in the price of digital cameras will: A. cause the demand curve for memory cards to become vertical. B. shift the demand curve for memory cards to the right. C. shift the demand curve for memory cards to the left. D. not affect the demand for memory cards.
15. Assume that the demand curve for product C is downsloping. If the price of C falls from $2.00 to $1.75: A. a smaller quantity of C will be demanded. B. a larger quantity of C will be demanded. C. the demand for C will increase. D. the demand for C will decrease. 16. A leftward shift of a product supply curve might be caused by: A. an improvement in the relevant technique of production. B. a decline in the prices of needed inputs. C. an increase in consumer incomes. D. some firms leaving an industry. 17. A government subsidy to the producers of a product: A. reduces product supply. B. increases product supply. C. reduces product demand. D. increases product demand. 18. Suppose that corn prices rise significantly. If farmers expect the price of corn to continue rising relative to other crops, then we would expect: A. the supply of ethanol, a corn-based product, to increase. B. consumer demand for wheat to fall. C. the supply to increase as farmers plant more corn. D. the supply to fall as farmers plant more of other crops.
19. Refer to the above table. If demand is represented by columns (3) and (2) and supply is represented by columns (3) and (5), equilibrium price and quantity will be: A. $10 and 60 units. B. $9 and 50 units. C. $8 and 60 units. D. $7 and 50 units. 20. Refer to the above table. Suppose that demand is represented by columns (3) and (2) and supply is represented by columns (3) and (5). If the price were artificially set at $9, A. the market would clear. B. a surplus of 20 units would occur. C. a shortage of 20 units would occur. D. demand would change from columns (3) and (2) to columns (3) and (1).
21. Refer to the above diagram. The equilibrium price and quantity in this market will be: A. $1.00 and 200. B. $1.60 and 130. C. $0.50 and 130. D. $1.60 and 290. 22. Refer to the above diagram. A surplus of 160 units would be encountered if the price was: A. $1.10, that is, $1.60 minus $.50. B. $1.60. C. $1.00. D. $0.50. 23. Refer to the above diagram. A shortage of 160 units would be encountered if price was: A. $1.10, that is, $1.60 minus $.50. B. $1.60. C. $1.00. D. $0.50. 24. If there is a surplus of a product, its price: A. is below the equilibrium level. B. is above the equilibrium level. C. will rise in the near future. D. is in equilibrium.
25. Refer to the above diagram. A price of $60 in this market will result in: A. equilibrium. B. a shortage of 50 units. C. a surplus of 50 units. D. a surplus of 100 units.
26. Refer to the above diagram. A price of $20 in this market will result in a: A. shortage of 50 units. B. surplus of 50 units. C. surplus of 100 units. D. shortage of 100 units. 27. Assume in a competitive market that price is initially below the equilibrium level. We can predict that price will: A. decrease, quantity demanded will decrease, and quantity supplied will increase. B. decrease and quantity demanded and quantity supplied will both decrease. C. increase, quantity demanded will increase, and quantity supplied will decrease. D. increase, quantity demanded will decrease, and quantity supplied will increase. 28. If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will: A. increase the quantity demanded by about 2.5 percent. B. decrease the quantity demanded by about 2.5 percent. C. increase the quantity demanded by about 25 percent. D. increase the quantity demanded by about 250 percent.
29. Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demanded increases from 110 to 118. Then the price elasticity of demand is: A. 4.00. B. 2.09. C. 1.37. D. 3.94. 30. The price elasticity of demand of a straight-line demand curve is: A. elastic in high-price ranges and inelastic in low-price ranges. B. elastic, but does not change at various points on the curve. C. inelastic, but does not change at various points on the curve. D. 1 at all points on the curve. 31. The price elasticity of demand is generally: A. negative, but the minus sign is ignored. B. positive, but the plus sign is ignored. C. positive for normal goods and negative for inferior goods. D. positive because price and quantity demanded are inversely related. 32. If a demand for a product is elastic, the value of the price elasticity coefficient is: A. zero. B. greater than one. C. equal to one. D. less than one.
33. Refer to the above diagram. Between prices of $5.70 and $6.30: A. D1 is more elastic than D2. B. D2 is an inferior good and D1 is a normal good. C. D1 and D2 have identical elasticities. D. D2 is more elastic than D1. 34. Refer to the above diagram and assume a single good. If the price of the good decreases from $6.30 to $5.70, consumer expenditure would: A. decrease if demand were D1 only. B. decrease if demand were D2 only. C. decrease if demand were either D1 or D2. D. increase if demand were either D1 or D2.
35. Refer to the above diagram and assume a single good. If the price of the good increased from $5.70 to $6.30 along D1, the price elasticity of demand along this portion of the demand curve would be: A. 0.8. B. 1.0. C. 1.2. D. 2.0.
36. Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is: A. 0.8. B. 1.2. C. 1.6. D. 8.0 37. A firm can sell as much as it wants at a constant price. Demand is thus: A. perfectly inelastic. B. perfectly elastic. C. relatively inelastic. D. relatively elastic. 38. Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11, and 0.29 for products W, X, Y, and Z respectively. A 1 percent decrease in price will increase total revenue in the case(s) of: A. W and Y. B. Y and Z. C. X and Z. D. Z and W. 39. If a firm finds that it can sell $13,000 worth of a product when its price is $5 per unit and $11,000 worth of it when its price is $6, then: A. the demand for the product is elastic in the $6-$5 price range. B. the demand for the product must have increased. C. elasticity of demand is 0.74. D. the demand for the product is inelastic in the $6-$5 price range. 40. Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by 10 percent, the quantity demanded will increase by: A. 2 percent and total expenditures on bread will rise. B. 2 percent and total expenditures on bread will fall. C. 20 percent and total expenditures on bread will fall. D. 20 percent and total expenditures on bread will rise. 41. Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is: A. decreasing. B. relatively elastic. C. perfectly elastic. D. relatively inelastic. 42. Suppose the income elasticity of demand for toys is +2.00. This means that: A. a 10 percent increase in income will increase the purchase of toys by 20 percent. B. a 10 percent increase in income will increase the purchase of toys by 2 percent. C. a 10 percent increase in income will decrease the purchase of toys by 2 percent. D. toys are an inferior good.
43. We would expect the cross elasticity of demand between dress shirts and ties to be: A. positive, indicating normal goods. B. positive, indicating complementary goods. C. negative, indicating substitute goods. D. negative, indicating complementary goods. 44. We would expect the cross elasticity of demand between Pepsi and Coke to be: A. positive, indicating normal goods. B. positive, indicating inferior goods. C. positive, indicating substitute goods. D. negative, indicating substitute goods. 45. Assume that a 3 percent increase in income across the economy produces a 1 percent decline in the quantity demanded of good X. The coefficient of income elasticity of demand for good X is: A. negative and therefore X is an inferior good. B. negative and therefore X is a normal good. C. positive and therefore X is an inferior good. D. positive and therefore X is a normal good. 46. The two main characteristics of a public good are: A. production at constant marginal cost and rising demand. B. nonexcludability and production at rising marginal cost. C. nonrivalry and nonexcludability. D. nonrivalry and large negative externalities. 47. Unlike a private good, a public good: A. has no opportunity costs. B. has benefits available to all, including nonpayers. C. produces no positive or negative externalities. D. is characterized by rivalry and excludability. 48. Nonexcludability describes a condition where: A. one person's consumption of a good does not prevent consumption of the good by others. B. there is no effective way to keep people from using a good once it comes into being. C. sellers can withhold the benefits of a good from those unwilling to pay for it. D. there is no potential for free-riding behavior. 49. At the optimal quantity of a public good: A. marginal benefit exceeds marginal cost by the greatest amount. B. total benefit equals total cost. C. marginal benefit equals marginal cost. D. marginal benefit is zero. 50. The ability of a good or service to satisfy wants is called: A. utility maximization. B. opportunity cost. C. revenue potential. D. utility.
51. Marginal utility is the: A. sensitivity of consumer purchases of a good to changes in the price of that good. B. change in total utility obtained by consuming one more unit of a good. C. change in total utility obtained by consuming another unit of a good divided by the change in the price of that good. D. total utility associated with the consumption of a certain number of units of a good divided by the number of units consumed.
52. To maximize utility a consumer should allocate money income so that the: A. elasticity of demand on all products purchased is the same. B. marginal utility obtained from the last dollar spent on each product is the same. C. total utility derived from each product consumed is the same. D. marginal utility of the last unit of each product consumed is the same. Answer the question on the basis of the following total utility data for products L and M. Assume that the prices of L and M are $3 and $4 respectively and that the consumer's income is $18.
53. Refer to the above data. How many units of the two products will the rational consumer purchase? A. 3 of L and none of M B. 4 of L and 2 of M C. 3 of L and 5 of M D. 2 of L and 3 of M 54. Refer to the above data. What level of total utility does the rational consumer realize in equilibrium? A. 87 utils B. 104 utils C. 51 utils D. 58 utils 55. Diminishing marginal utility explains why: A. the income effect exceeds the substitution effect. B. the substitution effect exceeds the income effect. C. supply curves are upsloping. D. demand curves are downsloping. 56. Why do people tend to eat more at all-you-can-eat buffet restaurants than at restaurants where each item is purchased separately? A. Once the all-you-can-eat meal is purchased, consumers view additional trips back to the buffet as having a price of zero. B. MU/P is greater at all-you-can-eat restaurants. C. People who eat at all-you-can-eat restaurants do not experience diminishing marginal utility. D. Food at all-you-can-eat restaurants tends to have fewer calories, so consumers feel the need to consume a greater volume of food. 57. To the economist, total cost includes: A. explicit and implicit costs, including a normal profit. B. neither implicit nor explicit costs. C. implicit, but not explicit, costs. D. explicit, but not implicit, costs.
58. Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its accounting: A. profits were $100,000 and its economic profits were zero. B. losses were $500,000 and its economic losses were zero. C. profits were $500,000 and its economic profits were $1 million. D. profits were zero and its economic losses were $500,000. 59. The basic difference between the short run and the long run is that: A. all costs are fixed in the short run, but all costs are variable in the long run. B. the law of diminishing returns applies in the long run, but not in the short run. C. at least one resource is fixed in the short run, while all resources are variable in the long run. D. economies of scale may be present in the short run, but not in the long run. Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed.
60. Refer to the above data. Diminishing marginal returns become evident with the addition of the: A. sixth worker. B. fourth worker. C. third worker. D. second worker. 61. Refer to the above data. The marginal product of the sixth worker is: A. 180 units of output. B. 30 units of output. C. 15 units of output. D. negative. Use the following data to answer the question:
62. Refer to the above data. The average product (AP) when two units of labor are hired is: A. 8. B. 9. C. 10. D. 18.
63. Refer to the above data. Diminishing returns begin to occur with the hiring of the _________ unit of labor. A. first B. second C. third D. seventh 64. Refer to the above data. Marginal product becomes negative with the hiring of the __________ unit of labor. A. third B. fourth C. sixth D. seventh Answer the question on the basis of the following cost data:
65. Refer to the above data. Total fixed cost is: A. $6.25. B. $100.00. C. $150.00. D. $50.00. 66. Refer to the above data. The average total cost of five units of output is: A. $69. B. $78. C. $3. D. $10. 67. Refer to the above data. The total cost of four units of output is: A. $260. B. $77.50. C. $310. D. $215. 68. Refer to the above data. If the firm closed down in the short run and produced zero units of output, its total cost would be: A. zero. B. $50. C. $150. D. $100.
69. Refer to the above data. The marginal cost of the fifth unit of output is: A. $3. B. $62. C. $80. D. $78. 70. In which of the following market structures is there clear-cut mutual interdependence with respect to priceoutput policies? A. pure monopoly B. oligopoly C. monopolistic competition D. pure competition 71. An industry comprised of 40 firms, none of which has more than 3 percent of the total market for a differentiated product is an example of: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition.
72. An industry comprised of a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions is called: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition. 73. A purely competitive seller is: A. both a "price maker" and a "price taker." B. neither a "price maker" nor a "price taker." C. a "price taker." D. a "price maker." 74. For a purely competitive seller, price equals: A. average revenue. B. marginal revenue. C. total revenue divided by output. D. all of these.
Refer to the above short-run data. The profit-maximizing output for this firm is: A. above 440 units. B. 440 units. C. 320 units. D. 100 units. 76. In the short run the individual competitive firm's supply curve is that segment of the: A. average variable cost curve lying below the marginal cost curve. B. marginal cost curve lying above the average variable cost curve. C. marginal revenue curve lying below the demand curve. D. marginal cost curve lying between the average total cost and average variable cost curves. 77. Suppose you find that the price of your product is less than minimum AVC. You should: A. minimize your losses by producing where P = MC. B. maximize your profits by producing where P = MC. C. close down because, by producing, your losses will exceed your total fixed costs. D. close down because total revenue exceeds total variable cost.
75.
78. Refer to the above data. This firm is selling its output in a(n): A. monopolistically competitive market. B. monopolistic market. C. purely competitive market. D. oligopolistic market. 79. Refer to the above data. If the firm's minimum average variable cost is $10, the firm's profit-maximizing level of output would be: A. 2. B. 3. C. 4. D. 5. 80. Refer to the above data. At the profit-maximizing output the firm's total revenue is: A. $48. B. $32. C. $80. D. $64. 81. Refer to the above data. Assuming total fixed costs equal to zero, the firm's: A. economic profit is $12. B. economic profit is $16. C. loss is $14. D. economic profit is $3. 82. A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should: A. shut down in the short run. B. produce because the resulting loss is less than its TFC. C. produce because it will realize an economic profit. D. liquidate its assets and go out of business.
83. Refer to the above diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is: A. P1. B. P2. C. P3. D. P4. 84. Refer to the above diagram for a purely competitive producer. The firm will produce at a loss at all prices: A. above P1. B. above P3. C. above P4. D. between P2 and P3. 85. Refer to the above diagram for a purely competitive producer. If product price is P3: A. the firm will maximize profit at point d. B. the firm will earn an economic profit. C. economic profits will be zero. D. new firms will enter this industry. Answer the question on the basis of the following cost data for a firm that is selling in a purely competitive market:
86. Refer to the above data. If the market price for the firm's product is $12, the competitive firm will produce: A. 4 units at a loss of $109. B. 4 units at an economic profit of $31.75. C. 8 units at a loss of $48.80. D. zero units at a loss of $100. 87. Refer to the above data. If the market price for the firm's product is $32, the competitive firm will produce: A. 8 units at an economic profit of $16. B. 6 units at an economic profit of $7.98. C. 10 units at an economic profit of $4. D. 7 units at an economic profit of $41.50. 88. Refer to the above data. If the market price for the firm's product is $28, the competitive firm will: A. produce 4 units at a loss of $17.40. B. produce 7 units at a loss of $14.00. C. shut down in the short run. D. produce 6 units at a loss of $23.80.
89. In a purely competitive industry: A. there will be no economic profits in either the short run or the long run. B. economic profits may persist in the long run if consumer demand is strong and stable. C. there may be economic profits in the short run, but not in the long run. D. there may be economic profits in the long run, but not in the short run. 90. If a purely competitive constant-cost industry is realizing economic profits, we can expect industry supply to: A. increase, output to increase, price to decrease, and profits to decrease. B. increase, output to increase, price to increase, and profits to decrease. C. decrease, output to decrease, price to increase, and profits to increase. D. increase, output to decrease, price to decrease, and profits to decrease. 91. Which of the following conditions is true for a purely competitive firm in long-run equilibrium? A. P > MC = minimum ATC. B. P > MC > minimum ATC. C. P = MC = minimum ATC. D. P < MC < minimum ATC. 92. Which of the following is correct? A. Both purely competitive and monopolistic firms are "price takers." B. Both purely competitive and monopolistic firms are "price makers." C. A purely competitive firm is a "price taker," while a monopolist is a "price maker." D. A purely competitive firm is a "price maker," while a monopolist is a "price taker." 93. Which of the following is a characteristic of pure monopoly? A. close substitute products B. barriers to entry C. the absence of market power D. "price taking" Answer the question on the basis of the demand schedule shown below:
94. Refer to the above data. The marginal revenue obtained from selling the third unit of output is: A. $6. B. $1. C. $3. D. $5.
95. Which of the following is characteristic of a pure monopolist's demand curve? A. Average revenue is less than price. B. Its elasticity coefficient is 1 at all levels of output. C. Price and marginal revenue are equal at all levels of output. D. It is the same as the market demand curve. 96. Because the monopolist's demand curve is downsloping: A. MR will equal price. B. price must be lowered to sell more output. C. the elasticity coefficient will increase as price is lowered. D. its supply curve will also be downsloping. 97. An unregulated pure monopolist will maximize profits by producing that output at which: A. P = MC. B. P = ATC. C. MR = MC. D. MC = AC. 98. Suppose that a pure monopolist can sell 5 units of output at $4 per unit and 6 units at $3.90 per unit. The monopolist will produce and sell the sixth unit if its marginal cost is: A. $4 or less. B. $3.90 or less. C. $3.50 or less. D. $3.40 or less. 99. A pure monopolist is producing an output such that ATC = $4, P = $5, MC = $2, and MR = $3. This firm is realizing: A. a loss that could be reduced by producing more output. B. a loss that could be reduced by producing less output. C. an economic profit that could be increased by producing more output. D. an economic profit that could be increased by producing less output.
100. Refer to the above diagram. To maximize profits or minimize losses this firm should produce: A. E units and charge price C. B. E units and charge price A. C. M units and charge price N. D. L units and charge price LK.
101. Refer to the above diagram. At the profit-maximizing level of output, total revenue will be: A. NM times 0M. B. 0AJE. C. 0EGC. D. 0EHB. 102. Refer to the above diagram. At the profit-maximizing level of output, total cost will be: A. NM times 0M. B. 0AJE. C. 0CGC. D. 0BHE. 103. Refer to the above diagram. At the profit-maximizing level of output, the firm will realize: A. an economic profit of ABHJ. B. an economic profit of ACGJ. C. a loss of GH per unit. D. a loss of JH per unit. 104. If profits are maximized (or losses minimized), which of the following conditions is common to both unregulated monopoly and to pure competition? A. MC = P B. MC = ATC C. MR = MC D. P = MR
105. Refer to the above diagram for a pure monopolist. Monopoly price will be: A. e. B. c. C. b. D. a. 106. Refer to the above diagram for a pure monopolist. Monopoly output will be: A. between f and g. B. h. C. g. D. f.
107. Refer to the above diagram. If this industry is comprised of only one seller, the profit-maximizing price and quantity will be: A. P3 and Q3. B. P1 and Q3. C. P2 and Q2. D. indeterminate on the basis of the information given. 108. Which of the following statements is correct? A. The pure monopolist will maximize profit by producing at that point on the demand curve where elasticity is zero. B. In seeking the profit-maximizing output the pure monopolist underallocates resources to its production. C. The pure monopolist maximizes profits by producing that output at which the differential between price and average cost is the greatest. D. Purely monopolistic sellers earn only normal profits in the long run. 109. When economists say that the demand for labor is a derived demand, they mean that it is: A. dependent on government expenditures for public goods and services. B. related to the demand for the product or service labor is producing. C. based on the desire of businesses to exploit labor by paying below equilibrium wage rates. D. based on the assumption that workers are trying to maximize their money incomes. 110. Marginal product is: A. the output of the least skilled worker. B. a worker's output multiplied by the price at which each unit can be sold. C. the amount an additional worker adds to the firm's total output. D. the amount any given worker contributes to the firm's total revenue. 111. Assume labor is the only variable input and that an additional input of labor increases total output from 72 to 78 units. If the product sells for $6 per unit in a purely competitive market, the MRP of this additional worker is: A. $6. B. $12. C. $36. D. $72. 112. If one worker can pick $30 worth of grapes and two workers together can pick $50 worth of grapes, the: A. marginal revenue product of each worker is $25. B. marginal revenue product of the first worker is $20. C. marginal revenue product of the second worker is $20. D. data given do not permit the determination of the marginal revenue product of either worker.
Answer the question on the basis of the following information for Manfred's Shoe Shine Parlor. Assume Manfred hires labor, its only variable input, under purely competitive conditions. Shoe shines are also sold competitively.
113. Refer to the above data. How many units of output are produced when 2 workers are employed? A. 4 B. 16 C. 24 D. 10 114. Refer to the above data. What is the marginal product of the sixth worker? A. 2 units B. 3 units C. 4 units D. 5 units 115. Refer to the above data. At what price does each shoe shine sell? A. $1 B. $2 C. $3 D. $2.50 116. Refer to the above data. If the wage rate is $11, how many workers will Manfred hire to maximize profits? A. 1 B. 2 C. 3 D. 5 117. Refer to the above data. If the wage rate is $11 and Manfred's only fixed input is capital, the total cost of which is $30, then what will be his economic profit? A. $62 B. $42 C. $28 D. $32 118. Assume that a restaurant is hiring labor in an amount such that the MRC of the last worker is $16 and her MRP is $12. On the basis of this information we can say that: A. profits will be increased by hiring additional workers. B. profits will be increased by hiring fewer workers. C. marginal revenue product must exceed average revenue product. D. the restaurant is maximizing profits.
Answer the question on the basis of the data contained in the following table. Assume that the firm is hiring labor in a purely competitive market.
119. Refer to the above data. If the wage rate is $20, how many workers will the firm choose to employ? A. 5 B. 4 C. 3 D. 2 120. Refer to the above data. If the wage rate is $11, how many workers will the firm choose to employ? A. 5 B. 4 C. 3 D. 2 121. If the nominal wages of carpenters rose by 5 percent in 2010 and the price level increased by 3 percent, then the real wages of carpenters: A. decreased by 2 percent. B. increased by 2 percent. C. increased by 3 percent. D. increased by 8 percent. 122. If the nominal wage rises by 4 percent, and the price level rises by 7 percent, the real wage will: A. be unaffected. B. rise by 3 percent. C. fall by 3 percent. D. rise by 11 percent.
123. Refer to the above diagram. Assuming no union or relevant minimum wage, the firm represented will hire: A. Q2 workers and pay a W4 wage rate. B. Q2 workers and pay a W1 wage rate. C. Q3 workers and pay a W2 wage rate. D. Q4 workers and pay a W1 wage rate. 124. A progressive tax is such that: A. tax rates are higher the greater one's income. B. the same tax rate applies to all income receivers, so that the rich pay absolutely more taxes than the poor. C. entrepreneurial income is exempt from taxation. D. the revenues it yields are spent on transfer payments. The following data represent a personal income tax schedule. Answer the question on the basis of this information.
125. Refer to the above table. If your taxable income is $8,000, your average tax rate is: A. 25 percent and the marginal rate on additional income is also 25 percent. B. 25 percent and the marginal rate on additional income is 40 percent. C. 25 percent and the marginal rate on additional income cannot be determined from the information given. D. 20 percent and the marginal rate on additional income is 30 percent. 126. Which of the following best reflects the ability-to-pay philosophy of taxation? A. a tax on residential property B. a progressive income tax C. an excise tax on gasoline D. an excise tax on coffee 127. The incidence of a tax pertains to: A. the degree to which it alters the distribution of income. B. how easy it is to evade the tax. C. who actually bears the burden of a tax. D. the progressiveness or regressiveness of tax rates.
%uppose that a '( percent increase in the price of normal good : causes a -(K increase in the quantity demanded of normal good 4. The coefficient of cross elasticity of demand is# A. positive and therefore complements 6. negative and therefore complements +. negative and therefore these goods are su"stitutes C. positive and therefore su"stitutes
:
Which of the following statements is correct? A. economic profits induce firms to enter an industryN losses encourage firms to leave
6. Formal profits will cause an industry to expand +. >conomic profits induce firms to leave an industry profits encourage firms to leave C. >conomic profits and losses have no significant impact on the growth or decline of an industry
+
A firm can sell as much as it wants at constant price. Cemand is thus# A. perfectly elastic 6. relatively elastic +. perfectly inelastic C. relatively inelastic
+
>conomists would descri"e the 9% automo"ile industry as# A. a pure monopoly 6. monopolistically competitive +. an oligopoly C. purely competitive
'
2mplicit and explicit costs are different in that# A. the latter refer to non5expenditure costs and the former to monetary payments 6. the former refer to non5expenditure costs and the latter to monetary payments +. explicit costs are opportunity costsN implicit costs are not C. implicit costs are opportunity costsN explicit costs are not
8
Auasi5;u"lic goods all have negative externalities "ecause the government provides them. T?F!
0
2n efficiently functioning mar1ets& the supply curve must reflect all the costs of production.
T
Which of the following industries most closely approximates pure competition? A. clothing 6. steel +. farm implements C. agriculture
:
2n the short run& fixed costs are irrelevant in determining a firm)s optimal level of output. T?F
T
From an economist)s perspective& an important consideration for policies to address glo"al warming is# A. a lawsuit that can arise from the enactment of the policies 6. the mar1et for recycla"le inputs +. the marginal cost and marginal "enefit of policies C. the supply and demand for recycled products
'
A good with a price5elasticity coefficient of !.G. has a demand that is price5inelastic. T?F
T
2n the mar1et system& prices tend to guide resources from less important to more important uses as the mar1et system accommodates change T?F
T
The utility of a good or service# A. is easy to quantify 6. rarely varies from person to person +. is synonymous with usefulness C. is the satisfaction or pleasure one gets from consuming it
:
+reative destruction# A. is applica"le to planned economies& "ut not to mar1et economies 6. the process "y which large firms "uy up small firms +. the process "y which new firms and new products replace existing dominant firms and products C. a term coined many years ago "y Adam %mith
'
A person should consume more of something when its marginal "enefit exceeds its marginal cost. T?F
T
6y free enterprise& we mean that products are provided free to those who can)t afford to "uy them.
0
The four factors of production are land& la"or& capital& and government services. T?F
0
Which of the following distinguishes the short run from the long run in pure competition? A. firms can enter and exit the mar1et in the long run& "ut not in the short run 6. firms use the /$@/+ rule to maximize profits in the short run& "ut not in the long run +. firms attempt to maximize profits in the long run& "ut not in the short run C. the quantity of la"or hired can vary in the long run& "ut not in the short run
+
the law of diminishing returns explains diseconomies of scale. T?F

0
Movernment5set price floors and price ceilings interfere with rationing function of price in a fee mar1et. T?F
T
+haracteristics of pu"lic goods include non5rivalry& non5excluda"ility& and the free5rider pro"lem. T?F
T
What do wages paid to factory wor1ers& interest paid on a "an1 loan& forgone interest& and the purchase of component parts have in common? A. All are opportunity costs 6. All are implicit costs +. all are explicit costs C. Fone are either implicit or explicit costs
+
The concept of consumer sovereignty refers to the situation where consumers have the right to vote for the "oard of directors of large corporations. T?F
0
2n which of the following instances will total revenue decline? A. price rises and demand is elastic 6. price rises and demand is inelastic +. price rises and supply is elastic C. price falls and demand is elastic
+
;rice is constant or given to the individual firm selling in a purely competitive mar1et "ecause# A. of product differentiation reinforced "y extensive advertising 6. the firm)s demand curve is downsloping +. there are no good su"stitutes for its product C. each seller supplies a negligi"le fraction of total supply
:
Which of the following is an example of creative destruction? A. automo"ile production causes the wagon industry to shut down 6. Apple earns more economic profits than other manufacturers of /;0 players +. %tar"uc1s shuts down stores to crate greater demand for its remaining outlets C. an economic recession forces firms out of "usiness
+
All costs are varia"le in the long run "ut not the short run. T?F
T
Which of the following is not a characteristic of pure competition? A. a standardized product 6. price strategies "y firms +. no "arriers to entry C. a large num"er of sellers
8
2f a mar1et is allocatively efficient& it means that at the equili"rium price& the maximum price consumers are willing to pay is equal to the minimum accepta"le price for producers. T?F
T
>xtenalities are unforeseen costs or "enefits accruing to a company producing a product. T?F
0
The short run is a period of time during which all costs are fixed costs. T?F
0
Th economy of the 9nited %tates can "est "e descri"ed as laissez5faire capitalism. T?F
0
At zero units of output a firm)s varia"le costs are zero. T?F

T
A firm)s economic profit is usually higher than its accounting profit.

0
Which of the following types of firms are least li1ely to have their /+& A*+& and AT+ curves affected "y fluctuations in gasoline prices?
A. taxi ca" and limousine companies 6. firms li1e 9;% that use a fleet of gasoline5powered vehicles +. firms li1e iTunes that distri"uted their products over the internet C. companies that operate "us tours to popular vacation destinations
'
An effective anti pollution policy from the economic perspective requires that all pollution "e eliminated and "anned.
0
The primary force encouraging the entry of new firms into a purely competitive industry is# A. economic profits earned "y firms already in the industry 6. a desire to provide goods for the "etterment of society +. government su"sidies for start5up firms C. normal profits earned "y firms already in the industry
+
2f there are many firms in an industry& then it must "e a purely competitive mar1et. T?F
0
A constant5cost industry is one in which# A. a higher price per unit wil not result in an increased output 6. if '(( units can"e produced for ,'((& then '.( can "e produced for ,'.(& -(( for ,-((& and so forth +. the total cost of producing -(( or 0(( units is no greater than the costs of producing '(( units C. the demand curve and therefore the unit price and quantity sold seldom change
8
The "udget line shows all the com"inations of two products which the consumer can "uy& given money income and product prices. T?F
T
The 2llinois +entral $ailroad once as1ed the 2llinois +ommerce +ommission for permission to increase its commuter rates "y -(K. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad)s revenues would fall "ecause of the rate hi1e. 2t can "e concluded that# A. the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic 6. "oth groups felt that the demand was inelastic "ut for different reasons +. "oth groups felt that the demand was elastic "ut for different reasons C. the railroad felt that the demand for passenger service was elastic and opponents of the rate increase felt it was inelastic.
+
The types and quantities of pu"lic goods produced are ultimately determined through the political process. T?F
T
>conomic profits are calculated "y su"tracting# A. explicit costs from total revenue 6. implicit costs from normal profits
+. implicit costs from total revenue C. explicit and implicit costs from total revenue
:
The demand curve for a purely competitive industry is perfectly elastic& "ut the demand curves faced "y individual firms in such an industry are downsloping. T?F
0
2f the price of ground "eef increases& the demand for ham"urger "uns is predicted to increase as well. T?F
0
The supply of tic1ets to a maOor sporting event held in a stadium is perfect inelastic. T?F
T
Migantic %tate 9niversity raises tuition for the purpose of increasing its revenue so that more faculty can "e hired. M%9 is assuming that the demand for education at M%9 is# A. relatively elastic 6. decreasing +. relatively inelastic C. perfectly elastic
'
/icro economics is concerned with the esta"lishing of an overall view of the operation of the economic system. T?F
0
A surplus indicates that the quantity demanded is greater than the quantity supplied at the price. T?F
0
2n the price range where demand is elastic& if the seller of the good raises its price& then total revenues will increase. T?F
0
Costs: explicit and implicit
Type: D Topic: 1 1: 32 !/: 1&0 1. 1conomic cost can best be defined as: A9 any contractual obligation that results in a flo% of money expenditures from an enterprise to resource suppliers. B9 C9 D9 Ans%er: C any contractual obligation to labor or material suppliers. compensations that must be received by resource o%ners to insure their continued supply. all costs exclusive of payments to fixed factors of production.
Type: A Topic: 1 1: 3
!/: 1&3
2. @hich of the follo%ing constitutes an implicit cost to the Bohnston !anufacturing Company< A9 B9 C9 D9 Ans%er: C payments of %ages to its office %or'ers rent paid for the use of e2uipment o%ned by the 7chult, !achinery Company depreciation charges on company6o%ned e2uipment economic profits resulting from current production
!/: 1&3
. @hich of the follo%ing is most li'ely to be an implicit cost for Company K< A9 B9 C9 D9 Ans%er: A depreciation charges on company6o%ned e2uipment rental payments on /B! e2uipment payments for ra% materials purchased from Company L transportation costs paid to a nearby truc'ing firm
!/: 1&3
&. Costs to an economist: A9 consist only of explicit costs. C9 never reflect monetary outlays. D9 al%ays reflect monetary outlays.
B9may or may not involve monetary outlays. Ans%er: B
!/: 1&3
(. @hat do %ages paid to blue6collar %or'ers- interest paid on a ban' loan- forgone interest- and the purchase of component parts have in common< A9 B9 Ans%er: B 5one are either implicit or explicit costs. All are opportunity costs. C9 All are implicit costs. D9 All are explicit costs.
!/: 1&3
*. To the economist total cost includes: A9 B9 C9 D9 Ans%er: A explicit and implicit costs- including a normal profit. neither implicit nor explicit costs. implicit- but not explicit- costs. explicit- but not implicit- costs.
Type: D Topic: 1 1: 3
!/: 1&3
.. /mplicit and explicit costs are different in that: A9 B9 C9 D9 Ans%er: D explicit costs are relevant only in the short run. implicit costs are relevant only in the short run. the latter refer to nonexpenditure costs and the former to out6of6poc'et costs. the former refer to nonexpenditure costs and the latter to out6of6poc'et costs.
Type: D Topic: 1 1: 3 0. /mplicit costs are:
!/: 1&3
A9 B9 C9 D9 Ans%er: C
regarded as costs by accountants but not by economists. payments that a firm ma'es to other firms or individuals %ho supply resources to it. nonexpenditure costs. costs that vary proportionately %ith output.
Type: D Topic: 1 1: 3 3. An explicit cost is: A9 B9 C9 D9 Ans%er: B
!/: 1&3
omitted %hen accounting profits are calculated. a money payment made for resources not o%ned by the firm itself. an implicit cost to the resource o%ner %ho receives that payment. al%ays in excess of a resource$s opportunity cost.
Profits
!/: 1&3
14. Accounting profits are typically: A9 B9 C9 D9 Ans%er: D greater than economic profits because the former do not ta'e explicit costs into account. e2ual to economic profits because accounting costs include all opportunity costs. smaller than economic profits because the former do not ta'e implicit costs into account. greater than economic profits because the former do not ta'e implicit costs into account.
!/: 1&3
11. 1conomic profits are calculated by subtracting: A9 B9 Ans%er: D explicit costs from total revenue. implicit costs from total revenue. C9 implicit costs from normal profits. D9 explicit and implicit costs from total revenue.
Type: D Topic: 2 1: 3 12. 5ormal profit is: A9 B9 C9 D9 Ans%er: C
!/: 1&3
determined by subtracting implicit costs from total revenue. determined by subtracting explicit costs from total revenue. the return to the entrepreneur %hen economic profits are ,ero. the average profitability of an industry over the preceding 14 years.
!/: 1&3
1 . @hich of the follo%ing definitions is correct< A9 B9 C9 D9 Ans%er: C Accounting profit I economic profit = normal profit. 1conomic profit 6 accounting profit = explicit costs. 1conomic profit = accounting profit 6 implicit costs. 1conomic profit 6 implicit costs = accounting profits.
!/: 1&3
1&. 7uppose that a business incurred implicit costs of )244-444 and explicit costs of )1 million in a specific year. /f the firm sold &-444 units of its output at ) 44 per unit- its accounting profits %ere: A9 B9 C9 D9 Ans%er: B )144-444 and its economic profits %ere ,ero. )244-444 and its economic profits %ere ,ero. )144-444 and its economic profits %ere )144-444. ,ero and its economic loss %as )244-444.
!/: 1&3
1(. 7uppose that a business incurred implicit costs of )(44-444 and explicit costs of )( million in a specific year. /f the firm sold 144-444 units of its output at )(4 per unit- its accounting: A9 B9 C9 D9 Ans%er: D profits %ere )144-444 and its economic profits %ere ,ero. losses %ere )(44-444 and its economic losses %ere ,ero. profits %ere )(44-444 and its economic profits %ere )1 million. profits %ere ,ero and its economic losses %ere )(44-444.
Fse the follo%ing to ans%er 2uestions 1*62 :
Fse the follo%ing cost information for the Creamy Crisp Donut Company to ans%er 2uestions 1*62 :
1ntrepreneur$s potential earnings as a salaried %or'er = )(4-444 Annual lease on building = )22-444 Annual revenue from operations = ) 04-444 #ayments to %or'ers = )124-444 Ftilities 8electricity- %ater- disposal9 costs = )0-444 1ntrepreneur$s potential economic profit from the next best entrepreneurial activity = )04-444 1ntrepreneur$s forgone interest on personal funds used to finance the business = )*-444
!/: 1&3
1*. "efer to the above data. Creamy Crisp$s explicit costs are: A9 Ans%er: B )20*-444. B9 )1(4-444. C9 )3&-444. D9 )1(*-444.
!/: 1&3
1.. "efer to the above data. Creamy Crisp$s implicit costs- including a normal profit are: A9 Ans%er: A )1 *-444. B9 )1(4-444. C9 )3&-444. D9 )1(*-444.
!/: 1&3
10. "efer to the above data. Creamy Crisp$s total economic costs 8explicit I implicit costs- including a normal profit9 are: A9 Ans%er: A )20*-444. B9 )1(4-444. C9 )3&-444. D9 )1(*-444.
!/: 1&3
13. "efer to the above data. Creamy Crisp$s accounting profit is: A9 )1(4-444. B9 ) 04-444. C9 )2 4-444. D9 )23&-444.
Ans%er: C
!/: 1&3
24. "efer to the above data. Creamy Crisp$s economic profit is: A9 Ans%er: D )1(4-444. B9 )04-444. C9 )2 4-444. D9 )3&-444.
!/: 1&3
21. "efer to the above data. Creamy Crisp$s total revenues exceed its total costs- including a normal profit- by: A9 Ans%er: B )1(4-444. B9 )3&-444. C9 )04-444. D9 )2 4-444.
!/: 1&3
22. "efer to the above data. Creamy Crisp: A9 B9 C9 D9 Ans%er: C has lo%er implicit costs- including a normal profit- than its explicit costs. is earning a normal profit but not an economic profit. is earning an economic profit. is suffering an economic loss- %hen implicit costs are considered.
!/: 1&3
2 . "efer to the above data. /f- other things e2ual- Creamy Crisp$s revenue fell to )20*-444: A9 B9 C9 D9 Ans%er: B its implicit costs- including a normal profit- %ould exceed its explicit costs. it %ould earn a normal profit but not an economic profit. it %ould suffer an economic loss. its accounting profit %ould fall to ,ero.
Short run versus long run
Type: A Topic:
1: 3& !/: 1(4
2&. The basic characteristic of the short run is that: A9 B9 C9 D9 employs. Ans%er: B barriers to entry prevent ne% firms from entering the industry. the firm does not have sufficient time to change the si,e of its plant. the firm does not have sufficient time to cut its rate of output to ,ero. a firm does not have sufficient time to change the amounts of any of the resources it
Type: A Topic:
1: 3& !/: 1(4
2(. @hich of the follo%ing represents a long6run ad:ustment< A9 B9 a farmer uses an extra dose of fertili,er on his corn crop unable to meet foreign competition- a F.7. %atch manufacturer sells one of its branch plants
C9 D9 Ans%er: B
a steel manufacturer cuts bac' on its purchases of co'e and iron ore a supermar'et hires four additional cler's
Type: A Topic:
1: 3& !/: 1(4
2*. @hich of the follo%ing is a short6run ad:ustment< A9 B9 C9 D9 Ans%er: A A local ba'ery hires t%o additional ba'ers. 7ix ne% firms enter the plastics industry. The number of farms in the Fnited 7tates declines by ( percent. B!@ constructs a ne% assembly plant in 7outh Carolina.
Type: D Topic:
1: 3& !/: 1(4
2.. To economists the main difference bet%een the short run and the long run is that: A9 B9 C9 run. D9 Ans%er: B in the short run all resources are fixed- %hile in the long run all resources are variable. the la% of diminishing returns applies in the long run- but not in the short run. in the long run all resources are variable- %hile in the short run at least one resource is fixed. fixed costs are more important to decision ma'ing in the long run than they are in the short
Type: A Topic:
1: 3& !/: 1(4
20. The amount of calendar time associated %ith the long run: A9 B9 C9 D9 Ans%er: B is less than that associated %ith the immediate mar'et period. varies from industry to industry. is the same for all firms. is one year by definition.
Type: A Topic:
1: 3& !/: 1(4
23. The basic difference bet%een the short run and the long run is that: A9 B9 C9 D9 Ans%er: C all costs are fixed in the short run- but all costs are variable in the long run. the la% of diminishing returns applies in the long run- but not in the short run. at least one resource is fixed in the short run- %hile all resources are variable in the long run. economies of scale may be present in the short run- but not in the long run.
Type: A Topic:
1: 3& !/: 1(4
4. The short run is characteri,ed by: A9 B9 C9 D9 Ans%er: C plenty of time for firms to either enter or leave the industry. increasing- but not diminishing returns. at least one fixed resource. ,ero fixed costs.
Type: A Topic:
1: 3& !/: 1(4
1. The long run is characteri,ed by: A9 B9 C9 D9 Ans%er: D the relevance of the la% of diminishing returns. at least one fixed input. insufficient time for firms to enter or leave the industry. the ability of the firm to change its plant si,e.
Law of diminishing returns
Type: D Topic: & 1: 3( !/: 1(1 2. !arginal product is: A9 B9 C9 D9 Ans%er: A the increase in total output attributable to the employment of one more %or'er. the increase in total revenue attributable to the employment of one more %or'er. the increase in total cost attributable to the employment of one more %or'er. total product divided by the number of %or'ers employed.
Type: D Topic: & 1: 3( !/: 1(1 . The la% of diminishing returns indicates that: A9 as extra units of a variable resource are added to a fixed resource- marginal product %ill decline beyond some point. B9 because of economies and diseconomies of scale a competitive firm$s long6run average total cost curve %ill be F6shaped. C9 the demand for goods produced by purely competitive industries is do%nsloping.
D9 beyond some point the extra utility derived from additional units of a product %ill yield the consumer smaller and smaller extra amounts of satisfaction. Ans%er: A
Type: A Topic: & 1: 3(6 3* !/: 1(161(2 &. @hich of the follo%ing statements concerning the relationships bet%een total product 8T#9- average product 8A#9- and marginal product 8!#9 is not correct< A9 B9 C9 D9 Ans%er: A A# continues to rise so long as T# is rising. A# reaches a maximum before T# reaches a maximum. T# reaches a maximum %hen the !# of the variable input becomes ,ero. !# cuts A# at the maximum A#.
Type: D Topic: & 1: 3* !/: 1(2 (. @hich of the follo%ing best expresses the la% of diminishing returns< A9 Because large6scale production allo%s the reali,ation of economies of scale- the real costs of production vary directly %ith the level of output. B9 #opulation gro%th automatically ad:usts to that level at %hich the average product per %or'er %ill be at a maximum. C9 As successive amounts of one resource 8labor9 are added to fixed amounts of other resources 8property9- beyond some point the resulting extra output %ill decline. D9 #roportionate increases in the inputs of all resources %ill result in a less6than6proportionate increase in total output. Ans%er: C
Fse the follo%ing to ans%er 2uestions *6 0:
Ans%er the next 2uestion8s9 on the basis of the follo%ing output data for a firm. Assume that the amounts
of all nonlabor resources are fixed.
F um "er of w or1ers ! $ 2 % ) & .
9 n its o f o u tp u t ! )! A! $2. $&! $.& $8!
Type: T Topic: & 1: 3* !/: 1(2 *. "efer to the above data. Diminishing marginal returns become evident %ith the addition of the: A9 Ans%er: C sixth %or'er. B9 fourth %or'er. C9 third %or'er. D9 second %or'er.
Type: T Topic: & 1: 3* !/: 1(2 .. "efer to the above data. The marginal product of the sixth %or'er is: A9 Ans%er: C 104 units of output. B9 4 units of output. C9 1( units of output. D9 negative.
Type: T Topic: & 1: 3* !/: 1(2 0. "efer to the above data. Average product is at a maximum %hen: A9 B9 Ans%er: D five %or'ers are hired. four %or'ers are hired. C9 three %or'ers are hired. D9 t%o %or'ers are hired.
Type: A Topic: & 1: 3( !/: 1(1 3. !arginal product: A9 B9 C9 D9 Ans%er: C diminishes at all levels of production. may initially increase- then diminish- but never become negative. may initially increase- then diminish- and ultimately become negative. is al%ays less than average product.
Type: A Topic: & 1: 3(6 3* !/: 1(161(2 &4. The first- second- and third %or'ers employed by a firm add 2&- 10- and 3 units to total product respectively. Therefore- the: A9 marginal product of the third %or'er is 3. B9 Ans%er: A total product of the three %or'ers is (&. C9 average product of the three %or'ers is 10. D9 marginal product of the second %or'er is 10.
Type: D Topic: & 1: 3( !/: 1(1 &1. /f a variable input is added to some fixed input- beyond some point the resulting extra output %ill decline. This statement describes: A9 B9 Ans%er: C economies and diseconomies of scale. K6inefficiency. C9 the la% of diminishing returns. D9 the la% of diminishing marginal utility.
Type: A Topic: & 1: 3( !/: 1(1 &2. /f in the short run a firm$s total product is increasing- then its: A9 B9 C9 D9 Ans%er: C marginal product must also be increasing. marginal product must be decreasing. marginal product could be either increasing or decreasing. average product must also be increasing.
Type: A Topic: & 1: 3*6 3. !/: 1(261( & . The la% of diminishing returns results in: A9 B9 C9 D9 Ans%er: B an eventually rising marginal product curve. a total product curve that eventually increases at a decreasing rate. an eventually falling marginal cost curve. a total product curve that rises indefinitely.
Type: A Topic: & 1: 3( !/: 1(1 &&. The la% of diminishing returns describes the: A9 B9 C9 D9 Ans%er: C relationship bet%een total costs and total revenues. profit6maximi,ing position of a firm. relationship bet%een resource inputs and product outputs in the short run. relationship bet%een resource inputs and product outputs in the long run.
Type: A Topic: & 1: 3* !/: 1(2 &(. @hich of the follo%ing is correct< A9 B9 C9 D9 product. Ans%er: D @hen total product is rising- both average product and marginal product must also be rising. @hen marginal product is falling- total product must be falling. @hen marginal product is falling- average product must also be falling. !arginal product rises faster than average product and also falls faster than average
Type: A Topic: & 1: 3* !/: 1(2 &*. @hich of the follo%ing is not correct< A9 B9 C9 D9 Ans%er: B @here marginal product is greater than average product- average product is rising. @here total product is at a maximum- average product is also at a maximum. @here marginal product is ,ero- total product is at a maximum. !arginal product becomes negative before average product becomes negative.
Fse the follo%ing to ans%er 2uestions &.6&0:
; rod u ct
' * a r ia " le in p u t
Type: E Topic: & 1: 3. !/: 1( &.. /n the above diagram curves 1- 2- and A9 B9 C9 D9 Ans%er: B represent the:
average- marginal- and total product curves respectively. marginal- average- and total product curves respectively. total- average- and marginal product curves respectively. total- marginal- and average product curves respectively.
Type: E Topic: & 1: 3. !/: 1( &0. The above diagram suggests that: A9 B9 C9 D9 Ans%er: B %hen marginal product is ,ero- total product is at a minimum. %hen marginal product lies above average product- average product is rising. %hen marginal product lies belo% average product- average product is rising. %hen total product is at a maximum- so is marginal product and average product.
Type: E Topic: & 1: 3. !/: 1( &3. The total output of a firm %ill be at a maximum %here: A9 Ans%er: C !# is at a maximum. B9 A# is at a minimum. C9 !# is ,ero. D9 A# is at a maximum.
Fse the follo%ing to ans%er 2uestions (46(1:
Ans%er the next 2uestion8s9 on the basis of the follo%ing information:
F um "er of w or1ers ! $ 2 % ) & .
T o ta l p rod u ct ! 8 2& %!
/ a r g in a l product -8 $! %
%)
Type: T Topic: & 1: 3* !/: 1(2 (4. "efer to the above data. @hen t%o %or'ers are employed: A9 B9 C9 D9 Ans%er: B total product is 24. total product is 10. average product is 14. total product cannot be determined from the information given.
Type: T Topic: & 1: 3* !/: 1(2 (1. "efer to the above data. The marginal product of the fourth %or'er: A9 Ans%er: A is (. B9 is .. C9 is . J .
2 1
D9 cannot be calculated from the information given.
Type: E Topic: & 1: 3. !/: 1( (2.
/ a r g in a l a n d a v e r a g e p rod u ct
/ a r g in a l p r o d u c t A verage p rod u ct
Q 2 2 n p u ts o f la " o r
/n the above diagram the range of diminishing marginal returns is: A9 Ans%er: D 4Q . B9 4Q .
2
C9 Q Q .
1 2
D9 Q Q .
1
Fse the follo%ing to ans%er 2uestions ( 6((:
Fse the follo%ing data to ans%er the next 2uestion8s9:
2n p u ts o f la " o r ! $ 2 % ) & .
T o ta l p rod u ct ! 8 $8 2& %! %% %) %2
Type: T Topic: & 1: 3. !/: 1( ( . "efer to the above data. @hen total product is increasing at an increasing rate- marginal product is: A9 Ans%er: A positive and increasing. B9 positive and decreasing. C9 constant. D9 negative.
Type: T Topic: & 1: 3. !/: 1( (&. "efer to the above data. @hen total product is increasing at a decreasing rate- marginal product is:
A9 Ans%er: B
positive and increasing.
B9 positive and decreasing.
C9 constant.
D9 negative.
Type: T Topic: & 1: 3. !/: 1( ((. "efer to the above data. @hen total product is diminishing- marginal product is: A9 Ans%er: D positive and increasing. B9 positive and decreasing. C9 constant. D9 negative.
Short-run costs
Type: D Topic: ( 1: 30 !/: 1(& (*. Dixed cost is: A9 B9 C9 D9 Ans%er: B the cost of producing one more unit of capital- say- machinery. any cost %hich does not change %hen the firm changes its output. average cost multiplied by the firm$s output. usually ,ero in the short run
Type: A Topic: ( 1: 30 !/: 1(& (.. @hich of the follo%ing is most li'ely to be a fixed cost< A9 B9 Ans%er: B shipping charges property insurance premiums C9 %ages for uns'illed labor D9 expenditures for ra% materials
Type: A Topic: ( 1: 30 !/: 1(& (0. /f you o%ned a small farm- %hich of the follo%ing %ould be a fixed cost< A9 Ans%er: B harvest labor B9 hail insurance C9 fertili,er D9 seed
Type: A Topic: ( 1: 30 !/: 1(& (3. @hich of the follo%ing is most li'ely to be a variable cost< A9 B9 Ans%er: A fuel and po%er payments interest on business loans. C9 rental payments on /B! e2uipment D9 real estate taxes
Type: A Topic: ( 1: 30 !/: 1(& *4. /f you operated a small ba'ery- %hich of the follo%ing %ould be a variable cost in the short run< A9 ba'ing ovens C9 annual lease payment for use of the building
B9 Ans%er: D
interest on business loans D9 ba'ing supplies 8flour- salt- etc.9
Type: D Topic: ( 1: &44 !/: 1(* *1. !arginal cost is the: A9 B9 C9 D9 Ans%er: B rate of change in total fixed cost that results from producing one more unit of output. change in total cost that results from producing one more unit of output. change in average variable cost that results from producing one more unit of output. change in average total cost that results from producing one more unit of output.
Type: A Topic: ( 1: &44 !/: 1(* *2. Dor most producing firms: A9 B9 C9 D9 marginal cost rises as output is carried to a certain level- and then begins to decline. total costs rise as output is carried to a certain level- and then begin to decline. average total costs decline as output is carried to a certain level- and then begin to rise. average total costs rise as output is carried to a certain level- and then begin to decline.
Ans%er: CType: A Topic: ( 1: 33 !/: 1(( * . Average fixed cost: A9 B9 C9 D9 Ans%er: D e2uals marginal cost %hen average total cost is at its minimum. may be found for any output by adding average variable cost and average total cost. graphs as a F6shaped curve. declines continually as output increases.
Type: A Topic: ( 1: &42 !/: 1(0 *&. @hich of the follo%ing is correct as it relates to cost curves< A9 B9 C9 D9 Ans%er: B Average variable cost intersects marginal cost at the latter$s minimum point. !arginal cost intersects average total cost at the latter$s minimum point. Average fixed cost intersects marginal cost at the latter$s minimum point. !arginal cost intersects average fixed cost at the latter$s minimum point.
Fse the follo%ing to ans%er 2uestions *(6.4:
Type: E Topic: ( 1: 336&44 !/: 1((61(* *(. "efer to the above diagram. At output level Q total variable cost is: A9 Ans%er: A 4BEQ. B9 BCDE. C9 4CDQ. D9 4AFQ.
Type: E Topic: ( 1: 336&44 !/: 1((61(* **. "efer to the above diagram. At output level Q total fixed cost is: A9 Ans%er: B 4BEQ. B9 BCDE. C9 4BEQ64AFQ. D9 4CDQ.
Type: E Topic: ( 1: 336&44 !/: 1((61(* *.. "efer to the above diagram. At output level Q total cost is: A9 Ans%er: C 4BEQ. B9 BCDE. C9 4BEQ plus BCDE. D9 4AFQ plus BCDE.
Type: E Topic: ( 1: 33 !/: 1(( *0. "efer to the above diagram. At output level Q average fixed cost: A9 B9 C9 D9 Ans%er: C is e2ual to EF. is e2ual to QE. is measured by both QF and ED. cannot be determined from the information given.
Type: E Topic: ( 1: &41 !/: 1(. *3. "efer to the above diagram. At output level Q: A9 B9 C9 D9 Ans%er: A marginal product is falling. marginal product is rising. marginal product is negative. one cannot determine %hether marginal product is falling or rising.
Type: E Topic: ( 1: 336&44 !/: 1((61(* .4. "efer to the above diagram. The vertical distance bet%een ATC and AAC reflects: A9 the la% of diminishing returns. C9 marginal cost at each level of output. the presence of economies of scale.
B9the average fixed cost at each level of output. D9 Ans%er: B
Type: A Topic: ( 1: &42 !/: 1(0 .1. !arginal cost: A9 B9 C9 D9 Ans%er: A e2uals both average variable cost and average total cost at their respective minimums. is the difference bet%een total cost and total variable cost. rises for a time- but then begins to decline %hen diminishing returns set in. declines continuously as output increases.
Type: A Topic: ( 1: 336&44 !/: 1((61(*
.2. @hen average fixed costs are falling: A9 B9 C9 D9 Ans%er: B average total cost must be falling. average variable cost may be either rising or falling. marginal cost must be falling. average variable costs must be rising.
Type: A Topic: ( 1: &44 !/: 1(* . . @hich of the follo%ing statements is correct< A9 B9 C9 Average total cost is the difference bet%een average variable cost and average fixed cost. !arginal cost measures the cost per unit of output associated %ith any level of production. @hen marginal product rises- marginal cost must also rise.
D9 !arginal cost is the price or cost of an extra variable input 8for example- an additional %or'er9 divided by its marginal product. Ans%er: D
Type: A Topic: ( 1: &44 !/: 1(* .&. Assume that in the short run a firm is producing 144 units of output- has average total costs of )244- and average variable costs of )1(4. The firm$s total fixed costs are: A9 Ans%er: A )(-444. B9 )(44. C9 ).(4. D9 )(4.
Type: A Topic: ( 1: &44 !/: 1(* .(. /f average total cost is declining- then: A9 B9 C9 D9 Ans%er: C marginal cost must be greater than average total cost. the average fixed cost curve must lie above the average variable cost curve. marginal cost must be less than average total cost. total cost must also be declining.
Type: A Topic: ( 1: &41 !/: 1(. .*. The relationship bet%een the marginal cost and the average total cost schedule is such that: A9 B9 C9 D9 Ans%er: D the behavior of one schedule does not affect the other. if ATC exceeds !C- !C must be rising. if !C is declining- ATC may be either declining or rising. if !C is declining- ATC must also be declining.
Type: A Topic: ( 1: &42 !/: 1(0 ... +ther things e2ual- if the prices of a firm$s variable inputs %ere to fall: A9 B9 C9 D9 Ans%er: C one could not predict ho% unit costs of production %ould be affected. marginal cost- average variable cost- and average fixed cost %ould all fall. marginal cost- average variable cost- and average total cost %ould all fall. average variable cost %ould fall- but marginal cost %ould be unchanged.
Type: A Topic: ( 1: 306&44 !/: 1(&61(*
.0. +ther things e2ual- if the fixed costs of a firm %ere to increase by )144-444 per year- %hich of the follo%ing %ould happen< A9 B9 C9 D9 Ans%er: C !arginal costs and average variable costs %ould both rise. Average fixed costs and average variable costs %ould rise. Average fixed costs and average total costs %ould rise. Average fixed costs %ould rise- but marginal costs %ould fall.
Type: A Topic: ( 1: 30 !/: 1(& .3. /f a firm decides to produce no output in the short run- its costs %ill be: A9 Ans%er: C its marginal costs. B9 its fixed plus its variable costs. C9 its fixed costs. D9 ,ero.
Fse the follo%ing to ans%er 2uestions 0460&:
Ans%er the next 2uestion8s9 on the basis of the follo%ing cost data:
O u tp u t ! $ 2 % ) & .
T o ta l cost $2) %% )$ )8 &) .$ .A
Type: T Topic: ( 1: 30 !/: 1(& 04. "efer to the above data. The total variable cost of producing ( units is: A9 Ans%er: C )*1. B9 )&0. C9 ) .. D9 )2&.
Type: T Topic: ( 1: &44 !/: 1(* 01. "efer to the above data. The average total cost of producing A9 Ans%er: D )1&. B9 )12. C9 )1 .(4. D9 )1*. units of output is:
Type: T Topic: ( 1: 33 !/: 1(( 02. "efer to the above data. The average fixed cost of producing A9 Ans%er: A )0. B9 )..&4. C9 )(.(4. D9 )*. units of output is:
Type: T Topic: ( 1: &44 !/: 1(* 0 . "efer to the above data. The marginal cost of producing the sixth unit of output is: A9 Ans%er: D )2&. B9 )12. C9 )1*. D9 )0.
Type: T Topic: ( 1: &44 !/: 1(* 0&. "efer to the above data. The profit6maximi,ing output for this firm: A9 Ans%er: D is . B9 is &. C9 is (. D9 cannot be determined from the information given.
Type: A Topic: ( 1: 30 !/: 1(& 0(. /n comparing the changes in TAC and TC associated %ith an additional unit of output- %e find that: A9 B9 C9 D9 Ans%er: B no generali,ation about the changes in TC and TAC can be made. the changes in TC and TAC are e2ual. the change in TC is greater than the change in TAC. the change in TAC is greater than the change in TC.
Fse the follo%ing to ans%er 2uestions 0*603:
Ans%er the next 2uestion8s9 on the basis of the follo%ing information:
TDC = total fixed cost !C = marginal cost TAC = total variable cost
Q = 2uantity of output P = product price
Type: 1 Topic: ( 1: 33 !/: 1(( 0*. "efer to the above information. Average fixed cost is: A9 B9 TAC 6 !C !C Q C9 TDC Q D9 TAC Q Ans%er: C
Type: 1 Topic: ( 1: &44 !/: 1(* 0.. "efer to the above information. Average total cost is: A9 B9 TAC 6 !C TAC 6 TDC Q C9 TAC Q D9 TDC I TAC Q Ans%er: D
Type: 1 Topic: ( 1: &44 !/: 1(* 00. "efer to the above information. !arginal cost is:
A9
change in TAC Q
B9
change in TAC change in Q
C9
#MN change in Q
D9
change in TDC change in Q
Ans%er: D
Type: 1 Topic: ( 1: 30 !/: 1(& 03. "efer to the above information. Total cost is: A9 B9 C9 D9 the change in marginal cost. TAC 6 TDC TDC I TAC TDC I TAC Q Ans%er: C
Fse the follo%ing to ans%er 2uestions 34632:
/ a r g in a l a n d a v e r a g e p rod u ct
/ a r g in a l p r o d u c t A verage p rod u ct
Q 2 2 n p u ts o f la " o r
Type: E Topic: ( 1: &42 !/: 1(0 34. "efer to the above diagram- %here variable inputs of labor are being added to a constant amount of property resources. The total output of this firm %ill cease to expand: A9 B9 C9 D9 Ans%er: C if a labor force in excess of Q is employed.
1 2
if a labor force in excess of Q is employed. if a labor force in excess of Q is employed. only if the marginal product curve becomes negative at all levels of output.
Type: E Topic: ( 1: &42 !/: 1(0 31. "efer to the above diagram- %here variable inputs of labor are being added to a constant amount of property resources. !arginal cost %ill be at a minimum for this firm %hen it is hiring: A9 Ans%er: C Q %or'ers. B9 Q %or'ers.
2
C9 Q %or'ers.
1
D9 more than Q %or'ers.
Type: E Topic: ( 1: &42 !/: 1(0 32. "efer to the above diagram- %here variable inputs of labor are being added to a constant amount of property resources. Average variable cost %ill be at a minimum %hen the firm is hiring: A9 Ans%er: B Q %or'ers. B9 Q %or'ers.
2
C9 Q %or'ers.
1
D9 more than Q %or'ers.
Type: E Topic: ( 1: &42 !/: 1(0 3 .
/n the above figure- curves 1- 2- - and & represent the: A9ATC- !C- ADC- and AAC curves respectively. C9 !C- ATC- AAC- and ADC curves respectively. B9ADC- !C- AAC- and ATC curves respectively. D9 ATC- AAC- ADC- and !C curves respectively. Ans%er: C
Type: A Topic: ( 1: &4
!/: 1(3
3&. /f a technological advance reduces the amount of variable resources needed to produce any level of outputthen the: A9 B9 Ans%er: B AAC curve %ill shift up%ard. !C curve %ill shift do%n%ard. C9 ATC curve %ill shift up%ard. D9 ADC curve %ill shift do%n%ard.
Type: A Topic: ( 1: 306 33 !/: 1(&61(( 3(. /n the short run %hich of the follo%ing statements is correct< A9 The marginal cost curve intersects the average variable and average fixed cost curves at their minimum points. B9 C9 Average variable cost declines continuously as total output is expanded. Total cost %ill exceed variable cost.
D9 /f the inputs of all resources are increased by e2ual amounts- total output %ill expand by diminishing amounts. Ans%er: C
Type: A Topic: ( 1: 30 !/: 1(& 3*. Total fixed cost 8TDC9: A9 B9 C9 D9 Ans%er: D falls as the firm expands output from ,ero- but eventually rises. falls continuously as total output expands. varies directly %ith total output. does not change as total output increases or decreases.
Type: A Topic: ( 1: 30 !/: 1(& 3.. Dixed costs are associated %ith: A9 B9 Ans%er: C highly ad:ustable inputs such as labor. both the short run and the long run. C9 the short run only. D9 the long run only.
Type: E Topic: ( 1: 33 !/: 1(( 30.
/n the above diagram curves 1- 2- and A9 B9 C9 D9 Ans%er: C
represent:
average variable cost- marginal cost- and average fixed cost respectively. total variable cost- total fixed cost- and total cost respectively. total fixed cost- total variable cost- and total cost respectively. marginal product- average variable cost- and average total cost respectively.
Type: A Topic: ( 1: &416&42 !/: 1(.61(0 33. @hich of the follo%ing is correct<. A9 B9 C9 D9 Ans%er: D There is no relationship bet%een !# and !C. @hen A# is rising !C is falling- and %hen A# is falling !C is rising. @hen !# is rising !C is rising- and %hen !# is falling !C is falling. @hen !# is rising !C is falling- and %hen !# is falling !C is rising.
Type: A Topic: ( 1: 33 !/: 1(( 144. @hich of the follo%ing curves is not F6shaped< A9 Ans%er: B !C B9 ADC C9 AAC D9 ATC
Type: A Topic: ( 1: &44 !/: 1(* 141. /f a firm %anted to 'no% ho% much it %ould save by producing one less unit of output- it %ould loo' to: A9 Ans%er: A !C. B9 ATC. C9 AAC. D9 ADC.
Type: A Topic: ( 1: &42 !/: 1(0 142. @hich of the follo%ing holds true< A9 B9 C9 D9 Ans%er: C There is no relationship bet%een A# and AAC. @hen !# is rising AAC is falling- and %hen !# is falling AAC is rising. @hen A# is rising AAC is falling- and %hen A# is falling AAC is rising. @hen A# is rising AAC is rising- and %hen A# is falling AAC is falling.
Type: A Topic: ( 1: 33 !/: 1(( 14 . /n the short run it is impossible for an expansion of output to increase: A9 Ans%er: B average total cost. B9 average fixed cost. C9 marginal cost. D9 average variable cost.
Type: A Topic: ( 1: &44 !/: 1(* 14&. Average fixed costs can be determined graphically by: A9 output. B9 C9 D9 Ans%er: D summing the marginal costs of any number of units of output and dividing the sum by that the vertical distance bet%een TC and TAC. the vertical distance bet%een AAC and !C. the vertical distance bet%een ATC and AAC.
Type: A Topic: ( 1: 306 33 !/: 1(&61(( 14(. The vertical distance bet%een the total cost and the total variable cost curves differs by an amount %hich: A9 B9 C9 D9 Ans%er: B initially increases- but then decreases- as output increases. is constant as output changes. decreases as output increases. increases as output increases.
Type: A Topic: ( 1: &44 !/: 1(*
14*. The vertical distance bet%een a firm$s ATC and AAC curves represents: A9 B9 C9 D9 Ans%er: B ADC- %hich increases as output increases. ADC- %hich decreases as output increases. marginal costs- %hich decrease as output decreases. marginal costs- %hich increase as output increases.
Type: A Topic: ( 1: &44 !/: 1(* 14.. /f a profitable firm$s fixed costs someho% %ere ,ero: A9 B9 C9 D9 Ans%er: C !C and ATC %ould be e2ual at all levels of output. ADC %ould become negative as output increases. AAC and ATC %ould coincide. ATC %ould be ,ero at all output levels.
Type: E Topic: ( 1: &42 !/: 1(0 140. "efer to the above short6run production and cost data. /n Digure A curve 819 is: A9 B9 C9 D9 Ans%er: C total product and curve 829 is average product. total product and curve 829 is marginal product. average product and curve 829 is marginal product. marginal product and curve 829 is average product.
Type: E Topic: ( 1: &42 !/: 1(0 143. "efer to the above short6run production and cost data. /n Digure B curve 8 9 is: A9 B9 Ans%er: B AAC and curve 8&9 is !C. !C and curve 8&9 is AAC. C9 !C and curve 8&9 is ADC. D9 ADC and curve 8&9 is !C.
Type: E Topic: ( 1: &42 !/: 1(0
114. "efer to the above short6run production and cost data. The curves of Digures A and B suggest that: A9 B9 C9 D9 Ans%er: B marginal product and marginal cost reach their maximum points at the same output. marginal cost reaches a minimum %here marginal product is at its maximum. marginal cost and marginal product reach their minimum points at the same output. AAC cuts !C at the latter$s minimum point.
Type: E Topic: ( 1: &42 !/: 1(0 111. "efer to the above short6run production and cost data. The curves of Digures A and B suggest that: A9 B9 C9 D9 Ans%er: C average product and average variable cost reach their maximum points at the same output. AAC cuts !C at the latter$s maximum point. AAC reaches a minimum %here A# is at its maximum. ADC declines so long as output increases.
Type: A Topic: ( 1: 306 33 !/: 1(&61(( 112. /n the short run: A9 TAC %ill increase for a time at a diminishing rate- but then beyond some point %ill increase at an increasing rate. B9 TAC %ill increase for a time at an increasing rate- but then beyond some point %ill increase at a diminishing rate. C9 D9 Ans%er: A TAC %ill increase by the same absolute amount for each additional unit of output produced. one cannot generali,e concerning the behavior of TAC as output increases.
Type: A Topic: ( 1: 306 33 !/: 1(&61(( 11 . Total cost minus total variable cost e2uals: A9 Ans%er: B average fixed cost. B9 total fixed cost. C9 average variable cost. D9 marginal cost.
Type: A Topic: ( 1: 306 33 !/: 1(&61(( 11&. As output increases- total variable cost: A9 B9 C9 D9 Ans%er: C increases more rapidly than does total cost. increases continuously at a decreasing rate. increases at a decreasing rate and then at an increasing rate. increases at a constant rate.
Type: A Topic: ( 1: 33 !/: 1((
11(. /n the short run the 7ure67creen T67hirt Company is producing (44 units of output. /ts average variable costs are )2.44 and its average fixed costs are ).(4. The firm$s total costs: A9 Ans%er: B are )2.(4. B9 are )12(4. C9 are ).(4. D9 are )1144.
Type: A Topic: ( 1: &42 !/: 1(0 11*. Because the marginal product of a variable resource at first increases and then decreases as the output of the firm is increased: A9 B9 rate. C9 D9 Ans%er: A average total cost at first increases and then diminishes. average fixed cost %ill rise beyond the point of diminishing returns. total cost at first increases at a decreasing rate and then increases at an increasing rate. total variable cost at first increases at an increasing rate and then increases at a decreasing
Type: A Topic: ( 1: 33 !/: 1(( 11.. 7uppose that- %hen producing 14 units of output- a firm$s AAC is )22- its ADC is )(- and its !C is ) 4. This: A9 B9 Ans%er: C firm$s ATC is ) (. firm$s ATC is )(.. C9 firm$s total cost is )2.4. D9 firm$s total cost is ) 4.
Type: A Topic: ( 1: 336&44 !/: 1((61(* 110. The relationship bet%een marginal cost and average fixed cost is such that: A9 B9 C9 D9 Ans%er: D declines in !C cause ADC to decline as output increases. increases in !C cause ADC to increase as output increases. !C intersects ADC at that output %here ADC is at a minimum. !C may either rise or fall as ADC declines.
Type: A Topic: ( 1: &44 !/: 1(* 113. /n comparing the changes in TC and TAC associated %ith an additional unit of output- %e find that: A9 B9 C9 D9 Ans%er: D the change in TAC is e2ual to !C- %hile the change in TC is e2ual to TDC. the change in TC exceeds the change in TAC. the change in TAC exceeds the change in TC. both are e2ual to !C.
Type: A Topic: ( 1: &42 !/: 1(0 124. @hich of the follo%ing is correct< A9 B9 Ans%er: B @hen A# is rising- AAC is rising. @hen A# is rising- AAC is falling. C9 @hen A# is rising- A# exceeds !#. D9 There is no relationship bet%een A# and AAC.
Fse the follo%ing to ans%er 2uestions 121612.:
Ans%er the next 2uestion8s9 on the basis of the follo%ing cost data:
O u tp u t $ 2 % ) & . 8
A verage fix e d cost $ & ! .! ! 2 & .! ! $ . .. $ 2 .& ! $ ! .! ! 8 .% .$ ) . .2 &
A verage v a r ia " le cost $ $ ! ! .! ! 8 ! .! ! . . .. . & .! ! . 8 .! ! % .% % 8 ! .! ! 8 .& !
Type: T Topic: ( 1: 33 !/: 1(( 121. "efer to the above data. Total fixed cost is: A9 Ans%er: D )*.2(. B9 )144.44. C9 )1(4.44. D9 )(4.44.
Type: T Topic: ( 1: &44 !/: 1(* 122. "efer to the above data. The average total cost of five units of output is: A9 Ans%er: B )*3. B9 ).0. C9 ) . D9 )14. .
Type: T Topic: ( 1: 336&44 !/: 1((61(* 12 . "efer to the above data. The total cost of four units of output is: A9 Ans%er: C )2*4. B9 )...(4. C9 ) 14. D9 )21(.
Type: T Topic: ( 1: 306 33 !/: 1(&61(( 12&. "efer to the above data. /f the firm closed do%n and produced ,ero units of output- its total cost %ould be: A9 Ans%er: B ,ero. B9 )(4. C9 )1(4. D9 )144.
Type: T Topic: ( 1: 336&44 !/: 1((61(* 12(. "efer to the above data. The marginal cost of the fifth unit of output is: A9 Ans%er: C ) . B9 )*2. C9 )04. D9 ).0.
Type: T Topic: ( 1: &416&42 !/: 1(.61(0 12*. "efer to the above data. The marginal cost curve %ould intersect the average variable cost curve at about: A9 Ans%er: B 2 units of output. B9 & units of output. C9 * units of output. D9 . units of output.
Type: T Topic: ( 1: 306 33 !/: 1(&61(( 12.. "efer to the above data. /f the firm decided to increase its output from * to . units- its total costs %ould rise by: A9 )0..1&. B9 )04.44. C9 )*.*.. D9 )124.44.
Ans%er: D
Type: D Topic: ( 1: 30 !/: 1(& 120. A fixed cost is: A9 B9 C9 D9 Ans%er: C associated %ith any productive resource %hose price is fixed. any cost %hich increases proportionately %ith output. any cost %hich a firm %ould incur even if output %as ,ero. associated %ith all inputs %hose short6run supply is perfectly inelastic.
Type: A Topic: ( 1: &42 !/: 1(0 123. +ther things e2ual- if the %age rates paid to a firm$s labor inputs %ere to rise- %e %ould expect the: A9 ADC- AAC- ATC- and !C curves all to rise. B9 Ans%er: B AAC- ATC- and !C curves all to rise. C9 ADC and ATC curves to fall. D9 !# curve to fall.
Type: A Topic: ( 1: &4
!/: 1(3
1 4. /f a technological advance increases a firm$s labor productivity- %e %ould expect its: A9 B9 Ans%er: B average total cost curve to rise. average total cost curve to fall. C9 total cost curve to rise. D9 average total cost curve to be unaffected.
Type: A Topic: ( 1: 30 !/: 1(& 1 1. As a firm produces successive units of output in the short run %e %ould expect: A9 amounts. B9 C9 TAC to increase initially by declining amounts- but eventually increase by increasing TAC to increase initially by increasing amounts- but eventually by decreasing amounts. TDC to increase by constant amounts.
D9 the sum of TAC and TDC to increase initially by increasing amounts- but eventually by decreasing amounts. Ans%er: A
Type: A Topic: ( 1: 30 !/: 1(& 1 2. Assume a firm closes do%n in the short run and produces no output. Fnder these conditions: A9 TAC is positive- but TDC and TC are ,ero. B9 TDC is positive- but TAC and TC are ,ero. Ans%er: C C9 TDC and TC are positive- but TAC is ,ero. D9 TDC- TAC- and TC %ill all be positive.
Type: A Topic: ( 1: &446&41 !/: 1(*61(. 1 . /f marginal cost is: A9 B9 C9 D9 Ans%er: C falling- then average total cost must also be falling. rising- then average total cost must also be rising. rising- then average total cost could be either falling or rising. falling- then average total cost could be either falling or rising.
Type: A Topic: ( 1: 306 33 !/: 1(&61(( 1 &. @hich of the follo%ing is incorrect<
A9 B9 C9 D9 Ans%er: D
Total fixed cost does not change %ith output in the short run. Dixed costs exist only in the short run. Total fixed cost must be added to total variable cost to determine total cost. Total fixed cost e2uals total variable cost in the long run.
Type: A Topic: ( 1: 336&44 !/: 1((61(* 1 (. /f the total variable cost of 3 units of output is )34 and the total variable cost of 14 units of output is )124- then: A9 B9 C9 D9 Ans%er: B the average variable cost of 14 units is )14. the average variable cost of 3 units is )14. the marginal cost of the tenth unit is )34. the firm is operating in the range of increasing marginal returns.
Type: A Topic: ( 1: 30 !/: 1(& 1 *. A firm$s total variable cost %ill depend on: A9 the prices of variable resources. C9 the level of output. D9 all of the above.
B9 the production techni2ues that are used. Ans%er: D
Type: A Topic: ( 1: &44 !/: 1(* 1 .. The short6run average total cost curve is F6shaped because: A9 B9 C9 D9 Ans%er: B average fixed costs decline continuously as output increases. of increasing and diminishing returns. of economies and diseconomies of scale. minimum efficient scale is encountered.
Fse the follo%ing to ans%er 2uestions 1 061&2:
The 7unshine Corporation finds that its costs are )&4 %hen it produces no output. /ts total variable costs 8TAC9 change %ith output as sho%n in the accompanying table. Fse this information to ans%er the follo%ing 2uestion8s9.
O u tp u t $ 2 % ) &
T* + $ %! &! .& 8& $$!
Type: T Topic: ( 1: 30 !/: 1(& 1 0. "efer to the above information. The total cost of producing A9 Ans%er: B )*(. B9 )14(. C9 )1&(. D9 )10(. units of output is:
Type: T Topic: ( 1: &44 !/: 1(*
1 3. "efer to the above information. The average total cost of A9 Ans%er: D )*(. B9 )21.*.. C9 )&4. D9 ) (.
units of output is:
Type: T Topic: ( 1: 33 !/: 1(( 1&4. "efer to the above information. The average fixed cost of A9 Ans%er: A )1 . . B9 )12.(4. C9 )&4. D9 )10.(4. units of output is:
Type: T Topic: ( 1: &44 !/: 1(* 1&1. "efer to the above information. The marginal cost of the third unit of output is: A9 Ans%er: C )14(. B9 )2(. C9 )1(. D9 )24.
Type: T Topic: ( 1: 3 6 3& !/: 1&361(4 1&2. "efer to the above information. This firm: A9 B9 Ans%er: C is ma'ing an economic profit of )2*4. is reali,ing a loss of )12(. C9 may be either reali,ing a profit or a loss. D9 is selling its output in a competitive mar'et.
Fse the follo%ing to ans%er 2uestions 1& 61&*:
Type: E Topic: ( 1: 336&44 !/: 1((61(* 1& . "efer to the above diagram. This firm$s average fixed costs are: A9 not sho%n. C9 the vertical distance bet%een AAC and ATC.
B9the vertical distance bet%een AAC and !C. D9 e2ual to the per unit change in !C. Ans%er: C
Type: E Topic: ( 1: &42 !/: 1(0 1&&. "efer to the above diagram. /f labor is the only variable input- the marginal product of labor is at a: A9 point c. Ans%er: A maximum at point a. B9 minimum at point a. C9 maximum at point b. D9 maximum at
Type: E Topic: ( 1: &42 !/: 1(0 1&(. "efer to the above diagram. /f labor is the only variable input- the average product of labor is at a:
A9 point c. Ans%er: B
minimum at point b.
B9 maximum at point b.
C9 maximum at point a.
D9 maximum at
Type: E Topic: ( 1: 3 6 3& !/: 1&361(4 1&*. "efer to the above diagram. The profit6maximi,ing level of output for this firm: A9 B9 C9 D9 Ans%er: D is at point a. is at point b. is at point c. cannot be determined from the information given.
Fse the follo%ing to ans%er 2uestions 1&.61(4:
Ans%er the next 2uestion8s9 on the basis of the accompanying table that sho%s average total costs 8ATC9 for a manufacturing firm %hose total fixed costs are )14:
O u tp u t $ 2 % ) &
AT $) 2 2 % %
+ ! A $ 8
Type: T Topic: ( 1: 306 33 !/: 1(&61(( 1&.. "efer to the above data. The total cost of producing & units of output is: A9 Ans%er: C ) 1. B9 )0.. C9 )12&. D9 )140.
Type: T Topic: ( 1: 336&44 !/: 1((61(* 1&0. "efer to the above data. The average variable cost of & units of output is: A9 Ans%er: B ) .(4. B9 )20.(4. C9 )13.44. D9 )21.44.
Type: T Topic: ( 1: 336&44 !/: 1((61(* 1&3. "efer to the above data. The marginal cost of the fourth unit of output is: A9 Ans%er: C )2. B9 )12. C9 ) .. D9 )1*.
Type: T Topic: ( 1: 3 6 3& !/: 1&361(4 1(4. "efer to the above data. The profit6maximi,ing level of output for this firm: A9 Ans%er: D is . B9 is &. C9 is (. D9 cannot be determined from the information given.
Fse the follo%ing to ans%er 2uestions 1(161(.:
: o lla rs
d a
f e c b +T'
$
3 u a n tity
Type: E Topic: ( 1: &44 !/: 1(* 7tatus: 5e% 1(1. "efer to the above graph. @hich one of the follo%ing %ould cause a move from point b to point c along short6run average total cost curve ATC <
1
A9 B9 Ans%er: A
diminishing marginal returns C9 a decrease in the %age rate an increase in the %age rate D9 increasing marginal returns
Type: E Topic: ( 1: &44 !/: 1(* 7tatus: 5e% 1(2. "efer to the above graph. @hich one of the follo%ing %ould cause a move from point d to point e along short6run average total cost curve ATC <
2
A9 B9 Ans%er: D
Type: E Topic: ( 1: &4
!/: 1(3 7tatus: 5e%
1( . "efer to the above graph. @hich one of the follo%ing %ould cause a move from point b on short6run average total cost curve ATC to point e on short6run average cost curve ATC <
1 2
A9 B9 Ans%er: B
!/: 1(3 7tatus: 5e%
1(&. "efer to the above graph. @hich one of the follo%ing %ould cause a move from point e on short6run average total cost curve ATC to point b on short6run average cost curve ATC <
2 1
A9 B9 Ans%er: C
!/: 1(3 7tatus: 5e%
1((. "efer to the above graph. @hich one of the follo%ing %ould cause a move from point e on short6run average total cost curve ATC to point b on short6run average cost curve ATC <
2 1
A9 B9 Ans%er: A
a decline in total fixed costs C9 an increase in the %age rate diminishing marginal returns D9 increasing marginal returns
Type: E Topic: ( 1: &44 !/: 1(* 7tatus: 5e% 1(*. "efer to the above graph. Diminishing marginal returns are reflected in: A9 B9 C9 D9 Ans%er: B the shift of the of short6run average total cost curve from ATC to ATC .
2 1
a move along short6run average total cost curve ATC from point e to point f.
2 1
a move along short6run average total cost curve ATC from point a to point b. the shift of the short6run average total cost curve from ATC to ATC .
1 2
!/: 1(3 7tatus: 5e%
1(.. "efer to the above graph. A decrease in fixed costs is sho%n by: A9 B9 C9 D9 Ans%er: D a move along short6run average total cost curve ATC from point e to point f.
2 1
a move along short6run average total cost curve ATC from point a to point b. the shift of the short6run average total cost curve from ATC to ATC .
1 2
the shift of the of short6run average total cost curve from ATC to ATC .
2 1
Long-run costs
Type: A Topic: * 1: &4& !/: 1*4 1(0. 1conomies and diseconomies of scale explain: A9 B9 the profit6maximi,ing level of production. %hy the firm$s long6run average total cost curve is F6shaped.
C9 %hy the firm$s short6run marginal cost curve cuts the short6run average variable cost curve at its minimum point. D9 Ans%er: B the distinction bet%een fixed and variable costs.
Type: D Topic: * 1: &4 1(3. /n the long run:
!/: 1(3
A9 B9 Ans%er: A
all costs are variable costs. all costs are fixed costs.
C9 variable costs e2ual fixed costs. D9 fixed costs are greater than variable costs.
Fse the follo%ing to ans%er 2uestions 1*461*&:
Type: E Topic: * 1: &44 !/: 1(* 7tatus: 5e% 1*4. The above diagram sho%s the short6run average total cost curves for five different plant si,es of a firm. The shape of each individual curve reflects: A9 B9 C9 D9 Ans%er: A increasing returns- follo%ed by diminishing returns. economies of scale- follo%ed by diseconomies of scale. constant costs. increasing costs- follo%ed by decreasing costs.
Type: E Topic: * 1: &4& !/: 1*4 7tatus: 5e% 1*1. As the firm in the above diagram expands from plant si,e O1 to plant si,e O - it experiences: A9 costs. Ans%er: B diminishing returns. B9 economies of scale. C9 diseconomies of scale. D9 constant
Type: E Topic: * 1: &4. !/: 1*
7tatus: 5e%
1*2. As the firm in the above diagram expands from plant si,e O to plant si,e O(- it experiences: A9 Ans%er: C increasing returns. B9 economies of scale. C9 diseconomies of scale. D9 constant costs.
Type: E Topic: * 1: &4& !/: 1*4 1* . The above diagram sho%s the short6run average total cost curves for five different plant si,es of a firm. The position of these five curves in relation to one another reflects:
A9 B9 C9 D9 Ans%er: A
economies and diseconomies of scale. the effect of fixed costs on ATC as output increases. the la% of constant costs. the la% of diminishing returns.
Type: E Topic: * 1: &4
!/: 1(3
1*&. The above diagram sho%s the short6run average total cost curves for five different plant si,es of a firm. /n the long run the firm should produce output 4 %ith a plant of si,e:
x
A9 Ans%er: C
O&
B9 O .
C9 O2.
D9 O1.
Type: A Topic: * 1: &4. !/: 1* 1*(. @hen diseconomies of scale occur: A9the long6run average total cost curve falls. C9 the long6run average total cost curve rises.
B9marginal cost intersects average total cost. D9 average fixed costs %ill rise. Ans%er: C
Type: A Topic: * 1: &4&6&4* !/: 1*461*2 1**. @hich of the follo%ing is not a source of economies of scale< A9 B9 Ans%er: D learning6by6doing. C9 use of larger machines. labor speciali,ation. D9 inelastic resource supply curves.
Type: A Topic: * 1: &4* !/: 1*2 1*.. @hen a firm does more of something- it gets better at it. This learning6by6doing is: A9 B9 Ans%er: B a source of diseconomies of scale. C9 called the principle of natural progression. a source of economies of scale. D9 called Cspreading the overhead.C
Fse the follo%ing to ans%er 2uestions 1*061.1:
Fse the follo%ing data to ans%er the next 2uestion8s9. The letters A- B- and C designate three successively larger plant si,es.
O u tp u t $! 2! %! )! &! .! ! 8! A! $!!
A T + 5A $ . & ) & $! $) $A 2& %2
A T + 56 $$% A . ) % ) & $! $.
A T + 5+ $)) %& 2 2! $) $$ 8 . &
Type: T Topic: * 1: &4 6&4& !/: 1(361*4 1*0. "efer to the above data. /n the long run the firm should use plant si,e CAC for: A9 B9 Ans%er: B all possible levels of output. 14 to 4 units of output. C9 4 to *4 units of output.
D9 all outputs greater than &4.
Type: T Topic: * 1: &4 6&4& !/: 1(361*4 1*3. "efer to the above data. /n the long run the firm should use plant si,e CCC for: A9 B9 Ans%er: D all possible levels of output. 14 to 4 units of output. C9 &4 to .4 units of output. D9 all units of output greater than 04.
Type: T Topic: * 1: &4&6&4( !/: 1*461*1 1.4. "efer to the above data. 1conomies of scale are reali,ed over the PPP to PPP levels of output> diseconomies of scale exist over the PPP to PPP levels of output. A9 Ans%er: C 14- 4> &4- 144 B9 14- &4> 04- 144 C9 14- (4> *4- 144 D9 14- .4> 04- 144
Type: T Topic: * 1: &4. !/: 1* 1.1. "efer to the above data. At %hat level of output is minimum efficient scale reali,ed< A9 Ans%er: C 4 B9 &4 C9 (4 D9 *4
Type: A Topic: * 1: &4& !/: 1*4 1.2. 1conomies of scale are indicated by: A9 B9 C9 D9 Ans%er: B the rising segment of the average variable cost curve. the declining segment of the long6run average total cost curve. the difference bet%een total revenue and total cost. a rising marginal cost curve.
Type: A Topic: * 1: &4. !/: 1* 1. . Diseconomies of scale: A9 B9 Ans%er: A pertain to the long run. pertain to the short run. C9 are synonymous %ith diminishing returns. D9 are synonymous %ith increasing returns.
Type: A Topic: * 1: &4
!/: 1(3
1.&. The long6run average total cost curve: A9 B9 C9 D9 %ill rise if diminishing returns are encountered. %ill fall if diminishing returns are encountered. %ill rise if economies of scale are incurred. is based on the assumption that all resources are variable.
Ans%er: D
Type: A Topic: * 1: &4& !/: 1*4 1.(. /f a firm doubles its output in the long run and its unit costs of production decline- %e can conclude that: A9 B9 Ans%er: B technological progress has occurred. economies of scale are being reali,ed. C9 the firm is encountering diminishing returns. D9 diseconomies of scale are being encountered.
Fse the follo%ing to ans%er 2uestions 1.*61.0:
Type: E Topic: * 1: &4& !/: 1*4 1.*. "efer to the above diagram. Dor output level Q- per unit costs of C are: A9 B9 C9 D9 Ans%er: C unobtainable and imply the inefficient use of resources. unobtainable- given resource prices and the current state of technology. obtainable- but imply the inefficient use of resources. obtainable and imply that resources are being combined efficiently.
Type: E Topic: * 1: &4& !/: 1*4 1... "efer to the above diagram. Dor output level Q- per unit costs of B are: A9 B9 C9 D9 Ans%er: D unobtainable and imply the inefficient use of resources. unobtainable- given resource prices and the current state of technology. obtainable- but imply the inefficient use of resources. obtainable and imply least6cost production of this output.
Type: E Topic: * 1: &4& !/: 1*4 1.0. "efer to the above diagram. Dor output level Q- per unit costs of A are: A9 B9 C9 D9 Ans%er: B unobtainable and imply the inefficient use of resources. unobtainable- given resource prices and the current state of technology. obtainable- but imply the inefficient use of resources. obtainable and imply least6cost production of this output.
Type: D Topic: * 1: &4. !/: 1* 1.3. The minimum efficient scale of a firm: A9 B9 C9 D9 Ans%er: D is reali,ed some%here in the range of diseconomies of scale. occurs %here marginal product becomes ,ero. is in the middle of the range of constant returns to scale. is the smallest level of output at %hich long6run average total cost is minimi,ed.
Type: A Topic: * 1: &4*6&4. !/: 1*261* 104. /f an industry$s long6run average total cost curve has an extended range of constant returns to scale- this implies that: A9 B9 C9 D9 Ans%er: C technology precludes both economies and diseconomies of scale. the industry %ill be a natural monopoly. both relatively small and relatively large firms can be viable in the industry. the industry %ill be comprised of a very large number of small firms.
Type: D Topic: * 1: &4. !/: 1* 101. A natural monopoly exists %hen: A9 B9 C9 D9 Ans%er: A unit costs are minimi,ed by having one firm produce an industry$s entire output. several formerly competing producers merge to become the only firm in an industry. short6run average total cost curves are tangent to long6run average total cost curves. minimum efficient scale is attained at a small level of output.
Type: A Topic: * 1: &4. !/: 1* 102. Diseconomies of scale arise primarily because: A9 B9 the short6run average total cost curve rises %hen marginal product is increasing. of the difficulties involved in managing and coordinating a large business enterprise.
C9 firms must be large both absolutely and relative to the mar'et to employ the most efficient productive techni2ues available. D9 beyond some point marginal product declines as additional units of a variable resource 8labor9 are added to a fixed resource 8capital9. Ans%er: B
Fse the follo%ing to ans%er 2uestions 10 610*:
Type: E Topic: * 1: &4
!/: 1(3
10 . /n the above diagram it is assumed that: A9 B9 C9 D9 Ans%er: B some costs are fixed and other costs are variable. all costs are variable. the la% of diminishing returns determines the shape of the cost curve. marginal product first falls- but ultimately rises as output is increased.
Type: E Topic: * 1: &4. !/: 1* 10&. "efer to the above diagram. 1conomies of scale: A9are evident over the entire range of output. C9 begin at output Q . B9 Ans%er: B occur over the 4Q range of output.
1
D9 occur only over the Q Q range of output.

1
Type: E Topic: * 1: &4. !/: 1* 10(. "efer to the above diagram. Diseconomies of scale: A9 B9 Ans%er: C
1
begin at output Q .
1
C9 begin at output Q . D9 are in evidence at all output levels.
occur over the Q Q range of output.
Type: E Topic: * 1: &4. !/: 1* 10*. "efer to the above diagram. !inimum efficient scale: A9 B9 Ans%er: B occurs at some output greater than Q . is achieved at Q .
1
C9 is achieved at Q . D9 cannot be identified in this diagram.
Type: E Topic: * 1: &4. !/: 1* 10..
/n the above long6run average total cost curve the: A9 movement from A to B reflects diseconomies of scale.
B9 C9 D9 Ans%er: B
movement from B to C reflects diseconomies of scale. reali,ation of economies of scale %ould shift the entire curve do%n%ard. movement from B to C reflects the la% of diminishing returns.
Type: D Topic: * 1: &4 6&4& !/: 1(361*4 100. The long6run average total cost curve: A9 B9 si,e. C9 D9 industry. Ans%er: B has a shape %hich is the inverse of the la% of diminishing returns. can be derived by summing hori,ontally the average total cost curves of all firms in an displays declining unit costs so long as output is increasing. indicates the lo%est unit costs achievable %hen a firm has had sufficient time to alter plant
Type: A Topic: * 1: &4* !/: 1*2 103. /f a firm increases all of its inputs by 14 percent and its output increases by 1( percent- then: A9 it is encountering diseconomies of scale. B9 Ans%er: B it is encountering economies of scale. C9 the la% of diminishing returns is ta'ing hold. D9 the firm$s long6run ATC curve %ill be rising.
Type: A Topic: * 1: &4. !/: 1* 134. /f a firm increases all of its inputs by 14 percent and its output increases by 14 percent- then: A9 it is encountering diseconomies of scale. B9 Ans%er: C it is encountering economies of scale. C9 it is encountering constant returns to scale. D9 the marginal products of all inputs are falling.
Type: A Topic: * 1: &4. !/: 1* 131. The ABC Corporation decreases all of its inputs by 12 percent and finds that its output falls by only 0 percent. This means that initially it %as producing: A9 B9 Ans%er: A in the range of diseconomies of scale. in the range of economies of scale. C9 %here A# is less than !#. D9 at the point of minimum efficient scale.
Type: A Topic: * 1: &4. !/: 1* 132. Diseconomies of scale means that: A9 B9 C9 D9 Ans%er: B a firm$s long6run average total cost curve is declining. a firm$s long6run average total cost curve is rising. the advantages of speciali,ation are being more fully reali,ed. a given increase in inputs results in a more6than6proportionate increase in output.
Type: A Topic: * 1: &4* !/: 1*2 13 . 7uppose a firm is in a range of production %here it is experiencing economies of scale. Gno%ing this- %e can predict that: A9 B9 the long6run average total cost curve is upsloping. a 14 percent increase in all inputs %ill increase output by less than 14 percent.
C9 D9 Ans%er: C
a 14 percent increase in all inputs %ill increase output by more than 14 percent. the firm is encountering problems of managerial bureaucracy because of its si,e.
Last Word Questions
Type: D 1: &43 !/: 1*( 13&. 8?ast @ord9 A cost that cannot be partly or fully recovered through any subse2uent action is 'no%n as a: A9 Ans%er: D variable cost. B9 fixed cost. C9 marginal cost. D9 sun' cost.
Type: B 1: &43 !/: 1*( 13(. 8?ast @ord9 @hich of the follo%ing is an example of a sun' cost- as it relates to a firm< A9 B9 C9 D9 Ans%er: B an expenditure on ra% materials used in the production process. an expenditure on a nonrefundable- nontransferable airline tic'et. an expenditure to buy a delivery van. an expenditure for a ne% factory.
Type: A 1: &43 !/: 1*( 13*. 8?ast @ord9 @hich of the follo%ing sayings relates most closely to the idea of sun' costs: A9 Don$t cry over spilt mil'. C9 ;e %ho hesitates is lost.
B9A bird in the hand is %orth t%o in the bush. D9 7ho% me the money. Ans%er: A
True/ alse Questions
Type: A 1: 32 !/: 1&0 13.. The real opportunity cost of producing product K is the amounts of products L- Q- and so forth- that might have been produced if resources had not been used to produce K. Ans%er: True
Type: D 1: 3& !/: 1(4 130. The short run is a period of time during %hich all costs are fixed costs. Ans%er: Dalse
Type: D 1: 30 !/: 1(& 133. Aariable costs are costs that vary directly %ith output. Ans%er: True
Type: A 1: 3( !/: 1(1 244. The la% of diminishing returns explains %hy the long6run average total cost curve is F6shaped. Ans%er: Dalse
Type: A 1: &4. !/: 1* 241. Diseconomies of scale stem primarily from the difficulties in managing and coordinating a large6 scale business enterprise. Ans%er: True
Type: A 1: 30 !/: 1(& 242. At ,ero units of output a firm$s variable costs are ,ero. Ans%er: True
Type: A 1: 33 !/: 1(( 24 . Average fixed costs diminish continuously as output increases. Ans%er: True
Type: A 1: &41 !/: 1(. 24&. /f the marginal6cost curve lies belo% the average6variable6cost curve- the average6variable6cost curve must be falling. Ans%er: True
Type: A 1: 3
!/: 1&3
24(. 1conomic profit is found by subtracting accounting costs from total revenue. Ans%er: Dalse
Type: A 1: 3
!/: 1&3
24*. A firm$s economic profit is usually higher than its accounting profit. Ans%er: Dalse
Type: D 1: 3
!/: 1&3
24.. /n economics- a firm earns a normal profit %hen its total revenue e2uals its total economic costs. Ans%er: True
Type: C 1: &41 !/: 1(. 240. The la% of diminishing returns explains %hy short6run marginal cost curves are up%ard sloping. Ans%er: True
Type: C 1: &4& !/: 1*4 243. The la% of diminishing returns explains diseconomies of scale. Ans%er: Dalse
Type: C 1: &4. !/: 1* 214. !inimum efficient scale varies by industry. Ans%er: True
'.
+verage fixed costs can be determined graphically by< A.
6. the vertical distance between T' and T,
+. the vertical distance between +,' and M
C. the vertical distance between +T' and +
-.
:iseconomies of scale stem primarily from the difficulties in managing and coordinating a largescale business enterprise. A. True 6. 0alse
0.
Bhich of the following statements is correct> A.
6. Marginal cost measures the cost per unit
+. Bhen marginal product rises" marginal c
C. Marginal cost is the price or cost of an e wor5er* divided by its marginal product.
8.
The long-run average total cost curve< A.
displays dec long as outp
6. indicates the lowest unit costs achievabl size.
+. has a shape which is the inverse of the la
C. can be derived by summing horizontally industry.
..
Marginal product is< A.
6. the increase in total revenue attributable to the em
+. the increase in total cost attributable to the emplo
C. total product divided by the number of wor5ers e
E.
+ccounting profits are typically< A.
6. e/ual to economic profits because accountin
+. smaller than economic profits because the f
C. greater than economic profits because the fo
G.
To the economist total cost includes< A. 6. neither implicit nor explicit costs. +. implicit" but not explicit" costs. C. explicit" but not implicit" costs.
7.
@uppose that a business incurred implicit costs of $2!!"!!! and explicit costs of $$ million in a specific year. =f the firm sold )"!!!
units of its output at $%!! per unit" its accounting profits were< $$!!"!!! and its A. economic profits we zero. 6. $2!!"!!! and its economic profits were +. $$!!"!!! and its economic profits were
C. zero and its economic loss was $2!!"!!!
I.
The amount of calendar time associated with the long run< A. 6. varies from industry to industry. +. is the same for all firms. C. is one year by definition.
'(.
+nswer the next /uestion(s* on the basis of the following inform
F-$ F9022!&!
Fefer to the above data. Bhen two wor5ers are employed< A. total product is 2!. 6. total product is $8.
+. average product is $!.
C. total product cannot be determined from the information g
''.
0or most producing firms< A.
6. total costs rise as output is carried to a certai
+. average total costs decline as output is carrie
C. average total costs rise as output is carried to
'-.
Total cost minus total variable cost e/uals< average A. fixed cost. 6. total fixed cost. +. average variable cost. C. marginal cost.
'0.
The law of diminishing returns describes the< A. relationship between total costs and total revenues.
6. profit-maximizing position of a firm.
+. relationship between resource inputs and product out
C. relationship between resource inputs and product out
'8.
:iseconomies of scale arise primarily because< A. 6. of the difficulties involved in managing +. firms must be large both absolutely and productive techni/ues available.
C. beyond some point marginal product dec (labor* are added to a fixed resource (cap
'..
;se the following data to answer the next /ue successively larger plant sizes.
F-2 F9022$&8
Fefer to the above data. +t what level of output is minimum efficient scale realized> A. %! 6. )! +. &! C. .!
'E.
;se the following data to answer the next /ue successively larger plant sizes.
F-2 F9022$&8
Fefer to the above data. 9conomies of scale are realized over the RRR to RRR levels of outputQ diseconomies of scale exist over the RRR to RRR levels of output. A. $!" %!Q )!" $!! 6. $!" )!Q 8!" $!! +. $!" &!Q .!" $!! C. $!" !Q 8!" $!!
'G.
=n the above diagram curves $" 2" and % represent< A.
6. total variable cost" total fixed cost" and total cost res
+. total fixed cost" total variable cost" and total cost res
C. marginal product" average variable cost" and averag
'7.
4=f a variable input is added to some fixed input" beyond some point the resulting extra output will decline.4 This statement describes< economies and A. diseconomies of scale.
6. 6-inefficiency. +. the law of diminishing returns. C. the law of diminishing marginal utility.
'I.
;se the following cost information for the 'r $.-2%<
9ntrepreneur's potential earnings as a salaried +nnual lease on building I $22"!!! +nnual revenue from operations I $%8!"!!! #ayments to wor5ers I $$2!"!!! ;tilities (electricity" water" disposal* costs I $ 9ntrepreneur's potential economic profit from 9ntrepreneur's forgone interest on personal fu
F-% F9022!$.
Fefer to the above data. 'reamy 'risp's accounting profit is< A. $$&!"!!!. 6. $%8!"!!!. +. $2%!"!!!. C. $2A)"!!!.
-(.
F-) 022!.&
Fefer to the above diagram. +t output level Q total cost is< A. !BEQ. 6. BCDE. +. !BEQ plus BCDE. C. !AFQ plus BCDE.
'.
Kormal profit is< A. 6. +. C.
determined by subtracting implicit costs from total revenue.
determined by subtracting explicit costs from total revenue. the return to the entrepreneur when economic profits are zero. the average profitability of an industry over the preceding $! years.
-.
@uppose that a business incurred implicit costs of $2!!"!!! and explicit costs of $$ million in a specific year. =f the firm sold )"!!! units of its output at $%!! per unit" its accounting profits were< A. $$!!"!!! and its economic profits were zero. 6. +. C. $2!!"!!! and its economic profits were zero. $$!!"!!! and its economic profits were $$!!"!!!. zero and its economic loss was $2!!"!!!.
0.
The basic characteristic of the short run is that< A. barriers to entry prevent new fi from entering the industry. 6. +. C. the firm does not have sufficient time to change the size of
the firm does not have sufficient time to cut its rate of outp a firm does not have sufficient time to change the amounts
8.
Marginal product is< A. 6. +.
the increase in total output att the employment of one more
the increase in total revenue attributable to the employment of one
the increase in total cost attributable to the employment of one mo
C.
total product divided by the number of wor5ers employed.
..
The first" second" and third wor5ers employed by a firm add 2)" $8" and A units to total product respectively. Be can conclude that< A. the marginal product of the third wor5er is A. 6. +. C. the total product of the three wor5ers is &). the average product of the three wor5ers is $8. the average product of the first two wor5ers is $8.
E.
F-$ 022!%A
=n the above diagram curves $" 2" and % represent the< A. average" marginal" and total product curves respectively. 6. marginal" average" and total product curves respectively.
+. C.
total" average" and marginal product curves respectively. total" marginal" and average product curves respectively.
G.
F-$ 022!%A
The above diagram suggests that< A. when marginal product is zero" total product is at a maximum. 6. +. C.
when marginal product lies above average product" average produc
when marginal product lies below average product" average produc all of the above hold true.
7.
=f you owned a small farm" which of the following would be a fixed cost> A. harvest labor 6. hail insurance
+. C.
fertilizer seed
I.
Marginal cost is the< A. 6. +. C.
rate of change in total from producing one m
change in total cost which results from producing one more un change in average variable cost which results from producing
change in average total cost which results from producing one
'(.
+ssume that in the short run a firm is producing $!! units of output" has average total costs of $2!!" and average variable costs of $$&!. The firm's total fixed costs are< A. $&"!!!. 6. +. C. $&!!. $.&!. $&!.
''.
=f a firm decides to produce no output in the short run" its costs will be< A. its marginal costs. 6. +. C. its fixed plus its variable costs. its fixed costs. zero.
'-.
+nswer the next /uestion(s* on the basis of the following cost data< Output Total
+ost ! $ 2 % ) & . $ 2) %% )$ )8 &) .$ .A
F-2 F9022! !
Fefer to the above data. The total variable cost of producing & units< A. is $.$. 6. +. C. is $)8. is $% . is $2).
'0.
+nswer the next /uestion(s* on the basis of the following cost data< Output ! $ 2 % ) & . Total +ost
$ 2) %% )$ )8 &) .$ .A
F-2 F9022! !
Fefer to the above data. The average total cost of producing % units of output< A. is $$). 6. is $$2.
+. C.
is $$%.&!. is $$..
'8.
$ 2) %% )$ )8 &) .$ .A
F-2 F9022! !
Fefer to the above data. The average fixed cost of producing % units of output< A. is $8. 6. +. C. is $ .)!. is $&.&!. is $..
'..
$ 2) %% )$ )8 &) .$ .A
F-2 F9022! !
Fefer to the above data. The marginal cost of producing the sixth unit of output< A. is $2). 6. +. C. is $$2. is $$.. is $8.
'E.
=n the above figure" curves $" 2" %" and ) represent the< A. +T'" M'" +0'" and +,' curves respectively. 6. +. C. +0'" M'" +,'" and +T' curves respectively. M'" +T'" +,'" and +0' curves respectively. +T'" +,'" +0'" and M' curves respectively.
'G.
9conomies and diseconomies of scale explain< A. the profit-maximizing level of production. 6. +. C.
why the firm's long-run average total cost curve is ;-sha
why the firm's short-run marginal cost curve cuts the sho minimum point. the distinction between fixed and variable costs.
'7.
F-% 022$))
The above diagram shows the short-run average total cost curves for five different plant sizes of a firm. =n the long run the firm should produce output !*B x with a plant of size< A. S) 6. +. C. S%. S2. S$.
'I.
;se the following data to answer the next /uestion(s*. The letter successively larger plant sizes. Output AT+5A AT+56 AT+5+ $! 2! %! )! &! .! ! 8! A! $!! $! $) $A 2& %2 $! $. $. & ) & $$% A . ) % ) & $)) %& 2 2! $) $$ 8 . &
F-) F9022$)
Fefer to the above data. +t what level of output is minimum efficient scale realized> A. %! 6. +. C. >. )! &! .! !
-(.
F-& 022!&&
Fefer to the above diagram. +t output level Q< A. marginal product is falling. 6. +. C. marginal product is rising. marginal product is negative.
one cannot determine whether marginal product is falling or risi
-'.
F-& 022!&&
Fefer to the above diagram. +t output level Q average fixed cost< A. is e/ual to EF. 6. +. C. is e/ual to QE. is measured by both QF and ED. cannot be determined from the information given.
--.
F-& 022!&&
Fefer to the above diagram. +t output level Q total cost is< A. !BEQ. 6. +. C. BCDE. !BEQ plus BCDE. !AFQ plus BCDE.
-0.
F-& 022!&&
Fefer to the above diagram. +t output level Q total fixed cost is< A. !BEQ. 6. +. C. BCDE. !BEQ-!AFQ. !CDQ.
-8.
F-& 022!&&
Fefer to the above diagram. +t output level Q total variable cost is< A. !BEQ. 6. +. C. BCDE. !CDQ. !AFQ.
Practice Exam - Final Key

1. For economists, the word "utility" means: A. versatility and flexibility. B. rationality. C. pleasure or satisfaction. D. purposefulness. 2. Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any money on my financial investment." His economist friend points out that in effect he did lose money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of: A. opportunity costs. B. marginal benefits that exceed marginal costs. C. imperfect information. D. normative economics. 3. The assertion that "There is no free lunch" means that: A. there are always tradeoffs between economic goals. B. all production involves the use of scarce resources and thus the sacrifice of alternative goods. C. marginal analysis is not used in economic reasoning. D. choices need not be made if behavior is rational. 4. The budget line shows: A. the amount of product A that a consumer is willing to give up to obtain one more unit of product B. B. all possible combinations of two goods that can be purchased, given money income and the prices of the goods. C. the minimum amount of two goods that a consumer can purchase with a given money income. D. all possible combinations of two goods that yield the same level of utility to the consumer.
5. Refer to the budget line shown in the diagram above. If the consumer's money income is $20, the: A. prices of C and D cannot be determined. B. price of C is $2 and the price of D is $4. C. consumer can obtain a combination of 5 units of both C and D. D. price of C is $4 and the price of D is $2. 6. Any point inside the production possibilities curve indicates: A. the presence of technological change. B. that resources are imperfectly substitutable among alternative uses.
C. the presence of inflationary pressures. D. that more output could be produced with available resources.
75.
125. Refer to the above table. If your taxable income is $8,000, your average tax rate is: A. 25 percent and the marginal rate on additional income is also 25 percent. B. 25 percent and the marginal rate on additional income is 40 percent. C. 25 percent and the marginal rate on additional income cannot be determined from the information given. D. 20 percent and the marginal rate on additional income is 30 percent. 126. Which of the following best reflects the ability-to-pay philosophy of taxation? A. a tax on residential property B. a progressive income tax C. an excise tax on gasoline D. an excise tax on coffee 127. The incidence of a tax pertains to: A. the degree to which it alters the distribution of income. B. how easy it is to evade the tax. C. who actually bears the burden of a tax. D. the progressiveness or regressiveness of tax rates. Multiple 'hoice 3uestions 0our mar5et models Type< + Topic< $ 9< )$) M=< $ ! $. 9conomists would describe the ;.@. automobile industry as< +* purely competitive. an oligopoly. '* monopolistically competitive. :* a pure 8* monopoly. +nswer< 8
Type< + Topic< $ 9< )$) M=< $ ! 2.=n which of the following mar5et structures is there clear-cut mutual interdependence with respect to priceoutput policies> +* pure 8* oligopoly '* monopolistic competition :* pure competition monopoly +nswer< 8 Type< + Topic< $ 9< )$) M=< $ ! %.Bhich of the following industries most closely approximates pure competition> +*agriculture 8* farm implements '* clothing :* steel 'hapter 2%< #ure 'ompetition +nswer< + Type< : Topic< $ 9< )$) M=< $ ! ).9conomists use the term imperfect competition to describe< +*all industries which produce standardized products. 8*any industry in which there is no nonprice competition. '*a pure monopoly only. :*those mar5ets which are not purely competitive. +nswer< : Mc'onnell28rue< 9conomics" $.2e #age .88 'hapter 2%< #ure 'ompetition Type< + Topic< $ 9< )$) M=< $ ! &. =n which of the following industry structures is the entry of new firms the most difficult> +* pure monopoly 8* oligopoly '* monopolistic competition :* pure competition +nswer< + Type< + Topic< $ 9< )$) M=< $ ! ..+n industry comprised of )! firms" none of which has more than % percent of the total mar5et for a differentiated product is an example of< ' : +* monopolistic competition 8* oligopoly pure monopoly pure competition * * +nswer< + Type< + Topic< $ 9< )$%-)$) M=< $.A-$ ! . + one-firm industry is 5nown as< ' : +* monopolistic competition 8* oligopoly pure monopoly pure competition * * +nswer< ' Type< + Topic< $ 9< )$) M=< $ ! 8 +n industry comprised of four firms" each with about 2& percent of the total mar5et for a . product is an example of< +* monopolistic competition 8* oligopoly '* pure monopoly :* pure competition +nswer< 8 Type< + Topic< $ 9< )$%-)$) M=< $.A-$ ! A +n industry comprised of a very large number of sellers producing a standardized product . is 5nown as< +* monopolistic competition 8* oligopoly '* pure monopoly :* pure competition +nswer< :
Type< + Topic< $ 9< )$) M=< $ ! $!.+n industry comprised of a small number of firms" each of which considers the potential reactions of its rivals in ma5ing price-output decisions is called< +* monopolistic competition 8* oligopoly '* pure monopoly :* pure competition +nswer< 8 #ure competition definedQ demand curve Type< + Topic< 2 9< )$) M=< $ ! $$.Bhich of the following statements applies to a purely competitive producer> +*=t will not advertise its product. Mc'onnell28rue< 9conomics" $.2e #age .8A 'hapter 2%< #ure 'ompetition 8*=n long-run e/uilibrium it will earn an economic profit. '*=ts product will have a brand name. :*=ts product is slightly different from those of its competitors. +nswer< + Mc'onnell28rue< 9conomics" $.2e #age .A! 'hapter 2%< #ure 'ompetition Type< + Topic< 2 9< )$) M=< $ ! $2. + purely competitive seller is< +* both a 4price ma5er4 and a 4price ta5er.4 '* a 4price ta5er.4 8* neither a 4price ma5er4 nor a 4price ta5er.4 :* a 4price ma5er.4 +nswer< ' Type< + Topic< 2 9< )$) M=< $ ! $%. Bhich of the following is not characteristic of pure competition> +* price strategies by firms '* no barriers to entry 8* a standardized product :* a larger number of sellers +nswer< + Type< + Topic< 2 9< )$) M=< $ ! $). Bhich of the following is not a basic characteristic of pure competition> +* considerable nonprice competition '* a standardized or homogeneous product 8* no barriers to the entry or exodus of firms :* a large number of buyers and sellers +nswer< + Type< + Topic< 2 9< )$& M=< $ $ $&.The demand schedule or curve confronted by the individual purely competitive firm is< +*relatively elastic" that is" the elasticity coefficient is greater than unity. 8*perfectly elastic. '*relatively inelastic" that is" the elasticity coefficient is less than unity. :*perfectly inelastic. +nswer< 8 Type< + Topic< 2 9< )$&-)$. M=< $ $-$ 2 $..Bhich of the following is characteristic of a purely competitive seller's demand curve> +*#rice and marginal revenue are e/ual at all levels of output. 8*+verage revenue is less than price. '*=ts elasticity coefficient is $ at all levels of output. :*=t is the same as the mar5et demand curve. +nswer< + ;se the following to answer /uestions $ -$A< =n answering the next /uestion(s*" assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.
Type< ? Topic< 2 9< )$&-)$. M=< $ $-$ 2 Mc'onnell28rue< 9conomics" $.2e #age .A$ 'hapter 2%< #ure 'ompetition $ . Fefer to the above information. 0or a purely competitive firm total revenue< +* graphs as a straight" upsloping line.'* is a straight line" parallel to the horizontal axis. 8*is a straight line" parallel to the vertical axis. :* graphs as a straight" downsloping line. +nswer< + Mc'onnell28rue< 9conomics" $.2e #age .A2 'hapter 2%< #ure 'ompetition Type< ? Topic< 2 9< )$. M=< $ 2 $8. Fefer to the above information. 0or a purely competitive firm marginal revenue< +* graphs as a straight" upsloping line.'* is a straight line" parallel to the horizontal axis. 8*is a straight line" parallel to the vertical axis. :* graphs as a straight" downsloping line. +nswer< ' Type< ? Topic< 2 9< )$. M=< $ 2 $A.Fefer to the above information. 0or a purely competitive firm< +*marginal revenue will graph as an upsloping line. 8*the demand curve will lie above the marginal revenue curve. '*the marginal revenue curve will lie above the demand curve. :*the demand and marginal revenue curves will coincide. +nswer< : Type< + Topic< 2 9< )$&-)$. M=< $ $-$ 2 2!.=f a firm in a purely competitive industry is confronted with an e/uilibrium price of $&" its marginal revenue< +*may be either greater or less than $&. 8*will also be $&. +nswer< 8 '*will be less than $&. :*will be greater than $&. Type< + Topic< 2 9< )$) M=< $ ! 2$.#rice is constant or given to the individual firm selling in a purely competitive mar5et because< +*the firm's demand curve is downsloping. 8*of product differentiation reinforced by extensive advertising. '*each seller supplies a negligible fraction of total supply. :*there are no good substitutes for its product. +nswer< ' Type< + Topic< 2 9< )$&-)$. M=< $ $-$ 2 22. 0or a purely competitive seller" price e/uals< +* average 8* marginal revenue. '* total revenue divided by output. :* all revenue. of the above. +nswer< : Type< + Topic< 2 9< )$& M=< $ $ 2%.0or a purely competitive firm total revenue<
+*is price times /uantity sold. Mc'onnell28rue< 9conomics" $.2e #age .A% 'hapter 2%< #ure 'ompetition 8*increases by a constant absolute amount as output expands. '*graphs as a straight upsloping line from the origin. :*has all of the above characteristics. +nswer< : Type< + Topic< 2 9< )$. M=< $ 2 2).The marginal revenue curve of a purely competitive firm< +*lies below the firm's demand curve. 8*increases at an increasing rate as output expands. '*is horizontal at the mar5et price. :*is downsloping because price must be reduced to sell more output. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age .A) 'hapter 2%< #ure 'ompetition Type< + Topic< 2 9< )$& M=< $ $ 2&. The demand curve in a purely competitive industry is RRRRRR" while the demand curve to a single firm in that industry is RRRRRR. +* perfectly inelastic" perfectly '*downsloping" perfectly inelastic elastic 8* downsloping" perfectly elastic :*perfectly elastic" downsloping +nswer< 8 Type< + Topic< 2 9< )$& M=< $ $ 2..+ perfectly elastic demand curve implies that the firm< +*must lower price to sell more output. 8*can sell as much output as it chooses at the existing price. '*realizes an increase in total revenue which is less than product price when it sells an extra unit. :*is selling a differentiated (heterogeneous* product. +nswer< 8 Type< + Topic< 2 9< )$&-)$. M=< $ $-$ 2 2 .The vertical distance between the horizontal axis and any point on a pure competitor's demand curve measures< +*total revenue. 8*total cost. '*product price" marginal revenue" and average revenue. :*the /uantity demanded. +nswer< ' Type< + Topic< 2 9< )$. M=< $ 2 28.The fact that a purely competitive firm's total revenue curve is linear and upsloping to the right implies that< +*product price increases as output increases. 8*product price decreases as output increases. '*product price is constant at all levels of output. :*marginal revenue declines as more output is produced. +nswer< ' Type< + Topic< 2 9< )$& M=< $ $ 2A.Bhich of the following statements is correct>
+*The demand curve for a purely competitive firm is perfectly elastic" but the demand curve for a purely competitive industry is downsloping. 8*The demand curve for a purely competitive firm is downsloping" but the demand curve for a purely competitive industry is perfectly elastic. '*The demand curves are downsloping for both a purely competitive firm and a purely competitive industry. Mc'onnell28rue< 9conomics" $.2e #age .A& 'hapter 2%< #ure 'ompetition :*The demand curves are perfectly elastic for both a purely competitive firm and a purely competitive industry. +nswer< + Mc'onnell28rue< 9conomics" $.2e #age .A.
'hapter 2%< #ure 'ompetition ;se the following to answer /uestions %!-%$< Type< ? Topic< 2 9< )$. M=< $ 2 %!. Fefer to the above diagram" which pertains to a purely competitive firm. 'urve + represents< +* total revenue and marginal revenue.'*total revenue and average revenue. : 8* marginal revenue only. total revenue only. * +nswer< : Type< ? Topic< 2 9< )$&-)$. M=< $ $-$ 2 %$.Fefer to the above diagram" which pertains to a purely competitive firm. 'urve ' represents< +*total revenue and marginal revenue. 8*marginal revenue only. +nswer< : '*total revenue and average revenue. :*average revenue and marginal revenue. Type< + Topic< 2 9< )$. M=< $ 2 %2.+ purely competitive seller's average revenue curve coincides with< +*its marginal revenue curve only. 8*its demand curve only. '*both its demand and marginal revenue curves. :*neither its demand nor its marginal revenue curve. +nswer< ' Type< : Topic< 2 9< )$. M=< $ 2 %%.Marginal revenue is the< +*change in product price associated with the sale of one more unit of output. 8*change in average revenue associated with the sale of one more unit of output.
'*difference between product price and average total cost. :*change in total revenue associated with the sale of one more unit of output. +nswer< : Mc'onnell28rue< 9conomics" $.2e #age .A 'hapter 2%< #ure 'ompetition Type< + Topic< 2 9< )$. M=< $ 2 %). Marginal revenue for a purely competitive firm< +* is greater than price. '* is e/ual to price. 8* is less than price. :* may be either greater or less than price. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age .A8
'hapter 2%< #ure 'ompetition #rofit maximizing in short run Type< + Topic< % 9< )$. M=< $ 2 %&.0irms see5 to maximize< +*per unit profit. 8* total revenue. '* total profit. :* mar5et share. +nswer< ' Type< + Topic< % 9< )$8 M=< $ ) %..+ competitive firm in the short run can determine the profit-maximizing (or loss-minimizing* output by e/uating< +*price and average total cost. 8*price and average fixed cost. +nswer< ' '*marginal revenue and marginal cost. :*price and marginal revenue. Type< + Topic< % 9< )$ M=< $ % % .=n the short run a purely competitive firm that see5s to maximize profit will produce< +*where the demand and the +T' curves intersect. 8*where total revenue exceeds total cost by the maximum amount. '*that output where economic profits are zero. :*at any point where the total revenue and total cost curves intersect. +nswer< 8 ;se the following to answer /uestions %8-)$< Type< ? Topic< % 9< )$ -)$8 M=< $ %-$ ) %8.Fefer to the above short-run data. Total fixed cost for this firm is< +*about $. . 8* $%!!. '* $2!!. :* $$!!. Mc'onnell28rue< 9conomics" $.2e #age .AA
'hapter 2%< #ure 'ompetition +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age !!
'hapter 2%< #ure 'ompetition Type< ? Topic< % 9< )$ M=< $ % %A. Fefer to the above short-run data. The shape of the total cost curve reflects< + diminishing opportunity costs.'*increasing and diminishing returns. * 8*the law of rising fixed costs. :*economies and diseconomies of scale. +nswer< ' Type< ? Topic< % 9< )$8 M=< $ ) )!.Fefer to the above short-run data. The profit-maximizing output for this firm is< +*above ))! units. 8* ))! units. '* %2! units. :* $!! units. +nswer< ' Type< ? Topic< % 9< )$8 M=< $ ) )$.Fefer to the above short-run data. Bhich of the following is correct> +*This firm will maximize its profit at ))! untis of output. 8*+ny level of output between $!! and ))! units will yield an economic profit. '*This firm's marginal revenue rises with output. :*+ny level of output less than $!! units or greater than ))! units is profitable. +nswer< 8 Type< + Topic< % 9< )$ M=< $ % )2.+ competitive firm will maximize profits at that output at which< +*total revenue exceeds total cost by the greatest amount. 8*total revenue and total cost are e/ual. '*price exceeds average total cost by the largest amount. :*the difference between marginal revenue and price is at a maximum. +nswer< + ;se the following to answer /uestions )%-)8< Type< ? Topic< % 9< )$8 M=< $ ) Mc'onnell28rue< 9conomics" $.2e #age !$ 'hapter 2%< #ure 'ompetition )%. 'urve ($* in the above diagram is a purely competitive firm's< + total cost curve. '*marginal revenue curve * 8*total revenue curve.:*total economic profit curve. +nswer< : Mc'onnell28rue< 9conomics" $.2e #age !2
'hapter 2%< #ure 'ompetition Type< ? Topic< % 9< )$. M=< $ 2 )). 'urve (2* in the above diagram is a purely competitive firm's +* total cost curve. '* marginal revenue curve 8* total revenue curve. :* total economic profit curve. +nswer< ' Type< ? Topic< % 9< )$8 M=< $ ) )&. 'urve (%* in the above diagram is a purely competitive firm's +* total cost curve. '* marginal revenue curve. 8* total revenue curve. :* total economic profit curve. +nswer< 8 Type< ? Topic< % 9< )$8 M=< $ ) ).. 'urve ()* in the above diagram is a purely competitive firm's< +* total cost curve. 8* total revenue curve. '* marginal revenue curve. :* total profit curve. +nswer< + Type< ? Topic< % 9< )$8 M=< $ ) ) .Fefer to the above diagram. Mther things e/ual" an increase of product price would be shown as< +*an increase in the steepness of curve (%*" an upward shift in curve (2*" and upward shift in curve ($*. 8*a decrease in the steepness of curve (%*" a downward shift in curve (2*" and an upward shift in curve ($*. '*an downward shift in curve ()* and an upward shift in curve ($*" with no changes in lines (2* and (%*. :*an upward shift in line (2* only. +nswer< + Type< ? Topic< % 9< )$8 M=< $ ) )8.The firm represented by the above diagram would maximize its profit where< +*curves (2* and ($* intersect. 8*curve ($* touches the horizontal axis for the second time. '*the vertical distance between curves (%* and ()* is the greatest. :*curves (%* and ()* intersect. +nswer< ' Type< : Topic< % 9< )$ -)$8 M=< $ %-$ ) )A.+ firm reaches a brea5-even point (normal profit position* where< +*marginal revenue cuts the horizontal axis. Mc'onnell28rue< 9conomics" $.2e #age !% 'hapter 2%< #ure 'ompetition 8*marginal cost intersects the average variable cost curve. '*total revenue e/uals total variable cost. :*total revenue and total cost are e/ual. +nswer< : Type< + Topic< % 9< )$A M=< $ & &!. The MF I M' rule applies< +* to firms in all types of industries. '*only to monopolies. 8* only when the firm is a 4price ta5er.4:*only to purely competitive firms. +nswer< +
Mc'onnell28rue< 9conomics" $.2e #age !) 'hapter 2%< #ure 'ompetition Type< + Topic< % 9< )$8 M=< $ ) &$.Bhen a firm is maximizing profit it will necessarily be< +*maximizing profit per unit of output. 8*maximizing the difference between total revenue and total cost. '*minimizing total cost. :*maximizing total revenue. +nswer< 8 Type< + Topic< % 9< )$A M=< $ & &2.The MF I M' rule can be restated for a purely competitive seller as # I M' because< +*each additional unit of output adds exactly its price to total revenue. 8*the firm's average revenue curve is downsloping. '*the mar5et demand curve is downsloping. :*the firm's marginal revenue and total revenue curves will coincide. +nswer< + Type< + Topic< % 9< )2) M=< $8! &%.=n the short run the individual competitive firm's supply curve is that segment of the< +*average variable cost curve lying below the marginal cost curve. 8*marginal cost curve lying above the average variable cost curve. '*marginal revenue curve lying below the demand curve. :*marginal cost curve lying between the average total cost and average variable cost curves. +nswer< 8 Type< + Topic< % 9< )2) M=< $8! &).Bhich of the following is not a valid generalization concerning the relationship between price and costs for a purely competitive seller in the short run> +*#rice must be at least e/ual to average total cost. 8*#rice times /uantity produced must be e/ual to or greater than total variable cost for some level of output or the firm will close down in the short run. '*#rice may be e/ual to" greater than" or less than average total cost. :*#rice must be e/ual to or greater than minimum average variable cost for the firm to continue producing. +nswer< + Type< + Topic< % 9< )$8 M=< $ ) &&.+ssume the 67T 'orporation is producing 2! units of output. =t is selling this output in a purely competitive mar5et at $$! per unit. =ts total fixed costs are $$!! and its average variable cost is $% at 2! units of output. This corporation< +*should close down in the short run. 8*is maximizing its profits. '*is realizing a loss of $.!. :*is realizing an economic profit of $)!. Mc'onnell28rue< 9conomics" $.2e #age !& 'hapter 2%< #ure 'ompetition +nswer< : Mc'onnell28rue< 9conomics" $.2e #age !. 'hapter 2%< #ure 'ompetition Type< : Topic< % 9< )2) M=< $8! &..+ purely competitive firm's short-run supply curve is<
+*perfectly elastic at the minimum average total cost. 8*upsloping and e/ual to the portion of the marginal cost curve that lies above the average variable cost curve. '*upsloping and e/ual to the portion of the marginal cost curve that lies above the average total cost curve. :*upsloping only when the industry has constant costs. +nswer< 8 Type< + Topic< % 9< )2) M=< $8! & .@uppose you find that the price of your product is less than minimum +,'. 7ou should< +*minimize your losses by producing where # I M'. 8*maximize your profits by producing where # I M'. '*close down because" by producing" your losses will exceed your total fixed costs. :*close down because total revenue exceeds total variable cost. +nswer< ' Type< + Topic< % 9< )22 M=< $ 8 &8.=f a purely competitive firm shuts down in the short run< +*its loss will be zero. 8*it will realize a loss e/ual to its total variable costs. '*it will realize a loss e/ual to its total fixed costs. :*it will realize a loss e/ual to its total costs. +nswer< ' Type< + Topic< % 9< )22 M=< $ 8 &A.+ purely competitive firm should produce in the short run if its total revenue is sufficient to cover its< +*total variable costs. 8* total costs. '* total fixed costs. :* marginal costs. +nswer< + ;se the following to answer /uestions .!-.)< +nswer the next /uestion(s* on the basis of the following data confronting a firm< Mc'onnell28rue< 9conomics" $.2e #age ! 'hapter 2%< #ure 'ompetition MarginalMarginal Mutputrevenue cost ! --$ $$. $$! 2 $. A % $. $% ) $. $ & $. 2$ Type< T Topic< % 9< )$. M=< $ 2 .!. Fefer to the above data. This firm is selling its output in a(n*< + imperfectly competitive mar5et.'*purely competitive mar5et. * : 8*monopolistic mar5et. oligopolistic mar5et. * +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age !8 'hapter 2%< #ure 'ompetition Type< T Topic< % 9< )2) M=< $8!
.$. Fefer to the above data. =f the firm's minimum average variable cost is $$!" the firm's profit-maximizing level of output would be< +* 2. 8* %. '* ). :* &. +nswer< 8 Type< T Topic< % 9< )$ M=< $ % .2.Fefer to the above data. +t the profit-maximizing output the firm's total revenue is< +*$)8. 8* $%2. '* $8!. :* $.). +nswer< + Type< T Topic< % 9< )$ M=< $ % .%.Fefer to the above data. +t the profit-maximizing output the firm's total cost is< +*$)8. 8* $%2. '* $8!. :* $.). +nswer< 8 Type< T Topic< % 9< )$ M=< $ % .). Fefer to the above data. The firm's< +*economic profit is $$2. 8* economic profit is $$.. '* loss is $$). :* economic profit is $%. +nswer< 8 Type< + Topic< % 9< )2) M=< $8! .&. =n the short run a purely competitive firm will always ma5e an economic profit if< +* # I +T'. 8* # N +,'. '* # I M'. :* # N +T'. +nswer< : Type< + Topic< % 9< )2) M=< $8! ...@uppose that at &!! units of output marginal revenue is e/ual to marginal cost. The firm is selling its output at $& per unit and average total cost at &!! units of output is $.. Mn the basis of this information we< +*can say that the firm should close down in the short run. 8*can say that the firm can produce and realize an economic profit in the short run. '*cannot determine whether the firm should produce or shut down in the short run. :*can assume the firm is not using the most efficient technology. +nswer< ' Type< + Topic< % 9< )2) M=< $8! . .=f a firm is confronted with economic losses in the short run" it will decide whether or not to produce by comparing< Mc'onnell28rue< 9conomics" $.2e #age !A 'hapter 2%< #ure 'ompetition + marginal revenue and marginal cost. '* total revenue and total cost. * 8*price and minimum average variable cost.:* total revenue and total fixed cost. +nswer< 8 Mc'onnell28rue< 9conomics" $.2e #age $!
'hapter 2%< #ure 'ompetition Type< + Topic< % 9< )2) M=< $8! .8.+ firm finds that at its MF I M' output" its T' I $$!!!" T,' I $8!!" T0' I $2!!" and total revenue is $A!!. This firm should< +*shut down in the short run. 8*produce because the resulting loss is less than its T0'. '*produce because it will realize an economic profit. :*li/uidate its assets and go out of business. +nswer< 8 Type< + Topic< % 9< )2) M=< $8! .A.The lowest point on a purely competitive firm's short-run supply curve corresponds to< +*the minimum point on its +T' curve. '* the minimum point on its +0' curve. 8*the minimum point on its +,' curve. :* the minimum point on its M' curve. +nswer< 8 ;se the following to answer /uestions !- %< Type< ? Topic< % 9< )2%-)2) M=< $ A-$8! !.Fefer to the above diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down* is< +* #$. 8* #2. '* #%. :* #). +nswer< 8 Type< ? Topic< % 9< )2%-)2) M=< $ A-$8! $.Fefer to the above diagram for a purely competitive producer. The firm will produce at a loss at all prices< +*above #$. 8* above #%. '* above #). :* between #2 and # %. +nswer< : Mc'onnell28rue< 9conomics" $.2e #age $$ 'hapter 2%< #ure 'ompetition Type< ? Topic< % 9< )2) M=< $8! 2. Fefer to the above diagram for a purely competitive producer. =f product price is #%< + the firm will maximize profit at point '*economic profits will be zero. * d. 8*the firm will earn an economic profit. :*new firms will enter this industry. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age $2
'hapter 2%< #ure 'ompetition Type< ? Topic< % 9< )2) M=< $8! %. Fefer to the above diagram for a purely competitive producer. The firm's short-run supply curve is< +* the abcd segment of the M' '*the cd segment of the M' curve. curve. 8* the bcd segment of the M' curve. :*not shown. +nswer< 8 Type< + Topic< % 9< )2) M=< $8! ).The short-run supply curve of a purely competitive producer is based on its< +* +,' curve. 8* +T' curve. '* +0' curve. :* M' curve. +nswer< : Type< + Topic< % 9< )2) M=< $8! &. Mn a per unit basis economic profit can be determined as the difference between< +* marginal revenue and product price.'*marginal revenue and marginal cost. : 8* product price and average total cost. average fixed cost and product price. * +nswer< 8 Type< + Topic< % 9< )2%-)2) M=< $ A-$8! ..=n the short run a purely competitive seller will shut down if< +*it cannot produce at an economic profit. 8*price is less than average variable cost at all outputs. '*price is less than average fixed cost at all outputs. :*there is no point at which marginal revenue and marginal cost are e/ual. +nswer< 8 ;se the following to answer /uestions -8$< Type< ? Topic< % 9< )2) M=< $8! Mc'onnell28rue< 9conomics" $.2e #age $% 'hapter 2%< #ure 'ompetition . Fefer to the above diagram. To maximize profit or minimize losses this firm will produce< +* U units at price '. 8* : units at price J. '* 9 units at price +. :* 9 units at price 8. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age $) 'hapter 2%< #ure 'ompetition Type< ? Topic< % 9< )2! M=< $ .
8. Fefer to the above diagram. +t the profit-maximizing output" total revenue will be< +* !+G9. 8* !8?9. '* !'09. :* +8?9. +nswer< + Type< ? Topic< % 9< )2! M=< $ . A.Fefer to the above diagram. +t the profit-maximizing output" total fixed cost is e/ual to< +*!+G9. 8* !8?9. '* !'09. :* 8'0?. +nswer< : Type< ? Topic< % 9< )2! M=< $ . 8!.Fefer to the above diagram. +t the profit-maximizing output" total variable cost is e/ual to< +*!+G9. 8* !'09. '* !8?9. :* +8?G. +nswer< 8 Type< ? Topic< % 9< )2! M=< $ . 8$. Fefer to the above diagram. +t the profit-maximizing output" the firm will realize< +* a loss e/ual to '*an economic profit of +'0G. 8'0?. 8* a loss e/ual to +'0G.:*an economic profit of +8?G. +nswer< : Type< + Topic< % 9< )2! M=< $ . 82.=f a purely competitive firm is producing at some level less than the profit-maximizing output" then< +*price is necessarily greater than average total cost. 8*fixed costs are large relative to variable costs. '*price exceeds marginal revenue. :*marginal revenue exceeds marginal cost. +nswer< : Mc'onnell28rue< 9conomics" $.2e #age $& 'hapter 2%< #ure 'ompetition ;se the following to answer /uestions 8%-8 < +nswer the next /uestion(s* on the basis of the following cost data for a firm that is selling in a purely competitive mar5et< +verage+verage+verage Total fixed variable total Marginal produc cost cost cost cost t $ $$!!.!! $$ .!! $$$ .!! $$ 2 &!.!! $..!! ...!! $& % %%.%% $&.!! )8.%% $% ) 2&.!! $).2& %A.2& $2 & 2!.!! $).!! %).!! $% . $... $).!! %!.. $) $).2A $&. $ %!.!! 2. 8 $2.&! $ .&! %!.!! %! A $$.$$ $A.)) %!.&& %& $! $!.!! 2$..! %$..! )$ $$ A.!A 2).!! %%.!A )8 $2 8.%% 2... %&.!! &.
Type< T Topic< % 9< )2$ M=< $ 8%.Fefer to the above data. =f the mar5et price for the firm's product is $$2" the competitive firm will produce< + ) units at a loss of $$!A. '* 8 units at a loss of $)8.8!. * 8*) units at an economic profit of $%$. &. :*zero units at a loss of $$!!. +nswer< : Type< T Topic< % 9< )2! M=< $ . 8).Fefer to the above data. =f the mar5et price for the firm's product is $%2" the competitive firm will produce< +*8 units at an economic profit of $$.. 8*& units at a loss of $$!. '*8 units at a loss e/ual to the firm's total fixed cost. :* units at an economic profit of $)$.&!. +nswer< + Type< T Topic< % 9< )2$ M=< $ 8&.Fefer to the above data. =f the mar5et price for the firm's product is $28" the competitive firm will< +*produce ) units at a loss of $$ .)!. 8*produce units at a loss of $$).!!. +nswer< 8 '*close down in the short run. :*produce . units at a loss of $2%.8!. Mc'onnell28rue< 9conomics" $.2e #age $. 'hapter 2%< #ure 'ompetition Type< T Topic< % 9< )2% M=< $ A 8.. Fefer to the above data. Bhich of the following is the firm's short-run supply schedule> (a* (b* (c* (d* #ric #ric #ric 3s#rice3s 3s 3s e e e $&! $2 $&! $2 $&! $$ $&! $$ )2 $! )2 $$ )2 $! )2 $! %. 8 %. A %. A %. A %2 8 %2 8 %2 8 %2 8 2! . 2! . 2! . 2! . $% ! $% & $% ! $% & +nswer< ' Type< T Topic< % 9< )2& M=< $8$ 8 .Fefer to the above data. =f there were $"!!! identical firms in this industry and total or mar5et demand is as shown below" e/uilibrium price will be< #ric 3uantity demanded e $&! %"!!! )2 ."!!! %. A"!!! %2 $$"!!! 2! $)"!!! $%$A"&!!
+*$%2. 8* $)2. '* $%.. :* $$%. +nswer< ' Type< + Topic< % 9< )2%-)2) M=< $ A-$8! 88.=f at the M' I MF output" +,' exceeds price< +*new firms will enter this industry. 8*the firm should produce the M' I MF output and realize an economic profit. '*the firm should shut down in the short run. :*the firm should expand its plant. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age $
'hapter 2%< #ure 'ompetition ;se the following to answer /uestions 8A-A)< Type< ? Topic< % 9< )2) M=< $8! 8A.Fefer to the above diagram. The profit-maximizing output< +*is n. 8* is 5. '* is h. :* cannot be determined from the information given. +nswer< + Type< ? Topic< % 9< )2) M=< $8! A!.Fefer to the above diagram. +t the profit-maximizing output" average variable cost is< +*ef. 8* fg. '* na. :* ac. +nswer< ' Type< ? Topic< % 9< )2) M=< $8! A$. Fefer to the above diagram. +t the profit-maximizing output" total profit is< +* efbc. 8* fgab. '* egac. :* !fbn. +nswer< + Type< ? Topic< % 9< )2) M=< $8! A2.Fefer to the above diagram. 0or any level of output" total fixed cost< +*is fgab. 8* is !gan. '* is ba. :* is efbc. +nswer< + Type< ? Topic< % 9< )2) M=< $8! A%.Fefer to the above diagram. The short-run supply curve for this firm is the< +*entire M' curve. 8*segment of the +,' curve lying to the right of the M' curve. '*segment of the M' curve lying above the +T' curve. Mc'onnell28rue< 9conomics" $.2e #age $8 'hapter 2%< #ure 'ompetition :* segment of the M' curve lying above the +,' curve. +nswer< :
Mc'onnell28rue< 9conomics" $.2e #age $A 'hapter 2%< #ure 'ompetition Type< ? Topic< % 9< )$. M=< $ 2 A). Fefer to the above diagram. This firm is selling its product in a(n*< + purely competitive mar5et. '*monopsonistic mar5et. * : 8*imperfectly competitive mar5et. monopolistic mar5et. * +nswer< + Type< + Topic< % 9< )2%-)2) M=< $ A-$8! A&.=n the short run a purely competitive seller will shut down if product price< +*e/uals average revenue. 8* is greater than M'. '* is less than +,'. :* is less than +T'. +nswer< ' Type< + Topic< % 9< )2%-)2) M=< $ A-$8! A..The short-run shut-down point for a purely competitive firm occurs< +*at any point where price is less than the minimum +,'. 8*between the two brea5-even points. '*at any point where total revenue is less than total cost. :*at any point where the firm is not ma5ing an economic profit. +nswer< + Type< + Topic< % 9< )2 M=< $8% A .=n a purely competitive industry< +*there will be no economic profits in either the short run or the long run. 8*economic profits may persist in the long run if consumer demand is strong and stable. '*there may be economic profits in the short run" but not in the long run. :*there may be economic profits in the long run" but not in the short run. +nswer< ' Type< + Topic< % 9< )2) M=< $8! A8.The short-run supply curve for a purely competitive industry can be found by< +*multiplying the +,' curve of the representative firm by the number of firms in the industry. 8*adding horizontally the +,' curves of all firms. '*summing horizontally the segments of the M' curves lying above the +,' curve for all firms. :*adding horizontally the immediate mar5et period supply curves of each firm. +nswer< ' Type< + Topic< % 9< )$A M=< $ & AA.:+@G +irlines is considering the addition of a flight from Fed 'loud to :avid 'ity. The total cost of the flight would be $$$!! of which fixed costs are $8!!. 9xpected revenues Mc'onnell28rue< 9conomics" $.2e #age 2! 'hapter 2%< #ure 'ompetition from the flight are $.!!. :+@G should< +*not add this flight because only flights which cover their full costs are profitable. 8*not add this flight because it is not profitable at the margin. '*add this flight because marginal revenue exceeds marginal costs. :*not add this flight because total costs exceed total revenue. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age 2$ 'hapter 2%< #ure 'ompetition Type< + Topic< % 9< )2$ M=< $
$!!.=n contrast to +merican firms" Japanese firms fre/uently ma5e lifetime employment commitments to their wor5ers and agree not to lay them off when product demand is wea5. Mther things being e/ual" we would expect Japanese firms to< +*face more elastic product demand curves than +merican firms. 8*have relatively greater variable costs than +merican firms. '*discontinue production at higher product prices than would +merican firms. :*continue to produce in the short run at lower prices than would +merican firms. +nswer< : Type< + Topic< % 9< )2$ M=< $ $!$.+ssume for a competitive firm that M' I +,' at $$2" M' I +T' at $2!" and M' I MF at $$.. This firm will< +*realize a profit of $) per unit of output. 8*maximize its profit by producing in the short run. '*minimize its losses by producing in the short run. :*shut down in the short run. +nswer< ' Type< + Topic< % 9< )$8 M=< $ ) $!2.The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is e/ual to the marginal cost of producing it is 5nown as the< +*output-maximizing rule. 8* profit-maximizing rule. '* shut-down rule. :* brea5-even rule. +nswer< 8 Type< + Topic< % 9< )$A M=< $ & $!%.=f a purely competitive firm is producing at the # I M' output and realizing an economic profit" at that output< +*marginal revenue is less than price. 8*marginal revenue exceeds +T'. +nswer< 8 '*+T' is being minimized. :*total revenue e/uals total cost. Type< + Topic< % 9< )$8 M=< $ ) $!).=f a profit-see5ing competitive firm is producing its profit-maximizing output and its total fixed costs fall by 2& percent" the firm should< +*use more labor and less capital to produce a larger output. 8*not change its output. '*reduce its output. :*increase its output. +nswer< 8 Mc'onnell28rue< 9conomics" $.2e #age 22 'hapter 2%< #ure 'ompetition Mc'onnell28rue< 9conomics" $.2e #age 2%
'hapter 2%< #ure 'ompetition ;se the following to answer /uestions $!&-$!8< Type< ? Topic< % 9< )2) M=< $8! $!&.Fefer to the above diagram. +t #2" this firm will< +*produce )) units and realize an economic profit. 8*produce )) units and earn only a normal profit. '*produce .. units and earn only a normal profit. :*shut down in the short run. +nswer< 8 Type< ? Topic< % 9< )2) M=< $8! $!.. Fefer to the above diagram. +t #$" this firm will produce< + ) units and brea5 even. '* .. units and earn only a normal profit. * 8*) units and realize an economic profit. :* 2) units and earn only a normal profit. +nswer< 8 9< )2%-)2) M=< $ AType< ? Topic< % $8! $! . Fefer to the above diagram. +t #)" this firm will< +* shut down in the short run. '* produce %! units and earn only a normal profit. 8* produce %! units and incur a loss. :* produce $! units and earn only a normal profit. +nswer< + Type< ? Topic< % 9< )2%-)2) M=< $ A-$8! $!8.Fefer to the above diagram. +t #%" this firm will< +*produce $) units and realize an economic profit. 8*produce .2 units and earn only a normal profit. '*produce )! units and incur a loss. :*shut down in the short run. Mc'onnell28rue< 9conomics" $.2e #age 2) 'hapter 2%< #ure 'ompetition +nswer< ' Type< + Topic< % 9< )2%-)2) M=< $ A-$8! $!A. The loss of a purely competitive firm which shuts down in the short run<
+ is e/ual to its total variable costs.'*is e/ual to its total fixed costs. * 8*is zero. :*cannot be determined. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age 2& 'hapter 2%< #ure 'ompetition Type< + Topic< % 9< )2%-)2) M=< $ A-$8! $$!. The +Lax Manufacturing 'ompany is selling in a purely competitive mar5et. =ts output is $!! units which sell at $) each. +t this level of output total cost is $.!!" total fixed cost is $$!!" and marginal cost is $). The firm should< +* reduce output to about 8! units. '* continue to produce $!! units. 8* expand its production. :* produce zero units of output. +nswer< : Type< + Topic< % 9< )$A M=< $ & $$$.The MF I M' rule can be restated for a purely competitive seller as # I M' because< +*each additional unit of output adds exactly its constant price to total revenue. 8*the firm's average revenue curve is downsloping. '*the mar5et demand curve is downsloping. :*the firm's marginal revenue and total revenue curves will coincide. +nswer< + Type< + Topic< % 9< )2$ M=< $ $$2.=f a purely competitive firm is maximizing economic profit< +*it is necessarily maximizing per-unit profit. 8*it may or may not be maximizing per unit profit. '*then per-unit profit will be minimized. :*it is necessarily overallocating resources to its product. +nswer< 8 ;se the following to answer /uestions $$%-$$&< +nswer the next /uestion(s* on the basis of the following cost data for a purely competitive seller< Total Mutput cost !$ &! $A! 2$2! %$)! )$ ! &2$! .2.! %%! Type< T Topic< % 9< )$ M=< $ % $$%.Fefer to the above data. =f product price is $.!" the firm will< +*shut down. 8*produce ) units and realize a $$2! economic profit. '*produce . units and realize a $$!! economic profit. :*produce % units and incur a $)! loss. Mc'onnell28rue< 9conomics" $.2e #age 2.
'hapter 2%< #ure 'ompetition +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age 2 'hapter 2%< #ure 'ompetition Type< T Topic< % 9< )$ M=< $ % $$).Fefer to the above data. =f product price is $)&" the firm will< +*shut down. 8*produce ) units and realize a $$2! economic profit. '*produce & units and realize a $$& economic profit. :*produce . units and realize a $$!! economic profit. +nswer< ' Type< T Topic< % 9< )22 M=< $ 8 $$&.Fefer to the above data. =f product price is $2&" the firm will< +*shut down and incur a $A! loss. 8*shut down and incur a $&! loss. '*produce % units and incur a $.& loss. :*produce ) units and realize a $$! economic profit. +nswer< 8 Type< + Topic< % 9< )22 M=< $ 8 $$..=f total revenue is less than total variable costs at the MF I M' output" a purely competitive firm should< +* shut down. '* produce and may or may not realize a profit. 8* produce" but will necessarily realize a loss. :* increase its output. +nswer< + Type< + Topic< % 9< )$ M=< $ % $$ .+ssume a purely competitive firm is selling 2!! units of output at $% each. +t this output its total fixed cost is $$!! and its total variable cost is $%&!. This firm< +*is maximizing its profit. 8*is ma5ing a profit" but not necessarily the maximum profit. '*is incurring losses. :*should shut down in the short run. +nswer< 8 Mc'onnell28rue< 9conomics" $.2e #age 28
'hapter 2%< #ure 'ompetition ;se the following to answer /uestions $$8-$22<
Type< ? Topic< % 9< )2) M=< $8! $$8. Fefer to the above diagram. This firm will earn only a normal profit if product price is< +* #$. 8* #2. '* #%. :* #). +nswer< ' Type< ? Topic< % 9< )2) M=< $8! $$A. Fefer to the above diagram. The firm will realize an economic profit if price is< +* #$. 8* #2. '* #%. :* #). +nswer< : Type< ? Topic< % 9< )2%-)2) M=< $ A-$8! $2!. Fefer to the above diagram. The firm will produce at a loss if price is< +* #$. 8* #2. '* #%. :* #). +nswer< 8 Type< ? Topic< % 9< )2%-)2) M=< $ A-$8! $2$. Fefer to the above diagram. The firm will shut down at any price less than< +* #$. 8* #2. '* #%. :* #). +nswer< + Type< ? Topic< % 9< )2) M=< $8! @tatus< Kew $22.Fefer to the above diagram. The firm's supply curve is the segment of the< +*M' curve above its intersection with the +,' curve. 8*M' curve above its intersection with the +T' curve. '*+,' curve above its intersection with the M' curve. Mc'onnell28rue< 9conomics" $.2e #age 2A 'hapter 2%< #ure 'ompetition :* +T' curve above its intersection with the M' curve. +nswer< + Mc'onnell28rue< 9conomics" $.2e #age %! 'hapter 2%< #ure 'ompetition ;se the following to answer /uestions $2%-$%2< +nswer the next /uestion(s* on the basis of the following cost data for a firm that is selling in a purely competitive mar5et. +verage+verage+verage Total fixed variable total Marginal outpu cost cost cost cost t $ $$&!.!! $2&.!! $$ &.!! $ 2&.!! 2 &.!! 2%.!! A8.!! 2$.!! % &!.!! 2!.!! !.!! $).!! ) % .&! 2$.!! &8.&! 2).!! & %!.!! 2%.!! &%.!! %$.!! . 2&.!! 2&.!! &!.!! %&.!! 2$.)% 28.!! )A.)% )..!$ 8 $8. & %%.!! &$. . .8.! A $... %A.!! &&.. 8..A& $! $&.!! )8.!! .%.!! $28.A Type< ? Topic< % 9< )!2 M=< $&8 @tatus< Kew $2%. Fefer to the above data. The marginal cost column reflects< + the law of diminishing returns. '*diseconomies of scale. * 8*the law of diminishing marginal utility.: economies of scale.
* +nswer< + Type< ? Topic< % 9< %A8-%AA M=< $&)-$&& @tatus< Kew $2).Fefer to the above data. +t . units of output" total fixed cost is RRRR and total cost is RRRR< +*$2&Q $&!. 8* $&!Q $%!!. '* $$!!" $2!!. :* $$&!Q $%!!. +nswer< : Type< ? Topic< % 9< %A8-%AA M=< $&)-$&& @tatus< Kew $2&. Fefer to the above data. +t % units of output" total variable cost is RRRR and total cost is RRRR< +* $2!Q $ !. 8* $.!Q $2$!. '* $2!" $2$!. :* $.!Q $%&!. +nswer< 8 Type< ? Topic< % 9< %A8-%AA M=< $&)-$&& @tatus< Kew $2..Fefer to the above data. Be can infer that" at zero output" this firm's total fixed" total variable" and total costs are< +*zero" zero" and zero" respectively. 8*zero" $2&" and $$ &" respectively. +nswer< : '*$$&!" $2&" and $$ &" respectively. :*$$&!" zero" and $$&!" respectively. Type< ? Topic< % 9< )$A-)2! M=< $ &-$ . @tatus< Kew Mc'onnell28rue< 9conomics" $.2e #age %$ 'hapter 2%< #ure 'ompetition $2 .Fefer to the above data. =f the mar5et price for this firm's product is $8..A&" it will produce< +*A units at an economic profit of zero. 8*. units at a loss of $A!. +nswer< ' '*A units at an economic profit of $28$.&2. :*8 units at an economic profit of $$%!.)8. Mc'onnell28rue< 9conomics" $.2e #age %2 'hapter 2%< #ure 'ompetition Type< ? Topic< % 9< )$A-)2! M=< $ &-$ . @tatus< Kew $28. Fefer to the above data. =f the mar5et price for this firm's product is $.8.! " it will produce< +* 8 units at an economic profit of zero.'* A units at an economic profit of $28$.&2. 8* . units at a loss of $A!. :* 8 units at an economic profit of $$%!.)8. +nswer< : Type< ? Topic< % 9< )2$-)22 M=< $ -$ 8 @tatus< Kew $2A Fefer to the above data. =f the mar5et price for this firm's product is $%&" it will produce< . +* . units at a loss of $$&!.'* A units at an economic profit of $28$.&2. 8* . units at a loss of $A!. :* 8 units at an economic profit of $$%!.)8. +nswer< 8 Type< ?Topic< % 9< )2$-)22 M=< $ -$ 8 @tatus< Kew $%! Fefer to the above data. =f the mar5et price for this firm's product is $2)" it will produce< . +* ) units at a loss of $$&!.'* % units at an economic profit of zero.
8* . units at a loss of $A!. :* ) units at a loss of $$%8. +nswer< : Type< ?Topic< % 9< )22-)2% M=< $ 8-$ A @tatus< Kew $%$ Fefer to the above data. =f the mar5et price for this firm's product is $$)" it will produce< . +* ! units at a loss of $$&!.'* % units at an economic profit of zero. 8* % units at a loss of $$.8.:* ) units at a loss of $$%8. +nswer< + Type< ? Topic< % 9< )2) M=< $8! @tatus< Kew $%2.Fefer to the above data. The firm's supply schedule is reflected in the< +*marginal cost data for the fourth through tenth units of output. 8*marginal cost data for the first through tenth units of output. '*average total cost data for the seventh through tenth units of output. :*average variable cost data for fifth through tenth units of output. +nswer< + Type< + Topic< % 9< )$ M=< $ % $%%.+ purely competitive seller should produce (rather than shut down* in the short run< +*only if total revenue exceeds total cost. 8*only if total cost exceeds total revenue. '*if total revenue exceeds total cost or if total cost exceeds total revenue by some amount less than total fixed cost. :*if total cost exceeds total revenue by some amount greater than total fixed cost. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age %% 'hapter 2%< #ure 'ompetition Type< + Topic< % 9< )$ -)$8 M=< $ %-$ ) $%).=n the short run a purely competitive firm will maximize profit by producing that output at which< +*total revenue exceeds total cost by a maximum amount. 8*total revenue exceeds total cost by a minimum amount. '*total revenue and total cost are e/ual. :*total fixed cost e/uals total variable cost. +nswer< + Mc'onnell28rue< 9conomics" $.2e #age %) 'hapter 2%< #ure 'ompetition ;se the following to answer /uestions $%&-$%A< +nswer the next /uestion(s* on the basis of the following cost data for a purely competitive seller< TotalTotal Total fixedvariableTotal productcost cost cost ! $&! $ ! $ &! $ &! ! $2! 2 &! $2! $ ! % &! $&! 2!! ) &! 22! 2 ! & &! %!! %&! . &! %A! ))! Type< T Topic< % 9< )$ M=< $ %
$%&.The above data are for< +*the long run. 8*the short run. +nswer< 8 '*both the short run and the long run. :*the intermediate mar5et period only. Type< T Topic< % 9< )$A-)2! M=< $ &-$ . $%..Fefer to the above data. +t & units of output average fixed cost" average variable cost" and average total cost are< +* $$!" $.!" and $ ! respectively.'*$$!" $ !" and $8! respectively. 8* $&!" $)!" and $A! respectively. :*$&" $2&" and $%! respectively. +nswer< + Type< T Topic< % 9< )$A M=< $ & $% .Fefer to the above data. The marginal cost of the fifth unit of output is< +*$8!. 8* $A!. '* $&!. :* $2!. +nswer< + Type< T Topic< % 9< )$A-)2! M=< $ &-$ . $%8.Fefer to the above data. =f product price is $ &" the firm will produce< +*% units of output. 8* ) units of output. '* & units of output. :* . units of output. +nswer< 8 Type< T Topic< % 9< )$A-)2! M=< $ &-$ . $%A. Fefer to the above data. ?iven the $ & product price" at its optimal output the firm will< +* realize a $2& economic '*incur a $2& loss. profit. 8* realize a $%! economic profit.:*realize a $%! loss. +nswer< 8 Mc'onnell28rue< 9conomics" $.2e #age %& 'hapter 2%< #ure 'ompetition Type< + Topic< % 9< )2) M=< $8! $)!.+ purely competitive firm's short-run supply curve is< +*the upward sloping portion of its marginal cost curve. 8*the upward sloping portion of its average variable cost curve. '*its marginal cost curve above average variable cost. :*its average total cost curve. +nswer< ' Type< + Topic< % 9< )2) M=< $8! $)$.=n the short run" a purely competitive firm will earn a normal profit when< +* # I +,'. 8* # N M'. '* that firm's MF I mar5et e/uilibrium price. :* # I +T'. +nswer< : ;se the following to answer /uestions $)2-$) < The following table applies to a purely competitive industry composed of $!! identical firms. 3uantity 3uantity :emande #rice@upplied d )!!"!!! $& 8!!"!!! &!!"!!! ) !!"!!! .!!"!!! % .!!"!!! !!"!!! 2 &!!"!!!
8!!"!!!
)!!"!!!
Type< T Topic< % 9< )2& M=< $8$ $)2.Fefer to the above table. The e/uilibrium price in this purely competitive mar5et is< +*$&. 8* $). '* $%. :* $2. +nswer< ' Type< T Topic< % 9< )2& M=< $8$ $)%.Fefer to the above table. +t the e/uilibrium price" each of the $!! firms in this industry will produce< +*.!!"!!! units of output. 8*.!"!!! units of output. +nswer< ' '*."!!! units of output :*.!! units of output. Type< T Topic< % 9< )2&-)2. M=< $8$-$82 $)).Fefer to the above table. 0or each of the $!! firms in this industry" marginal revenue and total revenue will be< + $) and $)!!" respectively. '*$) and $2!"!!!" respectively. * 8*$% and $%!"!!!" respectively.:*$% and $$8"!!!" respectively. +nswer< : Mc'onnell28rue< 9conomics" $.2e #age %. 'hapter 2%< #ure 'ompetition Type< T Topic< % 9< )2&-)2. M=< $8$-$82 $)&.Fefer to the above table. =f each of the $!! firms in the industry is maximizing its profit" each must have a marginal cost of< +*$&. 8* $). '* $%. :* $2. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age % 'hapter 2%< #ure 'ompetition Type< T Topic< % 9< )2&-)2. M=< $8$-$82 $).. Fefer to the above table. =f each of the $!! firms in the industry is maximizing its profit and earning only a normal profit" each must have a total cost of< +* $$8"!!!. 8* $2!"!!!. '* $22"!!!. :* $2)"!!!. +nswer< + Type< T Topic< % 9< )2&-)2. M=< $8$-$82 $) .Fefer to the above table. =f each of the $!! firms in the industry is maximizing its profit and earning only a normal profit" each must have an average total cost of< +*$2. 8* $%. '* $). :* $&. +nswer< 8 #rofit maximizing in long run Type< + Topic< ) 9< )2 M=< $8% $)8.@uppose a firm in a purely competitive mar5et discovers that the price of its product is above its minimum +,' point but everywhere below +T'. ?iven this" the firm< +*minimizes losses by producing at the minimum point of its +,' curve. 8*maximizes profits by producing where MF I +T'. '*should close down immediately. :*should continue producing in the short run" but leave the industry in the long run. +nswer< : Type< + Topic< ) 9< )2 M=< $8% $)A.Bhich of the following is true concerning purely competitive industries>
+*There will be economic losses in the long run because of cut-throat competition. 8*9conomic profits will persist in the long run if consumer demand is strong and stable. '*=n the short run" firms may incur economic losses or earn economic profits" but in the long run they earn normal profits. :*There are economic profits in the long run" but not in the short run. +nswer< ' Type< + Topic< ) 9< )28 M=< $8) $&!.=f a purely competitive firm is producing at the MF I M' output level and earning an economic profit" then< +*the selling price for this firm is above the mar5et e/uilibrium price. 8*new firms will enter this mar5et. '*some existing firms in this mar5et will leave. :*there must be price fixing by the industry's firms. +nswer< 8 Mc'onnell28rue< 9conomics" $.2e #age %8 'hapter 2%< #ure 'ompetition Type< + Topic< ) 9< )2 M=< $8% $&$. Hong-run competitive e/uilibrium< + is realized only in constant-cost industries. '* is not economically efficient. * 8*will never change once it is realized. :* results in zero economic profits. +nswer< : Mc'onnell28rue< 9conomics" $.2e #age %A 'hapter 2%< #ure 'ompetition Type< + Topic< ) 9< )28 M=< $8) $&2. Be would expect an industry to expand if firms in that industry are< + earning normal profits. '*incurring economic losses. * earning economic 8* :*earning accounting profits. profits. +nswer< 8 Type< + Topic< ) 9< )22-)2% M=< $ 8-$ A $&%.Bhich of the following statements is correct> +*9conomic profits induce firms to enter an industryQ losses encourage firms to leave. 8*9conomic profits induce firms to leave an industryQ profits encourage firms to leave. '*9conomic profits and losses have no significant impact on the growth or decline of an industry. :*Kormal profits will cause an industry to expand. +nswer< + Type< + Topic< ) 9< )%! M=< $8. $&).@uppose a purely competitive increasing-cost industry is in long-run e/uilibrium. Kow assume that a decrease in consumer demand occurs. +fter all resulting adLustments have been completed" the new e/uilibrium price< +*and industry output will be less than the initial price and output. 8*will be greater than the initial price" but the new industry output will be less than the original output. '*will be less than the initial price" but the new industry output will be greater than the original output. :*and industry output will be greater than the initial price and output. +nswer< +
Type< + Topic< ) 9< )%! M=< $8. $&&.Bhich of the following statements is correct> +*The long-run supply curve for a purely competitive increasing-cost industry will be upsloping. 8*The long-run supply curve for a purely competitive increasing-cost industry will be perfectly elastic. '*The long-run supply curve for a purely competitive industry will be less elastic than the industry's short-run supply curve. :*The long-run supply curve for a purely competitive decreasing-cost industry will be upsloping. +nswer< + Type< + Topic< ) 9< )2A M=< $8& $&..+ constant-cost industry is one in which< +*a higher price per unit will not result in an increased output. Mc'onnell28rue< 9conomics" $.2e #age )! 'hapter 2%< #ure 'ompetition 8*if $!! units can be produced for $$!!" then $&! can be produced for $$&!" 2!! for $2!!" and so forth. '*the demand curve and therefore the unit price and /uantity sold seldom change. :*the total cost of producing 2!! or %!! units is no greater than the cost of producing $!! units. +nswer< 8 Type< + Topic< ) 9< )%2 M=< $88 $& . Bhich of the following will not hold true for a competitive firm in long-run e/uilibrium> +* # e/uals +0' 8* # e/uals minimum +T' '* M' e/uals minimum +T' :* # e/uals M' +nswer< + Mc'onnell28rue< 9conomics" $.2e #age )$ 'hapter 2%< #ure 'ompetition Type< + Topic< ) 9< )%! M=< $8. $&8.+ssume a purely competitive increasing-cost industry is initially in long-run e/uilibrium and that an increase in consumer demand occurs. +fter all economic adLustments have been completed product price will be< +*lower" but total output will be larger than originally. 8*higher and total output will be larger than originally. '*lower and total output will be smaller than originally. :*higher" but total output will be smaller than originally. +nswer< 8 Type< + Topic< ) 9< )%! M=< $8. $&A.+ssume a purely competitive" increasing-cost industry is in long-run e/uilibrium. =f a decline in demand occurs" firms will< +*leave the industry" price will decrease" and /uantity produced will increase. 8*enter the industry and price and /uantity will both increase. '*leave the industry and price and output will both increase. :*leave the industry and price and output will both decline. +nswer< : Type< + Topic< ) 9< )2 M=< $8% $.!.Bhen a purely competitive firm is in long-run e/uilibrium< +*marginal revenue exceeds marginal cost. 8*price e/uals marginal cost. '*total revenue exceeds total cost. :*minimum average total cost is less than the product price. +nswer< 8 Type< + Topic< ) 9< )2 M=< $8%
$.$.+ purely competitive firm< +*must earn a normal profit in the short run. 8*cannot earn economic profit in the long run. '*may realize either economic profit or losses in the long run. :*cannot earn economic profit in the short run. +nswer< 8 Type< + Topic< ) 9< )2A M=< $8& $.2.+ constant-cost industry is one in which< +*resource prices fall as output is increased. 8*resource prices rise as output is increased. '*resource prices remain unchanged as output is increased. :*small and large levels of output entail the same total costs. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age )2 'hapter 2%< #ure 'ompetition Type< + Topic< ) 9< )%! M=< $8. $.%.+n increasing-cost industry is associated with< +*a perfectly elastic long-run supply curve. '* a perfectly inelastic long-run supply curve. 8* an upsloping long-run supply :* an upsloping long-run demand curve. curve. +nswer< 8 Mc'onnell28rue< 9conomics" $.2e #age )%
'hapter 2%< #ure 'ompetition ;se the following to answer /uestions $.)-$..< Type< ? Topic< ) 9< )2. M=< $82 $.).Fefer to the above diagrams" which pertain to a purely competitive firm producing output / and the industry in which it operates. Bhich of the following is correct> +*The diagrams portray neither long-run nor short-run e/uilibrium. 8*The diagrams portray both long-run and short-run e/uilibrium. '*The diagrams portray short-run e/uilibrium" but not long-run e/uilibrium. :*The diagrams portray long-run e/uilibrium" but not short-run e/uilibrium. +nswer< ' Type< ? Topic< ) 9< )2 -)28 M=< $8%-$8) $.&.Fefer to the above diagrams" which pertain to a purely competitive firm producing output / and the industry in which it operates. =n the long run we should expect< +*firms to enter the industry" mar5et supply to rise" and product price to fall. 8*firms to leave the industry" mar5et supply to rise" and product price to fall. '*firms to leave the industry" mar5et supply to fall" and product price to rise. :*no change in the number of firms in this industry.
+nswer< ' Type< ? Topic< ) 9< )%2 M=< $88 $...Fefer to the above diagrams" which pertain to a purely competitive firm producing output / and the industry in which it operates. The predicted long-run adLustments in this industry might be offset by< +*a decline in product demand. 8*an increase in resource prices. '*a technological improvement in production methods. :*entry of new firms into the industry. +nswer< ' Type< + Topic< ) 9< )2 M=< $8% $. .+ssume a purely competitive firm is maximizing profit at some output at which long-run average total cost is at a minimum. Then< Mc'onnell28rue< 9conomics" $.2e #age )) 'hapter 2%< #ure 'ompetition +*the firm is earning an economic profit. 8*there is no tendency for the firm's industry to expand or contract. '*allocative but not productive efficiency is being achieved. :*other firms will enter this industry. +nswer< 8 Mc'onnell28rue< 9conomics" $.2e #age )& 'hapter 2%< #ure 'ompetition Type< + Topic< ) 9< )%! M=< $8. $.8.+n increasing-cost industry is the result of< +*higher resource prices which occur as the industry expands. 8*a change in the industry's minimum efficient scale. '*6-inefficiency. :*the law of diminishing returns. +nswer< + Type< + Topic< ) 9< )2 M=< $8% $.A.+ purely competitive firm is precluded from ma5ing economic profit in the long run because< +*it is a 4price ta5er.4 8*its demand curve is perfectly elastic. +nswer< ' '*of unimpeded entry to the industry. :*it produces a differentiated product. Type< + Topic< ) 9< )28-)2A M=< $8)-$8& $ !.=f a purely competitive constant-cost industry is realizing economic profits" we can expect industry supply to< +*increase" output to increase" price to decrease" and profits to decrease. 8*increase" output to increase" price to increase" and profits to decrease. '*decrease" output to decrease" price to increase" and profits to increase. :*increase" output to decrease" price to decrease" and profits to decrease. +nswer< + Type< + Topic< ) 9< )2 M=< $8% $ $.+ssume that a decline in consumer demand occurs in a purely competitive industry which is initially in long-run e/uilibrium. Be can< +*predict that the new price will be greater than the original price. 8*predict that the new price will be less than the original price.
'*predict that the new price will be the same as the original price. :*not compare the original and the new price without 5nowing about cost conditions in the industry. +nswer< : Type< : Topic< ) 9< )%!-)%$ M=< $8.-$8 $ 2.+ decreasing-cost industry is one in which< +*contraction of the industry will decrease unit costs. 8*input prices fall or technology improves as the industry expands. '*the long-run supply curve is perfectly elastic. :*the long-run supply curve is upsloping. +nswer< 8 Mc'onnell28rue< 9conomics" $.2e #age ). 'hapter 2%< #ure 'ompetition Type< + Topic< ) 9< )%!-)%$ M=< $8.-$8 $ %.Bhen compact disc (':* players first came on the mar5et" they sold for over $$"!!!. Kow they cost only $$!!. These facts imply that< +*the ': industry was once competitive" but is now monopolistic. 8*fewer firms produce ': players than was the case five or ten years ago. '*the demand curve for ': players has shifted leftward. :*the ': player industry is a decreasing-cost industry. +nswer< : Mc'onnell28rue< 9conomics" $.2e #age ) 'hapter 2%< #ure 'ompetition Type< + Topic< ) 9< )%$ M=< $8 $ ).@uppose that an industry's long-run supply curve is downsloping. This suggests that< +*it is an increasing-cost industry. 8*relevant inputs have become more expensive as the industry has expanded. '*technology has become less efficient as a result of the industry's expansion. :*it is a decreasing-cost industry. +nswer< : Type< + Topic< ) 9< )%!-)%$ M=< $8.-$8 $ &.@uppose an increase in product demand occurs in a decreasing-cost industry. +s a result< +*the new long-run e/uilibrium price will be lower than the original long-run e/uilibrium price. 8*e/uilibrium /uantity will decline. '*firms will eventually leave the industry. :*the new long-run e/uilibrium price will be higher than the original price. +nswer< + Type< ' Topic< ) 9< )2A-)%! M=< $8&-$8. $ ..#urely competitive industry 6 has constant costs and its product is an inferior good. The industry is currently in long-run e/uilibrium. The economy now goes into a recession and average incomes decline. The result will be< +*an increase in output and in the price of the product. 8*an increase in output" but not in the price" of the product. '*a decrease in the output" but not in the price" of the product. :*a decrease in output and in the price of the product. +nswer< 8 Type< + Topic< ) 9< )%! M=< $8.
$ .@uppose losses cause industry 6 to contract and" as a result" the prices of relevant inputs decline. =ndustry 6 is< + a constant-cost industry. '*an increasing-cost industry. * 8*a decreasing-cost industry.:*encountering 6-inefficiency. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age )8
'hapter 2%< #ure 'ompetition ;se the following to answer /uestions $ 8-$8%< Type< ? Topic< ) 9< )2! M=< $ . $ 8.Fefer to the above diagram showing the average total cost curve for a purely competitive firm. @uppose this firm is maximizing its total profit and the mar5et price is $$&. The firm's per unit profit is< +*$&. 8* $2!!. '* a positive amount less than $&. :* a positive amount more than $2!!. +nswer< ' Type< ? Topic< ) 9< )2! M=< $ . $ A.Fefer to the above diagram showing the average total cost curve for a purely competitive firm. @uppose that total variable cost is $%!! at )! units of output. +t that level of output" average fixed cost< +*is $2.&!. 8* is $). '* is $$!!. :* cannot be determined from the information provided. +nswer< + Type< ? Topic< ) 9< )2! M=< $ . $8!.Fefer to the above diagram showing the average total cost curve for a purely competitive firm. @uppose that average variable cost is $8 at )! units of output. +t that level of output" total fixed cost< +*is $2. 8* is $)!. '* is $8!. :* cannot be determined from the information provided. +nswer< ' Type< ? Topic< ) 9< )$&-)$." )2 M=< $ $-$ 2" $8% $8$.Fefer to the above diagram showing the average total cost curve for a purely competitive firm. +t the longrun e/uilibrium level of output" this firm's total revenue< +*is $$!. 8* is $)!. '* is $)!!. :* cannot be determined from the information provided. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age )A 'hapter 2%< #ure 'ompetition Type< ? Topic< ) 9< )2!" )2 M=< $ ." $8% $82.Fefer to the above diagram showing the average total cost curve for a purely competitive firm. +t the longrun e/uilibrium level of output" this firm's total cost< +*is $$!. 8* is $)!. '* is $)!!. :* cannot be determined from the information provided. +nswer< ' Type< ? Topic< ) 9< )2 M=< $8%
$8%. Fefer to the above diagram showing the average total cost curve for a purely competitive firm. +t the longrun e/uilibrium level of output" this firm's economic profit< +* is zero. 8* is $)!!. '* is $2!!. :* cannot be determined from the information provided. +nswer< + Mc'onnell28rue< 9conomics" $.2e #age &!
'hapter 2%< #ure 'ompetition Type< + Topic< ) 9< )2 M=< $8% $8). The MF I M' rule applies< +* in the short run" but not in the long '*in both the short run and the long run. run. 8* in the long run" but not in the short run.:*only to a purely competitive firm. +nswer< ' Type< + Topic< ) 9< )%! M=< $8. $8&.=f the long-run supply curve of a purely competitive industry slopes upward" this implies that the prices of relevant resources< +*will fall as the industry expands. 8*are constant as the industry expands. +nswer< : '*rise as the industry contracts. :*rise as the industry expands. ;se the following to answer /uestions $8.-$8 < Type< ? Topic< ) 9< )%! M=< $8. $8.. Fefer to the above diagram. Hine ($* reflects the long-run supply curve for< +* a constant-cost industry. '* an increasing-cost industry. 8* a decreasing-cost industry. :* technologically progressive industry. +nswer< ' Type< ? Topic< ) 9< )2A M=< $8& $8 . Fefer to the above diagram. Hine (2* reflects the long-run supply curve for< +* a constant-cost industry. '* an increasing-cost industry. 8* a decreasing-cost industry. :* technologically progressive industry. +nswer< + #ure competition and efficiency Type< + Topic< & 9< )%2 M=< $88 Mc'onnell28rue< 9conomics" $.2e #age &$ 'hapter 2%< #ure 'ompetition $88. +llocative efficiency is achieved when the production of a good occurs where< +* # I minimum +T'. 8* # I M'. '* # I minimum +,'. :* total revenue is e/ual to T0'.
+nswer< 8 Mc'onnell28rue< 9conomics" $.2e #age &2 'hapter 2%< #ure 'ompetition Type< + Topic< & 9< )%2 M=< $88 $8A.+ firm is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit. This means the firm is< +*producing more output than allocative efficiency re/uires. 8*producing less output than allocative efficiency re/uires. '*achieving productive efficiency. :*producing an inefficient output" but we cannot say whether output should be increased or decreased. +nswer< 8 Type< + Topic< & 9< )%$ M=< $8 $A!. Fesources are efficiently allocated when production occurs where< + marginal cost e/uals average variable cost. '* price is e/ual to marginal cost. * 8*price is e/ual to average revenue. :* price is e/ual to average variable cost. +nswer< ' Type< : Topic< & 9< )%2 M=< $88 $A$.The term productive efficiency refers to< +*any short-run e/uilibrium position of a competitive firm. 8*the production of the product-mix most desired by consumers. '*the production of a good at the lowest average total cost. :*fulfilling the condition # I M'. +nswer< ' Type< + Topic< & 9< )%2 M=< $88 $A2.=f the price of product 7 is $2& and its marginal cost is $$8< +*7 is being produced with the least-cost combination of resources. 8*society will realize a net gain if less of 7 is produced. '*resources are being underallocated to 7. :*resources are being overallocated to 7. +nswer< ' Type< : Topic< & 9< )%2 M=< $88 $A%.The term allocative efficiency refers to< +*the level of output that coincides with the intersection of the M' and +,' curves. 8*minimization of the +0' in the production of any good. '*the production of the product-mix most desired by consumers. :*the production of a good at the lowest average total cost. +nswer< ' Type< + Topic< & 9< )%% M=< $8A Mc'onnell28rue< 9conomics" $.2e #age &% 'hapter 2%< #ure 'ompetition $A).;nder pure competition in the long run< +*neither allocative efficiency nor productive efficiency are achieved. 8*both allocative efficiency and productive efficiency are achieved. '*productive efficiency is achieved" but allocative efficiency is not. :*allocative efficiency is achieved" but productive efficiency is not. +nswer< 8
Mc'onnell28rue< 9conomics" $.2e #age &)
'hapter 2%< #ure 'ompetition Type< + Topic< & 9< )%2 M=< $88 $A&.=f for a firm # I minimum +T' I M'" then< +*neither allocative efficiency nor productive efficiency is being achieved. 8*productive efficiency is being achieved" but allocative efficiency is not. '*both allocative efficiency and productive efficiency are being achieved. :*allocative efficiency is being achieved" but productive efficiency is not. +nswer< ' ;se the following to answer /uestions $A.-2!$< Type< ? Topic< & 9< )%$ M=< $8 $A..The above diagram portrays< +*a competitive firm that should shut down in the short run. 8*the e/uilibrium position of a competitive firm in the long run. '*a competitive firm that is realizing an economic profit. :*the loss-minimizing position of a competitive firm in the short run. +nswer< 8 Type< ? Topic< & 9< )%$ M=< $8 @tatus< Kew $A .Fefer to the above diagram. =f this competitive firm produces output 3" it will< +*suffer an economic loss. 8*earn a normal profit. '*earn an economic profit. :*achieve productive efficiency" but not allocative efficiency. +nswer< 8 Type< ? Topic< & 9< )%% M=< $8A $A8.Fefer to the above diagram. 8y producing output level 3< +*neither productive nor allocative efficiency are achieved. 8*both productive and allocative efficiency are achieved. '*allocative efficiency is achieved" but productive efficiency is not. Mc'onnell28rue< 9conomics" $.2e #age && 'hapter 2%< #ure 'ompetition :* productive efficiency is achieved" but allocative efficiency is not. +nswer< 8 Mc'onnell28rue< 9conomics" $.2e #age &. 'hapter 2%< #ure 'ompetition Type< ? Topic< & 9< )%2 M=< $88 $AA.Fefer to the above diagram. +t output level 3$< +*neither productive nor allocative efficiency are achieved. 8*both productive and allocative efficiency are achieved.
'*allocative efficiency is achieved" but productive efficiency is not. :*productive efficiency is achieved" but allocative efficiency is not. +nswer< + Type< ? Topic< & 9< )%2 M=< $88 2!!.Fefer to the above diagram. +t output level 3$< +*resources are overallocated to this product and productive efficiency is not realized. 8*resources are underallocated to this product and productive efficiency is not realized. '*productive efficiency is achieved" but resources are underallocated to this product. :*productive efficiency is achieved" but resources are overallocated to this product. +nswer< 8 Type< ? Topic< & 9< )%2-)%% M=< $88-$8A 2!$.Fefer to the above diagram. +t output level 32< +*resources are overallocated to this product and productive efficiency is not realized. 8*resources are underallocated to this product and productive efficiency is not realized. '*productive efficiency is achieved" but resources are underallocated to this product. :*productive efficiency is achieved" but resources are overallocated to this product. +nswer< + Type< + Topic< & 9< )%2 M=< $88 2!2.+ssume that society places a higher value on the last unit of 6 produced than the value of the resources used to produce that unit. Bith no spillovers" this information means that< +*total cost is greater than total revenue. 8*price is greater than marginal cost. +nswer< 8 '*marginal cost is greater than price. :*resources are being overallocated to 6. Type< + Topic< & 9< )%2-)%% M=< $88-$8A 2!%.=f production is occurring where marginal cost exceeds price" the purely competitive firm will< +*maximize profit" but resources will be underallocated to the product. 8*maximize profit" but resources will be overallocated to the product. '*fail to maximize profit and resources will be overallocated to the product. :*fail to maximize profit and resources will be underallocated to the product. +nswer< ' Type< + Topic< & 9< )%2 M=< $88 Mc'onnell28rue< 9conomics" $.2e #age & 'hapter 2%< #ure 'ompetition 2!).=f a purely competitive firm is producing where price exceeds marginal cost" then< +*the firm will fail to maximize profit" but resources will be efficiently allocated. 8*the firm will fail to maximize profit and resources will be overallocated to the product. '*the firm will fail to maximize profit and resources will be underallocated to the product. :*resources will be underallocated to the product" but the firm will maximize profit. +nswer< ' Mc'onnell28rue< 9conomics" $.2e #age &8
'hapter 2%< #ure 'ompetition
Type< + Topic< & 9< )%2 M=< $88 @tatus< Kew 2!&. Bhich of the following conditions is true for a purely competitive firm in long-run e/uilibrium> +* # N M' I minimum +T'. '*# I M' I minimum +T'. 8* # N M' N minimum +T'. :*# V M' V minimum +T'. +nswer< ' 'onsider This 3uestions Type< + 9< )2% M=< $ A @tatus< Kew 2!.. ('onsider This*+n unprofitable motel will stay open in the short-run if< +*price (average nightly room rate* exceeds average variable cost. 8*marginal revenue exceeds marginal cost. '*price (average nightly room rate* exceeds average fixed cost. :*marginal revenue exceeds price. +nswer< + Type< + 9< )2% M=< $ A @tatus< Kew 2! . ('onsider This*+n otherwise unprofitable motel located on a largely abandoned roadway might be able to stay open for several years by< +*increasing its nightly room rates. 8*reducing or eliminating its annual maintenance expenses. '*charging room rates that exceed marginal revenue. :*eliminating its fixed costs" including its opportunity costs. +nswer< 8 Hast Bord 3uestions ;se the following to answer /uestions 2!8-2$!< Mc'onnell28rue< 9conomics" $.2e #age &A 'hapter 2%< #ure 'ompetition Type< ? 9< )%) M=< $A! 2!8.(Hast Bord* Fefer to the above graph of the mar5et for asparagus. +t the mar5et price of $2" area + 1 8 represents< + total consumer utility. '*consumer surplus. * : 8*total revenue to sellers. returns to capital and to labor. * +nswer< + Mc'onnell28rue< 9conomics" $.2e #age .! 'hapter 2%< #ure 'ompetition Type< ? 9< )%) M=< $A! 2!A. (Hast Bord* Fefer to the above graph of the mar5et for asparagus. +t the mar5et price of $2" area + represents< +* total consumer utility. 8* total revenue to sellers. '* consumer surplus. :* economic profit. +nswer< ' Type< ? 9< )%) M=< $A! 2$!.(Hast Bord* =n long-run e/uilibrium" purely competitive mar5ets< +*minimize total cost. 8*maximize consumer surplus.
'*yield economic profits to most sellers. :*inevitably degenerate into monopoly in increasing cost industries. +nswer< 8 True20alse 3uestions Type< + 9< )$. M=< $ 2 2$$.=n maximizing profit a firm will always produce that output where total revenues are at a maximum. +nswer< 0alse Type< + 9< )22 M=< $ 8 2$2.=n the short run a competitive firm will always choose to shut down if product price is less than the lowest attainable average total cost. +nswer< 0alse Type< + 9< )2 M=< $8% 2$%.+fter all long-run adLustments have been completed" a firm in a competitive industry will produce that level of output where average total cost is at a minimum. +nswer< True Type< + 9< )%!-)%$ M=< $8.-$8 2$).The long-run supply curve for a decreasing-cost industry is downsloping. +nswer< True Type< + 9< )2! M=< $ . 2$&.+ competitive firm will produce in the short run so long as its price exceeds its average fixed cost. Mc'onnell28rue< 9conomics" $.2e #age .$ 'hapter 2%< #ure 'ompetition +nswer< 0alse Type< + 9< )%2 M=< $88 2$..Marginal cost is a measure of the alternative goods which society forgoes in using resources to produce an additional unit of some specific product. +nswer< True Mc'onnell28rue< 9conomics" $.2e #age .2 'hapter 2%< #ure 'ompetition Type< + 9< )$&-)$. M=< $ $-$ 2 2$ .#rice and marginal revenue are identical for an individual purely competitive seller. +nswer< True Type< + 9< )%2 M=< $88 2$8.8ecause the e/uilibrium position of a purely competitive seller entails an e/uality of price and marginal costs" competition produces up to an efficient allocation of economic resources. +nswer< True Type< + 9< )2%-)2) M=< $ A-$8! 2$A.The short-run supply curve slopes upward because producers must be compensated for rising marginal costs. +nswer< True Type< + 9< )2& M=< $8$ 22!.The demand curve for a purely competitive industry is perfectly elastic" but the demand curves faced by individual firms in such an industry are downsloping. +nswer< 0alse Type< + 9< )$ -)$8 M=< $ %-$ ) 22$.The total revenue curve of a competitive seller graphs as a straight" upsloping line. +nswer< True Type< : 9< )$. M=< $ 2 222.Marginal revenue is the addition to total revenue resulting from the sale of one more unit of output. +nswer< True ;se the following to answer /uestions 22%-2%$< Mc'onnell28rue< 9conomics" $.2e #age .%
'hapter 2%< #ure 'ompetition Type< ? 9< )$A-)2! M=< $ &-$ . 22%.Fefer to the above diagram. This firm will maximize profits by producing output :. +nswer< 0alse Mc'onnell28rue< 9conomics" $.2e #age .) 'hapter 2%< #ure 'ompetition Type< ? 9< )$A-)2! M=< $ &-$ . 22).Fefer to the above diagram. +t the profit-maximizing output total revenue will be !?H:. +nswer< 0alse Type< ? 9< )2! M=< $ . 22&.Fefer to the above diagram. +t output ' production will result in an economic profit. +nswer< True Type< ? 9< )2! M=< $ . 22..Fefer to the above diagram. +t output ' total variable cost is 0?UJ. +nswer< 0alse Type< ? 9< )2! M=< $ . 22 .Fefer to the above diagram. +t output ' average fixed cost is ?0. +nswer< 0alse Type< ? 9< )2) M=< $8! 228.Fefer to the above diagram. +t any price below F the firm will shut down in the short run. +nswer< True Type< ? 9< )2) M=< $8! 22A.Fefer to the above diagram. =f demand fell to the level of 0KJ" there would be no output at which the firm could realize an economic profit. +nswer< 0alse Type< ? 9< )2) M=< $8! 2%!.Fefer to the above diagram. =f the firm produced : units of output at price ?" it would earn a normal profit. +nswer< True Type< ? 9< )$ M=< $ % 2%$.Fefer to the above diagram. Total costs are minimized at output level 8. +nswer< 0alse Type< + 9< )2& M=< $8$ 2%2.+lthough individual purely competitive firms can influence the price of their product" these firms as a group cannot influence mar5et price. +nswer< 0alse Mc'onnell28rue< 9conomics" $.2e #age .& 'hapter 2%< #ure 'ompetition Type< + 9< )$) M=< $ ! 2%%.=n a purely competitive industry competition centers more on advertising and sales promotion than on price. +nswer< 0alse
or an imperfectl! competitive firm:
the marginal revenue curve lies belo% the demand curve because any reduction in price applies to all units sold. "efer to the a#ove two diagrams for individual firms$ a purely competitive firm. "efer to the a#ove diagram$ &emand is relativel! inelastic: at any price belo% #2. The '" ( 'C rule: applies both to pure monopoly and pure competition. "efer to the a#ove data for a nondiscriminating monopolist$ )t its profit-maximi*ing output+ this firm,s total profit will #e: )02. The suppl! curve of a pure monopolist: does not exist because prices are not CgivenC to a monopolist. -n which one of the following mar.et models is /-inefficienc! least li.el! to #e present0 pure competition Which of the following is not a precondition for price discrimination0 The commodity involved must be a durable good. ) price discriminating pure monopolist will attempt to charge each #u!er 1or group of #u!ers2: the maximum price each %ould be %illing to pay. -f a regulator! commission wants to provide a natural monopol! with a fair return+ it should esta#lish a price that is e3ual to: average total cost. ) monopolisticall! competitive industr! com#ines elements of #oth competition and monopol!$ -t is correct to sa! that the competitive element results from: a relatively large number of firms and the monopolistic element from product differentiation. "efer to the a#ove diagram for a monopolisticall! competitive firm$ -f more firms were to enter the industr! and product differentiation were to wea.en+ then: the demand curve %ould become more elastic. "efer to the a#ove data$ -f columns 1%2 and 142 of the demand data shown a#ove are this firm,s demand schedule+ the profit-maximi*ing level of output will #e: igure % pertains to:
0 units ) significant #enefit of monopolistic competition compared with pure competition is: greater product variety. -n monopolisticall! competitive mar.ets+ resources are: underallocated because long6run e2uilibrium occurs %here price exceeds marginal cost. -n long-run e3uili#rium a monopolisticall! competitive producer achieves: neither productive efficiency nor allocative efficiency. -f an oligopolist is faced with a marginal revenue curve that has a gap in it+ we ma! assume that: its demand curve is 'in'ed. The economic profits earned #! monopolisticall! competitive sellers are *ero in the long run$ True "efer to the a#ove pa!off matrix$ 5o#,s 5urgers and Sam,s Sandwiches are competing restaurants in a small town$ 5oth are considering adding pi**a to their line of products$ -f this is a one-time simultaneous game: neither firm has a dominant strategy. Which of the following statements concerning a monopolisticall! competitive industr! is correct0 /f there are short6run losses- firms %ill leave the industry and the demand curves of the remaining firms %ill shift to the right. 6oda. introduced to the mar.etplace a digital camera which uses no film+ #ut which ta.es photos that can #e shown on personal computers$ This is an example of: product innovation. )s it relates to "7&+ the imitation pro#lem is that: a firm$s rivals may be able to copy its ne% product or process innovation- reducing the original firm$s return on "RD. )ll of the following increase the expected rate of return on "7& expenditures+ except: imitation by others. Legal protections against competitors producing and selling a product identical to the one !ou invented are called 8888888889 legal protections against competitors using !our product,s name are called 8888888888$ patents> trademar's
Suppose that 'arlen isher has legal protection against an!one producing and selling a fishing lure identical to his uni3ue-action :'ar ish: lure+ whatever the competitor might name the lure$ This legal protection is most li.el! to #e a: patent. Those who contend that oligopolists are less li.el! than more competitive firms to engage in "7& sa! that: +ligopolists have little incentive to introduce costly ne% technology and produce ne% products %hen they currently are earning large economic profit using existing technology and selling existing products. Technological advance improves allocative efficienc! #!: giving society a more6preferred mix of goods and services. Creative destruction is: the process by %hich ne% firms and ne% products replace existing dominant firms and products. The marginal cost to a firm of "7& expenditures is the mar.et interest rate the firm must pa! to o#tain the needed financing$ True The interest-rate cost-of-funds curve is perfectl! elastic #ecause firms can #orrow as much or as little as the! want at mar.et interest rates$ True The 3uantit! demanded of a good is the amount that #u!ers are %illing and able to purchase. The movement from point ) to point 5 on the graph shows an increase in 2uantity demanded. The following ta#le contains a suppl! schedule for a good$ -f the law of suppl! applies to this good+ then :0: could #e 4 ;ew cars are normal goods$ What will happen to the e3uili#rium price of new cars if the price of gasoline rises+ the price of steel falls+ pu#lic transportation #ecomes cheaper and more comforta#le+ auto-wor.ers accept lower wages+ and automo#ile insurance #ecomes more expensive0 #rice %ill stay exactly the same. The price elasticit! of demand measures how much 2uantity demanded responds to a change in price.
Consumer surplus is the amount a buyer is %illing to pay for a good minus the amount the buyer actually pays for it. The theor! of consumer choice provides the foundation for understanding the demand for a firm$s product. <<< -n a mar.et econom!+ government intervention may improve mar'et outcomes in the presence of externalities. )ssume that a college student spends her income on #oo.s and pi**a$ The price of a pi**a is <=+ and the price of a #oo. is <%>$ -f she has <%?? of income+ she could choose to consume & pi,,as and boo's.
)n indifference curve illustrates a consumer$s preferences. Large minimum efficient scale of plant com#ined with limited mar.et demand ma! lead to: natural monopoly. )nswer the 3uestion on the #asis of the following ta#le showing the demand schedule facing a nondiscriminating monopolist: "efer to the a#ove ta#le$ The profit-maximi*ing monopolist will sell at a price: that cannot be determined %ith the information provided. -f the varia#le costs of a profit-maximi*ing pure monopolist decline+ the firm should: produce more output and charge a lo%er price. )n important economic pro#lem associated with pure monopol! is that+ at the profit maximi*ing outputs+ resources are: underallocated because price exceeds marginal cost. "efer to the a#ove diagrams$ The price will #e 8888888 and the 3uantit! will #e 8888888 with the industr! structure represented #! diagram 152 compared to the one represented in 1)2$ higher> lo%er "efer to the a#ove long-run cost diagram for a firm$ -f the firm produces output Q@ at an average cost of )TC@+ then the firm is: incurring K6inefficiency- but is producing that output at %hich all existing economies of scale might be reali,ed.
-f a pure monopolist can price discriminate #! separating #u!ers into two or more groups: the firm %ill face multiple marginal revenue curves. "efer to the figure a#ove$ Suppose the graphs represent the demand for use of a local golf course for which there is no significant competition 1it has a local monopol!29 P denotes the price of a round of golf9 Q is the 3uantit! of rounds :sold: each da!$ -f the left graph represents the demand during wee.da!s+ and the right graph the wee.end demand+ this profit-maximi*ing golf course will earn how much economic profit over the course of a full seven-da! wee.0 )&-244 "efer to the a#ove diagram for a pure monopolist$ Suppose a regulator! commission is created to determine a legal price for the monopol!$ -f the commission see.s to provide the monopolist with a :fair return+: it will set price at: #1. "efer to the a#ove diagram for a natural monopolist$ -f a regulator! commission set a maximum price of P%+ the monopolist would produce output: N& and reali,e a loss. Ase !our #asic .nowledge and !our understanding of mar.et structures to answer this 3uestion$ Which of the following companies most closel! approximates a monopolistic competitor0 7ub%ay 7and%iches -n short-run e3uili#rium+ the monopolisticall! competitive firm shown a#ove will set its price: belo% ATC. "efer to the a#ove diagram for a monopolisticall! competitive firm$ Long-run e3uili#rium price will #e: A. The more elastic a monopolistic competitor,s long-run demand curve+ the: lo%er its average total cost at its profit maximi,ing level of output. "efer to the a#ove data$ The Berfindahl -ndex for the a#ove industr! is: 1-044. "efer to the a#ove diagram where the numerical data show profits in millions of dollars$ 5eta,s profits are shown in the northeast corner and )lpha,s profits in the southwest corner of each cell$ -f #oth firms follow a high-price polic!: each %ill reali,e a )24 million profit.
"efer to the a#ove game theor! matrix where the numerical data show the profits resulting from alternative com#inations of advertising strategies for )Cax and )cme$ )Cax,s profits are shown in the upper right part of each cell9 )cme,s profits are shown in the lower left$ With collusion and no cheating+ the outcome of the game is cell: D. "efer to the a#ove diagram$ D3uili#rium price is: d "efer to the a#ove pa!off matrix$ 5o#,s 5urgers and Sam,s Sandwiches are competing restaurants in a small town$ 5oth are considering adding pi**a to their line of products$ -f this is a se3uential game #ut we don,t .now who moves first+ what can we sa! a#out the final outcome0 Cells B and C both represent possible 5ash e2uilibrium outcomes for this game "efer to the a#ove pa!off matrix$ Suppose that Speed! 5i.e and Power 5i.e are the onl! two #ic!cle manufacturing firms serving the mar.et$ 5oth can choose large or small advertising #udgets$ -f this is a repeated game with no cooperation or reciprocit!+ cell ): is the expected outcome of this game- and it is both a 5ash e2uilibrium and a prisoner$s dilemma. The 3uantit! demanded of a good is the amount that #u!ers are %illing and able to purchase. The movement from point ) to point 5 on the graph shows an increase in 2uantity demanded. The following ta#le contains a suppl! schedule for a good$ Price Quantit! Supplied <%? %?? <@? 0
-f the law of suppl! applies to this good+ then :0: could #e 4 ;ew cars are normal goods$ What will happen to the e3uili#rium price of new cars if the price of gasoline rises+ the price of steel falls+ pu#lic transportation #ecomes
cheaper and more comforta#le+ auto-wor.ers accept lower wages+ and automo#ile insurance #ecomes more expensive0 #rice %ill stay exactly the same. The price elasticit! of demand measures how much 2uantity demanded responds to a change in price. Consumer surplus is the amount a buyer is %illing to pay for a good minus the amount the buyer actually pays for it. -n a mar.et econom!+ government intervention may improve mar'et outcomes in the presence of externalities. The theor! of consumer choice provides the foundation for understanding the demand for a firm$s product. )ssume that a college student spends her income on #oo.s and pi**a$ The price of a pi**a is <=+ and the price of a #oo. is <%>$ -f she has <%?? of income+ she could choose to consume & pi,,as and boo's.
)n indifference curve illustrates a consumer$s preferences. Eiven the #udget constraint depicted in the graph+ the consumer will choose #undle C Dconomists normall! assume that the goal of a firm is to maximi,e its profit. Profit is defined as total revenue minus total cost. Those things that must #e forgone to ac3uire a good are called opportunity costs. When a factor! is operating in the short run+ it cannot ad:ust the 2uantity of fixed inputs. Dconomies of scale occur when a firm,s long6run average total costs are decreasing as output increases. ) firm has mar.et power if it can
maximi,e profits. ) .e! characteristic of a competitive mar.et is that producers sell nearly identical products. Which of the following are necessar! characteristics of a monopol!0 1i2 The firm is the sole seller of its product$ 1ii2 The firm,s product does not have close su#stitutes$ 1iii2 The firm generates a large economic profit$ 1iv2 The firm is located in a small geographic mar.et$ 8i9 and 8ii9 only &eadweight loss e2uals monopoly revenues minus profits. Which of the following is not a characteristic of a perfectl! competitive mar.et0 Eoods offered for sale are largely the same. Price discrimination can occur in both perfectly competitive and monopoly mar'ets. 'onopolistic competition is a t!pe of oligopoly. What price will the monopolisticall! competitive firm charge in this mar.et0 )04 irms in a monopolisticall! competitive mar.et produce an output level that minimi,es average total cost in the long run. ) group of firms that act in unison to maximi*e collective profits is called a cartel. )n e3uili#rium in which each firm in an oligopol! maximi*es profit+ given the actions of its rivals+ is called a dominant e2uilibrium. Eame theor! is important for the understanding of competitive mar'ets. The prisoners, dilemma game
provides insight into %hy cooperation is individually rational. Two companies+ )5C and /FG+ each decide whether to produce a high level of output or a low level of output$ -n the figure+ the dollar amounts are pa!offs and the! represent annual profits for the two companies$ The dominant strateg! for )5C is to produce high output- and the dominant strategy for KLQ is to produce high output. Which of the following statements concerning a monopolisticall! competitive industr! is correct0 /f there are short6run losses- firms %ill leave the industry and the demand curves of the remaining firms %ill shift to the right. The 3uantit! demanded of a good is the amount that #u!ers are %illing and able to purchase. The movement from point ) to point 5 on the graph shows an increase in 2uantity demanded. he following ta#le contains a suppl! schedule for a good$ Price Quantit! Supplied <%? %?? <@? 0
-f the law of suppl! applies to this good+ then :0: could #e 4 ;ew cars are normal goods$ What will happen to the e3uili#rium price of new cars if the price of gasoline rises+ the price of steel falls+ pu#lic transportation #ecomes cheaper and more comforta#le+ auto-wor.ers accept lower wages+ and automo#ile insurance #ecomes more expensive0 #rice %ill fall The price elasticit! of demand measures how much 2uantity demanded responds to a change in price. Consumer surplus is the amount a buyer is %illing to pay for a good minus the amount the buyer actually pays for it.
-n a mar.et econom!+ government intervention may improve mar'et outcomes in the presence of externalities. The theor! of consumer choice provides the foundation for understanding the demand for a firm$s product. )ssume that a college student spends her income on #oo.s and pi**a$ The price of a pi**a is <=+ and the price of a #oo. is <%>$ -f she has <%?? of income+ she could choose to consume & pi,,as and boo's.
)n indifference curve illustrates a consumer$s preferences. Eiven the #udget constraint depicted in the graph+ the consumer will choose #undle C Dconomists normall! assume that the goal of a firm is to maximi,e its profit. Profit is defined as total revenue minus total cost. Those things that must #e forgone to ac3uire a good are called opportunity costs. When a factor! is operating in the short run+ it cannot ad:ust the 2uantity of fixed inputs. Dconomies of scale occur when a firm,s long6run average total costs are decreasing as output increases. ) firm has mar.et power if it can influence the mar'et price of the good it sells. ) .e! characteristic of a competitive mar.et is that producers sell nearly identical products. Which of the following is not a characteristic of a perfectl! competitive mar.et0 Dirms have difficulty entering the mar'et. Which of the following are necessar! characteristics of a monopol!0 1i2 The firm is the sole seller of its product$
1ii2 The firm,s product does not have close su#stitutes$ 1iii2 The firm generates a large economic profit$ 1iv2 The firm is located in a small geographic mar.et$ 8i9 and 8ii9 only &eadweight loss measures monopoly inefficiency. Price discrimination can maximi,e profits if the seller can prevent the resale of goods bet%een customers. 'onopolistic competition is a t!pe of mar'et structure. What price will the monopolisticall! competitive firm charge in this mar.et0 )04 irms in a monopolisticall! competitive mar.et cannot earn economic profits in the long run. ) group of firms that act in unison to maximi*e collective profits is called a cartel. )n e3uili#rium in which each firm in an oligopol! maximi*es profit+ given the actions of its rivals+ is called a 5ash e2uilibrium. Eame theor! is important for the understanding of oligopolies. The prisoners, dilemma game provides insight into %hy cooperation is difficult. Two companies+ )5C and /FG+ each decide whether to produce a high level of output or a low level of output$ -n the figure+ the dollar amounts are pa!offs and the! represent annual profits for the two companies$ produce high output- and the dominant strategy for KLQ is to produce high output.
1 . "efer to the above information. Dor a purely competitive firm: 1&. /f a firm in a purely competitive industry is confronted %ith an e2uilibrium price of )(- its marginal revenue: 1(. #rice is constant or given to the individual firm selling in a purely competitive mar'et because: 1*. Dor a purely competitive firm total revenue: 1.. The demand curve in a purely competitive industry is PPPPPP- %hile the demand curve to a single firm in that industry is PPPPPP. 10. A perfectly elastic demand curve implies that the firm: 13. "efer to the above diagram- %hich pertains to a purely competitive firm. Curve A represents: 24. "efer to the above diagram- %hich pertains to a purely competitive firm. Curve C represents: 21. !arginal revenue is the: 22. !arginal revenue for a purely competitive firm:
D. the demand and marginal revenue curves %ill coincide. B. %ill also be )(. C. each seller supplies a negligible fraction of total supply. D. has all of these characteristics. B. do%nsloping- perfectly elastic B. can sell as much output as it chooses at the existing price. D. total revenue only. D. average revenue and marginal revenue. D. change in total revenue associated %ith the sale of one more unit of output. C. is e2ual to price.
2 . Dirms see' to maximi,e:
C. total profit.
2&. A competitive firm in the short run can C. marginal revenue and determine the profit6maximi,ing 8or loss6minimi,ing9 marginal cost. output by e2uating: 2(. The !" = !C rule applies: 2*. The !" = !C rule can be restated for a purely competitive seller as P = !C because: A. to firms in all types of industries. A. each additional unit of output adds exactly its price to total revenue.
B. marginal cost curve lying 2.. /n the short run the individual competitive firm$s above the average variable cost supply curve is that segment of the: curve. 20. Assume the KLQ Corporation is producing 24 units of output. /t is selling this output in a purely D. is reali,ing an economic profit competitive mar'et at )14 per unit. /ts total fixed of )&4. costs are )144 and its average variable cost is ) at 24 units of output. This corporation: 23. A purely competitive firm$s short6run supply curve is: B. upsloping and e2ual to the portion of the marginal cost curve that lies above the average variable cost curve. C. close do%n because- by producing- your losses %ill exceed your total fixed costs. C. it %ill reali,e a loss e2ual to its total fixed costs. A. total variable costs.
4. 7uppose you find that the price of your product is less than minimum AAC. Lou should: 1. /f a purely competitive firm shuts do%n in the short run: 2. A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its: . "efer to the above data. This firm is selling its output in a8n9: &. "efer to the above data. /f the firm$s minimum average variable cost is )14- the firm$s profit6 maximi,ing level of output %ould be:
C. purely competitive mar'et.
B. .
(. "efer to the above data. At the profit6maximi,ing A. )&0. output the firm$s total revenue is: *. "efer to the above data. At the profit6maximi,ing B. ) 2. output the firm$s total cost is: .. "efer to the above data. The firm$s: B. economic profit is )1*.
0. /f a firm is confronted %ith economic losses in the short run- it %ill decide %hether or not to produce by comparing: 3. The lo%est point on a purely competitive firm$s short6run supply curve corresponds to: &4. "efer to the above diagram for a purely competitive producer. The lo%est price at %hich the firm should produce 8as opposed to shutting do%n9 is:
B. price and minimum average variable cost. B. the minimum point on its AAC curve.
B. P2.
&1. "efer to the above diagram for a purely competitive producer. The firm %ill produce at a loss D. bet%een P2 and P . at all prices: &2. "efer to the above diagram for a purely competitive producer. /f product price is P : & . "efer to the above diagram for a purely competitive producer. The firm$s short6run supply curve is: &&. "efer to the above diagram. To maximi,e profit or minimi,e losses this firm %ill produce: &(. "efer to the above diagram. At the profit6 maximi,ing output- total revenue %ill be: &*. "efer to the above diagram. At the profit6 maximi,ing output- total fixed cost is e2ual to: &.. "efer to the above diagram. At the profit6 maximi,ing output- total variable cost is e2ual to: &0. "efer to the above diagram. At the profit6 maximi,ing output- the firm %ill reali,e: &3. /n a purely competitive industry: (4. The principle that a firm should produce up to the point %here the marginal revenue from the sale of an extra unit of output is e2ual to the marginal cost of producing it is 'no%n as the: (1. @hich of the follo%ing is true concerning purely competitive industries< (2. @hich of the follo%ing statements is correct< C. economic profits %ill be ,ero. B. the bcd segment and above on the !C curve. C. E units at price A. A. 4AHE. D. BCFG. B. 4CFE. D. an economic profit of ABGH. C. there may be economic profits in the short run- but not in the long run.
B. profit6maximi,ing rule.
C. /n the short run- firms may incur economic losses or earn economic profits- but in the long run they earn normal profits. A. 1conomic profits induce firms
to enter an industry> losses encourage firms to leave. ( . The !" = !C rule applies: (&. The term allocative efficiency refers to: C. in both the short run and the long run. C. the production of the product6 mix most desired by consumers. B. both allocative efficiency and productive efficiency are achieved. B. the e2uilibrium position of a competitive firm in the long run. B. earn a normal profit. C. # = !C = minimum ATC. d. all of the above. b. cost per unit to rise- prices to fall and profits to decrease.
((. Fnder pure competition in the long run:
(*. The above diagram portrays: (.. "efer to the above diagram. /f this competitive firm produces output N- it %ill: (0. @hich of the follo%ing conditions is true for a purely competitive firm in long6run e2uilibrium< (3. /f profits are made in purely competitive mar'et in the long run: *4. /n pure competition in the long run %hen firms are in an increasing cost industry- the entry of additional firms causes:
$'MFF9'T Bhich of the following is not a characteristic of 4pure monopoly4 A! There is only one firm. 6! =ts products are standardized and have many close substitutes
+!
There is considerable control over the price =t is very difficult to enter the industry
C!
0eedbac5< #ure monopoly produces a uni/ue product with no close substitutes.
2'MFF9'T
+ mar5et structure" which is dominated by a few large firms" each producing a similar product is called... A! Monopoli stic competiti on #ure compe tition
6!
+! Mlig opol y C! #ure mono poly
0eedbac5< 'hoice % by definition is correct.
%'MFF9'T =n pure competition" firms are 4price ta5ers4 because... A! #rices are fixed in this mar5et structure 6!
They exert m over the prod this mar5et st They must rely on government to set mar5et product prices
+!
C!
)'MFF9'T Bhich of the following is not true of the purely competition mar5et structure> A!
6!
+!
C!
Kone of the other choices
0eedbac5< 'hoice $ is incorrect. The mar5et demand curve (including all producers* will be downward sloping and may be inelastic. +s a whole" individual firms may change output and thus simultaneously change price. 8ut the individual producer still faces an elastic demand curve for any given good.
&'MFF9'T 0or a purely competitive mar5et structure A! :I MF I TF :I TF I +F :I MF I +F #I TF I +F
6!
+!
C!
.'MFF9'T
+ firm's demand schedule for good 6 is given below< #6 36 $$8! ! $$8! $ $$8! 2 $$8! % $$8! ) $$8! & =f the /uantity demanded increases from % to ) units" what is the firm's marginal revenue (MF*> A! $$ 8! 6! $2 &! +! $% !! C! $% &!
0eedbac5< MF I TF 3: $ 2! O $&)! I ) units O % units I $$8!
'MFF9'T +t brea5 even point... A! TF O T' is maximiz ed 6! +n economic profit would be earned
+! TF I T'
C!
TF is maxim ized
8'MFF9'T
;sing the chart in /uestion ." and given the following figures for T0' and T,'" 3 T0' T,' ! $2!! ! $ $2!! $!! 2 $2!! $8! % $2!! 2&! ) $2!! %$! & $2!! %8! . $2!! ).! $2!! &&! 8 $2!! .&! A $2!! .! $! $2!! 88! 0or output level 3 I %" T' I A! $% %! 6! $% 8! +! $) &! C! $) &
0eedbac5< T' I T,' 1 T0'
Bhat is the profit maximizing output level for this perfectly competitive firm> +ssume that the A'MFF9'T price remains the same for /uantities above & units" and for /uantities greater than $$ units" T,' continues to increase in the same pattern as shown. A! 3 I $! 6! 3 I $.
+! 3 I $ C! 3 I $8 0eedbac5< ;sing the total revenue O total cost approach" the profit-maximizing output level will occur where TF O T' is maximized. 'alculate TF O T' for each of the given values of 3. 3I$ units will maximize the firm's profits as it yields the highest value ($8.!*.
$ +s long as producing some output is preferable to shutting down" a purely competitive firm will 'MFF9'T ! maximize its output when... A! MF I M' MF N M' M' N MF
6!
+!
C! # N M' 0eedbac5< 8y definition" a perfectly competitive firm will maximize profits when MF I M'" or # I M'" since # I MF for this mar5et structure.
$$'MFF9'T +s long as there is MFNM'... A! + firm will find it profitable to produce less output + firm is producing at its output O maximizing level + firm will find it profitable to product more output
6!
+!
C!
Kone of the other
choices 0eedbac5< =f MFNM' additional revenue earned from producing an additional unit of output will exceed the additional cost
$ =f the price of a good is $$!!" the output is $! units and the average total cost is $)!" what is the 'MFF9'T 2 firm's economic profit> A! $% !! 6! $) !! +! $& !! C! $. !! 0eedbac5< TF O T' I I # x 3 O T' +T' I T'23 I # x 3 O (+T' x 3* I$$!! x $! units O ($)! x $! units* I$$!!! - $)!! I$.!!
$ =f +,'V#V+T'" then 'MFF9'T % A! The firm should shut down and produce nothing The firm should try to minimize the loss it will incur +!
6!
The firm will m profit of (# O +T'*Wprofitmaximizing out
C!
$ =f #V+,' then 'MFF9'T ) A! The firm will incur a loss 6! The firm will be unable to cover any of its fixed cost per unit The firm should shut down and produce no output
+!
C!
+ll of the other choices
0eedbac5< 'hoice $ is correct since #V+T'. 'hoice 2 is correct since #V (+T'R+,'* or #V+0'" so the firm will not be able to cover its fixed costs per unit. @ince choice 2 occurs then choice % becomes inevitable O shut down becomes the best strategy. 'hoice ) is correct.
$ The supply curve of a competitive firm is e/ual to... 'MFF9'T & A!
The marginal above the poin cuts the +T' c
6!
The marginal cost curve at all prices +!
The marginal above the poin cuts the +,'
C!
Kone of the other choices.
$ +s the price of a good increases" which of the following describes the adLustment along the 'MFF9'T . competitive firm's supply curve>
A!
6!
+!
C!
Kone of the above.
'MFF9'T
Thin5ing of the long-run e/uilibrium" if a decrease in tastes and preferences for a good causes the price of the good to fall below +T'" then... A!
6!
+!
C!
$ The long-run supply curve for the constant cost industry is... 'MFF9'T 8 A! ;pwar d slopin g :ownw ard sloping
6!
+!
Gori zont al
C! ,ert ical
$ 0or a competitive firm to exhibit productive efficiency" 'MFF9'T A A! # I +, ' 6! #I minimu m +T' #I TF O T' C! Kone of the other choices
+!
2 =f #NM' then... 'MFF9'T ! A!
M'NM8 and of the good is produced (ov allocation*
6!
M' I M8 and allocation efficiency is realized +! M8NM' and not enough of the good is being produced
C!
2 =n the computer industry" 'MFF9'T $ A! The long-run aggregate supply curve is horizontal 6! The long-run aggregate supply curve is downward sloping The long-run aggregate supply is upward sloping
+!
C!
2 Bhich of the following is true> 'MFF9'T 2 A!
6!
=f MFNM'" produce mor and output w
+!
C!
+ firm earns normal profits if # I Minimum +T'
0eedbac5< + firm can have losses and still not shut down if it is covering at least some of its fixed costs. 8ut if #V+,' then the firm will shut down.
2 Bhich of the following is not true> 'MFF9'T % A!
=f #N+T'" then will exit the indu due to reduced d 6!
+!
C!
consider two industries O the widget industry and the woggle industry. @uppose that tastes and 2 'MFF9'T preferences increase for woggles all else e/ual. =f widgets and woggles are substitutes in ) production A!
6!
=n the long run" the supply of woggles would increase +!
C!
+ll of the other choices.
$'MFF9'T
+n organization that uses factors of production to produce goods and services to maximize profits is called A! + pla nt 6! + fir m +! +n indus try Kone of the above
C!
0eedbac5< 'hoice 2 is correct by definition
2'MFF9'T The main disadvantage of a partnership is... A! =t is difficult to set up or organize 6! Hess specialization in management can occur +!
@ince two may be in disagreeme
C!
There is limited liability
0eedbac5< 8y definition" choice % is true.
%'MFF9'T The main advantage of the corporate form of business organization is... A! 'orporations are relatively easy to set up 6!
'orporations have relatively easy tim raising financial capital
+!
'orporatio ns are large in size C!
)'MFF9'T +ccountants tend to be concerned about... A! =mpli cit cost Mpport unity costs 9xpli cit costs C! Kone of the other choices
6!
+!
0eedbac5< 9xplicit costs are those costs" which involve an out-of-poc5et cash payment O e.g. wages" utilities.
Jim has decided to /uit his $%&"!!! per year teaching Lob in favor of opening up a small restaurant. Ge has invested $$! !!! of his own money" and the interest rate on savings is &C. :uring his final year in business" Jim had salaries costs of $$!! !!!" utilities costs of $$& !!!" &'MFF9'T materials costs of $)! !!!" and total revenue of $$ ! !!!. Jim owns the store space" and has been renting it out for $$! !!! per year. Gis entrepreneurial talent is worth $8 !!! in a similar business. JimPs accounting profit isX A! $$! "!! ! 6! $2! "!! ! +! $$2 "!! ! C! $$& "!! ! 0eedbac5< +cc. #rofit I total Fevenue - total costs explicit
.'MFF9'T Jim's total implicit costs are... A! $&% "&! ! 6! $)% "!! ! +! $)% "&! ! C! $$8 "&! ! 0eedbac5< Total implicit costs
'MFF9'T Bhich of the following is true about Jim's restaurant business> A! 8oth his accounting profit and economic profit are positive
6!
Gis accounting negative" but hi economic profit positive
+!
Gis accounting positive but his economic profit negative 8oth is accounting profit and economic profit are negative
C!
0eedbac5< 9conomic profit I +ccounting profit - implicit costs I$$&"!!! O $&%"&!! I($%8"&!!* or O$%8"&!!
8'MFF9'T 9conomic costs e/ual A! 9xplici t costs only =mplici t costs only +! =mplicit costs plus explicit costs Mpportu nity costs only
6!
C!
0eedbac5< 'hoice % is correct by definition
A'MFF9'T
Kortel is thin5ing of re-hiring some of its wor5ers due to an increase in demand for its products. Gowever" its plant capacity remains fixed. This means... A! The period of time being referred to is the short run The period of time being
6!
+!
Habour is a fixed resource Kone of the other choices
C!
0eedbac5< 'hoice $ is correct since in the short urn only the variable factors of production" such as labour can be changed. The capacity of the plant is fixed.
$ Bhich of the following is true> 'MFF9'T ! A!
The short and long run of a firm are measured by calen time 6!
+!
The size of changed in if labour in C!
0eedbac5< 'hoice ) is mentioned in the text.
$$'MFF9'T The total product (T#* of labour measures... A! The output per unit of labour 6! The total output produced by a given /uantity of labour
+!
The additional outp produced by an
additional unit of labour C! Kone of the other choices
$2'MFF9'T
Uevin is studying for his 'anadian securities exam ('@'*. Ge can learn the following numbers of concepts in the given no. of hours< 'oncept 3(hrs* lnd ! ! $ % 2 % $2 ) $. & $A . 2$ Bhat is Uevin's total product (T#* after ) hours> A! % conc epts $2 conc epts $. conc epts $A conc epts
6!
+!
C!
0eedbac5< T# ()* I $. concepts
$ Bhat is Uevin's marginal product when his study time increases from 2 O % hours> 'MFF9'T %
A!
% conc epts ) conc epts & conc epts A conc epts
6!
+!
C!
0eedbac5< M#H I T#H H $2 O I %O2 & I $ I & concepts
$ Bhen does Uevin begin to experience diminishing returns to studying for the exam> 'MFF9'T ) A! +fter % hours +fter 2 hours +fter $ hour +fter ) hours
6!
+!
C!
0eedbac5< M#H after % hours from 2 O % hours" M#H I & concepts M#H I ) concepts from % O ) hours. @o M#H decreases after % hours.
$'MFF9'T =f M# V +#" then...
& A! +# is risin g +# is fallin g M# is rising Kone of the above
6!
+!
C!
0eedbac5< =f marginal product V average product" additional units of output generated by increasing amounts of labour will be less than the average product (output per unit*. @o" the average product must decrease" and the +# curve will fall.
$ 0ixed costs... 'MFF9'T . A! =ncrease as a firm's output changes 6! =nclude cost of raw materials" labour and fuel +! Must be paid by firm even if it doesn't produce anything
C!
0eedbac5< 9ven if a firm's output is zero" it must still pay fixed costs" such as rent" office salaries and insurance.
'MFF9'T
The T,' curve begins to increase at an significant rate after some output level due to... A! Gigher fixed
costs 6! =ncreasing marginal product of labour :ecreasing total product of labour :iminis hing returns
+!
C!
0eedbac5< +s the marginal product of labour begins to decrease" 4larger amounts of additional variable resources (such as labour* must be used to produce extra units of output.4 Thus" total variable cost will increase at a significant rate.
$ +t an output of $! units" a firm's T0' I $8!2unit and its T' I $2!!. Bhat is the firm's +,' at 'MFF9'T 8 this output level> A! $$ 2! 6! $& ! +! $$ 2 C! $2 ! 0eedbac5< +,' I T,' 3 T' O T0' I 3 $$2! I $! units I $$22unit
$ @uppose that this firm has total costs of $$ ! when its output is A units. The marginal cost of 'MFF9'T A increasing output from A to $! units is... A! $% ! 6! $) !
+! $& ! C! $. ! 0eedbac5< 'hange in total M 'ost I cost 'hange in output $2!! O $ ! I $! units O A units I $%!
2 Bhich of the following is true> 'MFF9'T ! A!
6!
Bhen M# is increasing" M' is decreasing Bhen M# is at maximum" M' is at a minimum
+!
C!
0eedbac5< @ince M# and M' are mirror images of one another" choice 2 and % are also correct. #lease see the text.
2 @uppose that firm 6 increases the wages offered to its factors wor5ers. Bhich of the following 'MFF9'T $ will occur> A! T0' would shift upward +0'
6!
would shift upward +! T,' would shift upward +,' would shift downward
C!
0eedbac5< @ince labour is a variable input (resource* an increase in wages affects only variable costs. =n this case" total variable costs would increase" so T,' shifts upward.
2 =n the long run" 'MFF9'T 2 A! +ll resources are variable +ll costs are variable +! The firm can alter the size of its plant (plant capacity*
6!
C!
0eedbac5< +ll of these statements are true of long run.
2 + firm's long-run average cost curve is derived by Loining the minimum points on its RRRRR 'MFF9'T % curve. A! +verage variable cost (+,' +verage total cost (+T'*
6!
+!
Margin al cost (M'* Kone of the other choices
C!
2 =f a firm increases its resources by &C" and its output increases by 2!C" then... 'MFF9'T ) A! The firm exhibits constant returns to scale The firm exhibits decreasing returns to scale The firm exhibits increasing returns to scale Kone of the other choices
6!
+!
C!
0eedbac5< @ince a more than proportionate increase in output occurs" we have increasing returns to scale
2 =n the above /uestion" what would the long-run average cost curve loo5 li5e> 'MFF9'T & A! =t would be flat (horizonta l* =t would be downward sloping =t would be upward sloping
6!
+!
C!
0eedbac5< Bhen increasing returns to scale" HF+' would be falling since slower than output total costs are increasing.
$'MFF9'T The pure monopolist's product... A! Gas many substitutes offered by different companies
6!
=s differe ntiated +! =s standardized and similar to that in different companies
C!
0eedbac5< The pure monopolist's product has no substitutes. =f the consumer doesn't buy the monopolist's product" he2she must do without it.
2'MFF9'T Bhich of the following is not a characteristic of a pure monopoly> A! + pure monopoly is the single seller of a particular good 6!
The monopolist price ma5er and great control ov price
+!
There is relativ entry for firms monopolistic i The monopolist has a downward sloping demand curve
C!
0eedbac5< There are barriers" which prevent competitors from entering the industry (e.g. patents*.
%'MFF9'T Bhich of the following mar5et structures has the strongest barriers to entry in an industry> A! #ure mono poly Mlig opol y +! Monopoli stic competiti on #ure compet ition
6!
C!
0eedbac5< 'hoice $ is correct. #ure monopoly use many barriers to entry" including economics of scale" patents and licenses.
#fizer is a large #harmaceutical 'ompany that produces #rozac" an anti-depressant. Bhich of the )'MFF9'T following barriers to entry would have been used by #fizer to prevent other firms from imitating their drug> A! 9cono mics of scale
6! #at ents +! Hice nses C! Mwnersh ip of resources
&'MFF9'T Bhich of the following is true of pure monopoly> A! =ts demand curve slopes downward
6!
+!
C!
'onsider the following table showing a monopolist's output and price< 3 #I+ F ! $2!! $ $$ ! 2 $$)! % $$$! ) $8! & $&! . $2! .'MFF9'T +lso given is total cost for different levels of output< 3 T' ! $$!! $ $$ ! 2 $2%! % $28! ) $%2! & $%&! . $% ! 'onsidering the information given" if the monopolist increases its output from 2 O % units" its marginal revenue will be... A! $% !
6! $) ! +! $& ! C! $. ! 0eedbac5< MF O change in total revenue change in output I #(%* x % units O #(2* x 2 units $
$%%! O $28! $ I $&! I
'MFF9'T ;nder what condition will a monopolist maximize its profit A! =f MFN M' =f MF I M' =f MFV M'
6!
+!
C! =f # I M'
8'MFF9'T
the information given above suggests this monopolist will provide RRRR units of output of maximum profits A$ ! 62 !
+& ! C% ! 0eedbac5< MF I M' for the third output unit produced therefore" % units of output maximizes profit.
A'MFF9'T + monopolist will never operate in the inelastic region of the demand curve because... A!
6!
+!
C!
=ncreasin reducing region w revenue.
0eedbac5< Mn the inelastic region of a monopolist's demand curve" a reduction in price will result in only a small increase in /uantity demand" thus TF decreases.
$ Bhich of the following is true> + monopolist will 'MFF9'T ! A! =ncrease output in the elastic region of the demand curve. :ecrease output in the inelastic region of the demand curve Kot change output if MF I M' +ll of the other choices
6!
+!
C!
are correct.
$$'MFF9'T Bhich of the following formulas represents a monopolist's economic profit A! (#m O +T'* x 3M
6!
#m 1 +T'
+! #m x 3m C! Kone of the other choices
0eedbac5< 'hoice $ is correct since total economic profit is measured by the difference between the monopolist's price per unit and +verage total cost multiplied by the number of units produced.
$ @uppose a monopolist is producing at a level of output such that MFVM'. Bhich of the 'MFF9'T 2 following happens> A!
The mono increase h because sh doing so.
6!
The mono decrease h because sh doing so.
+!
The monopolist h incentive to chan level of her outpu C!
0eedbac5< @ince MFVM' by increasing total output the monopolist will experience a greater increase in total cost than in total revenue" so total profit will decrease. Thus" the monopolist should reduce output" because she can increase MF and decrease M'.
$ Bhich of the following is true of the monopolist> 'MFF9'T % A! Ge will always charge the highest priced he can get Ge will maximize profit per unit +! Ge may suffer a loss if #mV+verage total cost Kone of the other choices
6!
C!
0eedbac5< 'hoice $ is wrong because the monopolist maximizing total profit" not total price. 'hoice 2 is incorrect since again the monopolist maximizes total profit rather than profit per unit.
$ pure monopoly will... 'MFF9'T ) A!
#roduce a gr at a higher p purely comp
6!
#roduce a gre at a lower pri purely compe
+!
#roduce a sm at a lower pr purely comp
C!
#roduce a sm at a higher p purely comp
$ =f a monopolist charges different prices at different times of the day (as in the case of a movie 'MFF9'T & theatre*...
A!
This is called price fixing 6! This is called price discriminati on This is call price disruption Kone of the other choices
+!
C!
0eedbac5< 'hoice 2 is correct by definition.
$ Bhich of the following is true of a pure monopolist> 'MFF9'T . A! # I M' and #I minimum +T' #NM' and #I minimum +T' #VM' and #Vminimu m +T' #NM' and #Nminimu m +T'
6!
+!
C!
0eedbac5< ) is correct by definition of a monopoly.
'MFF9'T
$ - Bhich of the following is true of 6 O inefficiency A!
0or a given level o output" +T' is gre than minimum +T
6!
+!
6 O inef monopo than pur firms
C!
0eedbac5< 9ach of these statements correctly describes 6 O inefficiency.
$ @uppose a monopolist spends years in court trying to gain a license to secure its monopoly... 'MFF9'T 8 A! This is an example of profit maximizing behaviour This is an example of rentsee5ing behaviour This is an example of cost minimizing behaviour
6!
+!
C!
0eedbac5< 8y definition" choice 2 is correct.
$ Bhich of the following explains why the monopoly structure is not widespread in the economy> 'MFF9'T A A!
6!
+!
C!
0eedbac5< +ll three statements are reasons why monopoly prices and monopolists may not be that widespread in the economy.
2 Bhich of the following is not a condition for price discrimination> 'MFF9'T ! A!
+ll sellers must the same willing purchase the pro
6!
Monop oly power +! The original purchaser can't resell the product Kone of the other choices
C!
0eedbac5< 'hoice $ is correct. The monopolist must be able to separate buyers into different classes" each with a different willingness to purchase the product.
2 + perfectly discriminating monopolist... 'MFF9'T $ A!
6!
Fealizes a lower profit than a single price monopolist. Bill produce less output than a single price monopolist
+!
C!
0eedbac5< 'hoice $ is correct. 'hoice 2 should read a higher profit and choice % should read more profit.
2 + regulated monopoly produces where : I M' will charge 'MFF9'T 2 A! The monopoly price (#m* The firm return price The socially optimal price Kone of the other choices.
6!
+!
C!
2 =f a monopoly charges a price # I +T'" then... 'MFF9'T % A! =t will earn monopoly profit 6! =t will earn a normal profit and brea5 even
+!
=t may produce losses for the monopolist Kone of the other choices
C!
0eedbac5< Mnly choice 2 is correct. 'hoice $ implies to #m" which choice % applies to the socially optimal price.
2 Bhich of the following is true of the monopolist> 'MFF9'T ) A! Ge will operate on the inelastic part of the demand curve 6!
+!
Ge will reduce his output as long as MFNM' Kone of the other choices.
C!
0eedbac5< 'hoice 2 is correct. Bhen demand is elastic" a price reduction will increase total revenue. Gowever" if profit continues to decrease to the inelastic portion of the demand curve" then TF decreases. @o as long as demand is elastic output increases.
$'MFF9'T
The main difference between the perfectly competitive mar5et structure and that of monopolistic competition is that... A!
6!
+!
C!
0eedbac5< Mnly choice ) is correct.
2'MFF9'T
The fact that #epsi uses a predominantly blue can" while 'o5e uses a red and white one is an example of... A! 'oll usio n 6! #rodu ct choice +! #roduct different iation #rice compet ition
C!
0eedbac5< 8y definition" choice % is correct.
%'MFF9'T Bhich of the following is not a characteristic of monopolistically competitive firms> A!
6!
They have a lot of control over the mar5et price of the
product +!
They have relative easy entry into and exit from their industry
C!
0eedbac5< 'hoice 2 is not true since there are a lot of substitutes for each monopolistically competitive firm's output. The individual firm will have little control over the price of its product.
)'MFF9'T Bhich of the following is true of the demand curve of a monopolistically competitive firm> A!
=t is more ela demand curv perfectly com firm. =t is more inelastic than the demand curve of a pure monopoly. +!
6!
C!
0eedbac5< 'hoice $ should read less elastic. 'hoice 2 should read less inelastic and choice % should read elastic O remove 4perfectly4 from the sentence.
&'MFF9'T + monopolistically competitive firm's demand curve is... A!
6!
#erfectly has many producing
+!
=nelastic bec most no com
producing th C! Kone of the other choices
0eedbac5< 8y definition" choice $ is correct.
.'MFF9'T + monopolistically competitive firm will maximize profit in the short run A! Bher e# IM' Bhere MFN M' Bhere MF I M' Bhere M'N MF
6!
+!
C!
0eedbac5< 'hoice 2 is correct by definition
'MFF9'T =n the long run" a monopolistically competitive firm will earn... A! +n econom ic profit Mnly a normal profit +!
6!
C!
0eedbac5< 'hoice 2 is correct # I +T' implies the firm is earning a normal profit.
8'MFF9'T +s new firms enter the industry" in the long run" due to economic profits" then... A!
6!
+!
C!
0eedbac5< 'hoice ) is correct. +s new firms enter the industry" all else e/ual" they will eat into the demand (sales* of the other firms" since they produce similar" substitutable products.
A'MFF9'T
@uppose that in the short run" a monopolistically competitive industry faces #V+T'. This will cause... A!
6!
+!
C!
0eedbac5< 0irms would leave the industry since #V+T' constitutes an economic loss.
$ Bhy might a monopolistically competitive firm earn better than normal profits in the long run as 'MFF9'T ! theory suggests> A!
6!
+!
C!
0eedbac5< +ll these answers are correct.
$$'MFF9'T Thin5ing of monopolistic competition and efficiency... A!
Monopoli exhibits b and alloca
6!
Monopo exhibits nor alloc
+!
Monopolis exhibits pr not allocat
C!
Monopolis exhibits all productive
0eedbac5< 'hoice 2 is correct according to the text.
$ Bhich of the following is not true of an oligopoly> 'MFF9'T 2 A! =t consists of a few
6!
There is a mutua interdependence between firms in oligopoly.
+!
0irms that a oligopoly p differentiate
C!
Kone of the above
0eedbac5< 0irms in the oligopoly may produce either a homogeneous (standard* product or a differentiated product.
$ Bhich of the following firms belong to an oligopolistic mar5et> 'MFF9'T % A! Mc :ona ld's 6! Uellogg's food products
+!
@telc o steel +ll of the above
C!
0eedbac5< +ll of these firms are oligopolists
$ @tatistically" an oligopoly is defined as... 'MFF9'T ) A!
Bhen the largest firms dominate &!C or more of the mar5et. Bhen one firm controls 2!C or more of the mar5et.
6!
+!
Bhen th in an ind or more Bhen & or more firms control the entire mar5et.
C!
0eedbac5< 8y definition choice % is correct.
@uppose that there are six firms in an industry. 0irm + has a $!C mar5et share" firm 8 has a 2!C $ 'MFF9'T mar5et share" 0irm ' has a %!C mar5et share" while firms :" 9 and 0 have mar5et shares of & $&C" 2!C and &C respectively. The Gerfindahl index for this industry is A! $& !! 6! 2! &! +! 2& !! C! $. &! 0eedbac5< To get the G=" add up the s/uares of each mar5et share" and you get 2!&!.
$ + perfectly competitive industry would have a Gerfindahl index of... 'MFF9'T . A! 'los e to ! 6! $!" !!! +! $! ! C! &! !! 0eedbac5< @ince each firm would have almost a regular mar5et share" G= would be very small O almost zero.
$ 'MFF9'T
:avid and his economics
professor were thrown in Lail for insider trading. The Lailer has approached them with an individual offer. =f one confesses and the other doesn't" the one who doesn't confess is let free while the other serves 2! years. =f both confess" each will serve $! years. =f neither confesses" then both will serve $& years. The payoffs are shown in the following chart< :avid '2T K' K2M ' $! ! $& 2! #rofessor $! ! $& 2! A! :avid has an incentive to confess The professor has an incentive to confess +!
6!
C!
8oth men will because this w both of them b
0eedbac5< 8ecause each person's answer depends on that the other says" there is an incentive not to confess. 8ut note that by wor5ing together" :avid and the #rofessor could confess and both be better off" each serving only $! years.
$ @uppose there are two oligopolists + and 8. =f + thin5s that 8 is going to price its product low... 'MFF9'T 8 A!
Then + should price his product high to earn a higher profit.
6!
Then + sh products lo capture so mar5et Then + shouldn't 'hange the price of his product.
+!
C!
$ =f two oligopolistic firms agree to collusion" 'MFF9'T A A!
Mne will a product pr another wi 8oth firms will agree to 5eep the product price low.
6!
+!
C!
8oth firms will a to try and force o firms out of busin
0eedbac5< 'hoice % is correct by definition.
2 Bhat is the main difficulty with collusion> 'MFF9'T ! A!
The oligopolist m have an incentiv cheat and lower price The oligopolist has an incentive to cheat and raise prices. Keither firm can profit
6!
+!
C!
0eedbac5< =f is very difficult to enforce a collusive agreement" thus" choice $ is correct.
2 The 5in5ed demand curve suggests... 'MFF9'T $ A!
6!
+!
C!
0eedbac5< +ll of these statements are correct.
2 Bhich of the following is not true of the 5in5ed demand curve> 'MFF9'T 2 A!
6!
=f applies to collusive oligopoly behaviour +!
=t explains why pr in oligopolistic fir tend to stay 5in5ed
C!
0eedbac5< 'hoice 2 is the correct answer. The 5in5ed demand curve explains non-collusive behaviour.
2 Bhich of the following is not true of cartels> 'MFF9'T % A! They represent a formal agreement among firms to set prices.
6!
They are illegal in 'anada +! They are often hidden from legal authorities M#9' is a common example of a cartel.
C!
0eedbac5< They are not hidden" but 4overt4 or open as the text points out.
2 Bhich of the following is an obstacle to collusion> 'MFF9'T ) A!
9conomic slowd often cause the oligopoly to red price. =t is often difficult to bloc5 the entry of new firms. +!
6!
C!
0eedbac5< +ll three of these statements illustrate obstacles to collusion.
2 Kon-price competition such as advertising is often more attractive to oligopolists than price wars 'MFF9'T & because... A!
6!
0irms may have a difficult time imitating price changes. +!
#rice chan provide m than non-p
C!
0eedbac5< Mnly choice $ is correct. =t is a manor reason why oligopolists prefer non-price competition over price wars.
$'MFF9'T Bhich of the following involve a technological advance> A! =ntel creating its new #entium ) processor 6! Microsoft comes out with a new version of windows. Genry 0ord develops the assembly line in $A2!
+!
C!
0eedbac5< 9ach of these examples shows the development of new and better goods.
2'MFF9'T +ccording to economists" technological advance occurs over a period of time called... A! The short run The long run The very long run The very short run
6!
+!
C!
%'MFF9'T Bhat is the main difference between innovation and invention> A!
6!
=nnovations can be patented" but inventions cannot. +!
C!
They are both the same in meaning
0eedbac5< 'hoice $ is correct by definition.
)'MFF9'T
@uppose that one pharmaceutical company creates a new drug that helps combat +=:@" and other companies copy the drug and pass it on to consumers. This is an example of... A! #rocess innovat
6!
Kegativ e externali ties
+! :iff usio n C! Kone of the other choices.
&'MFF9'T Bhich of the following is true of F Y :> A!
=t is an 4um that include innovation a
6!
'anada's F Y : expenditure is a larg percentage of its ?:#. +!
C!
0eedbac5< 'hoice $ is correct but choice 2 is incorrect. @ince 'anada's F Y : expenditure is a small percentage of its ?:#. 'hoice % should read 4not a leading spender4.
.'MFF9'T 'ompanies which focus on creating and introducing a new product are called A! 'ongl omera tes Mon opoli es
6!
+! @tar t-
ups C! 9stablish ed compani es
0eedbac5< 8y definition choice % is correct.
'MFF9'T
Mnly a small percentage of government FY : spending is allocated to basic scientific research since... A! The funding is not readily available 6!
@cientific pri cannot be imm applied to com uses ;niversity scientists and innovators rarely wor5 together.
+!
C!
0eedbac5< 'hoice 2 is correct. Gowever" recently scientists have found that more of their wor5 can have commercial uses.
8'MFF9'T Bhich of the following is an example of an entrepreneur> A! 8ill ?ate s 6! Genr y 0ord +! :ave Thomas O founder of Bendy's +ll of the other
C!
choices. 0eedbac5< +ll % of these choices are correct. @ince they are innovators and ris5-ta5ers who have combined resources to produce goods and services.
A'MFF9'T
+ technology firm is considering spending an extra $& million on F Y : to product a new product. =t will continue to spend funds on F Y : until A!
6!
The marginal investing in F exceeds the m benefit.
+!
The margina investing in e/uals the m
C!
0eedbac5< +s in basic economics" a firm will continue to increase its F Y : spending until M8 I M'.
$ :eciding how much to spend on F Y : can be tric5y since... 'MFF9'T ! A!
The marginal costs F Y : spending ar not always apparen
6!
The marginal be are realized in f and are often un =t is often difficult for a firm to get financing.
+!
C!
=nterest rates are often too high
0eedbac5< 'hoice 2 is correct. The expected benefits will be realized in the future long after the product has been purchased. Thus" there is some ris5 attached.
$$'MFF9'T Bhich of the following is not a common method of financing FY : activities> A! 8o nds 6! +! 8an5 loans ,entur e capital
C! :ivi dend s 0eedbac5< 'hoice ) is not a common method of financing since they are given out to shareholders while retained earnings are used to finance F Y :.
$2'MFF9'T
@uppose that firm 6 faces a constant marginal cost of .C for its borrowing. =ts expected rate of return curve in millions is< F Y : 9FF C $& $! %! 8 )& . .! ) & 2 =n this case" firm 6 will spend RRRR on F Y :. A! $$& milli on $%! milli on $)& milli on $.! milli
6!
+!
C!
0eedbac5< Mptimal amount of F Y : spending occurs where the marginal cost of borrowing Lust e/uals the expected rate of return. This occurs where r I = I .C spending I $)& million.
$ =f at some level of F Y : spending" r N i" then... 'MFF9'T % A! The company would expand F Y : spending until r Ii The company would contract F Y : spending until r I i +!
6!
The company w continue spendi Y : at the same
C!
0eedbac5< 'hoice $ is correct. =f r N i" the expected rate of return exceeds the marginal borrowing (the interest rate*. Thus" a firm should expand its F Y : spending as M8 N M'. The firm should 5eep spending until r I i.
$ The expected rate of return curve is negatively sloped because... 'MFF9'T ) A!
+s i falls" it becom less attractive for firms to borrow money. 6!
+!
C!
'hoices 2 and % are correct.
0eedbac5< The text explains that choices 2 and % are correct.
$ + decrease in the interest rate (i*" 'MFF9'T & A! Bill lower the marginal cost of F Y : spending Bill raise the marginal cost of F Y : spending Bill increase the marginal benefit of F Y : spending Bill lower the marginal benefit of F Y : spending.
6!
+!
C!
0eedbac5< +s i decreases" borrowing costs fall" so the marginal cost of expanding F Y : spending falls as well.
$ =n the model 4optimal F Y : expenditures4 the opportunity cost of expanding F Y : spending 'MFF9'T . is... A! The expected rate of return on the proLect underta5en. The interest rate given up on the funds used. +! #rofits must be given up now in exchange for the future.
6!
C!
0eedbac5< 'hoice 2 is correct. +s i increases" the opportunity cost of F Y : spending increases. More interest must be forgiven on the money spent.
'MFF9'T
=f a new product is introduced into the mar5et A!
'onsume decision o the produ 6!
+!
C!
0eedbac5< 'hoice ) is correct. Bhen deciding whether to purchase the new product" consumers will evaluate both the marginal utility they desire and its price.
$ #rocess innovation will... 'MFF9'T 8 A! =ncrease total product and reduce average total cost. =ncrease both total product and average total cost. :ecrease total product and increase average total cost. :ecrease both total product and average total cost.
6!
+!
C!
0eedbac5< 'hoice $ is correct as explained in the text.
$ Bhat incentive is there for firms to first produce a good" in spite of the higher expenses and ris5s 'MFF9'T A of innovation>
A!
8y being f get patents protect the imitation. 6!
+!
C!
0eedbac5< 9ach of these reasons acts as an incentive.
2 Bhich of the following mar5et structures has the strongest incentive to under ta5e F and : 'MFF9'T ! spending> A! #ure compet ition 6! Monopoli stic competiti on
+! Mlig opol y C! #ure mono poly
0eedbac5< 'hoice % has the most incentive to engage in F and : spending.
2 +ccording to the inverted-u theory of F Y : expenditures" 'MFF9'T $ A!
6!
+!
C!
0eedbac5< 'hoice % is shown to be correct in the text.
8ob 'anuc5 is an avid tennis player who li5es to play at the local tennis club. 8ob is willing to pay $2& for the first hour of tennis" $2! for the second hour" $$& for the third hour" $$! for the 2 'MFF9'T fourth hour and nothing ($!* for the fifth hour (he is to tired to play anymoreZ* =f the tennis club 2 charges a flat rate of $$22hour" what is the total consumer surplus realized for four hours of tennis> A! $$ ! 6! $$ % +! $2 $ C! $2 ) 0eedbac5< Total consumers' surplus< I ($2& - $$2* 1 ($2! - $$2* 1 ($$& - $$2* 1 $! 1 $! I$2)
2%'MFF9'T
The demand and supply schedule for 'anadian flats in a small city are shown below (in thousands*< # 3s 3d
%! 2& 2! $& $! &
$! 8 . ) 2 $
$ 2 % ) & .
=f the mar5et price is $$&" total producer surplus is A$ ! & 6$ ! 8 +! $$ & C! $2 & 0eedbac5< @ince the supply curve I total marginal cost" then total surplus I ($$& - $&* 1 ($$& - $$!* I $$&
2 Bhich of the following is true if the price in the previous /uestion were set at # I $2! 'MFF9'T ) A! 8oth consumer's and producer's surplus would be reduced. + dead-weight loss would occur for society. +!
6!
C!
0eedbac5< +ll of these are true.
The #rinciples of !icroeconomics 1 of 11 #ractice Dinal 1xam 6 A1"7/+5 1 Ans%ers 5amePPPPPPPPPPPPPPPPPPPPPPPPPPPPPP
Dramingham 7tate College Department of 1conomics and Business #rinciples of !icroeconomics 7ection D #ractice Dinal 1xam S 7pring 244* A1"7/+5 1 @/T; A57@1"7
This exam provides 2uestions that are representative of those contained on your exam. This test should in no %ay be considered a facsimile of your exam. All topics- problems- 'ey %ordsand class discussion are fair game for the exam %hether or not they are contained on this practice exam. 66666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666 Directions: M #rovide the best ans%er to the follo%ing: M 2( !ultiple Choice Nuestions each %orth 0 points for a total of 244 points. M Lou %ill be given 114 minutes to complete the exam. M /f you finish early- you may 2uietly turn in your exam and leave. M The exam is closed boo' and closed note- please place everything other than your calcu6 lator and %riting tools at the front of the class. M Lou may not share a calculator. 666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666666 !ultiple Choice: /dentify the letter of the choice that best completes the statement or ans%ers the 2uestion. PPPP 1a. The %ord economy comes from the Eree' %ord for a. Cenvironment.C b. Cone %ho manages a household.C c. Cone %ho participates in a mar'et.C d. Cconservation.C
A57: B Cone %ho manages a household.C The #rinciples of !icroeconomics 2 of 11 #ractice Dinal 1xam 6 A1"7/+5 1 Ans%ers PPPP 1b. Trade can benefit a family a. by allo%ing the family to buy a greater variety of goods and services at a lo%er cost. b. by allo%ing each person to speciali,e in the activities he or she does best. c. only if the family is not in economic competition %ith other families. d. All of the above are correct. e. Both a and b are correct. A57: 1 Both a and b are correct. PPPP 1c. A budget deficit a. occurs %hen government receipts are less than spending. b. occurs %hen government spending is less than receipts. c. occurs %hen government receipts are e2ual to spending. d. is the accumulation of years of government overspending. A57: A occurs %hen government receipts are less than spending. PPPP 2. Total revenue e2uals a. total output multiplied by price per unit of output. b. total output divided by profit. c. 8total output multiplied by sales price9 6 inventory surplus. d. 8total output multiplied by sales price9 6 inventory shortage. A57: A total output multiplied by price per unit of output. PPPP . @hen adding another unit of labor leads to an increase in output that is smaller than increases in output that resulted from adding previous units of labor- %e have the property of a. diminishing labor. b. diminishing output. c. diminishing marginal product. d. negative marginal product. A57: C diminishing marginal product. The #rinciples of !icroeconomics 1xam 6 A1"7/+5 1 Ans%ers of 11 #ractice Dinal
PPPP &. Assume that a given firm experiences decreasing marginal product of labor %ith the addition of each %or'er regardless of the current output level: average fixed cost %ill be a. al%ays rising. b. al%ays falling. c. F6shaped. d. constant. A57: B al%ays falling. PPPP (. 1conomies of scale occur %hen a. long6run average total costs rise as output increases. b. long6run average total costs fall as output increases. c. average fixed costs are falling. d. average fixed costs are constant. A57: B long6run average total costs fall as output increases. PPPP *. @hen a firm in a competitive mar'et receives )(44 in total revenue- it has a marginal revenue of )14. @hat is the average revenue- and ho% many units %ere sold< a. )( and 144 b. )14 and (4 c. )14 and 144 d. The ans%er cannot be determined from the information given. A57: B )14 and (4 PPPP *. /f marginal cost exceeds marginal revenue- the firm a. is most li'ely to be at a profit6maximi,ing level of output. b. should increase the level of production to maximi,e its profit. c. must be experiencing losses. d. may still be earning a profit. A5 7: D may still be earning a profit. The #rinciples of !icroeconomics & of 11 #ractice Dinal 1xam 6 A1"7/+5 1 Ans%ers PPPP .. As part of an estate settlement !ary received )1 million. 7he decided to use the money to purchase a
small business in Any%here- F7A. /f !ary %ould have invested the )1 million in a ris'6free bond fund she could have made )144-444 each year. 7he also 2uit her :ob %ith ?uc'y.Com /nc. to devote all of her time to her ne% business> her salary at ?uc'y.Com /nc. %as ).(-444 per year.
At the end of the first year of operating her ne% business- !ary$s accountant reported an accounting profit of )1(4-444. @hat %as !ary$s economic profit< a. )2(-444 loss b. )(4-444 loss c. )2(-444 profit d. )1(4-444 profit A57: A )2(-444 loss PPP 0. @hich of the follo%ing statements is correct< a. A competitive firm is a price ma'er and a monopoly is a price ta'er. b. A competitive firm is a price ta'er and a monopoly is a price ma'er. c. Both competitive firms and monopolies are price ta'ers. d. Both competitive firms and monopolies are price ma'ers. A57: B A competitive firm is a price ta'er and a monopoly is a price ma'er. PPPP 3. Competitive firms have a. do%n%ard6sloping demand curves and they can sell as much output as they desire at the mar'et price. b. do%n%ard6sloping demand curves and they can sell only a limited 2uantity of output at each price. c. hori,ontal demand curves and they can sell as much output as they desire at the mar'et price. d. hori,ontal demand curves and they can sell only a limited 2uantity of output at each price. A57: C hori,ontal demand curves and they can sell as much output as they desire at the mar'et price. The #rinciples of !icroeconomics ( of 11 #ractice Dinal 1xam 6 A1"7/+5 1 Ans%ers Digure 1
PPPP 14. "efer to Digure 1. The monopolist$s maximum profit a. is )044. b. is )1-444. c. is )1-2(4. d. cannot be determined from the diagram. A57: D cannot be determined from the diagram. PPPP 11. /f a monopolist is able to perfectly price discriminatea. consumer surplus is al%ays increased. b. total surplus is al%ays decreased. c. consumer surplus and dead%eight losses are transformed into monopoly profits. d. the price effect dominates the output effect on monopoly revenue. A57: C consumer surplus and dead%eight losses are transformed into monopoly profits. PPPP 12. @hich of the follo%ing may eliminate some or all of the inefficiency that results from monopoly pricing< a. The government can regulate the monopoly. b. The monopoly can be prohibited from price discriminating. c. The monopoly can be forced to operate at a point %here its marginal revenue is e2ual to its marginal cost. d. All of the above are correct. The #rinciples of !icroeconomics * of 11 #ractice Dinal 1xam 6 A1"7/+5 1 Ans%ers A57: A The government can regulate the monopoly. PPPP 1 . /n a typical cartel agreement- the cartel maximi,es profit %hen it a. behaves as a monopolist. b. behaves as a duopolist. c. is flexible in enforcing production targets. d. behaves as a perfectly competitive firm. A57: A behaves as a monopolist. Fse the follo%ing information to ans%er 2uestion 1&. T%o cigarette manufacturers 8Dirm A and
Dirm B9 are faced %ith la%suits from states to recover the health care related expenses associated %ith cigarette smo'ing. Both cigarette firms have evidence that indicates that cigarette smo'e causes lung cancer 8and other related illness9. 7tate prosecutors do not have access to the same data used by cigarette manufacturers and thus %ill have difficulty recovering full costs %ithout the help of at least one cigarette firm study. 1ach firm has been presented %ith an opportunity to lo%er their liability in the suit if they cooperate %ith attorneys representing the states. Table 1 Dirm A Concede that cigarette smo'e causes lung cancer Argue that there is no evidence that smo'e causes cancer Dirm B Concede that cigarette smo'e causes lung cancer
Dirm A profit = )S24 b Dirm B profit = )S1( b
Dirm A profit = )S(4 b Dirm B profit = )S( b Argue that there is no evidence that smo'e causes can6 cer
Dirm A profit = )S( b
Dirm B profit = )S(4 b
Dirm A profit = )S14 b Dirm B profit = )S14 b PPPP 1&. "efer to Table 1. #ursuing its o%n best interests- Dirm A %ill concede that cigarette smo'e causes lung cancer a. only if Dirm B concedes that cigarette smo'e causes lung cancer. b. only if Dirm B does not concede that cigarette smo'e causes lung cancer. c. regardless of %hether Dirm B concedes that cigarette smo'e causes lung cancer. d. none of the above> in pursuing its o%n best interests- Dirm A %ill in no case concede that cigarette smo'e causes lung cancer. A57: C regardless of %hether Dirm B concedes that cigarette smo'e causes lung cancer. The #rinciples of !icroeconomics . of 11 #ractice Dinal 1xam 6 A1"7/+5 1 Ans%ers PPPP 1(. Assume that #each Computers has entered into a resale price maintenance agreement %ith Computer 7uper 7tores /nc. 8C77 /nc.9 but not %ith Compu!art. /n this casea. The %holesale price of #each computers %ill be different for C77 /nc. than it is for Compu!art. b. #each computers %ill never increase profits by having a resale price maintenance agreement %ith all retail outlets that sell its products. c. Compu!art %ill benefit from customers %ho go to C77 /nc. for information about different computers. d. C77 /nc. %ill sell #each computers at a lo%er price than Compu!art. A57: C Compu!art %ill benefit from customers %ho go to C77 /nc. for information about different computers. Digure 2
PPPP 1*. "efer to Digure 2. The firm depicted in panel b faces a hori,ontal demand curve. /f panel b depicts a profit6maximi,ing firm-
a. it could be operating in either a perfectly competitive mar'et or in a monopolistically competitive mar'et. b. it %ould not have excess capacity in its production as long as it is earning ,ero economic profit. c. it is able to choose the price at %hich it sells its product. d. All of the above are correct. A57: B it %ould not have excess capacity in its production as long as it is earning ,ero economic profit. The #rinciples of !icroeconomics 0 of 11 #ractice Dinal 1xam 6 A1"7/+5 1 Ans%ers PPPP 1.. 7ince a firm in a monopolistically competitive mar'et faces a a. do%n%ard6sloping demand curve- it %ill al%ays operate %ith excess capacity. b. do%n%ard6sloping demand curve- it %ill al%ays operate at efficient scale. c. perfectly elastic demand curve- it %ill al%ays operate %ith excess capacity. d. perfectly inelastic demand curve- it %ill al%ays operate at efficient scale. A57: A do%n%ard6sloping demand curve- it %ill al%ays operate %ith excess capacity. PPPP 10a. Critics of vacation advertisements that depict CbeautifulC human bodies on sun6 drenched beaches as the primary focus of the message are li'ely to claim that the purpose of the advertisement is to a. provide helpful information about a tourist destination. b. manipulate people$s tastes through psychological messages. c. inflame carnal desire. d. encourage sun6bathing in general. A57: B manipulate people$s tastes through psychological messages. PPPP 10b. +n a vacation to Cancun- !exico- you find yourself eating every meal at the local !cDonald$s rather than having a hamburger from one of the street vendors. Lour traveling companion claims that you are irrational- since you never eat !cDonald$s hamburgers %hen you are home and !cDonald$s hamburgers cost more than those prepared and sold by Cancun$s street vendors. An economist %ould most li'ely explain your behavior by suggesting that
a. your behavior is rational- but your friend$s behavior is clearly irrational. b. you are clearly irrational. c. the !cDonald$s brand name guarantees consistent 2uality. d. the advertising by !cDonalds in Cancun is more persuasive than the advertising by !cDonalds in your home to%n. A57: C the !cDonald$s brand name guarantees consistent 2uality. The #rinciples of !icroeconomics 3 of 11 #ractice Dinal 1xam 6 A1"7/+5 1 Ans%ers Table 2 5umber of @or'ers +utput !arginal #roduct of ?abor Aalue of !arginal #roduct of ?abor @age !arginal6 #rofit 4 4 )1-444 )(44 )(44
1 144 2
04 ) 044 )(44 *4 )(44 )144 ) &44 )(44 )(44
& 204 ( 24
PPPP 13. "efer to Table 2. @hat is the marginal profit of the fourth %or'er< a. )&44 b. )244 c. )4 d. )6144 A57: D )6144 PPPP 24. The opportunity cost of an hour of leisure is
a. *4 minutes. b. an hour of sleep. c. an hour$s %orth of %ear and tear on your TA- exercise e2uipment- etc. d. your hourly %age. A57: D your hourly %age. The #rinciples of !icroeconomics 14 of 11 #ractice Dinal 1xam 6 A1"7/+5 1 Ans%ers Digure
PPPP 21. "efer to Digure . Assume @1 = )24 and @2 = )10 and the mar'et is al%ays in e2uilibrium. Then the shift of the labor supply curve from 71 to 72 a. increases the value of the marginal product of labor by )2. b. decreases the value of the marginal product of labor by )2. c. decreases the value of the marginal product of labor by more than )2. d. does not change the value of the marginal product of labor. A57: B decreases the value of the marginal product of labor by )2. PPPP 22. Because of diminishing returns- a factor in abundant supply has a. a high marginal product and a high rental price. b. a high marginal product and a lo% rental price. c. a lo% marginal product and a high rental price. d. a lo% marginal product and a lo% rental price. A57: D a lo% marginal product and a lo% rental price. PPPP 2 . A recent la% school graduate is considering t%o offers to practice la%- one in California and one in Alabama. "umor has it that it is very difficult to pass the Alabama bar exam and meet other certification re2uirements re2uired by the Alabama Bar Association. Assuming all other things e2ualthe attorney %ould expect a. to be unable to predict the %age difference bet%een Alabama and California. b. to ma'e a higher %age in California. c. to ma'e a higher %age in Alabama.
d. %ages in California and Alabama to be identical. A57: C to ma'e a higher %age in Alabama. PPPP 2&. @or'ers %ith more human capital on average earn substantially higher pay than %or'ers %ith less human capital in a. most countries- but not in the Fnited 7tates. b. the Fnited 7tates- but not in most other countries. c. the Fnited 7tates and in most other countries. d. 5one of the above are correct> the evidence fails to indicate that human capital is a significant factor in earnings any%here in the %orld. A57: C the Fnited 7tates and in most other countries. PPPP 2(. /f employers are profit6maximi,ers- then a. competition %ill al%ays eventually eliminate employment discrimination. b. employment discrimination may persist if consumers discriminate. c. employment discrimination %ill persist because it is al%ays profitable. d. compensating differentials %ill not exist. A57: B employment discrimination may persist if consumers discriminate.
Nuestions that still need thought attention are 11 8the ne% graph in the ans%er 'ey is not sho%ing u9- 21 8the ans%er is in yello%9
Fse the follo%ing to ans%er 2uestion 1.
Digure: Demand and 7upply of Easoline
1. 8Digure: Demand and 7upply of Easoline9 The supply curve shifts from 7 1 to 7 2 . @hich statement is most correct< A9 at the old e2uilibrium price of )2.(4- there %ill be pressure for the price to fall. B9 the ne% price %ill be )2.44. C9 the ne% 2uantity %ill be 44. D9 all of the above are true.
A: A9 is correct- B and C are not
Fse the follo%ing to ans%er 2uestion 2.
Digure: Aggregate Demand for 7hirts
2. 8Digure: Demand for 7hirts9 The price elasticity of demand for the segment BC using the midpoint method is: A9 greater than . B9 C9 . . . . 8absolute value9.
D9 4.
C: the price elasticity of demand =8 change in demandJaverage demand9J8change in priceJaverage price9 = 8144J1(49 J814J&(9 =&(J1(= The ans%er from my point of vie% is C. The G@ says- the price elasticity of demand S the percent change in the 2uantity demanded divided by the percent change in the price.
. Assume you consume t%o commodities- pollution- %hich is a bad- and other stuff. Do your indifference curves for pollution and other stuff loo' the same as the indifference curves discussed in Grugman and @ells< A9 Les B9 5o C9 !aybe
B: /f the other stuff are goods then the indifference curves are up%ard sloping- so not li'e in G@. /f other stuff is bad- so t%o bads- the indifference curves are do%n%ard sloping but bend the opposite %ay from those in G@.
Fse the follo%ing figure to ans%er 2uestions &6(.
Digure: A #erfectly Competitive Dirm in 7hort "un
&. 8Digure: A #erfectly Competitive Dirm in the 7hort "un9 At a price of E- the firm$s total cost is represented by the area PPPPP- and itTs profits are PPPPPPPPP. A9 DE?G- negative. B9 DE?G- positive. C9 4DGD- negative. D9 4DGD- positive.
D: Total costs are average costs at 2uantity D- D multiplied by D- so +DGD. Total revenues are greater- +E?D- so profits are positive.
(. 8Digure: A #erfectly Competitive Dirm in the 7hort "un9 The price at %hich profits are
,ero is: A9 E. B9 D. C9 1. D9 5.
C: at a price of 1 at the profit maximi,ing 2uantity- price e2uals average costs
*. The slope of a8n9 PPPPPPP curve sho%s the rate at %hich t%o goods can be exchanged PPPPPPP the consumer$s PPPPPPPP. A9 marginal utility> %hich increases> marginal utility B9 indifference> %ithout affecting> total utility C9 iso6utility> %ithout affecting> budget D9 indifference> %ithout affecting> budget
B: The indifference curve has nothing to do %ith the budget- B is correct- and A ma'es no sense to me.
.. @hich of the follo%ing is not true for indifference curves of ordinary goods< A9 They never cross. B9 They slope do%n%ard. C9 They are convex from the origin. D9 /ndifference curves farther a%ay from the origin have lo%er levels of utility.
D: 7ince goods are goods- as one increases the amount of both goods 8moves to the right9one moves to a more preferred bundle- one %ith higher utility- not lo%er utility.
0. /f the price of a coo'ie is )1 and the price of a bro%nie is )2- the relative price of coo'ies in terms of bro%nies is:
A9 4.(4. B9 1.44. C9 2.44. D9 undefined.
A: The 2uestion as's ho% many bro%nies one has to give up to get one more coo'ie. +ne has to give up U of a bro%nie. 3. /f the marginal rate of substitution of coo'ies in terms of bro%nies e2uals the relative price of coo'ies in terms of bro%nies- the consumer: A9 is maximi,ing her utility B9 should consume more coo'ies and fe%er bro%nies to maximi,e total utility. C9 should consume fe%er coo'ies and more bro%nies to maximi,e total utility. D9 may or may not be maximi,ing total utility.
D: since the 2uestion says nothing about budget exhaustion- %e do not 'no% %hether the respondent is maximi,ing utility.
14. /f Boseph chooses a combination of apples and oranges along his budget line %here the marginal rate of substitution of apples in place of oranges is 2 and the price of an apple is )4.(4 and the price of an orange is )4.(4- then Boseph: A9 is maximi,ing total utility. B9 should consume more apples and fe%er oranges to maximi,e total utility. C9 should consume fe%er apples and more oranges to maximi,e total utility. D9 may or may not be maximi,ing total utility.
B: Boe %ould give up t%o oranges to get one more apple 8if / interpret correctly9- but only has to give up one orange to get another apple- so should consume more apples and fe%er oranges. Drom Luchen66 The !"78apple to orange9 is 2- larger than the price ratio = 1. 7o %e need to decrease the !F8Apple9 and increase
!F8orange9. 7ince utility function is diminishing return to scale- %e %ill consume more apples to get its !F do%n.
Fse the follo%ing to ans%er 2uestions 11612.
Digure: /ndifference !ap for 7oda and #i,,a
The figure sho%s three of +%en$s indifference curves for pi,,a and soda per %ee'. +%en has )104 per %ee' to spend on the t%o goods> the price of a pi,,a is )24 and the price of a soda is )1.(4.
11. 8Digure: /ndifference !ap for 7oda and #i,,a9 /f +%en is consuming 1.( pi,,as and 144 sodas- %hich of the follo%ing is true< A9 +%en is maximi,ing his total utilitygiven his budget line. B9 +%en should consume more pi,,a and less soda to maximi,e his total utilitygiven his budget line. C9 +%en should consume less pi,,a and more soda to maximi,e his total utilitygiven his budget line. D9 +%en should consume more pi,,a and more soda to maximi,e his total utilitygiven his budget line.
B: ;is budget line is 7=124 S 1 .
#> so if he spends all of his money on soda he can
consume 124 cans> if he spends all of his money on pi,,a he can by 3 pi,,a. 7o at current bundle he is spending )1(4 on soda and 4 on pi,,a- so is on his budget lines. The 2uestion is %hether the slope of his budget line e2uals the slope of his indifference curve at this point.
Dra% in the budget line on the above graph. The slope of the budget line is 61 . ;ere is the graph %ith the budget line dra%n in. Lou can see that it crosses the first indifference curve at the point given in the 2uestion and is tangent to the second indifference curve at * pi,,as and &4 sodas- %hich sho%s he must increase pi,,a consumption to maximi,e utility.
12. 8Digure: /ndifference !ap for 7oda and #i,,a9 @hat is +%en$s marginal rate of substitution of pi,,a in place of soda %hen he is consuming his optimal consumption bundle< A9 4..( B9 1.( C9 1 . D9 24
/ %ould have said *4. To get another .( sodas he %ill give up soda- so *4< / am terribly confused her. 7lope of the budget line 8and indiff curve at that point9 is 124J3=6 1 .
1 . @hich of the follo%ing statements is true about Average Dixed Cost 8ADC9< A9 ADC is al%ays less than Average Aariable Cost B9 ADC is al%ays less than !arginal Cost C9 ADC is al%ays decreasing D9 ADC is constant across all 2uantities of output
C: Dividing a positive constant 8fixed cost9 by larger and larger numbers %ill ma'e the ratio decline.
1&. Assume an increase in the tax that oil and gas producers pay to the state of Colorado
%hen they extract gas from the state of Colorado. @ill the tax translate to higher gasoline and fuel prices for consumers< A9 Les- because demand for gas is inelastic in Colorado. B9 Les- because demand for gas is elastic every%here. C9 5o- because the price of gas is determined by %orld demand and supply- and ho% much is supplied by Colorado is too small of the total to affect the price. D9 5o- because Colorado supply is inelastic 19 Cannot determine because %e donTt 'no% the elasticity of demand.
C:
Fse the follo%ing figure to ans%er 2uestions 1(61*. Digure: /ndifference !ap for Eoods K and L
1(. Digure 8/ndifference !ap for goods K and L9 The indifference map sho%n above sho%s the consumerTs preferences for: A9 T%o goods B9 Three goods C9 +ne good and one bad D9 T%o bads or t%o goods
A: if they %ere a good and a bad the indifference curves %ould be up%ard sloping. /f both bads they %ould be do%n%ard sloping but curve the other %ay.
1*. 8Digure: /ndifference !ap for goods K and L9 @hich of the follo%ing statements about the points on the graph above is not true< A9 E is feasible but not optimal
B9 / is feasible and optimal C9 ; is optimal and feasible D9 B is not feasible
C9 ; does not exhaust the budget constraint- so it ot optimal.
1.. !arginal revenue of a profit6maximi,ing firm: A9 is the slope of the average revenue curve. B9 e2uals the mar'et price in perfect competition. C9 is the change in 2uantity divided by the change in total revenue. D9 is the price divided by the changes in 2uantity.
B: a competitive firm cans sell as much as it %ant at p- so p is its mr.
10. #rice elasticity of demand measures the responsiveness of the change in: A9 2uantity demanded to a change in price. B9 price to a change in 2uantity demanded. C9 slope of the demand curve to a change in price. D9 slope of the demand curve to a change in 2uantity demanded.
A: in percentage terms.
13. Assume that Bra,il gives up
automobiles for each ton of coffee it produces- %hile
#eru gives up . automobiles for each ton of coffee it produces. A9 Bra,il has a comparative advantage in automobile production and should speciali,e in coffee. B9 Bra,il has a comparative advantage in coffee production and should speciali,e in the production of automobiles.
C9 Bra,il has a comparative advantage in coffee production and should speciali,e in coffee production. D9 Bra,il has a comparative advantage in automobile production and should speciali,e in automobile production.
C: to produce another ton of coffee- Bra,il gives up
cars- #eru gives up ..
24. "ent controls set a price ceiling belo% the e2uilibrium price. @hich is the best explanation of %hat %ill happen< A9 2uantity supplied exceeds the 2uantity demanded. B9 2uantity demanded exceeds the 2uantity supplied. C9 a surplus of rental units %ill result. D9 poor people %ill be helped. B: B is correct. A and C are incorrect. @hile some poor people might be helped they %ill not all be helped.
21. True or Dalse: As a general rule- a perfectly competitive firm should not produce %here !C V ATC. A9 True B9 Dalse C9 /t depends on the fixed costs D9 /t depends on average fixed costs
Dalse: /t should produce %here !CVATC. #rices are maximi,ed %here #=!C. /f at this point !CWATC- the firm %ould be losing money.
22. Assume that a2uarium fish and dog biscuits are the only t%o goods that @ilma consumes S %hat a diet. ;o% %ould @ilmaTs indifference curves change if she %o'e up
one morning having developed a stronger preference for dog biscuits< Assume that dog biscuits are on the x6axis and goldfish are on the y6axis. A9 ;er indifference curves %ould become less steep B9 ;er indifference curves %ould not change C9 ;er indifference curves %ould become steeper D9 ;er indifference curves %ill bend bac'%ards
C: Consider a point on the original indifference curve- and ho% many more biscuits she %ould need to give up a fish. After her preference for biscuits increases she %ould need fe%er biscuits to ma'e up for the lost fish> her indifference curve is steeper.
2 . @hich of the follo%ing statements is true about the short run<
A9 The firm can go out of business B9 The firm can produce ,ero output C9 5one of the above D9 A R B
B: The firm can produce ,ero output in the short run- but they cannot rid of their fixed costs- so must stay in business- 'eep paying the bills.
2&. @hen the benefit to you of doing something are lo%er than the benefits to societyfrom societyTs perspective A9 you do too much of it B9 you do too little of it C9 you donTt do it at all D9 you do :ust the right amount B: Lou do too little of it. At your e2uilibrium level of consumption the marginal benefits to society are greater than the marginal costs to society.
2(. @hy are Dord- E! and Chrysler in more precarious positions than the foreign automa'ers operating in the F.7.<
A9 ;igher fixed costs B9 ;igher variable costs C9 Both of the above
C: They have higher fixed costs in terms of stuff li'e obligations to their retired %or'ers. They have higher variables costs because ho% many hours there %or'ers %or' can be varied in the 7" and the big three face higher per6hour labor costs 8union determined9.
2*. Lour preferences are determined by PPPPPPPPPP.
A9 !ar'et prices B9 Lour constraints C9 !ar'et supply D9 +nly %hat is in your head D:
2.. ;o% does one indifference curve represent a change in utility< A9 There is no change in utility bet%een indifference curves B9 The utility ta'en a%ay by giving up one unit of a good must be offset by the gain in utility from ac2uiring some amount of the other good. C9 A single indifference curve represents t%o levels of utility D9 The utility ta'en a%ay by giving up one unit of a good must be offset by the gain in utility from giving up one unit of the other good.
B: along the indifference curve utility is a constant.
20. @hich of the follo%ing e2uations for indifference curves puts more %eight on sporting goods 8s9 than cleaning supplies 8c9< A9 F8s-c9=s .0 c .&
B9 F8s-c9=s 1.* c .1
C9 F8s-c9=s .. c .(
D9 F8s-c9=s .* c .*
A: loo' at the ratio of the t%o coefficients.
23. ?ars and /ngrid have the same preferences for Bibles and Bose Cuervo Eold Te2uila. ?ars consumes Bibles and & bottles of te2uila and /ngrid consumes Bibles and *
bottles of te2uila. @hich of the follo%ing must be true< A9 /ngrid and ?ars face different prices
B9 /ngrid and ?ars have different levels of income C9 /ngrid li'es te2uila more than ?ars D9 A or B or both 19 A- B or C could be true D: /t could be because they have different incomes or because they face different pricesor both. The 2uestion said they have the same preferences- so it cannot be that.
4. @hich of the follo%ing represents a condition that needs to be met for efficiency to be achieved in a mar'et economy< A9 @ell6defined property rights B9 1xcess mar'et po%er C9 5egative externalities D9 #erfect e2uity 19 All of the above
A: D has nothing to do %ith efficiency. B and C are reasons that efficiency %ould not be achieved.
1. @hich of the follo%ing are examples of external effects< A9 / smo'e a cigarette you are sub:ected to second6hand smo'e B9 / eat pi,,a for lunch and am happy because / li'e pi,,a C9 Lou put 7no% @hite and the 7even D%arfs figurines in your yard and ma'e your neighbors happy %hen they %al' by. D9 ARC 19 ARB
D: A is a negative external effect- C is a positive external effect. /n B there are no external effects mentioned.
Dalse: many external effects are not efficiently taxes or regulated.
2. 7ince the beginning of the semester: @hy did the price of gas go up< @hy did the price of gas go do%n< A9 Demand gro%th %as outstripping supply gro%th> a %orld%ide recession decreased the demand B9 7upply gro%th %as outstripping demand> a %orld%ide recession decreased the price C9 +#1C %as refusing to produce more oil> ;ugo Chave, decided to produce tons and tons of oil %hen the price %as high D9 +#1C %as pumping more and more oil each month> 7audi Arabia decided to flood the mar'et to punish +#1C for cheating A:
. An increase in the consumer$s income %ill do all of the follo%ing- except: A9 shift the budget line a%ay from the origin. B9 increase the hori,ontal intercept. C9 increase the vertical intercept. D9 change the slope of the budget line. D: relative prices remain the same- so the slope of the budget line does not change.
Fse the follo%ing to ans%er 2uestion &6 (.
Table: Ftility of /ce Cream Cones
Cones 4 1 2 Total utility 4 24
& ( * . ( &( (4 (4 &( (
&. 8Table: Ftility of /ce Cream Cones9 The marginal utility for the second ice cream cone is: A9 (.
B9 1(. C9 14. D9 (.
B: utility increases from 24 to ( %hen you eat the second cone.
(. 8Table: Ftility of /ce Cream Cones9 True or Dalse: /ce cream cones are a good. A9 True B9 Dalse
B: They are neither a good or a bad. They start off as a good- but go bad at high levels of consumption.
*. @hen you do stuff %here the cost to you is less than the cost to societyfrom societyTs perspective A9 you do too little of it B9 you do too much of it C9 you do :ust the right amount D9 you donTt do it at all
B: Lou do too much. At your level of consumption the marginal benefit to society is less than the marginal cost.
.. True or Dalse. There is an efficient amount of each external effect.
A9 True B9 Dalse
0. Consider the Eeorge tattoo example from class. @hich of the follo%ing are necessary conditions for EeorgeTs tattoo consumption to constitute a negative externality mar'et failure< A9 Eeorge doesnTt internali,e the costs his tattoo consumption imposes on society B9 EeorgeTs tattoo consumption directly affects other people 8not through prices9 C9 Eeorge is consuming more tattoos than is efficient D9 EeorgeTs tattoo consumption causes prices to rise 19 A- B- R C
1:
3. Consider the Eeorge tattoo example from class. @hich of the follo%ing- from an economistTs perspective- is the best %ay for the government to entice Eeorge to put fe%er tattoos on himself< A9 The government could pass a la% saying that Eeorge can only have &.2 tattoos 8the efficient amount9 B9 The government could tax Eeorge for each tattoo he has. C9 The government could ban tattoos on Eeorge D9 A R B
D: C %ould leave Eeorge %ith too fe% tattoos from societyTs perspective.
&4. @hat is a #igouvian tax<
A9 A tax that attempts to drive up demand B9 A tax that internali,es the inefficiency associated %ith an external effect
C9 A tax that attempts to address the inefficiency associated %ith price floors D9 A tax on property rights
B: by definition
&1. True or Dalse: There is a cost associated %ith reducing pollution A9 True B9 Dalse
True: if there %as not- %e could get rid of all pollution at ,ero cost- and %ould.
&2. True or Dalse: There is an efficient amount of pollution from societyTs perspective that is greater than ,ero A9 True B9 Dalse
True: it %ould cost too much to eliminate all pollution: you %ould have to stop breathing.
& . Eary ;art- a former 7enator from Colorado and former candidate for the Democratic nomination for #resident- said- X#ollution is a bad that %e must get rid of.Y Lour best response as an economist is A9 !aybe B9 Les C9 5o
5o: there is an efficient amount of pollution
Fse the follo%ing information to ans%er 2uestions &&6&(.
The government gave out 44 tradable pollution permits to a number of firms that produce steel. 1ach permit allo%s the producer to emit 1 ton of pollution per year> if a firm pollutes %ithout a permit- the o%ners are shot. @ithout regulations or permits you produce & tons of pollution per year. /f you reduced your pollution by 1 ton if %ould cost you )144> if you reduced your pollution by 2 tons it %ould cost you a total of ) 44> if you reduced your pollution by tons it %ould cost you a total of )*44> and if your
pollution is reduced by & tons the total cost %ould be )1444.
&&. Then- you are given
tradable permits. Lour neighbor- %hose plant is much older
than yours- offers to pay you )2(4 for each permit you are %illing to sell him. Lou should PPPPPPPPP. A9 7ell him t%o permits and reduce your pollution by three tons B9 7ell him three permits and reduce your pollution by four tons C9 7ell him one permit and reduce your pollution by t%o tons D9 DonTt sell him any of the permits and reduce your pollution by one ton
C: Lou can increase your profits by selling the other guy one permit. This re2uires that you reduce your pollution by t%o permits. Lour costs go up by ) 44 and your revenue goes up by )2(4. 7o you lose )(4 in profits. /f you reduced you pollution by only one unit 8no sales to him9- your profits %ould go do%n by )144. /f you reduced your pollution by units 8selling t%o to him9 your costs %ould increase by )*44 and your revenues
%ould increase by )(44- so your profits %ould go do%n by )144. /f you reduced you pollution by four tons- selling to him. Lou profits %ould decline by )2(4 8).(46)14449.
&(. 5o%- assume you are given ,ero permits. @hich of the follo%ing statements is correct< A9 All of the follo%ing B9 /f the going price of a permit is )144- you should pollute three or four tons
C9 /f the going price of a permit is )244- you should buy one or t%o permits D9 Lou should buy t%o or three permits if the going price of a permit is ) 44
A: if the price of a permit is )144- since it cost )144 to reduce pollution from & to you are indifferent bet%een producing
units-
or & units of pollution 8buying or not buying one
permit9. /f the price of a permit is )244- reduce as long as the cost of reducing is less than )244- so reduce at least one unit 8buy at least one permit9. Lou are indifferent to buying the second permit because you can reduce pollution by a second unit for a cost )244 or pollute it and pay )244 for the permit. /f the going price is ) 44- it is profitable to buy t%o permits- but you are indifferent about buying a third permit. &*. Because they bother other users- the City of Boulder has banned mountain bi'ers from most of the trails in the City of Boulder. True or Dalse: The ban li'ely has achieved the efficient use of our trails< A9 True B9 Dalse
B: the efficient number of bi'ers is li'ely not ,ero.
&.. Consider the EeorgeTs tattoo example from class. Assuming others do not li'e EeorgeTs tattoos- %hich ans%er best describes the vertical distance bet%een the benefit to Eeorge from adding a tattoo to his body- and the benefit to society from Eeorge adding the tattoo A9 The benefit to society from Eeorge adding the tattoo. B9 The %illingness6to6pay of others members to stop the tattoo being added C9 The cost of producing the tattoo. D9 5one of the above
B: the marginal benefit curve for society lies belo% the marginal benefit curve for Eeorge because his tattoos ma'e others %orse off. The vertical distance is their loss- so %hat they %ould pay to get rid of it.
&0. True or Dalse: An externality has occurred if a bunch of people move to Boulder and drive up the cost of housing. A9 True B9 Dalse
Dalse: this is an example of the mar'et %or'ing- not a direct external effect.
&3. +f the follo%ing- choose the best ans%er to the 2uestion: @hat causes mar'et failures< A9 Eovernment price controls B9 The lac' of fairness in the distribution of %ealth C9 !ar'et prices sending the %rong signals D9 A R C
C: Eovernment price controls might cause inefficiency but are not the fault of the mar'etso are not Xmar'etY failures.
(4. True or Dalse: There can be too little pollution from an efficiency point of vie%. A9 True B9 Dalse C9 #robably true D9 #robably false
C: The sense is that %e have under rather than over corrected for the negative external effects from pollution. But it is difficult to say %ith 144H certaintly (1. True or Dalse: Assume that the follo%ing conditions hold: the government enforces property rights- there are no mar'et failures and society approves of ho% %ealth is distributed. Thus- the government should do nothing more 8build no roads- build no
schools- and produce no national defense- nothing9. A9 True B9 Dalse
True the allocation is efficient and the distribution is fair- so there is nothing for the government to do besides enforce property rights.
(2. @hat determines the rate you are %illing to substitute guns for +bama posters A9 !ar'et prices B9 Lour preferences C9 Lour preference and mar'et prices D9 The slopes of your budget line and the slope of you indifference curve. 19 !ore than one of the above.
B: Lour !"7 is only determined by your preferences- not by prices.
( . Candy bars and coo'ies are substitutes. The government puts an excise tax of )1 on candy bars. The burden of the tax falls partly on producers and partly on consumers. ;o% %ill this tax on candy bars affect the demand for coo'ies< A9 Demand for coo'ies %ill increase. B9 Demand for coo'ies %ill decrease. C9 Demand for coo'ies %ill stay the same. D9 /t is impossible to tell from the given information.
A: the price of candy bars goes up increasing the demand for substitutes of candy bars.
Fse the figure to belo% to ans%er 2uestions (&6((.
(&. The concave shape of the #roduction #ossibilities Drontier sho%n above reflects A9 /ncreased opportunity cost B9 Constant returns to scale C9 The ?a% of Diminishing !arginal Ftility D9 The ?a% of Diminishing !arginal Cost
A: As the 2uantity of grain increases- you must give up more and more %ine in order to increase your production of grain by one unit.
((. /n the figure above- point XaY represents: A9 1fficiency in production B9 /nefficiency in production C9 #roduction beyond technological capabilities D9 5ot enough information to tell
B: point XaY is inside the ##D
Fse the information belo% for 2uestions (*6(0.
Boe used to ma'e )&4-444Jyear and rented 1(4 movies to %atch by himself each year. /n 244(- Boe %as given a promotion and his salary %as increased to )(4-444. 7ubse2uentlyBoe rented 4 more movies per year.
(*. @hat is BoeTs income elasticity of demand< 8;int: Fse the midpoint formula9 A9 1.2( B9 1 C9 .010
D9 /t is impossible to tell from the information given.
C: /ncome elasticity of demand is:
H change in 2uantity demanded H change in income
= Z810461(49J1*([J Z8(4-4446&4-4449J&(-444[
(.. @hich is BoeTs price elasticity of demand< 8;int: Fse the midpoint formula9 A9 1.2( B9 1 C9 .0 D9 /t is impossible to tell from the information given.
D: 5o information on prices is given.
(0. Dor Boe- movies are a A9 5ormal good B9 /nferior good C9 Eiffen good D9 ?uxury good
A: demand increased %hen income increased by the elasticity is less than one- so it is a normal good.
Fse the follo%ing figure to ans%er 2uestions (36*1.
Digure: /ndifference !aps of Eoods and Bads /ndifference !ap A
4 1 2
& ( * . 0 3 14 4 2 & * 0 14 K
/ndifference !ap B 4 1 2
& ( * 412 K &
/ndifference !ap C 4 4.2 4.&
4.* 4.0 1 1.2 1.& 1.* 1.0 42&*0 K
(3. 8Digure: /ndifference maps of goods and bads9 +f the maps above- %hich represents indifference curves for t%o bads< A9 !ap A B9 !ap B C9 !ap C D9 !ap A and !ap C
C: !ap A represents one good and one bad. Dor t%o bads the indifference curve must by do%n%ard sloping: to accept more of one bad you had to have less of the other bad. The 2uestion comes do%n to shape. 1xplaining in a %ay beyond the students- the upper level sets have to be convex sets> this is true for C but not for B.
*4. 8Digure: /ndifference maps of goods and bads9 @hich of the follo%ing reasons best explains one reason %hy your ans%er to the 2uestion above is correct< A9 The indifference curves are increasing in utility as you move a%ay from the origin. B9 The indifference curves are do%n%ard sloping- %hich they must be for t%o bads. C9 The indifference curves are do%n%ard6sloping and increasing in utility as one moves to%ards the origin.
D9 @ith t%o bad- the indifference curves must have a positive slope.
C: see my ans%er to (3
*1. 8Digure: /ndifference maps of goods and bads9 +f the maps above- %hich represents indifference curves for one bad and one good< A9 !ap A B9 !ap B C9 !ap C D9 !aps A and !ap C
A: if you get more of the good commodity to hold utility constant you need to get more of the bad commodity.
*2. True or Dalse: !yrna can produce an efficient number of tattoos for herself %ithout it being efficient from a societal perspective. A9 True B9 Dalse
True: /f !yrnaTs tattoos affect other people and she does not have the correct incentive to ta'e this into account- she %ill have too many or too fe% from societyTs perspective.
Digure: 1llenTs indifference curve map for bananas and peaches.
Ans%er 2uestions * 6*( based on 1llenTs indifference curve map for bananas and peaches given above. * . 8Digure: 1llenTs indifference curve map for bananas and peaches9 1llen has )14 to
spend on bananas and peaches and the prices of each is )1. @hat is her optimal bundle<
A9 2 bananas- 2 peaches B9 & bananas- * peaches C9 . bananaspeaches
D9 & bananas- 2 peaches
B: 1llen %ill maximi,e utility given the budget line %hen she consumes & banana and * peach. ;e also exhausts his budget %hen he consume bundle C- but that is not optimal. +nce you dra% the budget line- you can chec' that.
*&. 8Digure: 1llenTs indifference curve map for bananas and peaches9 @hat is the marginal rate of substitution of peaches for bananas %hen she is consuming her optimal bundle< A9 1J14 B9 1J( C9 1 D9 (
C: At the optimal bundle- !"7 e2uals the ratio of prices- and the prices are e2ual
*(. 8Digure: 1llenTs indifference curve map for bananas and peaches9 1llen no%has )24 to spend on banana and peach and the prices of both are )2 each. @hatTs the optimal bundle<
A9 2 bananas- 2 peaches B9 & bananas- * peaches C9 ( bananas- ( peaches D9 & bananas- 2 peaches
B:;is budget line does not change from the original. 7o his optimal bundle %ould be same.
**. The marginal rate of substitution of peaches for apples- in absolute terms- is represented by PPPPPPPP. A9 ;o% many apples one %ould give up to get another peach B9 ;o% many peaches one %ould give up to get another apple
A: 5ote that %ord Xfor S Xof peaches for applesY. 7o this is the change in apples divided by the increase in peaches- holding utility constant- and converted to a positive number. Dor example if it is & it says to get one more peach you %ould give up four apples.
*.. /magine a %ilderness par' in the middle of no%here- filled %ith exotic %ildlife and fauna. 5o one visits the par'> it is too far to go. @hich of the follo%ing statements %ould an economist most agree %ith: A9 The par' is a good example of a public good B9 The par' is a bad example of a public good.
A: The ans%er is good example. The benefits one get from the part are non6use values and non6congestible. /n addition once the par' is created for you it is also there for me.
*0. True or Dalse: A congestible resource is one %here one personTs use of a unit of the resource precludes the use of that unit by others. A9 True B9 Dalse
True: This is the definition of congestible resource.
*3. /magine that the three firms that produce Euber gas all have the same marginal cost
of abatement curves. Durther assume that in the unregulated state they all emit the same amount of Euber gas. @hich statement is incorrect< A9 Euber gas emissions can be efficiently reduced by 144 units by splitting the 144 unit reduction among the three firms such that each is reducing emissions the same amount. B9 1fficiently reducing Euber gas emissions by 144 units re2uires different amounts of abatement for the three firms. C9 Euber gas emissions can be efficiently reduced by 144 units by splitting the 144 unit reduction among the three firms such that each after the split the marginal cost of abatement is e2ual for all three firms.
B: The second one is incorrect. They all have the same marginal cost of abatement curves- so the same marginal costs of abatement. 7o- efficiency dictates that they all reduce their pollution by the same number of units. A and C are correct statements.
.4. @ill %idening /6.4 bet%een Denver and 7ummit County- by itself- eliminate all congestion externalities on the high%ay< A9 Les B9 5o C9 !aybe D9 CanTt tell
B: The ans%er is no. There %ill still be un6internali,ed negative effects.
.1. True or Dalse: / %ould en:oy another cigar more than another cigarette. / should therefore smo'e another cigar rather than another cigarette. A9 True B9 Dalse
Dalse: The fact that / %ould en:oy it more does not mean / should choose it. @hich / should choose also depends on the price.
.2. @hich statement best describes microeconomics< A9 /t develops models of ho% individual and firms behave assuming that individuals behave rationally. B9 /t is a course in ho% to run a business and get more utility from life. C9 /t is science devoted to understanding and explaining the choices made by individuals- firms and other economic agents- and the outcomes of those choices. D9 /t helps to explain the current recession.
C:
. . True or Dalse: Basic consumer theory is consistent %ith the idea that oneTs preferences are a function of %hat they consume< C9 True D9 Dalse
Dalse: #references are assumed stable. /n basic consumer theory- %hat you consume affects your utility level but not your preferences
.&. @hich of the follo%ing is the best definition of property rights< A9 ;aving property rights to a commodity means one o%ns it. Dor example- one can build a house on your land because you o%n it. B9 ;aving property right to a commodity means one can sell it to someone else C9 ;aving property rights to a commodity means that one can control access to its use and consumption. +ne can- if they choose to- relin2uish these controls D9 All of the above
C: 7aying that having property rights means you Xo%n itY is not very informative. B is true by incomplete. C gives the most detailed definition.
.(. True or Dalse: 1verybody does everything better than Boe. /f he %or's- he should %or' producing %hat he can produce the most of per hour. A9 True B9 Dalse
Dalse- he should produce the commodity for %hich he has a comparative advantage%hich might be the commodity he can produce the most 2uic'ly 8has an absolute advantage9- but not necessarily.
.*. True or Dalse: The F.7. should do everything it can to eliminate violent crime in the F.7. A9 True B9 Dalse
Dalse: have to loo' at the benefits and costs of eliminating additional crime. The marginal cost of or eliminating crime li'ely rises steeply rises.
... The basic economic models of consumer behavior does not assume: A9 Dive utils of utility is better than 2 utils. B9 Dive utils of utility is 2.( times better than 2 utils C9 Transitive preferences.
B: the model only assumes the individual can ran' bundles. They %onTt 'no% %hat transitive preferences are but that is o'.
.0. /n the mind of a economist- %hich statement is least correct< A9 There is some efficient amount of global %arming B9 There is a cost to reducing global %arming C9 The benefits of reducing global %arming are al%ays greater than the costs. D9 /t might be better to help no% poor people in lo%6lying tropical countries rather than allocating resources to reducing global %arming.
C:
.3. True or Dalse: City- 7tate and 5ational par's are pubic goods: A9 True B9 Dalse
Dalse: @hile they are provided by the government- they are congestible.
04. True of Dalse: /f a purely competitive firm too' it upon itself to reduce its pollution it %ould go out of business in the longrun. A9 True B9 Dalse
True.
7tate %hether the follo%ing statements are true or false and explain %hy you say so. / %ill only grade %hat is %ritten in the space provided 814 points total9. 1. 8* points9 Fsing a 7olo% model it is possible to sho% that the saving rate that achieves the maximal long6run ED# level also achieves the highest long6run consumption level. DA?71- ;+?D/5E +T;1" DACT+"7 C+57TA5T- T;1 7AA/5E "AT1 T;AT E156 1"AT17 T;1 ;/E;17T 7+?+@ CF"A1 /7 7=1. T;F7- T;1 7AA/5E "AT1 T;AT E151"AT17 T;1 ;/E;17T ?+5E "F5 CA#/TA?- A5D T;1 ;/E;17T ED# /7 7=1. ;+@1A1"- AT 7=1 C+57F!#T/+5 /7 Q1"+. 2. 8& points9 Consider an economy %here the labor mar'et is al%ays in e2uilibrium 8and goes bac' to e2uilibrium immediately after any possible shoc'9. /f the central ban' of such an economy performs an open mar'et purchase %henever there is a recession then ED# %ill necessarily increase- %hich results in a milder recession. /t is thus clear that central ban's should al%ays play an active role in smoothing the business cycle. DA?71. /D T;1 ?AB+" !A"G1T /7 A?@AL7 /5 1NF/?/B"/F! T;15 AEE"16 EAT1 7F##?L /7 #1"D1CT?L A1"T/CA?. C;A5E17 /5 T;1 /5T1"17T "AT1 8@;/C; "17F?T D"+! +#15 !A"G1T +#1"AT/+579 @+F?D ;AA1 5+ /!6 #ACT +5 ED#- +5?L +5 #"/C17. !ultiple choice section Circle %hat you consider is the best ans%er to each of the follo%ing 2uestions 8(4 points totale2ually %eighted9. Fse the follo%ing data to ans%er 2uestions 6( Consumption in 7no%ville 2442 244 #rice Nuantity #rice Nuantity
"utabaga )4.(4 244 )4..4 114 #ar'a )(4.44 2 ).(.44 1 Boo' )&4.44 ( ) 4.44 14 /n 2442- consumers in 7no%ville consumed only rutabagas- par'as- and boo's. The prices and 2uantities for 2442 and 244 are listed in the above table. The base year for 7no%villeTs C#/ is 2442 . The C#/ for 7no%ville in 2442 e2ualed 8a9 1.1 8b9 1 B- BL D1D/5/T/+5 +D C#/ &. The C#/ for 7no%ville in 244 e2ualed 8a9 1.1 18b9 1 8c9 none of the above C#/ 244 8BA71 = 24429 = 244 \ )4.. I 2 \ ).( I ( \ ) 4 244 \ )4.( I 2 \ )(4 I ( \ )&4 = 1&4 I 1(4 I 1(4 144 I 144 I 244 = &&4 &44 = 1.1 (. The 244 real ED# of 7no%ville e2ualed 8assume the base year is also 24429 8a9 &(2 8b9 (4( 8c9 &44 Fseful information: The price index of year t %hen the base year is year ]t e2uals the cost of the base
year bas'et at period t prices divided by the cost of the base year bas'et at period ]t 8the base9 prices. "1A?ED# 244 8BA7124429 = )4.( ^ 114 I )(4 ^ 1 I )&4 ^ 14 = (( I (4 I &44 = (4( *. Eross domestic product 8ED#9 e2uals the PPPPPP of _nal PPPPPPP produced %ithin a country during a given period of time 8a9 mar'et value> goods 8b9 mar'et value> services 8c9 mar'et value> goods and services 8d9 2uantity> goods 8e9 2uantity> goods and services Ans%er: C .. Lou face t%o :ob oèrs. The _rst is in ?ondon and pays a(4-444 per year. The second is in the Fnited 7tatus and pays )0&-&&4 F.7. dollars per year. Assume that the exchange rate bet%een British pounds and American dollars is a1 = )1.0 F.7. /n ### terms a1 = )1.2 F.7. ###. The oèr that provides you %ith the highest purchasing po%er is 8a9 The _rst 8b9 The second Ans%er: B. T;1 +DD1" /5 ?+5D+5- /5 #F"C;A7/5E #+@1"- /7 1NF/AA6 ?15T T+ 1.2b(4444=.4-444W0&-&&4. 0. @hich of the follo%ing transactions %ould be included in the ED# of the Fnited 7tates< 8a9 Coca Cola produces soft drin's in 1ngland. 8b9 ;onda produces cars in +hio. 8c9 !cDonalds produces and sells hamburgers in "ussia. 8d9 Dord !otors produces cars in !exico. 8e9 5one of the above. Ans%er: B. 3. During 13.4- total compensation of employees 8i.e. the sum of %age income I all other bene_ts9 per %or'er in the Fnited 7tates e2ualed )*-40(. Total compensation of employees per %or'er in 244(
e2ualed )(4-14. dollars. The price level during 13.4 %as 2. and it e2ualed 112 during 244(. Fsing these numbers you can conclude 28a9 That the purchasing po%er of the average %or'er in the Fnited 7ates roughly doubled from 13.4 to 244(. 8b9 That the purchasing po%er of the average %or'er in the Fnited 7tates increased by a factor of 0 in one generation. 8c9 That %or'ers are clearly exploited and have obtained no bene_t from economic gro%th. Ans%er: A. "eal %age 13.4 = *40( 2. = 22(>"eal %age 244( = (414. 112 = &&.> &&. 22( = 1.30 14. Ero%th in Total factor productivity is often calculated as the 8a9 dièrence bet%een potential and actual economic gro%th. 8b9 gro%th in output per unit of labor. 8c9 gro%th in labor productivity not explained by the gro%th in capital per hour of labor 8after ad:usting by the 1J rule9. 8d9 gro%th of capital utili,ation. Ans%er: c. 11. "ecent increases in real estate prices have resulted in higher property tax revenues for the /"7. The F7
government is evaluating t%o possible uses for this money. +ption 1 consists of investing in research and development and is expected to increase total factor productivity by 2H. +ption 2 is as costly as option 1. +ption 2 consists of providing subsidies to investments in physical capital. These subsidies are expected to result in a H increase in the capital stoc' of the F7 economy. The Xone6thirdY rule applies for the F7 economy. /f the government %ants to generate the maximum increase in ED# from its policy it should 8a9 Dollo% option 1 8b9 Dollo% option 2 Ans%er: a. +ption 1 increases ED# by 2H. +ption one increases ED# by HJ =1H. 12. The follo%ing table provides you %ith data about the behavior of productive inputs in Bapan during t%o dièrent periods. #eriod Ero%th in ED# per %or'er Ero%th in capital per %or'er Ero%th in hours %or'ed 13*4613. ..2H *H 4H 133162444 4.(H 4.*H 4H Clearly- and relative to the 13*46. period- the economy of Bapan slo%ed6do%n substantially during the last decade. /f the one third6rule holds for Bapan then most of the slo%do%n in ED# gro%th can be attributed to a slo%do%n in 8a9 the gro%th rate of capital per %or'er 8b9 the gro%th rate of hours %or'ed 8c9 the gro%th rate of total factor productivity Ans%er: c 8explained during the revie% session9 1 . +ne implication of the /nformation Technology "evolution is that computers- semiconductorsetc. constitute no% a large proportion of the total capital stoc' of the Fnited 7tates. /nformation Tech6 nologies have a very high rate of depreciation. Thus- the /nformation Technology revolution resulted
in a sudden increase in the depreciation rate of physical capital in the Fnited 7tates. According to the 7olo% model- this increase in capital depreciation 8on its o%n9 8a9 should translate into a lo%er long6run capital stoc'- and thus lo%er long6run ED# 8b9 should translate into a higher long6run capital stoc'- and thus higher long6run ED# Ans%er: a. ;igher depreciation results in a lo%er 7olo% curve- and thus a lo%er long run capital and ED#. 1&. The F.7. economy experienced one of its strongest economic expansions during the 13346 2444 period. 7ome people attribute this economic expansion to the massive introduction of /nformation Technologies. Based on your ans%er to the previous 2uestion- and using a 7olo% diagram- it is possible to say 8a9 that the increase in TD# associated to the use of information technologies more than compensated for the negative impact of higher depreciation- %hich can help explain %hy the economy ended up %ith a higher ED# 8b9 that the increase in ED# attributed to the higher depreciation of capital %as further expanded by the increase in TD# associated to the use of information technologies Ans%er: a. ;igher TD# results in a higher 7olo% curve- and thus higher long run capital and ED#. Eiven the ans%er to 11- option b does not ma'e sense. +ption a has to be true. for ED# to gro% the positive impact of TD# must have more than compensated the negative impact of higher depreciation. 1(. According to the 7olo% gro%th model 8normali,ing population to 1 and assuming no population gro%th9- capital evolves through time follo%ing the la% of motion G tI1 = sAG 1
t I 81 c d9G t . 7uppose the saving rate of @eird country is e2ual to 1(H- that the level of total factor productivity 8A9 is e2ual to &4- and that capital depreciates at a *H annual rate. ?et G 244. = 1444 85ote: 1444
1 = 149. According to the 7olo% model- the stoc' of capital for year 2440 %ill be 8a9 344 8b9 1(&4 8c9 &*4 8d9 1444 8e9 none of the above G 2440 = 4.1( ^ &4 ^ 14 I 81 c 4.4*9 ^ 1444 = 1444 1*. Based on your previous ans%er- the long6run capital stoc' of the economy is 8a9 impossible to determine %ith the information provided 8b9 less than 1444 8c9 larger than 1444 but lo%er than 1(&4 8d9 1444 8e9 more than 1(&4 Ans%er: d 8explained during the revie% session9 1.. /f a _rm has capital stoc' valued at )&-(44 at the beginning of the year- invested 8in physical capital9 )1-(44 during the year- and ended up %ith a capital stoc' valued at )(-444 at the end of the year then %e 'no% that 8a9 depreciation e2ualed )(44. 8b9 gross investment e2ualed )1-(44 and depreciation e2ualed )1-444. 8c9 net investment e2ualed )1-(44. &8d9 depreciation e2ualed ) -(44. Ans%er: b- Capital at the end of the year = /nvestment I capital at beginning of year 6 depreciation. ;ere- (444=1(44I&(446depreciation 10. A _rm is considering a one6year pro:ect that is expected to deliver a .H nominal pro_t rate. The current real interest rate is (H and ineation is expected to e2ual H. Then-
8a9 The _rm should invest in the pro:ect 8b9 The _rm should not invest in the pro:ect Ans%er: b. The real pro_t rate is pro_t rate 6 ineation = &H %hich is less than %hat the _rm can obtain in the ban' 8in a deposit that pays the real interest rate- (H9. Digure 1. 13. /n Digure 1 above- if the government increases the taxes on corporate pro_ts then the real interest rate PPPP and the e2uilibrium 2uantity of investment and saving PPPPP. 8a9 rises> increases 8b9 rises> decreases 8c9 falls> increases 8d9 falls> decreases Ans%er: d- higher taxes shift the investment demand left. As a result- the interest rate falls- and investment and saving fall. 24. /n Digure 1 above- if future personal income is suddenly expected to be much higher than current personal income- the real interest rate PPPP and the e2uilibrium 2uantity of investment PPPP. 8a9 rises> increases 8b9 rises> decreases 8c9 falls> increases 8d9 falls> decreases Ans%er: b- higher future income lo%ers saving- ss shifts left so that a ne% e2uilibrium %ith higher interest and lo%er investment and saving appears. (Digure 2 21. /n the labor mar'et described by Digure 2 above- if the real %age temporarily dropped to )14 dollars per hour _rms %ould li'e to hire PPPPPPP hours and %or'ers %ould li'e to %or' PPPPPP hours. The latter situation implies there is an PPPPPPPPPPPP. 8a9 Approximately 144 billion hours per year> approximately 244 billion hours per year> excess supply of %or'ers that %ould eventually translate into higher %ages
8b9 Approximately 244 billion hours per year> approximately 144 billion hours per year> excess demand for %or'ers that %ould eventually translate into higher %ages Ans%er: b 22. 7uppose that the government imposes a minimum %age of )24 dollars per hour to the labor mar'et described in the previous 2uestion. As a result8a9 All %or'ers are better o` 8b9 All %or'ers are %orse o` 8c9 1mployment e2uals 144 bn hours and the %age rate e2uals )24 dollars per hour. "elative to e2uilibrium the imposition of a minimum %age generates unemployment e2uivalent to 144 bn hours 8d9 1mployment e2uals 144 bn hours and the %age rate e2uals )24 dollars per hour. "elative to e2uilibrium the imposition of a minimum %age generates excess demand for %or'ers and pressures for %ages to go up even further. Ans%er: c. 2 . Consider an economy %here the labor mar'et goes bac' to e2uilibrium immediately after any change in the labor mar'et. The D1D considers that the ED# of the economy is lo%er than it should be and lo%ers the interest rate. As a result 8a9 Aggregate demand shifts to the right- ED# and the price level go up 8i.e.- there is ineation9. 8b9 Aggregate demand shifts to the right- ED# is unchanged and the price level goes up 8i.e.there is ineation9. Ans%er: b. *2&. Consider an economy %here the labor mar'et goes bac' to e2uilibrium slo%ly 8it ta'es more than a 2uarter9 after any change in the labor mar'et. The D1D considers that the ED# of the economy is lo%er than it should be and lo%ers the interest rate. As a result 8a9 Aggregate demand shifts to the right- ED# and the price level goes up 8i.e.- there is ineation9.
8b9 Aggregate demand shifts to the right- ED# is unchanged and the price level goes up 8i.e.there is ineation9. Ans%er: a 2(. An increase in the reserve re2uirement ratio 8a9 lo%ers the amount of money commercial ban's create through loans and deposits. 8b9 increases the amount of money commercial ban's create through loans and deposits. 8c9 has nothing to do %ith the amount of money commercial ban's create. Ans%er: a. 2*. To increase commercial ban' lending the Ded can 8a9 lo%er the discount rate- or sell government securities. 8b9 raise the discount rate- or sell government securities. 8c9 lo%er the discount rate- or buy govmt. securities. 8d9 raise the discount rate- or buy government securities. Ans%er: c Fse the follo%ing data to ans%er 2uestion 2. 2.. /n the short6run e2uilibrium of this economy the labor mar'et is 8a9 at a full6employment e2uilibrium and %ages %ill not change. 8b9 above full6employment e2uilibrium and %ages %ill rise. 8c9 above full6employment e2uilibrium and %ages %ill fall. 8d9 belo% full6employment e2uilibrium and %ages %ill fall. Ans%er: b. 20. According to the theory of real business cycles a typical economic recession occurs %hen 8a9 The consumer con_dence index falls so that people spend less driving e2uilibrium ED# do%n. 8b9 The D1D increases the interest rate so that people spend less driving e2uilibrium ED# do%n. 8c9 The gro%th rate of total factor productivity slo%sdo%n. .8d9 The economy of any of the ma:or trading partners of the F7 slo%sdo%n. Ans%er: c. 23. According to 1d%ard C. #rescott in his paper CTheory ahead business cycle measurement-C economic
policy in relation to business cycles should focus on 8a9 ?eaving the economy alone. 8b9 Changing the interest rate to smooth the business cycle 8i.e. lo%er it during recessions- and increasing it during expansions so that ineation is contained9. 8c9 Fnderstanding the factors that determine the rate at %hich technology advances. Ans%er: c. 7hort ans%er problems Ans%er four out of the _ve follo%ing 2uestions as concisely as possible. 4. 814 points total9 The follo%ing 2uestions are based on our discussion of the paper CTheory ahead business cycle measurement-C by 1d%ard C. #rescott 8a9 8( points9 @hat is the business cycle phenomena< 8b9 8( points9 @hat are- according the 1.C. #rescott- the main forces accounting for business cycle euctuations< 1. 814 points total9 The follo%ing 2uestions are based on our discussion of the papers C+n the mechanics of economic development-C by "obert 1. ?ucas Br.- and C5eeded: A theory of total factor productivity-C by 1d%ard C. #rescott 8a9 8 points9 ;o% does ?ucas de_ne the problem of economic development< 8b9 8 points9 1xplain the orders of magnitude of the dièrence bet%een poor and rich countries in terms of their levels of per6capita ED#< 8i.e. the ED# per capita of the richest countries is ho% many times that of the poorest ones<9 8c9 8& points9 According to #rescott- %hat are the main factors accounting for the observed cross6 country disparity in per capita ED#< 2. 814 points9 The follo%ing table provides data for the output and capital per %or'er for Chile during the years 1304 and 2444. Chile year +utput per %or'er Capital per %or'er
1304 13-&(1..3 ) 2444 2-4*&.*1 ) ln8 24*&96ln813&(19= 4.(4
*-*(3.1 ) .1-03&... )
4. b8 8ln8.103&96ln8 **(399 9= 4.24 Fsing either one of the follo%ing t%o formulas belo%- ans%er each one of the follo%ing t%o 2uestions 8a9 ;o% much of the increase in ED# can be accounted for by changes in capital per %or'er< ;o% much by changes in TD#< C;A5E1 /5 ED# ACC+F5T1D D+" BL C;A5E17 /5 CA#/TA?: 24H 8711 ?+E D+"!F?A7 B1?+@ T;1 TAB?19 C;A5E1 /5 ED# ACC+F5T1D D+" BL C;A5E17 /5 TD# : 4H 87/5C1 C;A5E17 /5 CA#/TA? A5D C;A5E17 /5 TD# !F7T ADD F# T+ C;A5E17 /5 ED#9 08b9 %hat has been the most important factor behind the observed gro%th in output per %or'er for Chile< C;A5E17 /5 TD# A"1 T;1 !+7T /!#+"TA5T DACT+" 8 4HV24H9 . 814 points9 Deviations from trend in total factor productivity are positively correlated %ith deviations from trend in ED#. This observation motivated the development of the "eal Business Cycle Theory. ;o%ever it is also true that the magnitude of the deviations from trend in ED# are larger than the deviations from trend in TD#. Discuss in detail the mechanisms through %hich a 1H deviation from trend in TD# can generate a larger than 1H deviation from trend in ED#. 711 7?/D17 +5 "1A? BF7/5177 CLC?1 T;1+"L .
+ross5;rice >lasticity of Cemand

The percentage by which the /uantity demanded of the first good changes in response to a $ percent change in the price of the second.
2ncome >lasticity of Cemand
The percentage by which /uantity demanded changes in response to a $ percent change in income.
;rice >lasticity of %upply

The percentage change in /uantity supplied that occurs in response to a $ percent change in price.
;erfectly 2nelastic %upply

@upply is perfectly inelastic with respect to price if elasticity is zero.
;erfectly >lastic %upply

@upply is perfectly elastic with respect to price elasticity of supply is infinite
/arginal 9tility
The additional utility gained from consuming an additional unit of a good.
Law of Ciminishing /arginal 9tility

The tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point.
Optimal +om"ination of Moods

The affordable combination that yields the highest total utility.
The $ational %pending $ule

@pending should be allocated across goods so that the marginal utility per dollar is the same for each good. M;2# ($* I M;2# (2*
$eal ;rice
The dollar price of a good relative to the average dollar price of all other goods.
Fominal ;rice
The absolute price of a good in dollar terms
+onsumer %urplus
The difference between a buyer's reservation price for a product and the price actually paid.
;rofit
The total revenue a firm receives from the sale of its product minus all costs - explicit and implicit- incurred in producing it.
;rofit5/aximizing Firm
+ firm whose primary goal is to maximize the difference b2t its total revenues and total costs.
;erfectly +ompetitive /ar1et

+ mar5et in which no individual suppliers has significant influence on the mar5et price of the product.
;rice Ta1er
+ firm that has no influence over the price at which it sells its product.
2mperfectly +ompetitive Firm

+ firm that has at least some control over the mar5et price of its product
Factor of ;roduction
+n input used in the production of a good or service.
%hort $un
+ period of time sufficiently short that at least some of the firm's factors of production are fixed.
Long $un
+ period of time of sufficient length that all the firm's factors of production are variable.
Law of Ciminishing $eturns

+ property of the relationship between the amount of a good or service produced and the amount of a variable factor re/uired to produce itQ the law says that when some factors of production of the good eventually re/uires ever-larger increases in the variable factor.
Fixed Factor of ;roduction
+n input whose /uantity cannot be altered in the short run.
*aria"le Factor of ;roduction

+n input whose /uantity can be altered in the short run.
Fixed +ost
the sum of all payments made to the firm's fixed factors of production.
*aria"le cost
the sum of all payments made to the firm's variable factors of production.
Total cost
the sum of all payments made to the firm's fixed and variable factors of production.
/arginal cost
as output changes from one level to another" the change in total cost divided by the corresponding change in output.
Average varia"le cost

variable cost divided by total output
average total cost

total cost divided by total output
;rofita"le firm
a firm whose total revenue exceeds its total cost
;roducer %urplus
the amount by which price exceeds the seller's reservation price
>xplicit costs
the actual payments a firm ma5es to its factors of production and other suppliers
Accounting profits
the difference b2t a firm's total revenue and its explicit costs
2mplicit costs
the opportunity costs of the resources supplied by the firm's owners
>conomic profit
the difference b2t a firm's total revenue and the sum of its explicit and implicit costs
Formal profit
the opportunity cost of the resources supplied by a firm's owners" e/ual to accounting profit minus economic profit
economic loss
an economic profit that is less than zero
$ationing function of price

changes in prices distribute goods to those consumers who value them most highly
Allocative function of price

changes in prices direct resources away from overcrowded mar5ets and toward mar5ets that are undeserved
2nvisi"le hand theory

+dam @mith's theory that the actions of independent" self-interested buyers and sellers will often result in the most efficient allocation of resources
6arrier to >ntry
any force that prevents firms from entering a new mar5et
>conomic rent
that part of the payment for a factor of production that exceeds the owner's reservation price" the price below which the owner would not supply the factor
;rice setter
a firm with at least some latitude to set its own price
;ure monopoly
the only supplier of a uni/ue product with no close substitutes
/onopolistic competition
an industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another
Oligopoly
an industry structure in which a small number of large firms produce products that are either close or perfect substitutes
mar1et power
a firm's ability to raise the price of a good without losing all its sales
+onstant returns to scale

a production process is said to have constant returns to scale if" when all inputs are changed by a given proportion" output changes by the same proportion
Fatural monopoly
a monopoly that results from economies of scale (increasing returns to scale*
2ncreasing returns to scale

a production process is said to have increasing returns to scale if" when all inputs are changed by a given proportion" output changes by more than that proportion
/arginal revenue
the change in a firm's total revenue that results from a one-unit change in output
;rice discrimination
the practice of charging different buyers different prices for essentially the same good or service
;erfectly discriminating monopolist

a firm that charges each buyer exactly his or her reservation price
hurdle method of price discrimination

the practice by which a seller offers a discount to all buyers who overcome some obstacle
one who manages a household

The wor5 economy comes from the ?ree5 word for
scarcity
9conomics deals primarily with the concept of
everyone in that society cannot have all they want of the good
+ good is considered scarce in a society when...>
how society manages its scarce resources

9conomics is the study of...>
equity
9conomists use the word RRRRR to describe a situation in which the benefits of society's resources are distributed fairly among society's members
opportunity cost
Bhat you give up to obtain an item is called your...>
comparing costs and "enefits

#eople ma5e decisions at the margin by...>
marginal "enefit is greater than the marginal cost

+ rational decision ma5er ta5es an action only if the...>
%hawn has the comparative advantage.

=f @hawn can produce donuts at a lower opportunity cost than @ue" then...>
differences in opportunity costs.

'omparative advantage is based on...>
should export that product.

The country that has a comparative advantage in a product...>
2mports
RRRRR are produced abroad and sold domestically.
>xports
RRRRR are produced domestically and sold abroad.
the price of wheat

Mne result of a drought in the midwest could be an increase in...>
demand& supply
8uyers determine RRRRR" sellers determine RRRRR
price& quantity
0or each good produced in a mar5et economy" demand and supply determine both RRRRR and RRRRR
competitive
+ RRRRR mar5et is one in which each seller has limited control over the price of his product.
Technology
RRRRR is not a determinant of demand.
an increase in demand for the good

=f a good is 4normal4" then an increase in income will result in...>
reduces the quantity demanded of the other good

Two goods are substitutes if a decrease in the price of one good...>
increases the quantity demanded of the other good.

Two goods are complements if a decrease in the price of one good...>
elasticity
=n general" RRRRR is a measure of how much buyers and sellers respond to changes in mar5et conditions
"uyers are to a change in price

The price elasticity of demand measures how responsive...>
inelastic
=f a good is a necessity" demand for the good would tend to be...>
elastic
Bhen /uantity demanded responds substantially to changes in price" demand is said to be...>
the a"solute value of the actual num"er.

Most economists report the elasticity of demand as...>
greater than '

:emand is elastic if elasticity is...>
less than '

:emand is inelastic if elasticity is...>
equal to '
:emand is unit elastic if elasticity is...>
horizontal
+ perfectly elastic demand curve will be...>
vertical
+ perfectly inelastic demand curve will be...>
2nsulin
RRRRR would probably have the most inelastic demand.
ceiling.
+ legal maximum price at which a good can be sold is a price RRRRR
floor.
+ legal minimum price at which a good can be sold is a price RRRRR.
maximum amount that a "uyer will pay for a good.

Billingness to pay measures the...>
have an adverse impact on the well5"eing of a "ystander.

Kegative externalities occur when one person's actions...>
if price increases& quantity supplied increases.

+ccording to the law of supply...>
total revenue
The amount of money that a firm receives from the sale of its output is called RRRRR
total cost or opportunity cost

The amount of money that a firm pays to buy inputs is called...>
>xplicit
RRRRR costs re/uire monetary outlay.
entrepreneurial talents.
+n example of an implicit cost of production would be...>
competitive mar1et
Bhen a firm has little ability to influence mar5et prices it is said to be in what 5ind of mar5et>
fixed costs
0irms that shut down in the short run still have to pay their...>
firms have little a"ility to influence mar1et prices.

+ competitive mar5et is one in which...>
price of his product

=n a competitive mar5et each seller has limited control over the...>
ham"urgers and fries

+n example of complementary goods would be...>
ownership of a 1ey resource.

The :e 8eers diamond monopoly is a classic example of a monopoly that arises from...>
firms and factory sizes

The three average total cost curves on the diagram correspond to three different...>
A'5AThe firm experiences economies of scale if it changes its level of output
A85A.
The firm experiences diseconomies of scale if it changes its level of output
oligopolies
Mar5ets with only a few sellers" each offering a product similar or identical to the others" are typically referred to as...>
there are few sellers offering a similar or identical product

+n oligopoly is a mar5et in which...>
cooperation would ma1e each other "etter off

+ prisoner's dilemma game demonstrates how cooperative action is often not rational even though...>
monopoly
=n the short run" a firm in a monopolistically competitive mar5et operates much li5e a(n*...>
inputs a firm uses

The factors of production are best defined as the...>
marginal rate of su"stitution

The rate at which a consumer is willing to exchange one good for another" and maintain a constant level of satisfaction" is called the...>
wages
Most of the total income earned in the ;@ economy is ultimately paid to households in the form of...>
decreases
Bhat happens to the labor supply in the pear-pic5ing mar5et when the wage paid to apple pic5ers increases>
la"or supply in /exico decreases& la"or supply in 9% increases

Bhat happens to the labor supply curves in both countries when Mexican wor5ers leave Mexico and move to the ;@>
the factors of production

9conomists refer to the inputs that firms use to produce goods and services as...>
2ncrease
=f the price in airline tic5ets falls" what will happen to the demand curve for flight attendants>
<uman capital theory

Bhich theory is supportive of the idea that increasing educational levels for all wor5ers would raise all wor5ers' productivity and thereby their wages>
education
The most important source of human capital is...>
the supply and demand for that person)s la"or

+ person's earnings depend on...>
answer will "e all of the a"ove!

#overty is found to be correlated with...>
quantity demanded increases
Bhen the price of a pair of Leans rises" the...>
a"solute advantage
the ability to produce a good using fewer inputs than another producer
average fixed cost AF+!

Total fixed cost divided by the number of units of outputQ a per-unit measure of fixed costs. +0' I 0'23
average total cost AT+!

Total cost divided by the number of units of output +T' I T'23 or +T' I +0' 1 +,'
average varia"le cost A*+!

variable cost divided by the number of units of output +,' I ,'23
"udget constraint
the limits imposed on household choices by income" wealth" and product prices.
capital
goods used to produce other goods
cartel
a group of firms that gets together and ma5es Loint price and output decisions to maximize Loint profits
ceteris pari"us
a devise used to analyze the relationship between two variable while the values of other variables are held unchanged.
clayton act
act outlawed specific monopolistic behaviors such as tying contracts
command economy
+n economy in which a central government either directly or indirectly sets output targets" incomes" and prices
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other and vice versa
consumer goods
goods produced for present consumption
consumer sovereignty
The idea that consumers ultimately dictate what will be produced (or not produced* by choosing what to purchase (and what not to purchase*.
consumer surplus
The difference between the maximum amount a person is willing to pay for a good and its current mar5et price.
cross price elasticity of demand

measures the responsiveness of the /uantity demand of a good to a change in the price of another good.
diseconomies of scale
The property whereby long-run average total cost rises as the /uantity of output increases (right-most upward sloping part of the long-run +T'*
demand curve
a graph that shows the amount of a product that would be bought at all possible prices in the mar5et
depreciation
the decline in an asset's economic value over time
diminishing marginal utility

the point reached when an additional unit of a product consumed is less satisfying than the one before
economic theory
+ statement or set of related statements about cause and effect" action and reaction
economics
the study of how individuals and nations ma5e choices about ways to use scarce resources to fulfill their needs and wants
efficiency
producing what people want at the least possible cost
elastic demand
the percentage change in /uantity demanded is greater than the percentage change in price in absolute value
elasticity
a measure of responsiveness that tells us how a dependent variable such as /uantity responds to a change in an independent variable such as price
equili"rium
the point at which /uantity demanded and /uantity supplied are e/ual
entrepreneur
a person who organizes" manages" and ta5es on the ris5s of a business
equity
(n.* the state of being Lust" fair" or impartialQ fair and e/ual treatmentQ something that is fairQ the money value of a property above and beyond any mortgage or other claim
shortage
/uantity demanded exceeds /uantity supplied
surplus
/uantity supplied exceeds /uantity demanded
externality
unintended side effect that either benefits or harms a third party not involved in the activity that caused it
fallacy of composition
The incorrect belief that what is true for the individual" or part" must necessarily be true for the group" or whole.
firm
an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand. transforms inputs into outputs. primary producing unit in a mar5et economy
fixed cost
a cost that does not change" no matter how much of a good is produced. there are none in the long-run
free enterprise
the freedom of individuals to start and operate private businesses in search of profits
free rider pro"lem

getting the benefits of something without having to contribute.. this problem also arises when individuals receive the benefit whether they contributed or not ('leaner air*.
<ec1scher5Ohlin theorem
a country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product.
homogenous products
undifferentiated productsQ products that are identical to" or indistinguishable from" one another
income
the money a person gets from salary or wages" profits" interest" investments" and other sources
imperfectly competitive industry

+n industry in which single firms have some control over the price of their output
income elasticity of demand

measures the responsiveness of the /uantity demanded of a good to the change in the income of the people demanding the good. 0ormula< (Cchange in /uantity demanded* 2 (Cchange in income*
economies of scale
as a company produces larger numbers of a particular product" the cost of each of these products goes down a5a increasing returns to scale
indifference curve
a curve showing the combinations of two goods that leave the consumer with the same level of utility.
inelastic demand
demand that responds a little bit to change in price. always has a numerical value between ! and -$
inferior goods
good that demand falls when income rises
inputs
anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants
microeconomics
the branch of economics that studies the economy of consumers or households or individual firms
interest
the price paid for the use of borrowed money
monopolistic competition
mar5et structure of an industry in which there are many firms and freedom of entry and exit but in which each firm has a product somewhat differentiated from the others" giving it some control over its price
monopoly
one firm that produces a product which there are no close substitutes for and in which significant barriers exist to prevent new firms from entering the industry
laissez faire economy

government has zero to no control over the economy
law of demand
consumers buy more of a good when its price decreases and less when its price increases
law of diminishing marginal utility

+s the /uantity of a good consumed increases the extra satisfaction gained decreases
law of diminishing returns

a law affirming that to continue after a certain level of performance has been reached will result in a decline in effectiveness
law of supply
the claim that" other things e/ual" the /uantity supplied of a good rises when the price of the good rises
lorenz curve
+ widely used graph of the distribution of income" with cumulative percentage of families plotted along the horizontal axis and cumulative percentage of income plotted along the vertical axis.
macroeconomics
the branch of economics that studies the overall wor5ing of a national economy
marginal cost mc!

the increase in total cost that results form producing one more unit of output
marginal revenue mr!

the additional revenue that a firm ta5es in when it increases output by one additional unit
marginal social cost msc!

the total cost to society of producing an addiotnal unit of a good or service
marginal utility mu!

additional satisfaction gained by the consumption or use of one more unit of a good or service
marginalism
the process of analyzing the additional or incremental costs or benefits arising from a choice or decision
mar1et
+ group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
mar1et failure
@ituation in which an unregulated competitive mar5et is inefficient because prices fail to provide proper signals to consumers and producers
mar1et demand
sum of all the /uantities of a good or service demanded per period by all the households buying in the mar5et for that good or service
mar1et power
a firm's ability to raise the price of a good without losing all its sales
moral hazard
The ris5 that the behavior of one party may change to the detriment of another after a contract has been agreed upon. 9xample< Those with insurance may be less li5ely to guard against loss than those without insurance.
movement along the demand curve

the change in /uantity demanded brought about by a change in price
movement along a supply curve

the change /uantity supplied brought about by a change in price
natural monopoly
a monopoly that arises because a single firm can supply a good or service to an entire mar5et at a smaller cost than could two or more firms
negative relationship
a relationship between two variables which a decrease in one is associated with an increase in another or vice versa
normal goods
goods which demand goes up when income is higher and goes down when income is lower
normative economics
the part of economics involving value Ludgments about what the economy should be li5eQ focused on which economic goals and policies should be implementedQ policy economics
north american free trade agreement

an agreement signed by the united states" canada" and mexico in which it was agreed that north america be a 4free-trade4 zone
oc1ham)s razor
irrelevant detail should be cut away
oligopoly
a mar5et in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors
opportunity cost
The next best alternative given up when ma5ing a choice
outputs
goods and services of value to households
payoff
an advantage or profit that you get as a result of doing something
perfect competition
a mar5et structure that is characterized by a large number of small firms" a homogeneous product"freedom of entry and exit
perfect su"stitutes
identical products
perfectly elastic demand

demand in which /uantity drops to zero at the slightest increase in price
perfectly inelastic demand

demand in which /uantity demanded does not respond at all to a change in price
positive economics
+n approach to economics that see5s to understand behavior and the operation of systems without ma5ing Ludgments. =t describes what exists and how it wor5s.
positive relationship
a relationship between two variables which a decrease in one is associated with a decrease in another. and a increase in one is associated with an increase in another
pos hoc& ergo propter hoc

the common misconception that if event a happens before event b that event b happened because of event a
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it.
product differentiation
a positioning strategy that many firms use to distinguish their products from those of competitors
price ceiling
a maximum price that sellers may charge for a good
price discrimination
charging different prices to different buyers
price elasticity of demand

a measure of how much the /uantity demanded of a good responds to a change in the price of that good" computed as the percentage change in /uantity demanded divided by the percentage change in price
price floor
a minimum price below which exchange is not permitted
profit
the difference between revenues and cost
varia"le cost
a cost that depends on the level of production chosen
quantity demanded
how much people are willing to buy at a given price" only changes when price changes (move along curve*
quantity supplied
the amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.
real income
@et of opportunities to purchase real goods and services available to a household as determined by prices and money income.
scarce
limited
shift of a demand curve

The change that ta5es place in a demand curve corresponding to a new relationship between /uantities demanded of a good and price of that good. The shift is brought about by a change in the original conditions.
shift of a supply curve

the change that ta5es place in a supply curve corresponding to a new relationship between /uantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.
short run
a period of time sufficiently short that at least one of the firm's factors of production cannot be varied
slope
a measurement that indicates weather the relationship between variables is positive or negative and how much of a response there is
social capital
capital that provides services to the public
su"stitues
goods that can serve as replacements for one anotherQ wen the price of one increases demand for the other increases
supply curve
a graph illustrating how much of a product a firm will sell at different prices
theory of comparative advantage

Ficardo's theory that specialization and free trade will benefit all trading parties" even those that may be absolutely more efficient producers.
total cost tc!

total fixed costs plus total variable costs T' I T0' 1 T,'
total fixed cost tfc!

the total of all costs that do not change with output even if output is zero
total revenue tr!

the amount received from the sale of the productQ the price per unit 6 the /uantity of output the firm decides to produce
total utility
total amount of satisfaction obtained form consumption of a good or service
total varia"le cost tvc!

the total of all costs that vary with output in the short run
trade deficit
the situation when a country imports more than it exports
trade surplus
the situation when a country exports more than it imports
unitary elasticity
+ situation in which total revenue remains the same when prices change.
utility
the satisfaction a product yields
varia"le
a measure that can change from time to time or form observation to observation
isoquant
a graph that shows all the combinations of capital and labor that can be used to produce a given amount of output
Absolute advantage is found by The Circular flo% diagram is A left%ard shift in supply !icroeconomics is the study of /f there is a shortage of laborers- %e %ould expect the Another term for factors of production is /mports are 1conomics is the study of A movement along the supply curve might be caused by The forces that ma'e mar'et economies %or' are
comparing the productivity of one nation to that of another. a visual model of ho% the economy is organi,ed. is a decrease in supply. ho% individual households R firms ma'e decisions. %ages of farm laborers to increase. goods goods produced abroad R sold domestically. ho% society manages its scarce resources. the price of the good or service. demand and supply.
The primary determinant of a counties standard of its ability to produce goods and services. living is @hat you give up to obtain an item is called An economy$s scarce resources are allocated by opportunity cost price for resources
@hen goods that are produced in the Fnited 7tates exported by the united states and imported are sold to China- the goods are by china. A country has a comparative advantage in a product if the %orld price is An example of a complementary good is 1conomies deals primarily %ith the concept of higher than its domestic price. la%nmo%ers and automobiles scarcity.
@hat are the 2 basic reasons %hy economist often appear to give conflicting advice to policyma'ers scientific :udgement and values. are differences in< The country %ith the comparative advantage in a product Trade based on absolute advantage is @hen a country allo%s trade and becomes an exporter of a good- %hich of the follo%ing %ould 5+T be true< /f the demand for a product increases- %e %ould expect e2uilibrium price ?etters that are not on the Demand curve 1conomist use model in order to @hen economist are trying to help improve the %orld they are Technology is 5+T 7uppose there is an increase in input prices. @e %ould expect supply Common 7toc' #referred 7toc' DB/A ?a% of Demand 5ormative 1conomics "estrictions on Trade 5one of them are correct. 5+T correct The losses of domestic consumer exceeds the gains of domestic producers. and e2uilibrium 2uantity to both increase. CA55+T produce. learn ho% the economy %or's. policy advisors. a determinant of demand to decrease. 12uity 5o 12uity Top 4 industrial companies- price per share. inverse relationship bet%een price and 2uantity demanded. @hat should be. Bobs- 5ational 7ecurity- /nfant /ndustriesFnfair competition- #rotection as a barganship 7ome countries are socialist economies and dont encourage competition. 7ingle Curve T%o curves 7hortage 869 7urplus 8I9 5egative income6elasticity coefficient
@hy do some countries li'e restrictions on trade< Change in Nuantity Demanded Change in Demand /f D1!A5D is !+"1 than 7F##?L /f supply is !+"1 than D1!A5D /nferior Eood
designates inferior good. 7ho%ing different combinations of goods and services that can be produced in a fully employed economy assuming resources and technology are fixed. 7tudy of ho% individual households and firms ma'e decisions. 1. ?and 8"ent9 2. ?abor 8@ages and 7alaries9 . Capital 8not money 6 buildings and e2uipment9 &. 1ntrepreneur 8#rofit9 1. ;ousehold 2. Business . Eovernment &. The rest of the @+"?D 8imports and exports9 8+#159 +nce and for all cost that once incurred cannot be reserved. Cost of inputs used in production but is not paid for. Cost of inputs used and paid for. #roduced of not still paid for. Cost of producing one more unit. ?a% of Diminishing "eturns T" 6 1conomic Cost T" 6 1xplicit Cost 1. ?abor 7peciali,ation 2. ?o%er "a% !aterial . Better use of by products #rice x Nuanity 5egative #ositive #ositive 5egative #rice and T" = +pposite R !ore than 1
#roduction #ossibilities Curve
!icroeconomics
"esources
& 7ectors
7un' Cost /mplicit Cost 1xplicit Cost Dixed Cost !arginal Cost ATC short run F 1conomic #rofit Accounting Cost Causes of 1conomies to 7cale Total "evenue Complementary 7ubstitute 5ormal /nferior 1lastic
/nelastic Consumer 7urplus #roducers 7urplus 7hort "un ?ong "un
#rice and T" = Direct R ?ess than 1 8top9 Demand 6 !ar'et #rice 8bottom9 @hat producer gets 6 minimum he$ll except. a. Dixed b. Aariable a. Aariable = depends on production 1. 2. . &. (. *. 1. 2. . &. (. *. 1. 2. . &. (. *. !any buyer- many sellers ;omo 1asy 5o influence "egular Curve ?ess than (4 +ne seller- many buyers ;omo ;ard 7eller Control 7teep Curve %ith 2nd line (46.4 De% sellers- many buyer ;etero ;ard ;as influence Gin'ed Curve .46144
#erfect Competition
!onopoly J !onopsony
+ligopoly
#rice discrimination
1. #rice 1lasticity 2. 7eparate !ar'et 8time- age. 5o "esale 1. 2. . &. 1. 2. . &. !any buyers R 7ellers ;etero 1asy than +ligopoly Dirm try to influence De% buyers many sellers ;etero ;ard Buys influence
!onopolistic Competition
Coordination of Cullsion
!ar'et Concentration Concentration "atio
!ar'et dominated by fe% large ?argest &
Causes of !ar'et Concentration /f T" is less than TC /f price is above AT its /f price is bet%een AT and AA its /f price is belo% AT its Assuming a firm experiences decreasing marginal products of labor %ith the addition of each %or'er regardless of the current output level. AT %ill be 5egative externalities occur %hen one persons actions The minimum %age %as instituted in order to ensure %or'ers #roducer 7urplus is the Accounting #rofit is #rofit is defined as Demand is said to be inelastic if Dor a firm- the production function represents the relationship bet%een /f the 2uantity supplied is the same regardless of price- then the supply curve %ould be Consumer surplus measures
1. 1conomies of 7cale 2. Barrier for 1ntry its a loss #rofit ?oss but %ill still produce ?oss and %ill shut do%n Constant adversely affects the %ell being of a bystander %ho is not party to the action. a minimally ade2uate standard of living. amount a seller is paid less the cost of production. total revenue minus the explicit cost of producing goods and services. total revenue minus total cost the 2uantity demanded changes only slightly %hen the price of good changes. 2uantity of inputs and 2uantity of outputs perfectly inelastic the difference bet%een the amount a consumer has to pay and the amount the consumer %as %illing to pay a buyers responsiveness to change in the price of a good.
The price elasticity of demand measures A local pi,,a restaurant ma'es great bread stic's that the consumers don not respond much to a change in the price. /f the o%ner is only interest in increasing revenue he should 1conomist compute the price elasticity of demand as the /f t%o goods are substitutes- their cross elasticity
raise the price of the breadstic's
percentage change in the 2uantity demanded divided by the percentage change in price. positive
%ill be /mplicit cost 1conomies of scale occur %hen 1xplicit Cost Demand is inelastic if elasticity is do not re2uire an outlay of money by the firm. long6run average total costs fall as outputs increase. A?? the AB+A1 less than 1
Demand for a good %ould tend to be more inelastic fe%er the available substitutes. the /n the long run inputs that %ere fixed in short run become variable.
An example of an implicit cost of production %ould the income an entrepreneur could have be earned %or'ing for someone else /n any mar'et total revenue is Fncongested roads are a good example 7ince almost all forms of transportation produce some type of pollution #rice multiplied by 2uantity. public good society has to %eigh the cost and benefits and decide ho% much pollution to allo%.
Dixed cost can be defined as costs that A payroll tax is a
are incurred even if nothing is produced tax on the %ages and firms pay their %or'ers
/n an increase in income results in the 2uantity demanded of a an inferior good. good- then the good is
Chapter 2 : #ure CompetitionType: E 1: &136&24 !/: 1.(61.*22&."efer to the above diagram. At the profit6maximi,ing output total revenue %ill be 4 E?D
.Ans%er: DalseType: E 1: &24 !/: 1.*22(."efer to the above diagram. At output C production %ill result in an economic profit.Ans%er: TrueType: E 1: &24 !/: 1.*22*."efer to the above diagram. At output C total variable cost is DEGB .Ans%er: DalseType: E 1: &24 !/: 1.*22.."efer to the above diagram. At output C average fixed cost is ED .Ans%er: DalseType: E 1: &2& !/: 104220."efer to the above diagram. At any price belo% " the firm %ill shut do%n in the short run.Ans%er: TrueType: E 1: &2& !/: 104223."efer to the above diagram. /f demand fell to the level of D5B - there %ould be no output at %hich the firmcould reali,e an economic profit.Ans%er: DalseType: E 1: &2& !/: 1042 4."efer to the above diagram. /f the firm produced D units of output at price E - it %ould earn a normal profit.Ans%er: TrueType: E 1: &1. !/: 1. 2 1."efer to the above diagram. Total costs are minimi,ed at output level B .Ans%er: DalseType: A 1: &2( !/: 1012 2.Although individual purely competitive firms can influence the price of their product- these firms as agroup cannot influence mar'et price.Ans%er: Dalse
T!pe: T Topic: 4 D: H%I '-: %I4 %4>$ The a#ove data are for: )2 the long run$ C2 #oth the short run and the long run$
the short run$ &2 the intermediate mar.et period onl!$ )nswer: 5 T!pe: T Topic: 4 D: H%J-H@? '-: %I>-%IK %4K$ "efer to the a#ove data$ )t > units of output average fixed cost+ average varia#le cost+ and average total cost are: )2 <%?+ <K?+ and <I? respectivel!$ C2 <%?+ <I?+ and <=? respectivel!$ <>?+ <H?+ and <J? respectivel!$ &2 <>+ <@>+ and <4? respectivel!$ )nswer: ) T!pe: T Topic: 4 D: H%J '-: %I> %4I$ "efer to the a#ove data$ The marginal cost of the fifth unit of output is: )2 <=?$ <J?$ C2 <>?$ &2 <@?$ )nswer: ) T!pe: T Topic: 4 D: H%J-H@? '-: %I>-%IK %4=$ "efer to the a#ove data$ -f product price is <I>+ the firm will produce: )2 4 units of output$ H units of output$ C2 > units of output$ &2 K units of output$ )nswer: 5 T!pe: T Topic: 4 D: H%J-H@? '-: %I>-%IK %4J$ "efer to the a#ove data$ Eiven the <I> product price+ at its optimal output the firm will: )2 reali*e a <@> economic profit$ C2 incur a <@> loss$ reali*e a <4? economic profit$ &2 reali*e a <4? loss$ )nswer: 5
T!pe: ) Topic: 4 D: H@H '-: %=? %H?$ ) purel! competitive firm,s short-run suppl! curve is: )2 the upward sloping portion of its marginal cost curve$ the upward sloping portion of its average varia#le cost curve$ C2 its marginal cost curve a#ove average varia#le cost$ &2 its average total cost curve$ )nswer: C T!pe: ) Topic: 4 D: H@H '-: %=? %H%$ -n the short run+ a purel! competitive firm will earn a normal profit when: )2 P ( )LC$ P M 'C$ C2 that firm,s '" ( mar.et e3uili#rium price$ &2 P ( )TC$ )nswer: & Ase the following to answer 3uestions %H@-%HI: The following ta#le applies to a purel! competitive industr! composed of %?? identical firms$
T!pe: T Topic: 4 D: H@> '-: %=%
%H@$ "efer to the a#ove ta#le$ The e3uili#rium price in this purel! competitive mar.et is: )2 <>$ <H$ C2 <4$ &2 <@$ )nswer: C T!pe: T Topic: 4 D: H@> '-: %=% %H4$ "efer to the a#ove ta#le$ )t the e3uili#rium price+ each of the %?? firms in this industr! will produce: )2 K??+??? units of output$ C2 K+??? units of output K?+??? units of output$ &2 K?? units of output$ )nswer: C T!pe: T Topic: 4 D: H@>-H@K '-: %=%-%=@ %HH$ "efer to the a#ove ta#le$ or each of the %?? firms in this industr!+ marginal revenue and total revenue will #e: )2 <H and <H??+ respectivel!$ C2 <H and <@?+???+ respectivel!$ <4 and <4?+???+ respectivel!$ &2 <4 and <%=+???+ respectivel!$ )nswer: & T!pe: T Topic: 4 D: H@>-H@K '-: %=%-%=@ %H>$ "efer to the a#ove ta#le$ -f each of the %?? firms in the industr! is maximi*ing its profit+ each must have a marginal cost of: )2 <>$ <H$ C2 <4$ &2 <@$ )nswer: C T!pe: T Topic: 4 D: H@>-H@K '-: %=%-%=@ %HK$ "efer to the a#ove ta#le$ -f each of the %?? firms in the industr! is maximi*ing its profit and earning onl! a normal profit+ each must have a total cost of: )2 <%=+???$ <@?+???$ C2 <@@+???$ &2 <@H+???$ )nswer: ) T!pe: T Topic: 4 D: H@>-H@K '-: %=%-%=@ %HI$ "efer to the a#ove ta#le$ -f each of the %?? firms in the industr! is maximi*ing its profit and earning onl! a normal profit+ each must have an average total cost of: )2 <@$ <4$ C2 <H$ &2 <>$ )nswer: 5 Profit maximi*ing in long run T!pe: ) Topic: H D: H@I '-: %=4 %H=$ Suppose a firm in a purel! competitive mar.et discovers that the price of its product is a#ove its minimum )LC point #ut ever!where #elow )TC$ Eiven this+ the firm: )2 minimi*es losses #! producing at the minimum point of its )LC curve$ maximi*es profits #! producing where '" ( )TC$ C2 should close down immediatel!$ &2 should continue producing in the short run+ #ut leave the industr! in the long run$ )nswer: &
T!pe: ) Topic: H D: H@I '-: %=4 %HJ$ Which of the following is true concerning purel! competitive industries0 )2 There will #e economic losses in the long run #ecause of cut-throat competition$ Dconomic profits will persist in the long run if consumer demand is strong and sta#le$ C2 -n the short run+ firms ma! incur economic losses or earn economic profits+ #ut in the long run the! earn normal profits$ &2 There are economic profits in the long run+ #ut not in the short run$ )nswer: C T!pe: ) Topic: H D: H@= '-: %=H %>?$ -f a purel! competitive firm is producing at the '" ( 'C output level and earning an economic profit+ then: )2 the selling price for this firm is a#ove the mar.et e3uili#rium price$ new firms will enter this mar.et$ C2 some existing firms in this mar.et will leave$ &2 there must #e price fixing #! the industr!,s firms$ )nswer: 5 T!pe: ) Topic: H D: H@I '-: %=4 %>%$ Long-run competitive e3uili#rium: )2 is reali*ed onl! in constant-cost industries$ C2 is not economicall! efficient$ will never change once it is reali*ed$ &2 results in *ero economic profits$ )nswer: &
T!pe: ) Topic: H D: H@= '-: %=H %>@$ We would expect an industr! to expand if firms in that industr! are: )2 earning normal profits$ C2 incurring economic losses$ earning economic profits$ &2 earning accounting profits$ )nswer: 5 T!pe: ) Topic: H D: H@@-H@4 '-: %I=-%IJ %>4$ Which of the following statements is correct0 )2 Dconomic profits induce firms to enter an industr!9 losses encourage firms to leave$ Dconomic profits induce firms to leave an industr!9 profits encourage firms to leave$ C2 Dconomic profits and losses have no significant impact on the growth or decline of an industr!$ &2 ;ormal profits will cause an industr! to expand$ )nswer: ) T!pe: ) Topic: H D: H4? '-: %=K %>H$ Suppose a purel! competitive increasing-cost industr! is in long-run e3uili#rium$ ;ow assume that a decrease in consumer demand occurs$ )fter all resulting adCustments have #een completed+ the new e3uili#rium price: )2 and industr! output will #e less than the initial price and output$ will #e greater than the initial price+ #ut the new industr! output will #e less than the original output$ C2 will #e less than the initial price+ #ut the new industr! output will #e greater than
the original output$ &2 and industr! output will #e greater than the initial price and output$ )nswer: ) T!pe: ) Topic: H D: H4? '-: %=K %>>$ Which of the following statements is correct0 )2 The long-run suppl! curve for a purel! competitive increasing-cost industr! will #e upsloping$ The long-run suppl! curve for a purel! competitive increasing-cost industr! will #e perfectl! elastic$ C2 The long-run suppl! curve for a purel! competitive industr! will #e less elastic than the industr!,s short-run suppl! curve$ &2 The long-run suppl! curve for a purel! competitive decreasing-cost industr! will #e upsloping$ )nswer: ) T!pe: ) Topic: H D: H@J '-: %=> %>K$ ) constant-cost industr! is one in which: )2 a higher price per unit will not result in an increased output$ if %?? units can #e produced for <%??+ then %>? can #e produced for <%>?+ @?? for <@??+ and so forth$ C2 the demand curve and therefore the unit price and 3uantit! sold seldom change$ &2 the total cost of producing @?? or 4?? units is no greater than the cost of producing %?? units$ )nswer: 5 T!pe: ) Topic: H D: H4@ '-: %== %>I$ Which of the following will not hold true for a competitive firm in long-run e3uili#rium0 )2 P e3uals ) C P e3uals minimum )TC C2 'C e3uals minimum )TC &2 P e3uals 'C )nswer: )
T!pe: ) Topic: H D: H4? '-: %=K %>=$ )ssume a purel! competitive increasing-cost industr! is initiall! in long-run e3uili#rium and that an increase in consumer demand occurs$ )fter all economic adCustments have #een completed product price will #e: )2 lower+ #ut total output will #e larger than originall!$ higher and total output will #e larger than originall!$ C2 lower and total output will #e smaller than originall!$ &2 higher+ #ut total output will #e smaller than originall!$ )nswer: 5 T!pe: ) Topic: H D: H4? '-: %=K %>J$ )ssume a purel! competitive+ increasing-cost industr! is in long-run e3uili#rium$ -f a decline in demand occurs+ firms will: )2 leave the industr!+ price will decrease+ and 3uantit! produced will increase$ enter the industr! and price and 3uantit! will #oth increase$ C2 leave the industr! and price and output will #oth increase$
&2 leave the industr! and price and output will #oth decline$ )nswer: & T!pe: ) Topic: H D: H@I '-: %=4 %K?$ When a purel! competitive firm is in long-run e3uili#rium: )2 marginal revenue exceeds marginal cost$ price e3uals marginal cost$ C2 total revenue exceeds total cost$ &2 minimum average total cost is less than the product price$ )nswer: 5 T!pe: ) Topic: H D: H@I '-: %=4 %K%$ ) purel! competitive firm: )2 must earn a normal profit in the short run$ cannot earn economic profit in the long run$ C2 ma! reali*e either economic profit or losses in the long run$ &2 cannot earn economic profit in the short run$ )nswer: 5 T!pe: ) Topic: H D: H@J '-: %=> %K@$ ) constant-cost industr! is one in which: )2 resource prices fall as output is increased$ resource prices rise as output is increased$ C2 resource prices remain unchanged as output is increased$ &2 small and large levels of output entail the same total costs$ )nswer: C T!pe: ) Topic: H D: H4? '-: %=K %K4$ )n increasing-cost industr! is associated with: )2 a perfectl! elastic long-run suppl! curve$ C2 a perfectl! inelastic long-run suppl! curve$ an upsloping long-run suppl! curve$ &2 an upsloping long-run demand curve$ )nswer: 5
Ase the following to answer 3uestions %KH-%KK:
T!pe: E Topic: H D: H@K '-: %=@ %KH$ "efer to the a#ove diagrams+ which pertain to a purel! competitive firm producing output 3 and the industr! in which it operates$ Which of the following is correct0 )2 The diagrams portra! neither long-run nor short-run e3uili#rium$ The diagrams portra! #oth long-run and short-run e3uili#rium$ C2 The diagrams portra! short-run e3uili#rium+ #ut not long-run e3uili#rium$ &2 The diagrams portra! long-run e3uili#rium+ #ut not short-run e3uili#rium$ )nswer: C
T!pe: E Topic: H D: H@I-H@= '-: %=4-%=H %K>$ "efer to the a#ove diagrams+ which pertain to a purel! competitive firm producing output 3 and the industr! in which it operates$ -n the long run we should expect: )2 firms to enter the industr!+ mar.et suppl! to rise+ and product price to fall$ firms to leave the industr!+ mar.et suppl! to rise+ and product price to fall$ C2 firms to leave the industr!+ mar.et suppl! to fall+ and product price to rise$ &2 no change in the num#er of firms in this industr!$ )nswer: C T!pe: E Topic: H D: H4@ '-: %== %KK$ "efer to the a#ove diagrams+ which pertain to a purel! competitive firm producing output 3 and the industr! in which it operates$ The predicted long-run adCustments in this industr! might #e offset #!: )2 a decline in product demand$ an increase in resource prices$ C2 a technological improvement in production methods$ &2 entr! of new firms into the industr!$ )nswer: C T!pe: ) Topic: H D: H@I '-: %=4 %KI$ )ssume a purel! competitive firm is maximi*ing profit at some output at which long-run average total cost is at a minimum$ Then: )2 the firm is earning an economic profit$ there is no tendenc! for the firm,s industr! to expand or contract$ C2 allocative #ut not productive efficienc! is #eing achieved$ &2 other firms will enter this industr!$ )nswer: 5
T!pe: ) Topic: H D: H4? '-: %=K %K=$ )n increasing-cost industr! is the result of: )2 higher resource prices which occur as the industr! expands$ a change in the industr!,s minimum efficient scale$ C2 /-inefficienc!$ &2 the law of diminishing returns$ )nswer: ) T!pe: ) Topic: H D: H@I '-: %=4 %KJ$ ) purel! competitive firm is precluded from ma.ing economic profit in the long run #ecause: )2 it is a :price ta.er$: C2 of unimpeded entr! to the industr!$ its demand curve is perfectl! elastic$ &2 it produces a differentiated product$ )nswer: C T!pe: ) Topic: H D: H@=-H@J '-: %=H-%=> %I?$ -f a purel! competitive constant-cost industr! is reali*ing economic profits+ we can expect industr! suppl! to: )2 increase+ output to increase+ price to decrease+ and profits to decrease$
increase+ output to increase+ price to increase+ and profits to decrease$ C2 decrease+ output to decrease+ price to increase+ and profits to increase$ &2 increase+ output to decrease+ price to decrease+ and profits to decrease$ )nswer: ) T!pe: ) Topic: H D: H@I '-: %=4 %I%$ )ssume that a decline in consumer demand occurs in a purel! competitive industr! which is initiall! in long-run e3uili#rium$ We can: )2 predict that the new price will #e greater than the original price$ predict that the new price will #e less than the original price$ C2 predict that the new price will #e the same as the original price$ &2 not compare the original and the new price without .nowing a#out cost conditions in the industr!$ )nswer: & T!pe: & Topic: H D: H4?-H4% '-: %=K-%=I %I@$ ) decreasing-cost industr! is one in which: )2 contraction of the industr! will decrease unit costs$ input prices fall or technolog! improves as the industr! expands$ C2 the long-run suppl! curve is perfectl! elastic$ &2 the long-run suppl! curve is upsloping$ )nswer: 5 T!pe: ) Topic: H D: H4?-H4% '-: %=K-%=I %I4$ When compact disc 1C&2 pla!ers first came on the mar.et+ the! sold for over <%+???$ ;ow the! cost onl! <%??$ These facts impl! that: )2 the C& industr! was once competitive+ #ut is now monopolistic$ fewer firms produce C& pla!ers than was the case five or ten !ears ago$ C2 the demand curve for C& pla!ers has shifted leftward$ &2 the C& pla!er industr! is a decreasing-cost industr!$ )nswer: &
T!pe: ) Topic: H D: H4% '-: %=I %IH$ Suppose that an industr!,s long-run suppl! curve is downsloping$ This suggests that: )2 it is an increasing-cost industr!$ relevant inputs have #ecome more expensive as the industr! has expanded$ C2 technolog! has #ecome less efficient as a result of the industr!,s expansion$ &2 it is a decreasing-cost industr!$ )nswer: & T!pe: ) Topic: H D: H4?-H4% '-: %=K-%=I %I>$ Suppose an increase in product demand occurs in a decreasing-cost industr!$ )s a result: )2 the new long-run e3uili#rium price will #e lower than the original long-run e3uili#rium price$ 52 e3uili#rium 3uantit! will decline$ C2 firms will eventuall! leave the industr!$
&2 the new long-run e3uili#rium price will #e higher than the original price$ )nswer: ) T!pe: C Topic: H D: H@J-H4? '-: %=>-%=K %IK$ Purel! competitive industr! / has constant costs and its product is an inferior good$ The industr! is currentl! in long-run e3uili#rium$ The econom! now goes into a recession and average incomes decline$ The result will #e: )2 an increase in output and in the price of the product$ 52 an increase in output+ #ut not in the price+ of the product$ C2 a decrease in the output+ #ut not in the price+ of the product$ &2 a decrease in output and in the price of the product$ )nswer: 5 T!pe: ) Topic: H D: H4? '-: %=K %II$ Suppose losses cause industr! / to contract and+ as a result+ the prices of relevant inputs decline$ -ndustr! / is: )2 a constant-cost industr!$ C2 an increasing-cost industr!$ 52 a decreasing-cost industr!$ &2 encountering /-inefficienc!$ )nswer: C
Ase the following to answer 3uestions %I=-%=4:
T!pe: E Topic: H D: H@? '-: %IK %I=$ "efer to the a#ove diagram showing the average total cost curve for a purel! competitive firm$ Suppose this firm is maximi*ing its total profit and the mar.et price is <%>$ The firm,s per unit profit is: )2 <>$ 52 <@??$ C2 a positive amount less than <>$ &2 a positive amount more than <@??$ )nswer: C T!pe: E Topic: H D: H@? '-: %IK %IJ$ "efer to the a#ove diagram showing the average total cost curve for a purel! competitive firm$ Suppose that total varia#le cost is <4?? at H? units of output$ )t that level of output+ average fixed cost: )2 is <@$>?$ 52 is <H$ C2 is <%??$ &2 cannot #e determined from the information provided$ )nswer: ) T!pe: E Topic: H D: H@? '-: %IK %=?$ "efer to the a#ove diagram showing the average total cost curve for a purel! competitive firm$ Suppose that average varia#le cost is <= at H? units of output$ )t that level of output+ total fixed cost: )2 is <@$ 52 is <H?$ C2 is <=?$ &2 cannot #e determined from the information provided$ )nswer: C T!pe: E Topic: H D: H%>-H%K+ H@I '-: %I%-%I@+ %=4
%=%$ "efer to the a#ove diagram showing the average total cost curve for a purel! competitive firm$ )t the long-run e3uili#rium level of output+ this firm,s total revenue: )2 is <%?$ 52 is <H?$ C2 is <H??$ &2 cannot #e determined from the information provided$ )nswer: C T!pe: E Topic: H D: H@?+ H@I '-: %IK+ %=4 %=@$ "efer to the a#ove diagram showing the average total cost curve for a purel! competitive firm$ )t the long-run e3uili#rium level of output+ this firm,s total cost: )2 is <%?$ 52 is <H?$ C2 is <H??$ &2 cannot #e determined from the information provided$ )nswer: C T!pe: E Topic: H D: H@I '-: %=4 %=4$ "efer to the a#ove diagram showing the average total cost curve for a purel! competitive firm$ )t the long-run e3uili#rium level of output+ this firm,s economic profit: )2 is *ero$ 52 is <H??$ C2 is <@??$ &2 cannot #e determined from the information provided$ )nswer: ) T!pe: ) Topic: H D: H@I '-: %=4 %=H$ The '" ( 'C rule applies: )2 in the short run+ #ut not in the long run$ C2 in #oth the short run and the long run$ 52 in the long run+ #ut not in the short run$ &2 onl! to a purel! competitive firm$ )nswer: C T!pe: ) Topic: H D: H4? '-: %=K %=>$ -f the long-run suppl! curve of a purel! competitive industr! slopes upward+ this implies that the prices of relevant resources: )2 will fall as the industr! expands$ C2 rise as the industr! contracts$ 52 are constant as the industr! expands$ &2 rise as the industr! expands$ )nswer: & Ase the following to answer 3uestions %=K-%=I:
T!pe: E Topic: H D: H4? '-: %=K %=K$ "efer to the a#ove diagram$ Line 1%2 reflects the long-run suppl! curve for: )2 a constant-cost industr!$ C2 an increasing-cost industr!$ 52 a decreasing-cost industr!$ &2 technologicall! progressive industr!$ )nswer: C T!pe: E Topic: H D: H@J '-: %=> %=I$ "efer to the a#ove diagram$ Line 1@2 reflects the long-run suppl! curve for: )2 a constant-cost industr!$ C2 an increasing-cost industr!$ 52 a decreasing-cost industr!$ &2 technologicall! progressive industr!$ )nswer: )
Pure competition and efficienc! T!pe: ) Topic: > D: H4@ '-: %== %==$ )llocative efficienc! is achieved when the production of a good occurs where: )2 P ( minimum )TC$ 52 P ( 'C$ C2 P ( minimum )LC$ &2 total revenue is e3ual to T C$ )nswer: 5
T!pe: ) Topic: > D: H4@ '-: %== %=J$ ) firm is producing an output such that the #enefit from one more unit is more than the cost of producing that additional unit$ This means the firm is: )2 producing more output than allocative efficienc! re3uires$ 52 producing less output than allocative efficienc! re3uires$ C2 achieving productive efficienc!$ &2 producing an inefficient output+ #ut we cannot sa! whether output should #e increased or decreased$ )nswer: 5 T!pe: ) Topic: > D: H4% '-: %=I %J?$ "esources are efficientl! allocated when production occurs where: )2 marginal cost e3uals average varia#le cost$ C2 price is e3ual to marginal cost$ 52 price is e3ual to average revenue$ &2 price is e3ual to average varia#le cost$ )nswer: C T!pe: & Topic: > D: H4@ '-: %== %J%$ The term productive efficienc! refers to: )2 an! short-run e3uili#rium position of a competitive firm$ 52 the production of the product-mix most desired #! consumers$ C2 the production of a good at the lowest average total cost$ &2 fulfilling the condition P ( 'C$ )nswer: C T!pe: ) Topic: > D: H4@ '-: %== %J@$ -f the price of product F is <@> and its marginal cost is <%=: )2 F is #eing produced with the least-cost com#ination of resources$ 52 societ! will reali*e a net gain if less of F is produced$ C2 resources are #eing underallocated to F$ &2 resources are #eing overallocated to F$ )nswer: C T!pe: & Topic: > D: H4@ '-: %== %J4$ The term allocative efficienc! refers to: )2 the level of output that coincides with the intersection of the 'C and )LC curves$ 52 minimi*ation of the ) C in the production of an! good$ C2 the production of the product-mix most desired #! consumers$ &2 the production of a good at the lowest average total cost$ )nswer: C
T!pe: ) Topic: > D: H44 '-: %=J %JH$ Ander pure competition in the long run: )2 neither allocative efficienc! nor productive efficienc! are achieved$ 52 #oth allocative efficienc! and productive efficienc! are achieved$ C2 productive efficienc! is achieved+ #ut allocative efficienc! is not$ &2 allocative efficienc! is achieved+ #ut productive efficienc! is not$ )nswer: 5
T!pe: ) Topic: > D: H4@ '-: %== %J>$ -f for a firm P ( minimum )TC ( 'C+ then: )2 neither allocative efficienc! nor productive efficienc! is #eing achieved$ 52 productive efficienc! is #eing achieved+ #ut allocative efficienc! is not$ C2 #oth allocative efficienc! and productive efficienc! are #eing achieved$ &2 allocative efficienc! is #eing achieved+ #ut productive efficienc! is not$ )nswer: C Ase the following to answer 3uestions %JK-@?%:
T!pe: E Topic: > D: H4% '-: %=I %JK$ The a#ove diagram portra!s: )2 a competitive firm that should shut down in the short run$ 52 the e3uili#rium position of a competitive firm in the long run$ C2 a competitive firm that is reali*ing an economic profit$ &2 the loss-minimi*ing position of a competitive firm in the short run$ )nswer: 5 T!pe: E Topic: > D: H4% '-: %=I Status: ;ew %JI$ "efer to the a#ove diagram$ -f this competitive firm produces output Q+ it will: )2 suffer an economic loss$ 52 earn a normal profit$ C2 earn an economic profit$ &2 achieve productive efficienc!+ #ut not allocative efficienc!$ )nswer: 5 T!pe: E Topic: > D: H44 '-: %=J %J=$ "efer to the a#ove diagram$ 5! producing output level Q: )2 neither productive nor allocative efficienc! are achieved$ 52 #oth productive and allocative efficienc! are achieved$ C2 allocative efficienc! is achieved+ #ut productive efficienc! is not$ &2 productive efficienc! is achieved+ #ut allocative efficienc! is not$ )nswer: 5
T!pe: E Topic: > D: H4@ '-: %== %JJ$ "efer to the a#ove diagram$ )t output level Q%:
)2 neither productive nor allocative efficienc! are achieved$ 52 #oth productive and allocative efficienc! are achieved$ C2 allocative efficienc! is achieved+ #ut productive efficienc! is not$ &2 productive efficienc! is achieved+ #ut allocative efficienc! is not$ )nswer: ) T!pe: E Topic: > D: H4@ '-: %== @??$ "efer to the a#ove diagram$ )t output level Q%: )2 resources are overallocated to this product and productive efficienc! is not reali*ed$ 52 resources are underallocated to this product and productive efficienc! is not reali*ed$ C2 productive efficienc! is achieved+ #ut resources are underallocated to this product$ &2 productive efficienc! is achieved+ #ut resources are overallocated to this product$ )nswer: 5 T!pe: E Topic: > D: H4@-H44 '-: %==-%=J @?%$ "efer to the a#ove diagram$ )t output level Q@: )2 resources are overallocated to this product and productive efficienc! is not reali*ed$ 52 resources are underallocated to this product and productive efficienc! is not reali*ed$ C2 productive efficienc! is achieved+ #ut resources are underallocated to this product$ &2 productive efficienc! is achieved+ #ut resources are overallocated to this product$ )nswer: ) T!pe: ) Topic: > D: H4@ '-: %== @?@$ )ssume that societ! places a higher value on the last unit of / produced than the value of the resources used to produce that unit$ With no spillovers+ this information means that: )2 total cost is greater than total revenue$ C2 marginal cost is greater than price$ 52 price is greater than marginal cost$ &2 resources are #eing overallocated to /$ )nswer: 5 T!pe: ) Topic: > D: H4@-H44 '-: %==-%=J @?4$ -f production is occurring where marginal cost exceeds price+ the purel! competitive firm will: )2 maximi*e profit+ #ut resources will #e underallocated to the product$ 52 maximi*e profit+ #ut resources will #e overallocated to the product$ C2 fail to maximi*e profit and resources will #e overallocated to the product$ &2 fail to maximi*e profit and resources will #e underallocated to the product$ )nswer: C T!pe: ) Topic: > D: H4@ '-: %== @?H$ -f a purel! competitive firm is producing where price exceeds marginal cost+ then: )2 the firm will fail to maximi*e profit+ #ut resources will #e efficientl! allocated$
52 the firm will fail to maximi*e profit and resources will #e overallocated to the product$ C2 the firm will fail to maximi*e profit and resources will #e underallocated to the product$ &2 resources will #e underallocated to the product+ #ut the firm will maximi*e profit$ )nswer: C
T!pe: ) Topic: > D: H4@ '-: %== Status: ;ew @?>$ Which of the following conditions is true for a purel! competitive firm in long-run e3uili#rium0 )2 P M 'C ( minimum )TC$ C2 P ( 'C ( minimum )TC$ 52 P M 'C M minimum )TC$ &2 P N 'C N minimum )TC$ )nswer: C Consider This Questions T!pe: ) D: H@4 '-: %IJ Status: ;ew @?K$ 1Consider This2 )n unprofita#le motel will sta! open in the short-run if: )2 price 1average nightl! room rate2 exceeds average varia#le cost$ 52 marginal revenue exceeds marginal cost$ C2 price 1average nightl! room rate2 exceeds average fixed cost$ &2 marginal revenue exceeds price$ )nswer: ) T!pe: ) D: H@4 '-: %IJ Status: ;ew @?I$ 1Consider This2 )n otherwise unprofita#le motel located on a largel! a#andoned roadwa! might #e a#le to sta! open for several !ears #!: )2 increasing its nightl! room rates$ 52 reducing or eliminating its annual maintenance expenses$ C2 charging room rates that exceed marginal revenue$ &2 eliminating its fixed costs+ including its opportunit! costs$ )nswer: 5 Last Word Questions Ase the following to answer 3uestions @?=-@%?:
T!pe: E D: H4H '-: %J? @?=$ 1Last Word2 "efer to the a#ove graph of the mar.et for asparagus$ )t the mar.et price of <@+ area ) O 5 represents: )2 total consumer utilit!$ C2 consumer surplus$ 52 total revenue to sellers$ &2 returns to capital and to la#or$ )nswer: ) T!pe: E D: H4H '-: %J? @?J$ 1Last Word2 "efer to the a#ove graph of the mar.et for asparagus$ )t the mar.et
price of <@+ area ) represents: )2 total consumer utilit!$ 52 total revenue to sellers$ C2 consumer surplus$ &2 economic profit$ )nswer: C T!pe: E D: H4H '-: %J? @%?$ 1Last Word2 -n long-run e3uili#rium+ purel! competitive mar.ets: )2 minimi*e total cost$ 52 maximi*e consumer surplus$ C2 !ield economic profits to most sellers$ &2 inevita#l! degenerate into monopol! in increasing cost industries$ )nswer: 5 True/ alse Questions T!pe: ) D: H%K '-: %I@ @%%$ -n maximi*ing profit a firm will alwa!s produce that output where total revenues are at a maximum$ )nswer: alse T!pe: ) D: H@@ '-: %I= @%@$ -n the short run a competitive firm will alwa!s choose to shut down if product price is less than the lowest attaina#le average total cost$ )nswer: alse T!pe: ) D: H@I '-: %=4 @%4$ )fter all long-run adCustments have #een completed+ a firm in a competitive industr! will produce that level of output where average total cost is at a minimum$ )nswer: True T!pe: ) D: H4?-H4% '-: %=K-%=I @%H$ The long-run suppl! curve for a decreasing-cost industr! is downsloping$ )nswer: True T!pe: ) D: H@? '-: %IK @%>$ ) competitive firm will produce in the short run so long as its price exceeds its average fixed cost$ )nswer: alse T!pe: ) D: H4@ '-: %== @%K$ 'arginal cost is a measure of the alternative goods which societ! forgoes in using resources to produce an additional unit of some specific product$ )nswer: True
T!pe: ) D: H%>-H%K '-: %I%-%I@ @%I$ Price and marginal revenue are identical for an individual purel! competitive seller$ )nswer: True
T!pe: ) D: H4@ '-: %== @%=$ 5ecause the e3uili#rium position of a purel! competitive seller entails an e3ualit! of price and marginal costs+ competition produces up to an efficient allocation of economic resources$ )nswer: True T!pe: ) D: H@4-H@H '-: %IJ-%=? @%J$ The short-run suppl! curve slopes upward #ecause producers must #e compensated for rising marginal costs$ )nswer: True T!pe: ) D: H@> '-: %=% @@?$ The demand curve for a purel! competitive industr! is perfectl! elastic+ #ut the demand curves faced #! individual firms in such an industr! are downsloping$ )nswer: alse T!pe: ) D: H%I-H%= '-: %I4-%IH @@%$ The total revenue curve of a competitive seller graphs as a straight+ upsloping line$ )nswer: True T!pe: & D: H%K '-: %I@ @@@$ 'arginal revenue is the addition to total revenue resulting from the sale of one more unit of output$ )nswer: True Ase the following to answer 3uestions @@4-@4%:
T!pe: E D: H%J-H@? '-: %I>-%IK @@4$ "efer to the a#ove diagram$ This firm will maximi*e profits #! producing output &$ )nswer: alse
3uestion $! $.& out of $.& points The usual starting point for a master budget is< @elected +nswer< the sales forecast or sales budget. 'orrect +nswer< the sales forecast or sales budget.
3uestion $$ $.& out of $.& points Bhich of the following benefits could an organization reasonably expect from an effective budget program> @elected +nswer< +ll of these. 'orrect +nswer< +ll of these. 3uestion $2 $.& out of $.& points Mn January $" 8arnes 'ompany has 8"!!! units of #roduct + on hand. :uring the year" the company plans to sell %!"!!! units of #roduct +" and plans to have ."&!! units on hand at year end. Gow many units of #roduct + must be produced during the year> @elected +nswer< 28"&!! 'orrect +nswer< 28"&!! 3uestion $% ! out of $.& points #oorly trained wor5ers could have an unfavorable effect on which of the following variances>
@elected +nswer< 'orrect +nswer< 3uestion $) $.& out of $.& points The variance that is most useful in assessing the performance of the purchasing department manager is< @elected +nswer< the materials price variance. 'orrect +nswer< the materials price variance. 3uestion $& $.& out of $.& points The purpose of a flexible budget is to< @elected +nswer< compare actual and budgeted results at virtually any level of activity. 'orrect +nswer< compare actual and budgeted results at virtually any level of activity.
3uestion $. $.& out of $.& points =f operating income is $.!"!!!" average operating assets are $2)!"!!!" and the minimum re/uired rate of return is 2!C" what is the residual income> @elected +nswer< $$2"!!! 'orrect +nswer< $$2"!!! 3uestion $ $.& out of $.& points Uinsi 'orporation manufactures five different products. +ll five of these products must pass through a stamping machine in its fabrication department. This machine is Uinsi's constrained resource. Uinsi would ma5e the most profit if it produces the product that< @elected +nswer< generates the highest contribution margin per stamping machine hour. 'orrect +nswer< generates the highest contribution margin per stamping machine hour. 3uestion $8 $.& out of $.& points The following information relates to next year's proLected operating results of the 'hildren's :ivision of ?runge 'lothing 'orporation<
=f 'hildren's :ivision is dropped" half of the fixed costs above can be eliminated. Bhat will be the effect on ?runge's profit next year if 'hildren's :ivision is dropped instead of being 5ept> @elected +nswer< $&!"!!! increase 'orrect +nswer< $&!"!!! increase 3uestion $A $.& out of $.& points + company has unlimited funds to invest at its discount rate. The company should invest in all proLects having< @elected +nswer< a net present value greater than zero. 'orrect +nswer< a net present value greater than zero. 3uestion 2! $.& out of $.& points +n opportunity cost is<
@elected +nswer< the benefit forgone when one alternative is selected rather than another. 'orrect +nswer< the benefit forgone when one alternative is selected rather than another. 3uestion 2$ $.& out of $.& points + favorable materials price variance of $%8! and an unfavorable materials /uantity variance of $$2! were reported during the current year. 8ased on these variances" you can conclude that< @elected +nswer< the actual cost per unit of materials was less than the standard cost per unit. 'orrect +nswer< the actual cost per unit of materials was less than the standard cost per unit. 3uestion 22 $.& out of $.& points The process of assigning indirect costs is called @elected +nswer< cost allocation. 'orrect +nswer< cost allocation.
$. Huella 'orporation prepares its statement of cash flows using the indirect method. Bhich of the following would be added to net income in the operating activities section of the statement> +. 8. '. :. 2. Bhich of the following should be classified as an investing activity on a statement of cash flows> +. cash received from the sale of office e/uipment that was sold at a loss. 8. cash used to purchase a long-term investment in bonds of another corporation. '. cash received from the issuance of =guato 'orporation common stoc5. :. both + and 8 above 9. +ll of these %. Three potential investment proLects (+" 8" and '* at Kit 'orporation all re/uire the same initial investment" have the same useful life (% years*" and have no expected salvage value. 9xpected net cash inflows from these three proLects each year is as follows<
Bhat can be determined from the information provided above> +. the net present value of proLect ' will be the highest. 8. the internal rate of return of proLects + and ' cannot be computed. '. the net present value and the internal rate of return will be the same for all three proLects. :. both + and 8 above. ). Bhich of the following statements is false> =. 0or capital budgeting decisions" the net present value method is superior to the simple rate of return method. ==. Bhen using the paybac5 method" any cash flows for a proLect that occur after the paybac5 period are not
considered in computing the paybac5 period for that proLect. ===. The present value of a given future cash flow will increase as the discount rate decreases. +. @tatement = 8. @tatement == '. @tatement ===. :. 9xactly two of the statements. 9. Kone of the statements is false. &. (=gnore income taxes in this problem.* Gow much would you have to invest today in the ban5 at an interest rate of 8C to have an annuity of $)"8!! per year for years" with nothing left in the ban5 at the end of the years> @elect the amount below that is closest to your answer. +. $%%".!! 8. $2" A8 '. $2)"A8A :. $%$"$$$ .. Bhich of the following statements is true> =. @un5 costs and future costs that do not differ between the alternatives are not relevant in a decision. ==. + future cost that does not vary among alternatives under consideration is irrelevant. ===. Mpportunity costs represent economic benefits that are forgone as a result of pursuing some course of action. +. @tatement = 8. @tatement == '. @tatement ===. :. 9xactly two of the statements. 9. +ll three statements are true. . 'onsider the following statements< =. + division's net operating income" after deducting both traceable and allocated common corporate costs" is negative. ==. The division's avoidable fixed costs exceed its contribution margin. ===. The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin. Bhich of the above statements give an economic reason for eliminating the division> +. Mnly = 8. Mnly == '. Mnly === :. Mnly = and == 9. Kone of the above. 8. Mnce the brea5-even point is reached< +. the total contribution margin changes from negative to positive. 8. net income will increase by the unit contribution margin for each additional item sold. '. variable expenses will remain constant in total. :. the contribution margin ratio begins to decrease. 9. none of the above. A. The Jabba 'ompany manufactures the 4@nac5 8uster4 which consists of a wooden snac5 chip bowl with an attached porcelain dip bowl. Bhich of the following would be relevant in Jabba's decision to ma5e the dip bowls or buy them from an outside supplier>
+. 8. '. :. $!. Bhich of the following statements is true> =. + responsibility center is a business segment whose manager has control over costs" revenues" or investments in operating assets. ==. + segment is any part or activity of an organization about which a manager see5s cost" revenue" or profit data. ===. The use of return on investment (FM=* as a performance measure may lead managers to reLect a proLect that would be favorable for the company as a whole. +. @tatement = 8. @tatement == '. @tatement ===. :. Mnly two of the statements are true. 9. +ll three statements are true. $$. Mi5e 'orporation uses residual income to evaluate the performance of its divisions. The company's minimum re/uired rate of return is $)C. =n January" the 'ommercial #roducts :ivision had average operating assets of $A !"!!! and net operating income of $$)%" !!. Bhat was the 'ommercial #roducts :ivision's residual income in January> +. $ "A!! 8. -$2!"$$8 '. $2!"$$8 :. -$ "A!! $2. Bhich of the following statements is false> =. =n a flexible budget" when the activity declines" the variable cost per unit also declines. ==. The higher the denominator activity level used to compute the predetermined overhead rate" the higher the predetermined overhead rate. ===. =f the denominator level of activity is more than the standard hours allowed for the output of the period" then the volume variance is unfavorable" indicating an under utilization of available facilities. +. @tatement = 8. @tatement == '. @tatement ===. :. 9xactly two of the statements. 9. +ll of the statements are false. $%. The variance that is most useful in assessing the performance of the purchasing department manager is< +. the materials /uantity variance. 8. the materials price variance. '. the labor rate variance. :. the labor efficiency variance. $). +ll of the following statements are correct when referring to process costing except< +. #rocess costing would be appropriate for a Leweler who ma5es custom Lewelry to order. 8. + process costing system has the same basic purposes as a Lob-order costing system. '. ;nits produced are indistinguishable from each other. :. 'osts are accumulated by department.
$&. :uring a recent lengthy stri5e at Morell Manufacturing 'ompany" management replaced stri5ing assembly line wor5ers with office wor5ers. The assembly line wor5ers were being paid $$8 per hour while the office wor5ers are only paid $$! per hour. Bhat is the most li5ely effect on the labor variances in the first month of this stri5e> +. 8. '. :. $.. Bhich of the following statements is true> =. =deal standards do not allow for machine brea5downs and other normal inefficiencies. ==. The standard price per unit for direct materials should reflect the final" delivered cost of the materials" net of any discounts ta5en. ===. The standard /uantity or standard hours allowed refers to the amount of the input that should have been used to produce the actual output of the period. +. @tatement = 8. @tatement == '. @tatement ===. :. Mnly two of the statements are true. 9. +ll three statements are true. $ . Bhich of the following statements is true> =. The direct materials to be purchased for a period can be obtained by subtracting the desired ending inventory of direct materials from the total direct materials needed for the period. ==. The usual starting point in budgeting is to ma5e a forecast of net income. ===. =n a production budget" if the number of units in finished goods inventory at the end of the period is less than the number of units in finished goods inventory at the beginning of the period" then the expected number of units sold is greater than the number of units to be produced during the period. +. @tatement = 8. @tatement == '. @tatement ===. :. Mnly two of the statements are true. 9. +ll three statements are true. $8. The completion of goods is recorded as a decrease in the wor5 in process inventory account when using< +. 8. '. :. $A. Bhich of the following statements is true> =. =n a process costing system" the costs of one processing department become part of the costs of the next processing department. ==. The units in beginning wor5 in process inventory plus the units started into production must e/ual the units transferred out of the department plus the units in ending wor5 in process inventory. ===. #rocess costing is employed in industries that produce basically homogeneous products such as bric5s" flour" or cement but would not be appropriate for assembly-type operations such as those that manufacture
computers. +. @tatement = 8. @tatement == '. @tatement ===. :. Mnly two of the statements are true. 9. +ll three statements are true. 2!. =f company + has a higher degree of operating leverage than company 8" then< +. the company + has higher variable expenses. 8. the company +'s profits are more sensitive to percentage changes in sales. '. the company + is more profitable. :. the company + is less ris5y. 9. none of the above. 2$. Bhich of the following statements is false> =. #rocess costing is used where many different products are produced each period to customer specifications. ==. Bhen a company changes from a traditional costing system to an activity-based costing system" the unit product costs of high-volume products typically change more than the unit product costs of low-volume products. ===. +ctivity-based costing uses a number of activity cost pools" each of which is allocated to products on the basis of direct labor-hours. +. @tatement = 8. @tatement == '. @tatement ===. :. 9xactly two of the statements. 9. +ll of the statements are false. 22. Bhich of the following would probably be the most accurate measure of activity to use for allocating the costs associated with a factory's purchasing department> +. Machine-hours 8. :irect labor-hours '. Kumber of orders processed :. 'ost of materials purchased 2%. =n activity-based costing" unit product costs computed for external financial reports do KMT include< +. direct materials. 8. direct labor. '. manufacturing overhead. :. selling costs. 2). Bhich of the following statements is correct concerning Lob-order costing> +. Job-order costing would be appropriate for a textboo5 publisher. 8. +ll the costs appearing on a Lob cost sheet are actual costs. '. =ndirect materials are charged to a specific Lob. :. Job-order costing is mainly used in firms with homogeneous products such as oil refineries. 2&. Bhich of the following types of firms typically would use process costing rather than Lob-order costing> +. + small appliance repair shop. 8. + manufacturer of commercial passenger aircraft. '. + specialty e/uipment manufacturer. :. + brea5fast cereal manufacturer.
2.. =n a Lob-order costing system" the application of manufacturing overhead would be recorded as a debit to< +. Manufacturing Mverhead inventory. 8. 0inished ?oods inventory. '. Bor5 in #rocess inventory. :. 'ost of ?oods @old. 2 . Gow would the following costs be classified (product or period* under variable costing at a retail clothing store> +. 8. '. :. 28. =n a Lob-order costing system" the cost of a completed but unsold Lob is< +. closed to 'ost of ?oods @old. 8. part of the Bor5 in #rocess inventory balance. '. adLusted to exclude any applied overhead. :. part of the 0inished ?oods inventory balance. 2A. =f overhead is underapplied" then< +. actual overhead cost is less than estimated overhead cost. 8. the amount of overhead cost applied to Bor5 in #rocess is less than the actual overhead cost incurred. '. the predetermined overhead rate is too high. :. the Manufacturing Mverhead account will have a credit balance at the end of the year. %!. =f both the fixed and variable expenses associated with a product decrease" what will be the effect on the contribution margin ratio and the brea5-even point" respectively> +. 8. '. :. %$. Bhich of the following is true regarding the contribution margin ratio of a single product company> +. +s fixed expenses decrease" the contribution margin ratio increases. 8. The contribution margin ratio multiplied by the selling price per unit e/uals the contribution margin per unit. '. The contribution margin ratio will decline as unit sales decline. :. The contribution margin ratio e/uals the selling price per unit less the variable expense ratio. %2. =f a company is operating at the brea5-even point< +. its contribution margin will be e/ual to its variable expenses. 8. its margin of safety will be e/ual to zero. '. its fixed expenses will be e/ual to its variable expenses. :. its selling price will be e/ual to its variable expense per unit. %%. Bhich of the following strategies could be used to reduce the brea5-even point> +. 8.
'. :. %). Bhich costs will change with an increase in activity within the relevant range> +. ;nit fixed cost and total fixed cost 8. ;nit variable cost and total variable cost '. ;nit fixed cost and total variable cost :. ;nit fixed cost and unit variable cost %&. Bhich of the following would usually be considered a discretionary fixed cost for a soft drin5 bottling company> +. the cost of advertising its products 8. the cost of fire insurance on its factory building '. depreciation on its manufacturing e/uipment :. both a and b above Hi5e [ [ @hare Fecent #osts by Mthers@ee +ll
/uhiim"o Leonald Amootti What is the price of mother"oard and powersupply?
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@eptember $& 3uestion 2% $.& out of $.& points Bhich of the following is not an advantage of decentralization for a company> @elected +nswer< subunit managers will act to benefit the organization as a whole 'orrect +nswer< subunit managers will act to benefit the organization as a whole 3uestion 2) $.& out of $.& points ...@ee More Hi5e [ [ @hare
/artinsville 2ndiana +omputer $epair 5 8E'.'
@eptember $& 3uestion A $.& out of $.& points Bhich of the following is not one of the /uestions you should as5 when faced with an ethical dilemma> @elected +nswer< :o = thin5 = will get caught> 'orrect +nswer< :o = thin5 = will get caught>
3uestion $! $.& out of $.& points Bhich of the following costs is part of manufacturing overhead> @elected +nswer< =ndirect labor 'orrect +nswer< =ndirect labor 3uestion $$ $.& out of $.& points #roduct costs @elected +nswer< +ll of the above answers are correct. 'orrect +nswer< +ll of the above answers are correct. 3uestion $2 $.& out of $.& points Bhich of the following is not a period cost> @elected +nswer< :irect materials 'orrect +nswer< :irect materials 3uestion $% $.& out of $.& points Bhich of the following companies is most li5ely to use a process costing system> @elected +nswer< + company that produces petroleum products 'orrect +nswer< + company that produces petroleum products 3uestion $) $.& out of $.& points +n allocation base is @elected +nswer< a common characteristic that Lobs share" which is used to spread the overhead costs among the various Lobs. 'orrect +nswer< a common characteristic that Lobs share" which is used to spread the overhead costs among the various Lobs. 3uestion $& ! out of $.& points
Bhich of the following statements about Lob-order costing is not true> @elected +nswer< Manufacturing overhead cannot be traced directly to Lobs" so it is assigned using the overhead allocation rate. 'orrect +nswer< =ndirect labor is traced to Lobs using time tic5ets. 3uestion $. $.& out of $.& points Bhich of the following is the most reasonable allocation base for a highly mechanized process> @elected +nswer< machine hours 'orrect +nswer< machine hours 3uestion $ $.& out of $.& points + predetermined overhead rate is preferred over an actual overhead rate because a predetermined overhead rate @elected +nswer< 8oth + and ' 'orrect +nswer< 8oth + and ' 3uestion $8 $.& out of $.& points The balance in the 0inished ?oods =nventory account on July $" 2!!)" was $%)"!!! and the June %!" 2!!&" balance in the 0inished ?oods =nventory account was $)$"!!!. =f the cost of goods manufactured was $2!!"!!!" what was the cost of goods sold> @elected +nswer< $$A%"!!! 'orrect +nswer< $$A%"!!! 3uestion $A ! out of $.& points 8lac5 'ompany's Bor5 in #rocess =nventory account has a beginning balance of $)!"!!! and an ending balance of $&!"!!!. 'urrent manufacturing costs total $$2&"!!!. Bhat is the cost of goods manufactured> @elected +nswer< $$2&"!!! 'orrect +nswer< $$$&"!!! 3uestion 2! ! out of $.& points 9merald 'ompany estimates that the total overhead costs for 2!!) will be $$&!"!!! and that the production
employees will wor5 %!"!!! direct labor hours and earn $.!!"!!! during the year. =f the company allocates overhead based on direct labor hours" what is the predetermined overhead rate> @elected +nswer< $2!.!! per direct labor hour 'orrect +nswer< $&.!! per direct labor hour 3uestion 2$ $.& out of $.& points 'ompanies that use process costing systems @elected +nswer< +ll of the above answers are correct. 'orrect +nswer< +ll of the above answers are correct. 3uestion 22 $.& out of $.& points The type of costing system commonly used by companies that produce a large number of homogeneous units in a continuous production process is called a @elected +nswer< process costing system. 'orrect +nswer< process costing system. 3uestion 2% ! out of $.& points The e/uivalent units are calculated by< @elected +nswer< ta5ing the units started plus the e/uivalent units in ending inventory. 'orrect +nswer< ta5ing the units completed plus the e/uivalent units in ending inventory. 3uestion 2) $.& out of $.& points =n a process costing system" when items are sold" the cost of the items is moved from @elected +nswer< 0inished ?oods to 'ost of ?oods @old. 'orrect +nswer< 0inished ?oods to 'ost of ?oods @old. 3uestion 2& $.& out of $.& points Bhich of the following se/uences describes the typical flow of costs in a company that is using process costing> @elected +nswer< Bor5 in #rocess" 0inished ?oods" Faw Materials =nventory" 'ost of ?oods @old
'orrect +nswer< Bor5 in #rocess" 0inished ?oods" Faw Materials =nventory" 'ost of ?oods @old 3uestion 2. $.& out of $.& points Bhen partially completed units are converted to a comparable number of completed units" they are referred to as @elected +nswer< e/uivalent units. 'orrect +nswer< e/uivalent units. 3uestion 2 $.& out of $.& points + production cost report @elected +nswer< provides a reconciliation of units and a reconciliation of costs as well as the details of the cost per e/uivalent unit calculation. 'orrect +nswer< provides a reconciliation of units and a reconciliation of costs as well as the details of the cost per e/uivalent unit calculation. 3uestion 28 $.& out of $.& points =f beginning inventory consisted of %"&!! units" ending inventory was $"&!! units" and A"!!! units were started during the period" how many units were completed and transferred out of the department> @elected +nswer< $$"!!! units 'orrect +nswer< $$"!!! units 3uestion 2A $.& out of $.& points =f ending inventory consists of 2".!! units which are $!!C complete with respect to materials and %!C complete with respect to conversion costs" the number of e/uivalent units for materials and for conversion costs are @elected +nswer< 2".!! and 8!" respectively. 'orrect +nswer< 2".!! and 8!" respectively. 3uestion %! $.& out of $.& points Bhich of the following is most li5ely to be a variable cost> @elected +nswer< direct materials
'orrect +nswer< direct materials 3uestion %$ $.& out of $.& points Bhen the level of activity increases" total variable costs @elected +nswer< =ncreases in direct proportion to the increase in activity 'orrect +nswer< =ncreases in direct proportion to the increase in activity 3uestion %2 $.& out of $.& points Bhich of the following statements is correct> @elected +nswer< #rofit is e/ual to revenue minus total variable costs minus total fixed costs. 'orrect +nswer< #rofit is e/ual to revenue minus total variable costs minus total fixed costs. 3uestion %% $.& out of $.& points The number of units that must be sold in order for a company to exactly cover its fixed and variable costs is the @elected +nswer< brea5-even point. 'orrect +nswer< brea5-even point. 3uestion %) $.& out of $.& points Marro Manufacturing is operating at its brea5-even point of $!"!!! units. Bhich of the following statements is not true> @elected +nswer< Marro's fixed costs e/ual its variable costs. 'orrect +nswer< Marro's fixed costs e/ual its variable costs. 3uestion %& $.& out of $.& points Golding all other factors constant" the brea5-even point will be decreased by @elected +nswer< increasing the selling price. 'orrect +nswer< increasing the selling price. 3uestion %.
! out of $.& points Bhich of the following is not true for a firm with high operating leverage> @elected +nswer< =t has a larger contribution margin ratio than similar firms. 'orrect +nswer< =f sales increase" its profits will increase slower than a company with lower operating leverage. 3uestion % $.& out of $.& points Bhen considering a process that involves a resource constraint" the optimal decision @elected +nswer< maximizes the contribution margin per unit of the constraint. 'orrect +nswer< maximizes the contribution margin per unit of the constraint. 3uestion %8 $.& out of $.& points 0ixed costs are $2!"& !. +t the brea5-even point" variable costs are $$..% per unit and the sales price is $%.&! per unit. Bhat is the contribution margin per unit> @elected +nswer< $$.8 'orrect +nswer< $$.8 3uestion %A $.& out of $.& points 'opper 'orporation sells a single product at a price of $2 & per unit. ,ariable cost per unit is $$%& and fixed costs total $%&."8.!. =f sales are expected to be $82&"!!!" what is 'ooper's margin of safety> @elected +nswer< $$2)"!2& 'orrect +nswer< $$2)"!2& 3uestion )! $.& out of $.& points +nchor 'ompany produces a single product that is sold for $8& per unit. =f variable costs per unit are $2. and fixed costs total $) "&!!" how many units must +nchor sell in order to earn a profit of $$!!"!!!> @elected +nswer< 2"&!! 'orrect +nswer< 2"&!! 96+M 2 3uestion $ $.& out of $.& points
Bhich of the following is treated differently in full costing than in variable costing> @elected +nswer< fixed manufacturing overhead 'orrect +nswer< fixed manufacturing overhead 3uestion 2 $.& out of $.& points Bhich of the following is treated as a product cost in variable costing> @elected +nswer< direct labor 'orrect +nswer< direct labor 3uestion % $.& out of $.& points 0ull costing is< @elected +nswer< re/uired for financial reporting under generally accepted accounting principles. 'orrect +nswer< re/uired for financial reporting under generally accepted accounting principles. 3uestion ) $.& out of $.& points =n variable costing" when does fixed manufacturing overhead become an expense> @elected +nswer< in the period when the expense is incurred 'orrect +nswer< in the period when the expense is incurred 3uestion & $.& out of $.& points =n variable costing" which of the following would not be included in inventory> @elected +nswer< none of the above items would be in inventory in variable costing 'orrect +nswer< none of the above items would be in inventory in variable costing 3uestion . $.& out of $.& points Bhich of the following items appears on a variable costing income statement but not on a full costing income statement> @elected +nswer< contribution margin 'orrect +nswer< contribution margin
3uestion $.& out of $.& points Bhen the number of units sold is e/ual to the number of units produced" net income using full costing will be @elected +nswer< e/ual to net income using variable costing. 'orrect +nswer< e/ual to net income using variable costing. 3uestion 8 $.& out of $.& points The process of assigning indirect costs is called @elected +nswer< cost allocation. 'orrect +nswer< cost allocation. 3uestion A $.& out of $.& points + contract which specifies that the suppler will be paid for the cost of production as well as some fixed amount or percentage of cost is called a(n* @elected +nswer< cost-plus contract. 'orrect +nswer< cost-plus contract. 3uestion $! $.& out of $.& points + grouping of individual costs whose total is allocated using one allocation base is called @elected +nswer< cost pool. 'orrect +nswer< cost pool. 3uestion $$ $.& out of $.& points 'ompanies which use only one or two cost pools rather than several cost pools @elected +nswer< may have seriously distorted product costs. 'orrect +nswer< may have seriously distorted product costs. 3uestion $2 $.& out of $.& points
Bhen activity based costing is implemented" the initial outcome is normally that< @elected +nswer< The cost of low volume products will be higher and the cost of high volume products will be lower 'orrect +nswer< The cost of low volume products will be higher and the cost of high volume products will be lower 3uestion $% $.& out of $.& points 'ool 'ompany uses +8' costing. Bhich of the following is most li5ely to be the cost driver for the cost of ordering parts> @elected +nswer< number of orders placed 'orrect +nswer< number of orders placed 3uestion $) $.& out of $.& points Bhich of the following is not generally true when a company compares +8' and traditional costing> @elected +nswer< +8' allocates cost based solely on production volume. 'orrect +nswer< +8' allocates cost based solely on production volume. 3uestion $& $.& out of $.& points The production departments at 'oo5 'orporation occupy a total area of .!!"!!! s/uare feet. Geating costs total $A!!"!!! and are allocated based on the area that each department occupies. The finishing department occupies %!"!!! s/uare feet and the pac5aging department occupies 2!"!!! s/uare feet. Bhat amount of heating cost will be allocated to the finishing and pac5aging departments" respectively> @elected +nswer< $)&"!!! and $%!"!!! 'orrect +nswer< $)&"!!! and $%!"!!! 3uestion $. $.& out of $.& points Maintenance cost is allocated to the three producing departments based on the machine hours used in each department. The maintenance cost for May was $$!!"!!!. The three departments had the following usage for May< :epartment Machine hours used :irect labor hours used +ssembly &!! 2"!!! 0abrication 8!! &"!!! Testing !! %"!!! The maintenance cost that should be allocated to the 0abrication :epartment for May should be< @elected +nswer< $)!"!!!
'orrect +nswer< $)!"!!! 3uestion $ $.& out of $.& points Bhich of the following is li5ely to occur when more overhead cost pools are used> @elected +nswer< +ll of the above are true. 'orrect +nswer< +ll of the above are true. 3uestion $8 $.& out of $.& points Bhich of the following is not a term used to describe the additional costs incurred as a result of selecting one decision alternative over another> @elected +nswer< sun5 costs 'orrect +nswer< sun5 costs 3uestion $A $.& out of $.& points + company is trying to decide whether to sell partially completed goods in their current state or incur additional costs to finish the goods and sell them as complete units. Bhich of the following is not relevant to the decision> @elected +nswer< the costs incurred to process the units to this point 'orrect +nswer< the costs incurred to process the units to this point 3uestion 2! $.& out of $.& points + company is trying to decide whether to 5eep or drop the sporting goods department in its department store. =f the segment is dropped" the manager will be fired. The manager's salary" in relation to the decision to 5eep or drop the sporting goods department" is @elected +nswer< avoidable and therefore relevant 'orrect +nswer< avoidable and therefore relevant 3uestion 2$ $.& out of $.& points The value of benefits foregone by selecting one decision alternative over another is a(n* @elected +nswer< opportunity cost. 'orrect +nswer< opportunity cost.
3uestion 22 ! out of $.& points + product line should be dropped when @elected +nswer< there will be a positive change in income if the product line is dropped. 'orrect +nswer< all of the above. 3uestion 2% $.& out of $.& points Bhich of the following is a direct cost of a specific department in a retail store> @elected +nswer< cost of the department's inventory 'orrect +nswer< cost of the department's inventory 3uestion 2) $.& out of $.& points Two or more products that result from common inputs are called @elected +nswer< Loint products. 'orrect +nswer< Loint products. 3uestion 2& $.& out of $.& points Mster Medical @upply 'ompany is trying to decide whether or not to continue distributing hospital supplies. The following information is available for Mster's business segments. +ssume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if a segment is dropped. Gospital @upplies Fetail @tores Mail Mrder @ales $$2!"!!! $))!"!!! $%.!"!!! ,ariable 'osts $.)"!!! $2!!"!!! $$)!"!!! 'ontribution Margin $&."!!! $2)!"!!! $22!"!!! :irect 0ixed 'osts $&!"!!! $8!"!!! $A!"!!! +llocated 'ommon 0ixed 'osts $2!"!!! $ !"!!! $.!"!!! Ket =ncome ($$)"!!!* $A!"!!! $ !"!!! Feference< Fef -) =f hospital supplies are dropped" overall net income would< @elected +nswer< :ecrease by $."!!! 'orrect +nswer< :ecrease by $."!!! 3uestion 2. $.& out of $.& points Fitz 'ompany ma5es two products from a Loint input that have the following information<
;nits #roduced @ales ,alue per unit at split off Total +dditional processing costs @ales value per unit after additional processing #roduct + &!"!!! $$! $)!!"!!! $$& #roduct 8 %!"!!! $8 $%!!"!!! $2! The Loint cost incurred to produce the two products to the split off point is $.!!"!!!. Feference< Fef Bhich products should be processed further> @elected +nswer< 8 'orrect +nswer< 8 3uestion 2 $.& out of $.& points Bhich of the following would not appear in a capital budget> @elected +nswer< purchase of inventory to be sold next month 'orrect +nswer< purchase of inventory to be sold next month 3uestion 28 $.& out of $.& points 'apital expenditure decisions @elected +nswer< +ll of the above are correct. 'orrect +nswer< +ll of the above are correct. 3uestion 2A $.& out of $.& points The basic concept involved in time value of money calculations is that @elected +nswer< it is better to receive a dollar today than to receive a dollar in the future. 'orrect +nswer< it is better to receive a dollar today than to receive a dollar in the future. 3uestion %! $.& out of $.& points Bhich of the following techni/ues uses time value of money concepts> @elected +nswer< internal rate of return 'orrect +nswer< internal rate of return
3uestion %$ ! out of $.& points Bhich of the following would most li5ely be the present value of a & year annuity of $&"!!! per year (assuming a positive discount rate*> @elected +nswer< $2&"!!! 'orrect +nswer< $$8"!!! 3uestion %2 ! out of $.& points +ssuming a $!C rate of return" how does the present value of an amount to be received two years from today compare to the present value of the same amount to be received three years from today> @elected +nswer< =t is impossible to tell unless the actual amount is 5nown. 'orrect +nswer< The present value of the amount to be received in two years is larger. 3uestion %% $.& out of $.& points The sum of the present values of all cash flows (inflows and outflows* is called the @elected +nswer< net present value. 'orrect +nswer< net present value. 3uestion %) $.& out of $.& points #roLects with a negative net present value will always have a(n* @elected +nswer< internal rate of return that is less than the re/uired rate of return. 'orrect +nswer< internal rate of return that is less than the re/uired rate of return. 3uestion %& $.& out of $.& points +n annuity is @elected +nswer< a series of e/ual payments. 'orrect +nswer< a series of e/ual payments. 3uestion %. $.& out of $.& points The rate of return that e/uates the present value of future cash flows to the investment outlay is the
@elected +nswer< internal rate of return. 'orrect +nswer< internal rate of return. 3uestion % ! out of $.& points #roLects should be accepted when< @elected +nswer< The net present value is positive 'orrect +nswer< 8oth + and 8 3uestion %8 $.& out of $.& points =f the internal rate of return is greater than the re/uired rate of return @elected +nswer< the proLect should be accepted. 'orrect +nswer< the proLect should be accepted. 3uestion %A $.& out of $.& points Bhich of the following statements about the paybac5 period method is not true> @elected +nswer< The paybac5 period method is more sophisticated and yields better decisions than the internal rate of return method. 'orrect +nswer< The paybac5 period method is more sophisticated and yields better decisions than the internal rate of return method. 3uestion )! ! out of $.& points 'alculate the present value of $2$."!!! to be received in seven years if the discount rate is $.C. @elected +nswer< $ %"$&A 'orrect +nswer< $ .")2$ 96+M % 3uestion $ $.& out of $.& points + budget @elected +nswer< +ll of the above are true.
'orrect +nswer< +ll of the above are true. 3uestion 2 $.& out of $.& points + method of budget preparation that re/uires all budgeted amounts to be Lustified by the department" even if the amounts were supported in prior periods" is called @elected +nswer< zero base budgeting. 'orrect +nswer< zero base budgeting. 3uestion % $.& out of $.& points The comprehensive planning document that incorporates a number of individual budgets is the @elected +nswer< master budget. 'orrect +nswer< master budget. 3uestion ) $.& out of $.& points Bhich of the following is a reasonable order in which to prepare budgets> @elected +nswer< sales budget" production budget" material purchases budget 'orrect +nswer< sales budget" production budget" material purchases budget 3uestion & $.& out of $.& points =f the number of units in beginning inventory is more than the number of units in ending inventory" the number of units sold is @elected +nswer< greater than the number of units produced. 'orrect +nswer< greater than the number of units produced. 3uestion . $.& out of $.& points Bhen constructing the production budget" the desired ending inventory for the first period is @elected +nswer< the beginning inventory for the second period. 'orrect +nswer< the beginning inventory for the second period. 3uestion $.& out of $.& points + significant difference between the direct material purchases budget and the direct labor budget is that the direct material purchases budget
@elected +nswer< considers beginning and ending inventory amounts" which are not part of a direct labor budget. 'orrect +nswer< considers beginning and ending inventory amounts" which are not part of a direct labor budget. 3uestion 8 $.& out of $.& points Bhich of the following transactions will affect the cash receipts and disbursements budget for the month in which the transaction occurs> @elected +nswer< payment for direct labor 'orrect +nswer< payment for direct labor 3uestion A $.& out of $.& points The cash receipts and disbursements budget alerts management to all of the following except when @elected +nswer< stoc5outs will cause customer dissatisfaction. 'orrect +nswer< stoc5outs will cause customer dissatisfaction. 3uestion $! $.& out of $.& points Bhen budgets are used for evaluation" the differences between budgeted and actual amounts are called @elected +nswer< budget variances. 'orrect +nswer< budget variances. 3uestion $$ $.& out of $.& points The main difference between a static budget and a flexible budget is that the static budget is @elected +nswer< for a single level of activity while a flexible budget can be adLusted for different activity levels. 'orrect +nswer< for a single level of activity while a flexible budget can be adLusted for different activity levels. 3uestion $2 $.& out of $.& points + flexible budget ta5es into account the fact that when production levels change
@elected +nswer< total fixed costs remain the same. 'orrect +nswer< total fixed costs remain the same. 3uestion $% $.& out of $.& points Unight 'ompany has found that %!C of its sales are collected in the month of the sale and the remainder of the sales is collected in the next month. =f sales are expected to be $$!!"!!! in +pril" $$2!"!!! in May" and $8!"!!! in June" what is the estimated amount of cash receipts for May> @elected +nswer< $$!."!!! 'orrect +nswer< $$!."!!! 3uestion $) $.& out of $.& points The standard cost is @elected +nswer< the cost that should have been incurred to produce the item. 'orrect +nswer< the cost that should have been incurred to produce the item. 3uestion $& $.& out of $.& points The relationship between standard costs and budgeted costs is the @elected +nswer< standard cost times the expected production level e/uals the budgeted cost. 'orrect +nswer< standard cost times the expected production level e/uals the budgeted cost. 3uestion $. $.& out of $.& points @tandards that are developed under the assumption that a variety of things may lead to less than perfect performance are @elected +nswer< attainable standards. 'orrect +nswer< attainable standards. 3uestion $ $.& out of $.& points ,ariances are usually analyzed for @elected +nswer< direct materials" direct labor" and manufacturing overhead. 'orrect +nswer< direct materials" direct labor" and manufacturing overhead. 3uestion $8 $.& out of $.& points
=f the actual price per unit of material is greater than the standard price" the material price variance will be @elected +nswer< unfavorable. 'orrect +nswer< unfavorable. 3uestion $A $.& out of $.& points =f the material /uantity variance is favorable" the @elected +nswer< production manager has used materials efficiently. 'orrect +nswer< production manager has used materials efficiently. 3uestion 2! $.& out of $.& points Bhich of the following would cause a variance to be unfavorable> @elected +nswer< the standard hours allowed are less than the actual hours wor5ed 'orrect +nswer< the standard hours allowed are less than the actual hours wor5ed 3uestion 2$ ! out of $.& points + possible cause for an unfavorable labor rate variance is @elected +nswer< hiring new" inexperienced employees. 'orrect +nswer< using more experienced wor5ers than planned. 3uestion 22 $.& out of $.& points 9rie 'ompany produces one product" the 9)&!$. The standards for 9)&!$ include the use of 2& yards of raw material at a standard price of $).)2 per yard. :uring a recent month" the company used .&"!!! yards of raw material to produce 2"&8! units of 9)&!$. 9rie had purchased this material at a cost of $).% per yard. 'alculate the material /uantity variance. @elected +nswer< $2"2$! unfavorable 'orrect +nswer< $2"2$! unfavorable
Nuestion 3 1.( out of 1.( points @hich of the follo%ing is not one of the 2uestions you should as' %hen faced %ith an ethical dilemma<
7elected Ans%er: Do / thin' / %ill get caught< Correct Ans%er: Do / thin' / %ill get caught< Nuestion 14 1.( out of 1.( points @hich of the follo%ing costs is part of manufacturing overhead< 7elected Ans%er: /ndirect labor Correct Ans%er: /ndirect labor
Nuestion 11 1.( out of 1.( points #roduct costs 7elected Ans%er: All of the above ans%ers are correct. Correct Ans%er: All of the above ans%ers are correct.
Nuestion 12 1.( out of 1.( points @hich of the follo%ing is not a period cost< 7elected Ans%er: Direct materials Correct Ans%er: Direct materials
Nuestion 1 1.( out of 1.( points @hich of the follo%ing companies is most li'ely to use a process costing system< 7elected Ans%er: A company that produces petroleum products Correct Ans%er: A company that produces petroleum products Nuestion 1& 1.( out of 1.( points An allocation base is 7elected Ans%er: a common characteristic that :obs share- %hich is used to spread the overhead costs among the various :obs. Correct Ans%er: a common characteristic that :obs share- %hich is used to spread the overhead
costs among the various :obs. Nuestion 1( 4 out of 1.( points @hich of the follo%ing statements about :ob6order costing is not true< 7elected Ans%er: !anufacturing overhead cannot be traced directly to :obs- so it is assigned using the overhead allocation rate. Correct Ans%er: /ndirect labor is traced to :obs using time tic'ets.
Nuestion 1* 1.( out of 1.( points @hich of the follo%ing is the most reasonable allocation base for a highly mechani,ed process< 7elected Ans%er: machine hours Correct Ans%er: machine hours
Nuestion 1. 1.( out of 1.( points A predetermined overhead rate is preferred over an actual overhead rate because a predetermined overhead rate 7elected Ans%er: Both A and C Correct Ans%er: Both A and C Nuestion 10 1.( out of 1.( points The balance in the Dinished Eoods /nventory account on Buly 1- 244&- %as ) &-444 and the Bune 4- 244(- balance in the Dinished Eoods /nventory account %as )&1-444. /f the cost of goods manufactured %as )244-444- %hat %as the cost of goods sold< 7elected Ans%er: )13 -444 Correct Ans%er: )13 -444
Nuestion 13 4 out of 1.( points Blac' Company$s @or' in #rocess /nventory account has a beginning balance of )&4-444 and an ending balance of )(4-444. Current manufacturing costs total )12(-444. @hat is the cost of goods manufactured<
7elected Ans%er: )12(-444 Correct Ans%er: )11(-444
Nuestion 24 4 out of 1.( points 1merald Company estimates that the total overhead costs for 244& %ill be )1(4-444 and that the production employees %ill %or' 4-444 direct labor hours and earn )*44-444 during the year. /f the company allocates overhead based on direct labor hours- %hat is the predetermined overhead rate< 7elected Ans%er: )24.44 per direct labor hour Correct Ans%er: )(.44 per direct labor hour
Nuestion 21 1.( out of 1.( points Companies that use process costing systems 7elected Ans%er: All of the above ans%ers are correct. Correct Ans%er: All of the above ans%ers are correct.
Nuestion 22 1.( out of 1.( points The type of costing system commonly used by companies that produce a large number of homogeneous units in a continuous production process is called a 7elected Ans%er: process costing system. Correct Ans%er: process costing system.
Nuestion 2 4 out of 1.( points The e2uivalent units are calculated by: 7elected Ans%er: ta'ing the units started plus the e2uivalent units in ending inventory. Correct Ans%er: ta'ing the units completed plus the e2uivalent units in ending inventory. Nuestion 2&
1.( out of 1.( points /n a process costing system- %hen items are sold- the cost of the items is moved from 7elected Ans%er: Dinished Eoods to Cost of Eoods 7old. Correct Ans%er: Dinished Eoods to Cost of Eoods 7old. Nuestion 2( 1.( out of 1.( points @hich of the follo%ing se2uences describes the typical flo% of costs in a company that is using process costing< 7elected Ans%er: @or' in #rocess- Dinished Eoods- "a% !aterials /nventory- Cost of Eoods 7old Correct Ans%er: @or' in #rocess- Dinished Eoods- "a% !aterials /nventory- Cost of Eoods 7old Nuestion 2* 1.( out of 1.( points @hen partially completed units are converted to a comparable number of completed units- they are referred to as 7elected Ans%er: e2uivalent units. Correct Ans%er: e2uivalent units.
Nuestion 2. 1.( out of 1.( points A production cost report 7elected Ans%er: provides a reconciliation of units and a reconciliation of costs as %ell as the details of the cost per e2uivalent unit calculation. Correct Ans%er: provides a reconciliation of units and a reconciliation of costs as %ell as the details of the cost per e2uivalent unit calculation. Nuestion 20 1.( out of 1.( points /f beginning inventory consisted of -(44 units- ending inventory %as 1-(44 units- and 3-444 units %ere started during the period- ho% many units %ere completed and transferred out of the department< 7elected Ans%er: 11-444 units Correct Ans%er: 11-444 units
Nuestion 23 1.( out of 1.( points /f ending inventory consists of 2-*44 units %hich are 144H complete %ith respect to materials and 4H complete %ith respect to conversion costs- the number of e2uivalent units for materials and for conversion costs are 7elected Ans%er: 2-*44 and .04- respectively. Correct Ans%er: 2-*44 and .04- respectively.
Nuestion 4 1.( out of 1.( points @hich of the follo%ing is most li'ely to be a variable cost< 7elected Ans%er: direct materials Correct Ans%er: direct materials
Nuestion 1 1.( out of 1.( points @hen the level of activity increases- total variable costs 7elected Ans%er: /ncreases in direct proportion to the increase in activity Correct Ans%er: /ncreases in direct proportion to the increase in activity Nuestion 2 1.( out of 1.( points @hich of the follo%ing statements is correct< 7elected Ans%er: #rofit is e2ual to revenue minus total variable costs minus total fixed costs. Correct Ans%er: #rofit is e2ual to revenue minus total variable costs minus total fixed costs. Nuestion 1.( out of 1.( points The number of units that must be sold in order for a company to exactly cover its fixed and variable costs is the 7elected Ans%er: brea'6even point. Correct Ans%er: brea'6even point.
Nuestion & 1.( out of 1.( points !arro !anufacturing is operating at its brea'6even point of 14-444 units. @hich of the follo%ing statements is not true< 7elected Ans%er: !arro$s fixed costs e2ual its variable costs. Correct Ans%er: !arro$s fixed costs e2ual its variable costs.
Nuestion ( 1.( out of 1.( points ;olding all other factors constant- the brea'6even point %ill be decreased by 7elected Ans%er: increasing the selling price. Correct Ans%er: increasing the selling price.
Nuestion * 4 out of 1.( points @hich of the follo%ing is not true for a firm %ith high operating leverage< 7elected Ans%er: /t has a larger contribution margin ratio than similar firms. Correct Ans%er: /f sales increase- its profits %ill increase slo%er than a company %ith lo%er operating leverage. Nuestion . 1.( out of 1.( points @hen considering a process that involves a resource constraint- the optimal decision 7elected Ans%er: maximi,es the contribution margin per unit of the constraint. Correct Ans%er: maximi,es the contribution margin per unit of the constraint. Nuestion 0 1.( out of 1.( points Dixed costs are )24-(.4. At the brea'6even point- variable costs are )1.* per unit and the sales price is ) .(4 per unit. @hat is the contribution margin per unit< 7elected Ans%er: )1.0. Correct Ans%er: )1.0.
Nuestion 3 1.( out of 1.( points Copper Corporation sells a single product at a price of )2.( per unit. Aariable cost per unit is )1 ( and fixed costs total ) (*-0*4. /f sales are expected to be )02(-444- %hat is Cooper$s margin of safety< 7elected Ans%er: )12&-42( Correct Ans%er: )12&-42(
Nuestion &4 1.( out of 1.( points Anchor Company produces a single product that is sold for )0( per unit. /f variable costs per unit are )2* and fixed costs total )&.-(44- ho% many units must Anchor sell in order to earn a profit of )144-444< 7elected Ans%er: 2-(44 Correct Ans%er: 2-(44
1KA! 2 Nuestion 1 1.( out of 1.( points @hich of the follo%ing is treated differently in full costing than in variable costing< 7elected Ans%er: fixed manufacturing overhead Correct Ans%er: fixed manufacturing overhead Nuestion 2 1.( out of 1.( points @hich of the follo%ing is treated as a product cost in variable costing< 7elected Ans%er: direct labor Correct Ans%er: direct labor
Nuestion 1.( out of 1.( points Dull costing is: 7elected Ans%er: re2uired for financial reporting under generally accepted accounting principles.
Correct Ans%er: re2uired for financial reporting under generally accepted accounting principles. Nuestion & 1.( out of 1.( points /n variable costing- %hen does fixed manufacturing overhead become an expense< 7elected Ans%er: in the period %hen the expense is incurred Correct Ans%er: in the period %hen the expense is incurred
Nuestion ( 1.( out of 1.( points /n variable costing- %hich of the follo%ing %ould not be included in inventory< 7elected Ans%er: none of the above items %ould be in inventory in variable costing Correct Ans%er: none of the above items %ould be in inventory in variable costing Nuestion * 1.( out of 1.( points @hich of the follo%ing items appears on a variable costing income statement but not on a full costing income statement< 7elected Ans%er: contribution margin Correct Ans%er: contribution margin
Nuestion . 1.( out of 1.( points @hen the number of units sold is e2ual to the number of units produced- net income using full costing %ill be 7elected Ans%er: e2ual to net income using variable costing. Correct Ans%er: e2ual to net income using variable costing.
Nuestion 0 1.( out of 1.( points The process of assigning indirect costs is called 7elected Ans%er: cost allocation.
Correct Ans%er: cost allocation.
Nuestion 3 1.( out of 1.( points A contract %hich specifies that the suppler %ill be paid for the cost of production as %ell as some fixed amount or percentage of cost is called a8n9 7elected Ans%er: cost6plus contract. Correct Ans%er: cost6plus contract.
Nuestion 14 1.( out of 1.( points A grouping of individual costs %hose total is allocated using one allocation base is called 7elected Ans%er: cost pool. Correct Ans%er: cost pool.
Nuestion 11 1.( out of 1.( points Companies %hich use only one or t%o cost pools rather than several cost pools 7elected Ans%er: may have seriously distorted product costs. Correct Ans%er: may have seriously distorted product costs. Nuestion 12 1.( out of 1.( points @hen activity based costing is implemented- the initial outcome is normally that: 7elected Ans%er: The cost of lo% volume products %ill be higher and the cost of high volume products %ill be lo%er Correct Ans%er: The cost of lo% volume products %ill be higher and the cost of high volume products %ill be lo%er Nuestion 1 1.( out of 1.( points Cool Company uses ABC costing. @hich of the follo%ing is most li'ely to be the cost driver for the cost of ordering parts<
7elected Ans%er: number of orders placed Correct Ans%er: number of orders placed
Nuestion 1& 1.( out of 1.( points @hich of the follo%ing is not generally true %hen a company compares ABC and traditional costing< 7elected Ans%er: ABC allocates cost based solely on production volume. Correct Ans%er: ABC allocates cost based solely on production volume. Nuestion 1( 1.( out of 1.( points The production departments at Coo' Corporation occupy a total area of *44-444 s2uare feet. ;eating costs total )344-444 and are allocated based on the area that each department occupies. The finishing department occupies 4-444 s2uare feet and the pac'aging department occupies 24-444 s2uare feet. @hat amount of heating cost %ill be allocated to the finishing and pac'aging departments- respectively< 7elected Ans%er: )&(-444 and ) 4-444 Correct Ans%er: )&(-444 and ) 4-444 Nuestion 1* 1.( out of 1.( points !aintenance cost is allocated to the three producing departments based on the machine hours used in each department. The maintenance cost for !ay %as )144-444. The three departments had the follo%ing usage for !ay: Department !achine hours used Direct labor hours used Assembly (44 2-444 Dabrication 044 (-444 Testing .44 -444 The maintenance cost that should be allocated to the Dabrication Department for !ay should be: 7elected Ans%er: )&4-444 Correct Ans%er: )&4-444
Nuestion 1. 1.( out of 1.( points @hich of the follo%ing is li'ely to occur %hen more overhead cost pools are used< 7elected Ans%er: All of the above are true.
Correct Ans%er: All of the above are true.
Nuestion 10 1.( out of 1.( points @hich of the follo%ing is not a term used to describe the additional costs incurred as a result of selecting one decision alternative over another< 7elected Ans%er: sun' costs Correct Ans%er: sun' costs
Nuestion 13 1.( out of 1.( points A company is trying to decide %hether to sell partially completed goods in their current state or incur additional costs to finish the goods and sell them as complete units. @hich of the follo%ing is not relevant to the decision< 7elected Ans%er: the costs incurred to process the units to this point Correct Ans%er: the costs incurred to process the units to this point Nuestion 24 1.( out of 1.( points A company is trying to decide %hether to 'eep or drop the sporting goods department in its department store. /f the segment is dropped- the manager %ill be fired. The manager$s salary- in relation to the decision to 'eep or drop the sporting goods department- is 7elected Ans%er: avoidable and therefore relevant Correct Ans%er: avoidable and therefore relevant
Nuestion 21 1.( out of 1.( points The value of benefits foregone by selecting one decision alternative over another is a8n9 7elected Ans%er: opportunity cost. Correct Ans%er: opportunity cost. Nuestion 22 4 out of 1.( points A product line should be dropped %hen
7elected Ans%er: there %ill be a positive change in income if the product line is dropped. Correct Ans%er: all of the above.
Nuestion 2 1.( out of 1.( points @hich of the follo%ing is a direct cost of a specific department in a retail store< 7elected Ans%er: cost of the department$s inventory Correct Ans%er: cost of the department$s inventory Nuestion 2& 1.( out of 1.( points T%o or more products that result from common inputs are called 7elected Ans%er: :oint products. Correct Ans%er: :oint products. Nuestion 2( 1.( out of 1.( points +ster !edical 7upply Company is trying to decide %hether or not to continue distributing hospital supplies. The follo%ing information is available for +ster$s business segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs %ould remain unchanged if a segment is dropped. ;ospital 7upplies "etail 7tores !ail +rder 7ales )124-444 )&&4-444 ) *4-444 Aariable Costs )*&-444 )244-444 )1&4-444 Contribution !argin )(*-444 )2&4-444 )224-444 Direct Dixed Costs )(4-444 )04-444 )34-444 Allocated Common Dixed Costs )24-444 ).4-444 )*4-444 5et /ncome 8)1&-4449 )34-444 ).4-444 "eference: "ef .6& /f hospital supplies are dropped- overall net income %ould: 7elected Ans%er: Decrease by )*-444 Correct Ans%er: Decrease by )*-444
Nuestion 2* 1.( out of 1.( points "it, Company ma'es t%o products from a :oint input that have the follo%ing information: Fnits #roduced 7ales Aalue per unit at split off Total Additional processing costs 7ales value per
unit after additional processing #roduct A (4-444 )14 )&44-444 )1( #roduct B 4-444 )0 ) 44-444 )24 The :oint cost incurred to produce the t%o products to the split off point is )*44-444. "eference: "ef .6. @hich products should be processed further< 7elected Ans%er: B Correct Ans%er: B
Nuestion 2. 1.( out of 1.( points @hich of the follo%ing %ould not appear in a capital budget< 7elected Ans%er: purchase of inventory to be sold next month Correct Ans%er: purchase of inventory to be sold next month Nuestion 20 1.( out of 1.( points Capital expenditure decisions 7elected Ans%er: All of the above are correct. Correct Ans%er: All of the above are correct.
Nuestion 23 1.( out of 1.( points The basic concept involved in time value of money calculations is that 7elected Ans%er: it is better to receive a dollar today than to receive a dollar in the future. Correct Ans%er: it is better to receive a dollar today than to receive a dollar in the future. Nuestion 4 1.( out of 1.( points @hich of the follo%ing techni2ues uses time value of money concepts< 7elected Ans%er: internal rate of return Correct Ans%er: internal rate of return
Nuestion 1 4 out of 1.( points @hich of the follo%ing %ould most li'ely be the present value of a ( year annuity of )(-444 per year 8assuming a positive discount rate9< 7elected Ans%er: )2(-444 Correct Ans%er: )10-444
Nuestion 2 4 out of 1.( points Assuming a 14H rate of return- ho% does the present value of an amount to be received t%o years from today compare to the present value of the same amount to be received three years from today< 7elected Ans%er: /t is impossible to tell unless the actual amount is 'no%n. Correct Ans%er: The present value of the amount to be received in t%o years is larger. Nuestion 1.( out of 1.( points The sum of the present values of all cash flo%s 8inflo%s and outflo%s9 is called the 7elected Ans%er: net present value. Correct Ans%er: net present value.
Nuestion & 1.( out of 1.( points #ro:ects %ith a negative net present value %ill al%ays have a8n9 7elected Ans%er: internal rate of return that is less than the re2uired rate of return. Correct Ans%er: internal rate of return that is less than the re2uired rate of return. Nuestion ( 1.( out of 1.( points An annuity is 7elected Ans%er: a series of e2ual payments. Correct Ans%er: a series of e2ual payments.
Nuestion * 1.( out of 1.( points The rate of return that e2uates the present value of future cash flo%s to the investment outlay is the 7elected Ans%er: internal rate of return. Correct Ans%er: internal rate of return.
Nuestion . 4 out of 1.( points #ro:ects should be accepted %hen: 7elected Ans%er: The net present value is positive Correct Ans%er: Both A and B
Nuestion 0 1.( out of 1.( points /f the internal rate of return is greater than the re2uired rate of return 7elected Ans%er: the pro:ect should be accepted. Correct Ans%er: the pro:ect should be accepted. Nuestion 3 1.( out of 1.( points @hich of the follo%ing statements about the paybac' period method is not true< 7elected Ans%er: The paybac' period method is more sophisticated and yields better decisions than the internal rate of return method. Correct Ans%er: The paybac' period method is more sophisticated and yields better decisions than the internal rate of return method. Nuestion &4 4 out of 1.( points Calculate the present value of )21*-444 to be received in seven years if the discount rate is 1*H.
7elected Ans%er: ). -1(3 Correct Ans%er: ).*-&21
1KA! Nuestion 1 1.( out of 1.( points A budget 7elected Ans%er: All of the above are true. Correct Ans%er: All of the above are true.
Nuestion 2 1.( out of 1.( points A method of budget preparation that re2uires all budgeted amounts to be :ustified by the department- even if the amounts %ere supported in prior periods- is called 7elected Ans%er: ,ero base budgeting. Correct Ans%er: ,ero base budgeting.
Nuestion 1.( out of 1.( points The comprehensive planning document that incorporates a number of individual budgets is the 7elected Ans%er: master budget. Correct Ans%er: master budget. Nuestion & 1.( out of 1.( points @hich of the follo%ing is a reasonable order in %hich to prepare budgets< 7elected Ans%er: sales budget- production budget- material purchases budget Correct Ans%er: sales budget- production budget- material purchases budget Nuestion ( 1.( out of 1.( points /f the number of units in beginning inventory is more than the number of units in ending inventory- the number of units sold is 7elected Ans%er: greater than the number of units produced. Correct Ans%er: greater than the number of units produced.
Nuestion * 1.( out of 1.( points @hen constructing the production budget- the desired ending inventory for the first period is 7elected Ans%er: the beginning inventory for the second period. Correct Ans%er: the beginning inventory for the second period. Nuestion . 1.( out of 1.( points A significant difference bet%een the direct material purchases budget and the direct labor budget is that the direct material purchases budget 7elected Ans%er: considers beginning and ending inventory amounts- %hich are not part of a direct labor budget. Correct Ans%er: considers beginning and ending inventory amounts- %hich are not part of a direct labor budget. Nuestion 0 1.( out of 1.( points @hich of the follo%ing transactions %ill affect the cash receipts and disbursements budget for the month in %hich the transaction occurs< 7elected Ans%er: payment for direct labor Correct Ans%er: payment for direct labor
Nuestion 3 1.( out of 1.( points The cash receipts and disbursements budget alerts management to all of the follo%ing except %hen 7elected Ans%er: stoc'outs %ill cause customer dissatisfaction. Correct Ans%er: stoc'outs %ill cause customer dissatisfaction.
Nuestion 14 1.( out of 1.( points @hen budgets are used for evaluation- the differences bet%een budgeted and actual amounts are called 7elected Ans%er: budget variances.
Correct Ans%er: budget variances.
Nuestion 11 1.( out of 1.( points The main difference bet%een a static budget and a flexible budget is that the static budget is 7elected Ans%er: for a single level of activity %hile a flexible budget can be ad:usted for different activity levels. Correct Ans%er: for a single level of activity %hile a flexible budget can be ad:usted for different activity levels. Nuestion 12 1.( out of 1.( points A flexible budget ta'es into account the fact that %hen production levels change 7elected Ans%er: total fixed costs remain the same. Correct Ans%er: total fixed costs remain the same.
Nuestion 1 1.( out of 1.( points Gnight Company has found that 4H of its sales are collected in the month of the sale and the remainder of the sales is collected in the next month. /f sales are expected to be )144-444 in April- )124-444 in !ay- and )04-444 in Bune- %hat is the estimated amount of cash receipts for !ay< 7elected Ans%er: )14*-444 Correct Ans%er: )14*-444
Nuestion 1& 1.( out of 1.( points The standard cost is 7elected Ans%er: the cost that should have been incurred to produce the item. Correct Ans%er: the cost that should have been incurred to produce the item. Nuestion 1( 1.( out of 1.( points The relationship bet%een standard costs and budgeted costs is the
7elected Ans%er: standard cost times the expected production level e2uals the budgeted cost. Correct Ans%er: standard cost times the expected production level e2uals the budgeted cost. Nuestion 1* 1.( out of 1.( points 7tandards that are developed under the assumption that a variety of things may lead to less than perfect performance are 7elected Ans%er: attainable standards. Correct Ans%er: attainable standards. Nuestion 1. 1.( out of 1.( points Aariances are usually analy,ed for 7elected Ans%er: direct materials- direct labor- and manufacturing overhead. Correct Ans%er: direct materials- direct labor- and manufacturing overhead. Nuestion 10 1.( out of 1.( points /f the actual price per unit of material is greater than the standard price- the material price variance %ill be 7elected Ans%er: unfavorable. Correct Ans%er: unfavorable.
Nuestion 13 1.( out of 1.( points /f the material 2uantity variance is favorable- the 7elected Ans%er: production manager has used materials efficiently. Correct Ans%er: production manager has used materials efficiently. Nuestion 24 1.( out of 1.( points @hich of the follo%ing %ould cause a variance to be unfavorable< 7elected Ans%er: the standard hours allo%ed are less than the actual hours %or'ed Correct Ans%er: the standard hours allo%ed are less than the actual hours %or'ed Nuestion 21 4 out of 1.( points
A possible cause for an unfavorable labor rate variance is 7elected Ans%er: hiring ne%- inexperienced employees. Correct Ans%er: using more experienced %or'ers than planned. Nuestion 22 1.( out of 1.( points 1rie Company produces one product- the 1&(41. The standards for 1&(41 include the use of 2( yards of ra% material at a standard price of )&.&2 per yard. During a recent month- the company used *(-444 yards of ra% material to produce 2-(04 units of 1&(41. 1rie had purchased this material at a cost of )&. . per yard. Calculate the material 2uantity variance. 7elected Ans%er: )2-214 unfavorable Correct Ans%er: )2-214 unfavorable
Chapter ( Nuestion 1 1 out of 1 points Dull costing 7elected Ans%er: All of the above choices are correct. Correct Ans%er: All of the above choices are correct.
Nuestion 2 1 out of 1 points @hich of the follo%ing is treated differently in full costing than in variable costing< 7elected Ans%er: fixed manufacturing overhead Correct Ans%er: fixed manufacturing overhead Nuestion 1 out of 1 points @hich of the follo%ing is treated as a product cost in variable costing< 7elected Ans%er: direct labor Correct Ans%er: direct labor
Nuestion & 1 out of 1 points Dull costing is: 7elected Ans%er: re2uired for financial reporting under generally accepted accounting principles. Correct Ans%er: re2uired for financial reporting under generally accepted accounting principles. Nuestion ( 1 out of 1 points /n variable costing- %hen does fixed manufacturing overhead become an expense< 7elected Ans%er: in the period %hen the expense is incurred Correct Ans%er: in the period %hen the expense is incurred
Nuestion * 1 out of 1 points /n full costing- %hen does fixed manufacturing overhead become an expense< 7elected Ans%er: in the period %hen the product is sold Correct Ans%er: in the period %hen the product is sold Nuestion . 1 out of 1 points /f the number of units sold is less than the number of units produced 7elected Ans%er: full costing %ill assign some fixed manufacturing costs to the units in ending inventory. Correct Ans%er: full costing %ill assign some fixed manufacturing costs to the units in ending inventory. Nuestion 0 1 out of 1 points ?ast month- Active Company manufactured 24-444 units and sold 10-444 of these units at a price of )0.44 per unit. !anufacturing costs consisted of direct labor- ) 4-444> direct materials) 2-444> variable manufacturing overhead- ) -*44> fixed manufacturing overhead- )21-*44. 7elling and administrative costs totaled )2&-444. "eference: "ef (61 @hat is Active$s net income using variable costing<
7elected Ans%er: ) 3- *4 Correct Ans%er: ) 3- *4
Nuestion 3 1 out of 1 points ?ast month- Active Company manufactured 24-444 units and sold 10-444 of these units at a price of )0.44 per unit. !anufacturing costs consisted of direct labor- ) 4-444> direct materials) 2-444> variable manufacturing overhead- ) -*44> fixed manufacturing overhead- )21-*44. 7elling and administrative costs totaled )2&-444. "eference: "ef (61 @hat is Active$s net income using full costing< 7elected Ans%er: )&1-(24 Correct Ans%er: )&1-(24
Nuestion 14 4 out of 1 points 7lin'y !anufacturing ma'es a single product 6 the 7lin'y. /nformation for 244( appears belo%: 7ales in units: 244-444 #roduction in units: 2(4-444 Beginning inventory 4 Aariable production cost per unit: )1.44 Aariable selling cost per unit: )4. 4 Dixed production cost per year )144-444 Dixed selling and administrative cost per year )(4-444 7elling price per unit ) .44 "eference: "ef (6( @hat is the cost per unit of inventory using variable costing< 7elected Ans%er: )1. 4 Correct Ans%er: )1.44
Nuestion 11 4 out of 1 points 7lin'y !anufacturing ma'es a single product 6 the 7lin'y. /nformation for 244( appears belo%: 7ales in units: 244-444
#roduction in units: 2(4-444 Beginning inventory 4 Aariable production cost per unit: )1.44 Aariable selling cost per unit: )4. 4 Dixed production cost per year )144-444 Dixed selling and administrative cost per year )(4-444 7elling price per unit ) .44 "eference: "ef (6( @hat is the full cost per unit of inventory< 7elected Ans%er: )1..4 Correct Ans%er: )1.&4
Chapter * Nuestion 1 1 out of 1 points The process of assigning indirect costs is called 7elected Ans%er: cost allocation.
Nuestion 2 1 out of 1 points A contract %hich specifies that the suppler %ill be paid for the cost of production as %ell as some fixed amount or percentage of cost is called a8n9 7elected Ans%er: cost6plus contract.
Nuestion 1 out of 1 points The thing for %hich a cost is being calculated is a8n9 7elected Ans%er: cost ob:ect
Nuestion & 1 out of 1 points An allocation base 7elected Ans%er: relates the cost pool to the cost ob:ectives.
Nuestion ( 1 out of 1 points Companies %hich use only one or t%o cost pools rather than several cost pools 7elected Ans%er: may have seriously distorted product costs. Nuestion * 1 out of 1 points @hen activity based costing is implemented- the initial outcome is normally that: 7elected Ans%er: The cost of lo% volume products %ill be higher and the cost of high volume products %ill be lo%er Nuestion . 1 out of 1 points Cool Company uses ABC costing. @hich of the follo%ing is most li'ely to be the cost driver for the cost of ordering parts< 7elected Ans%er: number of orders placed
Nuestion 0 1 out of 1 points A grouping of individual costs %hose total is allocated using one allocation base is called 7elected Ans%er: cost pool.
Nuestion 3 1 out of 1 points #umper Company sells fine collectible statues and has implemented activity6based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to pac'aging and shipping and #umper has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected and shipped. The final cost pool is used for general operations and supervision of the department and the cost driver is the number of shipments. /nformation about the department is summari,ed belo%: Cost #ool Total Costs Cost Driver Annual Activity #ac'aging and shipping )1.4-444 5umber of boxes shipped 2(-444 boxes Dinal inspection )244-444 5umber of individual
items shipped 144-444 items Eeneral operations and supervision )0(-444 5umber of orders 14-444 orders "eference: "ef *6* @hat amount is allocated to each order for the general operations and supervision of the department< 7elected Ans%er: )0.(4
Nuestion 14 1 out of 1 points #umper Company sells fine collectible statues and has implemented activity6based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to pac'aging and shipping and #umper has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected and shipped. The final cost pool is used for general operations and supervision of the department and the cost driver is the number of shipments. /nformation about the department is summari,ed belo%: Cost #ool Total Costs Cost Driver Annual Activity #ac'aging and shipping )1.4-444 5umber of boxes shipped 2(-444 boxes Dinal inspection )244-444 5umber of individual items shipped 144-444 items Eeneral operations and supervision )0(-444 5umber of orders 14-444 orders "eference: "ef *6* An order is shipped to a retail customer %ho has ordered 14 individual items. This order %ill be shipped in separate boxes. @hat is the shipping department cost that %ill be allocated to the order< 7elected Ans%er: )&0.34
Nuestion 11 1 out of 1 points @hich of the follo%ing is not an advantage of Activity Based Costing 8ABC9 over traditional volume based costing systems< 7elected Ans%er: ABC is less costly to implement than traditional systems Chapter . Nuestion 1 1 out of 1 points
@hich of the follo%ing is not a term used to describe the additional costs incurred as a result of selecting one decision alternative over another< 7elected Ans%er: sun' costs Correct Ans%er: sun' costs
Nuestion 2 1 out of 1 points @hen deciding bet%een t%o alternatives- the preferred alternative al%ays has 7elected Ans%er: greater incremental profit than the other alternatives. Correct Ans%er: greater incremental profit than the other alternatives. Nuestion 1 out of 1 points The value of benefits foregone by selecting one decision alternative over another is a8n9 7elected Ans%er: opportunity cost. Correct Ans%er: opportunity cost. Nuestion & 1 out of 1 points T%o or more products that result from common inputs are called 7elected Ans%er: :oint products. Correct Ans%er: :oint products. Nuestion ( 1 out of 1 points @hen ma'ing a decision to sell a :oint product at the split off point or process it further- %hich of the follo%ing is not relevant< 7elected Ans%er: Boint cost assigned Correct Ans%er: Boint cost assigned
Nuestion * 1 out of 1 points The 7tale 7tore has 12-444 cans of tuna fish :ust a %ee' past the expiration date. 1ach can cost )4. 1. The cans could be sold as is for )4.24 each- or relabeled and sold as gourmet cat food.
The cost of relabeling the cans %ould be )4.4& per can and the cans %ould then sell for )4.23 per can. @hat should be done %ith the cans and %hy< 7elected Ans%er: The cans should be relabeled into cat food since the sales price increases )4.43 per can and the cost is only )4.4& per can Correct Ans%er: The cans should be relabeled into cat food since the sales price increases )4.43 per can and the cost is only )4.4& per can Nuestion . 1 out of 1 points 7mith Company manufactures %idgets. 5e%man Company has approached 7mith %ith a proposal to sell the company one of the components used to ma'e %idgets at a price of )144-444 for (4-444 units. 7mith is currently ma'ing these components in its o%n factory. The follo%ing costs are associated %ith this part of the process %hen (4-444 units are produced: Direct material )&&-444 Direct labor 24-444 !anufacturing overhead *4-444 Total )12&-444 The manufacturing overhead consists of ) 2-444 of costs that %ill be eliminated if the components are no longer produced by 7mith. The remaining manufacturing overhead %ill continue %hether or not 7mith ma'es the components. Ans%er the follo%ing 2uestions from 7mith$s point of vie%. "eference: "ef .62 7hould 7mith ma'e or buy the components for the %idgets< 7elected Ans%er: Continue to ma'e them because the incremental cost of buying from 5e%man is )&-444. Correct Ans%er: Continue to ma'e them because the incremental cost of buying from 5e%man is )&-444. Nuestion 0 1 out of 1 points ;uxley 7ports Company sells logo sports merchandise and does custom screen printing. They are trying to decide %hether or not to continue screen printing. The follo%ing information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs %ould remain unchanged if the screen printing %ere dropped. 7creen #rinting Apparel 7ales 7ales )124-444 )&24-444 Aariable Costs ).2-444 )224-444 Contribution !argin )&0-444 )244-444 Direct Dixed Costs ) 2-444 ).4-444 Allocated Common Dixed costs )24-444 ).4-444 5et /ncome 8)&-4449 )*4-444 "eference: "ef .6
/f screen printing is dropped- apparel sales %ill be unaffected. All direct fixed costs associated %ith screen printing %ill be eliminated. @hat %ill the effect on overall profits be if the segment is eliminated< 7elected Ans%er: +verall profits %ill decrease by )1*-444 Correct Ans%er: +verall profits %ill decrease by )1*-444
Nuestion 3 4 out of 1 points The ra% material- Erover- is processed into t%o :oint products- Bert and 1rnie. @hen processedeach pound of Erover yields six units of Bert and eight units of 1rnie. Bert sells for ) per unit and 1rnie sells for )2.(4 per unit. The total cost to process a 146pound batch of Erover is )204. "eference: "ef .6* /f the physical 2uantities method is used to allocate the )204 in :oint costs- ho% much %ill be allocated to Bert< 7elected Ans%er: )104 Correct Ans%er: )124
Nuestion 14 1 out of 1 points The ra% material- Erover- is processed into t%o :oint products- Bert and 1rnie. @hen processedeach pound of Erover yields six units of Bert and eight units of 1rnie. Bert sells for ) per unit and 1rnie sells for )2.(4 per unit. The total cost to process a 146pound batch of Erover is )204. "eference: "ef .6* /f the relative sales value method is used to allocate the :oint costs- ho% much %ill be allocated to Bert< 7elected Ans%er: )1 2.* Correct Ans%er: )1 2.*
Chapter 3 Nuestion 1 1 out of 1 points Capital expenditure decisions 7elected Ans%er: All of the above are correct.
Correct Ans%er: All of the above are correct.
Nuestion 2 1 out of 1 points @hich of the follo%ing techni2ues uses time value of money concepts< 7elected Ans%er: internal rate of return Correct Ans%er: internal rate of return
Nuestion 1 out of 1 points The sum of the present values of all cash flo%s 8inflo%s and outflo%s9 is called the 7elected Ans%er: net present value. Correct Ans%er: net present value.
Nuestion & 1 out of 1 points An annuity is 7elected Ans%er: a series of e2ual payments. Correct Ans%er: a series of e2ual payments.
Nuestion ( 1 out of 1 points The rate of return that e2uates the present value of future cash flo%s to the investment outlay is the 7elected Ans%er: internal rate of return. Correct Ans%er: internal rate of return.
Nuestion * 1 out of 1 points The length of time it ta'es to recover the initial cost of an investment is called the
7elected Ans%er: paybac' period. Correct Ans%er: paybac' period.
Nuestion . 4 out of 1 points Lou$ve :ust %on a lottery and %ill receive )*4-444 per year over the next 24 years. /f you feel that 14H is an appropriate rate of return- %hat is the present value of your %innings< 7elected Ans%er: )1-244-444 Correct Ans%er: )(14-01*
Nuestion 0 1 out of 1 points A proposed pro:ect %ill cost )*44-444 and %ill provide returns of )1(4-444 in Lear 1- ) 44-444 in Lear 2- and )(44-444 in Lear . There %ill not be any cash flo%s associated %ith the pro:ect after Lear . /f taxes are ignored- and the company$s hurdle rate is 1(H- %hat is the net present value of the pro:ect< 7elected Ans%er: )0*-424 Correct Ans%er: )0*-424
Nuestion 3 1 out of 1 points An investment is expected to generate returns of )*4-444 per year for each of the next six years. /f the initial amount invested is )2&4-444 and taxes are ignored- %hich of the follo%ing is closest to the internal rate of return< 7elected Ans%er: 1 H Correct Ans%er: 1 H
Nuestion 14 1 out of 1 points A pro:ect %ith an initial cost of )04-444 is expected to produce returns of )24-444 per year for each of the next nine years. @hat is the pro:ected paybac' period< 7elected Ans%er: & years
Correct Ans%er: & years
Chapter 14 Nuestion 1 1 out of 1 points A budget 7elected Ans%er: All of the above are true. Correct Ans%er: All of the above are true.
Nuestion 2 1 out of 1 points A method of budget preparation that re2uires all budgeted amounts to be :ustified by the department- even if the amounts %ere supported in prior periods- is called 7elected Ans%er: ,ero base budgeting. Correct Ans%er: ,ero base budgeting.
Nuestion 1 out of 1 points @hich of the follo%ing budgets is prepared first< 7elected Ans%er: sales budget Correct Ans%er: sales budget
Nuestion & 1 out of 1 points ?et #rod = the number of units to be produced> 1nd/nv = the desired ending inventory in units> Begin/nv = the number of units in beginning inventory> and 7ales = the number of units expected to be sold. @hich of the follo%ing is true< 7elected Ans%er: #rod = 7ales I 1nd/nv S Begin/nv Correct Ans%er: #rod = 7ales I 1nd/nv S Begin/nv Nuestion ( 1 out of 1 points
@hen budgets are used for evaluation- the differences bet%een budgeted and actual amounts are called 7elected Ans%er: budget variances. Correct Ans%er: budget variances.
Nuestion * 1 out of 1 points The main difference bet%een a static budget and a flexible budget is that the static budget is 7elected Ans%er: for a single level of activity %hile a flexible budget can be ad:usted for different activity levels. Correct Ans%er: for a single level of activity %hile a flexible budget can be ad:usted for different activity levels. Nuestion . 1 out of 1 points Aolc'mann Company$s policy is to 'eep 2(H of the next month$s sales in ending inventory. /f there are 1-244 units in inventory at the end of !arch- sales in April are expected to be &-044 units- and sales in !ay are expected to be 3-444 units- ho% many units should be produced in April< 7elected Ans%er: (-0(4 Correct Ans%er: (-0(4
Nuestion 0 1 out of 1 points Bac'ie$s Bump "opes is planning to produce 2-444 boxes of :ump ropes during Bune. 1ach box of :ump ropes 81 unit9 re2uires .( feet of rope and 4.(4 hours of direct labor. "ope costs )4.12 per foot and employees of the company are paid )11.44 per hour. !anufacturing overhead is applied at a rate of 1(4H of direct labor costs. Bac'ie$s has 1(-444 feet of rope in beginning inventory and %ants to have 24-444 feet of rope in ending inventory. "eference: "ef 1461 ;o% many feet of rope should Bac'ie$s Bump "opes plan to buy during Bune< 7elected Ans%er: 1((-444 Correct Ans%er: 1((-444
Nuestion 3
1 out of 1 points Bac'ie$s Bump "opes is planning to produce 2-444 boxes of :ump ropes during Bune. 1ach box of :ump ropes 81 unit9 re2uires .( feet of rope and 4.(4 hours of direct labor. "ope costs )4.12 per foot and employees of the company are paid )11.44 per hour. !anufacturing overhead is applied at a rate of 1(4H of direct labor costs. Bac'ie$s has 1(-444 feet of rope in beginning inventory and %ants to have 24-444 feet of rope in ending inventory. "eference: "ef 1461 @hat is the total amount that %ill be budgeted for direct labor for the month< 7elected Ans%er: )11-444 Correct Ans%er: )11-444
Nuestion 14 1 out of 1 points /n recent years- Nueens Company has collected 24H of its sales in the month of the sale and the other 04H in the follo%ing month. During the first three months of 244(- #rincess is anticipating sales of ) (4-444> )&4 -444> and ) 03-444- respectively. @hat is the amount of cash receipts budgeted for Debruary< 7elected Ans%er: ) *4-*44 Correct Ans%er: ) *4-*44
Nuestion 11 1 out of 1 points E@ Corporation$s expected manufacturing costs are summari,ed belo%: Aariable costs Direct material )1*. 4 per unit Direct labor )1(.04 per unit Aariable overhead )12.44 per unit Dixed costs per month Dactory depreciation )12-444 7upervisory salaries 1*-044 +ther fixed factory costs 2-(44 "eference: "ef 146. @hat is the flexible budget amount for a month %hen *-444 units are produced< 7elected Ans%er: )23(-344 Correct Ans%er: )23(-344
Chapter 11 Nuestion 1 1 out of 1 points The difference bet%een standard and actual costs is a8n9 7elected Ans%er: standard cost variance. Correct Ans%er: standard cost variance. Nuestion 2 1 out of 1 points The difference bet%een standard costs and budgeted costs is that standard costs 7elected Ans%er: refer to a single unit %hile budgeted costs refer to the cost- at standard- for the total number of budgeted units. Correct Ans%er: refer to a single unit %hile budgeted costs refer to the cost- at standard- for the total number of budgeted units. Nuestion 1 out of 1 points 7tandard costs are developed for all of the follo%ing except 7elected Ans%er: commissions per unit. Correct Ans%er: commissions per unit.
Nuestion & 1 out of 1 points /n general- an unfavorable material variances arise from 7elected Ans%er: Both A and B are correct. Correct Ans%er: Both A and B are correct. Nuestion ( 1 out of 1 points The material price variance uses the 2uantity of material PPPPP- %hile the material 2uantity variance uses the 2uantity of material PPPPP. 7elected Ans%er: purchased- used Correct Ans%er: purchased- used Nuestion * 1 out of 1 points
The overhead volume variance indicates that 7elected Ans%er: the 2uantity of production differed from %hat %as anticipated. Correct Ans%er: the 2uantity of production differed from %hat %as anticipated. Nuestion . 1 out of 1 points Ereen Company manufactures a single product- the AQN". The standards for materials for each unit have been set as ( pounds of G"62. at a standard cost of ) (.44 per pound. During !ay- the company purchased and used (12 pounds of G"62. to ma'e 144 units of the AQN". Ereen paid ) .44 per pound for the material. @hat is the material price variance< 7elected Ans%er: )1-42& favorable Correct Ans%er: )1-42& favorable
Nuestion 0 1 out of 1 points ;uron Company produces one product- the ;2441. 1ach unit of ;2441 re2uires *.( pounds of ra% material %ith a standard cost of )12.44 per pound. During Buly- ;uron purchased -(44 pounds of this ra% material at a price of )12.2( per pound and used -204 pounds to produce (44 units of the ;2441. Calculate the material 2uantity variance. 7elected Ans%er: ) *4 unfavorable Correct Ans%er: ) *4 unfavorable
Nuestion 3 1 out of 1 points At ;uron Company- the standard time re2uired to assemble one transmitter is 2. 4 hours. The standard %age is )3.*4 per hour. During Bune- employees at ;uron produced 0*4 transmitters and %or'ed 1-3 ( labor hours at a total cost of )10-3* . @hat is ;uron$s labor rate variance< 7elected Ans%er: ) 0..44 unfavorable Correct Ans%er: ) 0..44 unfavorable
Nuestion 14 1 out of 1 points 5orthern ?ights Company has a standard %age rate of )3.(4 per hour. /t has determined that the standard time to assemble one versascope is 2..( hours. During August- 5orthern ?ights
employees assembled *44 versascopes. They %ere paid )1(-3.& for 1-* 4 hours of %or'. @hat is 5orthern ?ight$s labor efficiency variance< 7elected Ans%er: )134.44 favorable Correct Ans%er: )134.44 favorable
Chapter 12 Nuestion 1 1 out of 1 points Dirms that grant substantial decision ma'ing authority to the managers of subunits are referred to as 7elected Ans%er: decentrali,ed organi,ations. Correct Ans%er: decentrali,ed organi,ations.
Nuestion 2 1 out of 1 points @hich of the follo%ing is not an advantage of decentrali,ation for a company< 7elected Ans%er: subunit managers %ill act to benefit the organi,ation as a %hole Correct Ans%er: subunit managers %ill act to benefit the organi,ation as a %hole Nuestion 1 out of 1 points Eoal congruence refers to the match bet%een 7elected Ans%er: goals of the individual managers and those of the company as a %hole. Correct Ans%er: goals of the individual managers and those of the company as a %hole. Nuestion & 1 out of 1 points The type of center that has responsibility for generating revenue as %ell as controlling costs is a8n9 7elected Ans%er: profit center. Correct Ans%er: profit center.
Nuestion ( 1 out of 1 points
@hich of the follo%ing is a responsibility that distinguishes an investment center manager from a profit center manager< 7elected Ans%er: significantly influencing investment decisions Correct Ans%er: significantly influencing investment decisions
Nuestion * 1 out of 1 points "+/ is the ratio of 7elected Ans%er: investment center income to invested capital. Correct Ans%er: investment center income to invested capital.
Nuestion . 1 out of 1 points +n a balanced scorecard- the measure of the number of ne% patents developed through research and development %ould be an example of a measure in the: 7elected Ans%er: learning and gro%th dimension Correct Ans%er: learning and gro%th dimension
Nuestion 0 1 out of 1 points Druit Company$s ?ime Division has invested capital of )344-444- sales of ).(4-444- and income 85+#AT9 of )*4-444. @hat is the division$s turnover< 7elected Ans%er: 4.0 Correct Ans%er: 4.0
Nuestion 3 1 out of 1 points "+/ can be improved by 7elected Ans%er: Both A and B are correct. Correct Ans%er: Both A and B are correct.
Nuestion 14 1 out of 1 points The maga,ine division of G"E Company has invested capital of )1-2(4-444. 7ales of )1-444-444 generated a income 85+#AT9 of )144-444. @hat is the division$s "+/< 7elected Ans%er: 0H Correct Ans%er: 0H
Nuestion 11 1 out of 1 points Cat Dood Company has t%o divisions- Tur'ey and Dish. +perating results for the t%o divisions are as follo%s: Tur'ey Dish 5+#AT )(4-444 )*4-444 /nvestment )2(4-444 )&44-444 The re2uired rate of return for the Cat Dood Company is 10H. "eference: "ef 126& @hat is the residual income for the Dish Division< 7elected Ans%er: 8)12-4449 Correct Ans%er: 8)12-4449
Chapter 1& Nuestion 1 1 out of 1 points ;ori,ontal analysis is 7elected Ans%er: consists of analy,ing changes in financial statements across time. Correct Ans%er: consists of analy,ing changes in financial statements across time. Nuestion 2 1 out of 1 points @hich type of analysis %ould highlight the percentage increase in sales from one year to the next< 7elected Ans%er: ;ori,ontal analysis Correct Ans%er: ;ori,ontal analysis
Nuestion 1 out of 1 points @hich ratio measures the rate earned on the total capital used by a firm< 7elected Ans%er: "eturn on total assets Correct Ans%er: "eturn on total assets Nuestion & 4 out of 1 points The gross margin 7elected Ans%er: is the same as operating income. Correct Ans%er: is sales less the cost of the inventory that generated those sales. Nuestion ( 1 out of 1 points Asset turnover is a measure of 7elected Ans%er: the overall efficiency %ith %hich the company uses assets to generate revenues. Correct Ans%er: the overall efficiency %ith %hich the company uses assets to generate revenues.
Nuestion * 4 out of 1 points The higher the accounts receivable turnover7elected Ans%er: neither A nor B Correct Ans%er: both A and B
Nuestion . 1 out of 1 points /f a company has an inventory turnover of 12- that means that 7elected Ans%er: it has about one month$s sales in inventory. Correct Ans%er: it has about one month$s sales in inventory.
Nuestion 0
1 out of 1 points The higher the debt to e2uity ratio- the higher the level of 7elected Ans%er: ris'. Correct Ans%er: ris'.
Nuestion 3 1 out of 1 points The ratio that measures ho% many multiples of the firm$s earning investors are %illing to pay for its stoc' is: 7elected Ans%er: the price earnings ratio Correct Ans%er: the price earnings ratio
Nuestion 14 1 out of 1 points 1arnings per share represents the dividends shareholders receive for each share they o%n. 7elected Ans%er: Dalse Correct Ans%er: Dalse
1KA! 1 Nuestion 1 1.( out of 1.( points !anagerial accounting stresses accounting concepts and procedures that are relevant to preparing reports for 7elected Ans%er: internal users of accounting information. Correct Ans%er: internal users of accounting information.
Nuestion 2 1.( out of 1.( points The principle that managers follo% %hen they only investigate departures from the plan that appear to be significant is commonly 'no%n as 7elected Ans%er: management by exception.
Correct Ans%er: management by exception.
Nuestion 1.( out of 1.( points @hich of the follo%ing costs does not change %hen the level of business activity changes< 7elected Ans%er: total fixed costs Correct Ans%er: total fixed costs Nuestion & 1.( out of 1.( points @hich of the follo%ing is not li'ely to be a fixed cost< 7elected Ans%er: direct materials Correct Ans%er: direct materials
Nuestion ( 1.( out of 1.( points A sun' cost is a cost 7elected Ans%er: incurred in the past %hich is not relevant to present decisions. Correct Ans%er: incurred in the past %hich is not relevant to present decisions. Nuestion * 1.( out of 1.( points /n a period %hen anticipated production is 14-444 units- budgeted variable costs are )0(-444 and budgeted fixed costs are )&(-444. /f 12-444 units are actually produced- %hat is the expected total cost< 7elected Ans%er: )1&.-444 Correct Ans%er: )1&.-444
Nuestion . 1.( out of 1.( points Aariable cost per unit 7elected Ans%er: does not change %hen the number of units produced increases. Correct Ans%er: does not change %hen the number of units produced increases.
Nuestion 0 1.( out of 1.( points Lou o%n a car and are trying to decide %hether or not to trade it in and buy a ne% car. @hich of the follo%ing costs is an opportunity cost in this situation< 7elected Ans%er: the trip to 1urope that you %ill not be able to ta'e if you buy the car Correct Ans%er: the trip to 1urope that you %ill not be able to ta'e if you buy the car
Nuestion 2 1.( out of 1.( points @hich of the follo%ing is not an advantage of decentrali,ation for a company< 7elected Ans%er: subunit managers %ill act to benefit the organi,ation as a %hole Correct Ans%er: subunit managers %ill act to benefit the organi,ation as a %hole Nuestion 2& 1.( out of 1.( points Eoal congruence refers to the match bet%een 7elected Ans%er: goals of the individual managers and those of the company as a %hole. Correct Ans%er: goals of the individual managers and those of the company as a %hole. Nuestion 2( 1.( out of 1.( points "esponsibility accounting holds managers responsible for 7elected Ans%er: only the costs %hich they can control. Correct Ans%er: only the costs %hich they can control.
Nuestion 2* 1.( out of 1.( points A subunit that has responsibility for controlling costs- but does not have responsibility for generating revenue is a8n9 7elected Ans%er: cost center. Correct Ans%er: cost center.
Nuestion 2. 1.( out of 1.( points @hich of the follo%ing is not a characteristic of a profit center< 7elected Ans%er: The center$s manager has no control over the product pricing decisions. Correct Ans%er: The center$s manager has no control over the product pricing decisions. Nuestion 20 1.( out of 1.( points @hich of the follo%ing is a responsibility that distinguishes an investment center manager from a profit center manager< 7elected Ans%er: significantly influencing investment decisions Correct Ans%er: significantly influencing investment decisions
Nuestion 23 1.( out of 1.( points "+/ is used to evaluate 7elected Ans%er: investment centers. Correct Ans%er: investment centers.
Nuestion 4 1.( out of 1.( points #rofit margin is 7elected Ans%er: All of the above are correct. Correct Ans%er: All of the above are correct.
Nuestion 1 1.( out of 1.( points /f a manager is evaluated based on "+/- and is managing a division %hich has attained a high "+/- the manager 7elected Ans%er: may not %ant to invest in pro:ects that have an "+/ that is higher than the firm$s cost of capital- but lo%er than the division$s "+/. Correct Ans%er: may not %ant to invest in pro:ects that have an "+/ that is higher than the firm$s cost of capital- but lo%er than the division$s "+/.
Nuestion 2 1.( out of 1.( points @hich of the follo%ing is not one of the set of dimensions considered in the Balanced 7corecard< 7elected Ans%er: depreciation Correct Ans%er: depreciation
Nuestion 1.( out of 1.( points !anagers need to analy,e financial reports to: 7elected Ans%er: all of the above. Correct Ans%er: all of the above.
Nuestion & 1.( out of 1.( points The percentage increase in sales from one year to the next %ould be most obvious by using: 7elected Ans%er: hori,ontal analysis Correct Ans%er: hori,ontal analysis
Nuestion ( 1.( out of 1.( points The gross margin 7elected Ans%er: is sales less the cost of the inventory that generated those sales. Correct Ans%er: is sales less the cost of the inventory that generated those sales. Nuestion * 1.( out of 1.( points Asset turnover is a measure of 7elected Ans%er: the overall efficiency %ith %hich the company uses assets to generate revenues. Correct Ans%er: the overall efficiency %ith %hich the company uses assets to generate revenues.
Nuestion . 1.( out of 1.( points The higher the accounts receivable turnover7elected Ans%er: both A and B Correct Ans%er: both A and B Nuestion 0 1.( out of 1.( points /f a company has an inventory turnover of 12- that means that 7elected Ans%er: it has about one month$s sales in inventory. Correct Ans%er: it has about one month$s sales in inventory.
Nuestion 3 4 out of 1.( points @hich of the follo%ing %ould be included in the current ratio but not the 2uic' ratio< 7elected Ans%er: !ar'etable securities Correct Ans%er: /nventory
Nuestion &4 1.( out of 1.( points Comparative financial statements for Alpha Company are sho%n belo% Alpha Company Balance 7heet December 1- 244( December 1- 244& Assets: Current assets: Cash )03-14 )*0-24 Accounts receivable )1 0-243 1 4- 3& /nventory 3*-.40 0(-*3& +ther 21-24 (-110 Total current assets &(-22 203-&43 #roperty- plant and e2uipment- net .34-124 *00-342 /ntangible assets 2-&(* 232&2 Total assets )1-1*.-.33 )1-44.-(( ?iabilities and stoc'holders$ e2uity: Current liabilities: Accounts payable )0(-&& )*2- 3& +ther current liabilities &- 21 20-341 Total current liabilities 113-.*& 31-23( ?ong term debt 42-& 4 234- 2& Total liabilities &22-13& 01-*13
7toc'holders$ e2uity: Common stoc' &44-444 &44-444 Additional paid in capital 244-444 244-444 "etained earnings 1&(-*4( 2(-3 & Total stoc'holders$ e2uity .&(-*4( *2(-3 & Total liabilities and stoc'holders$ e2uity )1-1*.-.33 )1-44.-(( Alpha Company 7tatement of 1arnings Dor the year ended December 1- 244( Dor the year ended December 1- 244& 7ales )1(-44(-0(2 )1 -043-(0( Cost of Eoods 7old 14-2(4-2(. 3-02(-*1& Eross profit &-.((-(3( -30 -3.1 +perating expense -(0(-*(. -&44-2(0 /ncome before interest and tax 1-1*3-3 . (0 -.1 /nterest expense 20-(44 2.- 44 1arnings before tax 1-1&1-& . ((*-&1 Tax expense &2-& 1 1**-32& 5et earnings ).33-44* ) 03-&03 Alpha Company uses ending balance sheet balances %hen calculating ratios. "eference: "ef 1 62 Fsing hori,ontal analysis- the percentage change in accounts receivable from 244& to 244( %as: 7elected Ans%er: *.4H increase Correct Ans%er: *.4H increase
1KA! Nuestion 1 1.( out of 1.( points A budget 7elected Ans%er: All of the above are true. Correct Ans%er: All of the above are true.
Nuestion 2 1.( out of 1.( points A method of budget preparation that re2uires all budgeted amounts to be :ustified by the department- even if the amounts %ere supported in prior periods- is called 7elected Ans%er: ,ero base budgeting. Correct Ans%er: ,ero base budgeting.
Nuestion 1.( out of 1.( points The comprehensive planning document that incorporates a number of individual budgets is the 7elected Ans%er: master budget. Correct Ans%er: master budget. Nuestion & 1.( out of 1.( points @hich of the follo%ing is a reasonable order in %hich to prepare budgets< 7elected Ans%er: sales budget- production budget- material purchases budget Correct Ans%er: sales budget- production budget- material purchases budget Nuestion ( 1.( out of 1.( points /f the number of units in beginning inventory is more than the number of units in ending inventory- the number of units sold is 7elected Ans%er: greater than the number of units produced. Correct Ans%er: greater than the number of units produced. Nuestion * 1.( out of 1.( points @hen constructing the production budget- the desired ending inventory for the first period is 7elected Ans%er: the beginning inventory for the second period. Correct Ans%er: the beginning inventory for the second period. Nuestion . 1.( out of 1.( points A significant difference bet%een the direct material purchases budget and the direct labor budget is that the direct material purchases budget 7elected Ans%er: considers beginning and ending inventory amounts- %hich are not part of a direct labor budget. Correct Ans%er: considers beginning and ending inventory amounts- %hich are not part of a direct labor budget. Nuestion 0 1.( out of 1.( points
@hich of the follo%ing transactions %ill affect the cash receipts and disbursements budget for the month in %hich the transaction occurs< 7elected Ans%er: payment for direct labor Correct Ans%er: payment for direct labor
Nuestion 3 1.( out of 1.( points The cash receipts and disbursements budget alerts management to all of the follo%ing except %hen 7elected Ans%er: stoc'outs %ill cause customer dissatisfaction. Correct Ans%er: stoc'outs %ill cause customer dissatisfaction.
Nuestion 14 1.( out of 1.( points @hen budgets are used for evaluation- the differences bet%een budgeted and actual amounts are called 7elected Ans%er: budget variances. Correct Ans%er: budget variances.
Nuestion 11 1.( out of 1.( points The main difference bet%een a static budget and a flexible budget is that the static budget is 7elected Ans%er: for a single level of activity %hile a flexible budget can be ad:usted for different activity levels. Correct Ans%er: for a single level of activity %hile a flexible budget can be ad:usted for different activity levels. Nuestion 12 1.( out of 1.( points A flexible budget ta'es into account the fact that %hen production levels change 7elected Ans%er: total fixed costs remain the same. Correct Ans%er: total fixed costs remain the same.
Nuestion 1 1.( out of 1.( points Gnight Company has found that 4H of its sales are collected in the month of the sale and the remainder of the sales is collected in the next month. /f sales are expected to be )144-444 in April- )124-444 in !ay- and )04-444 in Bune- %hat is the estimated amount of cash receipts for !ay< 7elected Ans%er: )14*-444 Correct Ans%er: )14*-444
Nuestion 1& 1.( out of 1.( points The standard cost is 7elected Ans%er: the cost that should have been incurred to produce the item. Correct Ans%er: the cost that should have been incurred to produce the item. Nuestion 1( 1.( out of 1.( points The relationship bet%een standard costs and budgeted costs is the 7elected Ans%er: standard cost times the expected production level e2uals the budgeted cost. Correct Ans%er: standard cost times the expected production level e2uals the budgeted cost. Nuestion 1* 1.( out of 1.( points 7tandards that are developed under the assumption that a variety of things may lead to less than perfect performance are 7elected Ans%er: attainable standards. Correct Ans%er: attainable standards. Nuestion 1. 1.( out of 1.( points Aariances are usually analy,ed for 7elected Ans%er: direct materials- direct labor- and manufacturing overhead. Correct Ans%er: direct materials- direct labor- and manufacturing overhead. Nuestion 10 1.( out of 1.( points
/f the actual price per unit of material is greater than the standard price- the material price variance %ill be 7elected Ans%er: unfavorable. Correct Ans%er: unfavorable.
Nuestion 13 1.( out of 1.( points /f the material 2uantity variance is favorable- the 7elected Ans%er: production manager has used materials efficiently. Correct Ans%er: production manager has used materials efficiently. Nuestion 24 1.( out of 1.( points @hich of the follo%ing %ould cause a variance to be unfavorable< 7elected Ans%er: the standard hours allo%ed are less than the actual hours %or'ed Correct Ans%er: the standard hours allo%ed are less than the actual hours %or'ed Nuestion 21 4 out of 1.( points A possible cause for an unfavorable labor rate variance is 7elected Ans%er: hiring ne%- inexperienced employees. Correct Ans%er: using more experienced %or'ers than planned. Nuestion 22 1.( out of 1.( points 1rie Company produces one product- the 1&(41. The standards for 1&(41 include the use of 2( yards of ra% material at a standard price of )&.&2 per yard. During a recent month- the company used *(-444 yards of ra% material to produce 2-(04 units of 1&(41. 1rie had purchased this material at a cost of )&. . per yard. Calculate the material 2uantity variance. 7elected Ans%er: )2-214 unfavorable Correct Ans%er: )2-214 unfavorable
Nuestion 2 1.( out of 1.( points
@hich of the follo%ing is not an advantage of decentrali,ation for a company< 7elected Ans%er: subunit managers %ill act to benefit the organi,ation as a %hole Correct Ans%er: subunit managers %ill act to benefit the organi,ation as a %hole Nuestion 2& 1.( out of 1.( points Eoal congruence refers to the match bet%een 7elected Ans%er: goals of the individual managers and those of the company as a %hole. Correct Ans%er: goals of the individual managers and those of the company as a %hole. Nuestion 2( 1.( out of 1.( points "esponsibility accounting holds managers responsible for 7elected Ans%er: only the costs %hich they can control. Correct Ans%er: only the costs %hich they can control.
Nuestion 2* 1.( out of 1.( points A subunit that has responsibility for controlling costs- but does not have responsibility for generating revenue is a8n9 7elected Ans%er: cost center. Correct Ans%er: cost center.
Nuestion 2. 1.( out of 1.( points @hich of the follo%ing is not a characteristic of a profit center< 7elected Ans%er: The center$s manager has no control over the product pricing decisions. Correct Ans%er: The center$s manager has no control over the product pricing decisions. Nuestion 20 1.( out of 1.( points @hich of the follo%ing is a responsibility that distinguishes an investment center manager from a profit center manager<
7elected Ans%er: significantly influencing investment decisions Correct Ans%er: significantly influencing investment decisions
Nuestion 23 1.( out of 1.( points "+/ is used to evaluate 7elected Ans%er: investment centers. Correct Ans%er: investment centers.
Nuestion 4 1.( out of 1.( points #rofit margin is 7elected Ans%er: All of the above are correct. Correct Ans%er: All of the above are correct.
Nuestion 1 1.( out of 1.( points /f a manager is evaluated based on "+/- and is managing a division %hich has attained a high "+/- the manager 7elected Ans%er: may not %ant to invest in pro:ects that have an "+/ that is higher than the firm$s cost of capital- but lo%er than the division$s "+/. Correct Ans%er: may not %ant to invest in pro:ects that have an "+/ that is higher than the firm$s cost of capital- but lo%er than the division$s "+/. Nuestion 2 1.( out of 1.( points @hich of the follo%ing is not one of the set of dimensions considered in the Balanced 7corecard< 7elected Ans%er: depreciation Correct Ans%er: depreciation
Nuestion 1.( out of 1.( points
!anagers need to analy,e financial reports to: 7elected Ans%er: all of the above. Correct Ans%er: all of the above.
Nuestion & 1.( out of 1.( points The percentage increase in sales from one year to the next %ould be most obvious by using: 7elected Ans%er: hori,ontal analysis Correct Ans%er: hori,ontal analysis
Nuestion ( 1.( out of 1.( points The gross margin 7elected Ans%er: is sales less the cost of the inventory that generated those sales. Correct Ans%er: is sales less the cost of the inventory that generated those sales. Nuestion * 1.( out of 1.( points Asset turnover is a measure of 7elected Ans%er: the overall efficiency %ith %hich the company uses assets to generate revenues. Correct Ans%er: the overall efficiency %ith %hich the company uses assets to generate revenues.
Nuestion . 1.( out of 1.( points The higher the accounts receivable turnover7elected Ans%er: both A and B Correct Ans%er: both A and B Nuestion 0 1.( out of 1.( points /f a company has an inventory turnover of 12- that means that 7elected Ans%er: it has about one month$s sales in inventory.
Correct Ans%er: it has about one month$s sales in inventory.
Nuestion 3 4 out of 1.( points @hich of the follo%ing %ould be included in the current ratio but not the 2uic' ratio< 7elected Ans%er: !ar'etable securities Correct Ans%er: /nventory
Nuestion &4 1.( out of 1.( points Comparative financial statements for Alpha Company are sho%n belo% Alpha Company Balance 7heet December 1- 244( December 1- 244& Assets: Current assets: Cash )03-14 )*0-24 Accounts receivable )1 0-243 1 4- 3& /nventory 3*-.40 0(-*3& +ther 21-24 (-110 Total current assets &(-22 203-&43 #roperty- plant and e2uipment- net .34-124 *00-342 /ntangible assets 2-&(* 232&2 Total assets )1-1*.-.33 )1-44.-(( ?iabilities and stoc'holders$ e2uity: Current liabilities: Accounts payable )0(-&& )*2- 3& +ther current liabilities &- 21 20-341 Total current liabilities 113-.*& 31-23( ?ong term debt 42-& 4 234- 2& Total liabilities &22-13& 01-*13 7toc'holders$ e2uity: Common stoc' &44-444 &44-444 Additional paid in capital 244-444 244-444 "etained earnings 1&(-*4( 2(-3 & Total stoc'holders$ e2uity .&(-*4( *2(-3 & Total liabilities and stoc'holders$ e2uity )1-1*.-.33 )1-44.-(( Alpha Company 7tatement of 1arnings Dor the year ended December 1- 244( Dor the year ended December 1- 244& 7ales )1(-44(-0(2 )1 -043-(0( Cost of Eoods 7old 14-2(4-2(. 3-02(-*1& Eross profit &-.((-(3( -30 -3.1 +perating expense -(0(-*(. -&44-2(0 /ncome before interest and tax 1-1*3-3 . (0 -.1
/nterest expense 20-(44 2.- 44 1arnings before tax 1-1&1-& . ((*-&1 Tax expense &2-& 1 1**-32& 5et earnings ).33-44* ) 03-&03 Alpha Company uses ending balance sheet balances %hen calculating ratios. "eference: "ef 1 62 Fsing hori,ontal analysis- the percentage change in accounts receivable from 244& to 244( %as: 7elected Ans%er: *.4H increase Correct Ans%er: *.4H increase
Dinal "evie% Nuestion 1 1.( out of 1.( points The cost of the cushions that are used to manufacture sofas is best described as a: 7elected Ans%er: variable cost. Correct Ans%er: variable cost.
Nuestion 2 1.( out of 1.( points !aterials used in the operation of a factory- such as cleaning supplies- that are not an integral part of the final product should be classified as: 7elected Ans%er: manufacturing overhead. Correct Ans%er: manufacturing overhead.
Nuestion 1.( out of 1.( points @hich of the follo%ing is 5+T a period cost< 7elected Ans%er: !onthly depreciation on production e2uipment used by factory %or'ers. Correct Ans%er: !onthly depreciation on production e2uipment used by factory %or'ers. Nuestion & 1.( out of 1.( points A sun' cost is:
7elected Ans%er: irrelevant for decision ma'ing. Correct Ans%er: irrelevant for decision ma'ing.
Nuestion ( 1.( out of 1.( points During Buly- the cost of goods manufactured at Kxis Corporation %as ).4-444. The beginning finished goods inventory %as )13-444 and the ending finished goods inventory %as )1(-444. @hat %as the cost of goods sold for the month< 7elected Ans%er: ).&-444 Correct Ans%er: ).&-444
Nuestion * 1.( out of 1.( points /n a predetermined overhead rate in a :ob6order costing system that is based on machine6hours%hich of the follo%ing %ould be used in the numerator and denominator<
7elected Ans%er: Correct Ans%er:
Nuestion . 1.( out of 1.( points /f overhead is underapplied- then: 7elected Ans%er: the amount of overhead cost applied to @or' in #rocess is less than the actual overhead cost incurred. Correct Ans%er: the amount of overhead cost applied to @or' in #rocess is less than the actual overhead cost incurred. Nuestion 0 1.( out of 1.( points A is a fixed cost> B is a variable cost. During the current year the level of activity has decreased but is still %ithin the relevant range. @e %ould expect that: 7elected Ans%er: The cost per unit of B has remained unchanged.
Correct Ans%er: The cost per unit of B has remained unchanged. Nuestion 3 4 out of 1.( points Contribution margin is computed as sales revenue minus: 7elected Ans%er: cost of goods sold Correct Ans%er: variable expenses @hich of the follo%ing is not a difference bet%een financial accounting and managerial accounting< 7elected Ans%er: !anagerial accounting is primarily concerned %ith providing information for external users %hile financial accounting is concerned %ith internal users. Correct Ans%er: !anagerial accounting is primarily concerned %ith providing information for external users %hile financial accounting is concerned %ith internal users. Nuestion 2 1 out of 1 points @hich of the follo%ing is most li'ely to ma'e use of 7pruce Company$s managerial accounting information< 7elected Ans%er: the production manager of 7pruce$s plant in !innesota Correct Ans%er: the production manager of 7pruce$s plant in !innesota Nuestion 1 out of 1 points A difference bet%een actual costs and planned costs 7elected Ans%er: should be investigated if the amount is exceptional. Correct Ans%er: should be investigated if the amount is exceptional. Nuestion & 1 out of 1 points Costs incurred in the past %hich are not relevant to present decisions are 7elected Ans%er: sun' costs. Correct Ans%er: sun' costs.
Nuestion ( 1 out of 1 points The benefits that are given up %hen another alternative is selected is a8n9
7elected Ans%er: opportunity cost. Correct Ans%er: opportunity cost. Nuestion * 1 out of 1 points A cost %hich is directly traceable to a product- activity- or department is a 7elected Ans%er: direct cost. Correct Ans%er: direct cost. Nuestion . 1 out of 1 points A manager should be evaluated based on 7elected Ans%er: controllable costs. Correct Ans%er: controllable costs.
Nuestion 0 1 out of 1 points Calculating the difference in revenue and the difference in cost bet%een decision alternatives is called 7elected Ans%er: incremental analysis. Correct Ans%er: incremental analysis.
Nuestion 3 1 out of 1 points @hen ma'ing ethical decisions- you should consider: 7elected Ans%er: %hat is right. Correct Ans%er: %hat is right.
Nuestion 14 4 out of 1 points @hich of the follo%ing statements regarding fixed costs is true< 7elected Ans%er: @hen production decreases- total fixed costs decrease. Correct Ans%er: @hen production increases- fixed cost per unit decreases.
Chapter 2 Nuestion 1 1 out of 1 points @hich of the follo%ing is not a manufacturing cost< 7elected Ans%er: Administrative expenses Correct Ans%er: Administrative expenses
Nuestion 2 4 out of 1 points Cold Company manufactures refrigerators. @hich of the follo%ing items is most li'ely to be an indirect material cost for Cold Company< 7elected Ans%er: Dactory supervisor$s salary Correct Ans%er: ?ubricant for refrigerator door hinges
Nuestion 1 out of 1 points #roduct costs 7elected Ans%er: All of the above ans%ers are correct. Correct Ans%er: All of the above ans%ers are correct.
Nuestion & 1 out of 1 points Brandon Company allocates overhead based on machine hours used on a :ob. The predetermined overhead rate is )1( per machine hour. /f *-444 machine hours %ere used on :obs and )3.-444 in overhead costs %ere incurred- %hat is the amount of underapplied or overapplied overhead< 7elected Ans%er: ).-444 underapplied Correct Ans%er: ).-444 underapplied
Nuestion ( 1 out of 1 points @hich of the follo%ing is a period cost<
7elected Ans%er: Commissions paid on each unit sold Correct Ans%er: Commissions paid on each unit sold
Nuestion * 1 out of 1 points A :ob6order costing system is li'ely to be used by a 7elected Ans%er: custom home builder. Correct Ans%er: custom home builder.
Nuestion . 1 out of 1 points #redetermined overhead rates use 7elected Ans%er: estimated overhead costs and estimated levels of the allocation base. Correct Ans%er: estimated overhead costs and estimated levels of the allocation base. Nuestion 0 1 out of 1 points The 7ienna Company has a beginning balance in Dinished Eoods /nventory of )22-444 and an ending balance in Dinished Eoods /nventory of )24-444. /f the cost of goods manufactured is ) 04-444- %hat is the cost of goods sold< 7elected Ans%er: ) 02-444 Correct Ans%er: ) 02-444
Nuestion 3 1 out of 1 points Lello% Company has a beginning balance in the @or' in #rocess /nventory account of )2 4-444. Current manufacturing costs for the period are )(04-444. /f the cost of goods manufactured is ).(4-444- %hat is the ending balance in the @or' in #rocess /nventory account< 7elected Ans%er: )*4-444 Correct Ans%er: )*4-444
Nuestion 14
1 out of 1 points @ell Done Company applies overhead using machine hours as the allocation base- at a rate of )1. per machine hour. Bob GD re2uires )(44 %orth of material- 12 hours of labor at )1( per hour and 11 machine hours. @hat is the cost of :ob GD< 7elected Ans%er: )0*. Correct Ans%er: )0*.
Chapter Nuestion 1 1 out of 1 points @hich of the follo%ing companies is most li'ely to use a process costing system< 7elected Ans%er: a food manufacturer Correct Ans%er: a food manufacturer Nuestion 2 1 out of 1 points @hich of the follo%ing describes the differences bet%een :ob6order and process costing< 7elected Ans%er: Bob6order costing traces costs to :obs %hile process costing traces costs to departments and averages the costs among the units %or'ed on during the period. Correct Ans%er: Bob6order costing traces costs to :obs %hile process costing traces costs to departments and averages the costs among the units %or'ed on during the period. Nuestion 1 out of 1 points /n the manufacturing operations of a company using process costing 7elected Ans%er: a product typically must pass through t%o or more production departments. Correct Ans%er: a product typically must pass through t%o or more production departments. Nuestion & 1 out of 1 points ?abor and overhead are often grouped together and referred to as 7elected Ans%er: conversion costs. Correct Ans%er: conversion costs.
Nuestion (
1 out of 1 points A production cost report 7elected Ans%er: provides a reconciliation of units and a reconciliation of costs as %ell as the details of the cost per e2uivalent unit calculation. Correct Ans%er: provides a reconciliation of units and a reconciliation of costs as %ell as the details of the cost per e2uivalent unit calculation. Nuestion * 1 out of 1 points /f beginning inventory consisted of -(44 units- ending inventory %as 1-(44 units- and 3-444 units %ere started during the period- ho% many units %ere completed and transferred out of the department< 7elected Ans%er: 11-444 units Correct Ans%er: 11-444 units
Nuestion . 1 out of 1 points /n a process costing system- manufacturing overhead is added to @or' in #rocess 7elected Ans%er: using a predetermined overhead rate or actual overhead. Correct Ans%er: using a predetermined overhead rate or actual overhead. Nuestion 0 1 out of 1 points The ending @or' in #rocess inventory in the mixing department contains 44 units that are 4H complete %ith respect to labor costs. ;o% many e2uivalent units are in the ending inventory< 7elected Ans%er: 34 Correct Ans%er: 34
Nuestion 3 1 out of 1 points A company has 14-444 e2uivalent units in ending %or' in process- that are 144H complete %ith respect to materials and 04H complete %ith respect to conversion costs. The cost per unit for inventory is )2.44- %hich consists of )1.24 for materials and )4.04 for conversion costs. @hat is the dollar value assigned to the ending %or' in process inventory< 7elected Ans%er: )10-&44
Correct Ans%er: )10-&44
Nuestion 14 1 out of 1 points 12uivalent units 7elected Ans%er: All of the above are true. Correct Ans%er: All of the above are true.
Chapter & Nuestion 1 1 out of 1 points @hich of the follo%ing costs is least li'ely to be a variable cost< 7elected Ans%er: supervisory salaries Correct Ans%er: supervisory salaries
Nuestion 2 1 out of 1 points @hen the level of activity increases- total fixed costs 7elected Ans%er: remain the same. Correct Ans%er: remain the same.
Nuestion 1 out of 1 points The contribution margin per unit is the difference bet%een 7elected Ans%er: selling price and variable cost per unit. Correct Ans%er: selling price and variable cost per unit.
Nuestion & 1 out of 1 points ;olding all other factors constant- the brea'6even point %ill be decreased by
7elected Ans%er: increasing the selling price. Correct Ans%er: increasing the selling price.
Nuestion ( 1 out of 1 points A firm %ith high operating leverage has high 7elected Ans%er: fixed costs. Correct Ans%er: fixed costs. Nuestion * 1 out of 1 points @hen considering a process that involves a resource constraint- the optimal decision 7elected Ans%er: maximi,es the contribution margin per unit of the constraint. Correct Ans%er: maximi,es the contribution margin per unit of the constraint. Nuestion . 1 out of 1 points 5ic'$s 5ovelties has collected the follo%ing information over the last six months. !onth Fnits produced Total costs !arch 14-444 )2(-*44 April 12-444 2*-244 !ay 10-444 2.-*44 Bune 1 -444 2*-&(4 Buly 12-444 2*-444 August 1(-444 2*-(44 "eference: "ef &61 Fsing the high6lo% method- %hat is the variable cost per unit< 7elected Ans%er: )4.2( Correct Ans%er: )4.2(
Nuestion 0 1 out of 1 points 5ic'$s 5ovelties has collected the follo%ing information over the last six months. !onth Fnits produced Total costs !arch 14-444 )2(-*44
April 12-444 2*-244 !ay 10-444 2.-*44 Bune 1 -444 2*-&(4 Buly 12-444 2*-444 August 1(-444 2*-(44 "eference: "ef &61 Fsing the high6lo% method- %hat is the total fixed cost< 7elected Ans%er: )2 -144 Correct Ans%er: )2 -144
Nuestion 3 1 out of 1 points Copper Corporation sells a single product at a price of )2.( per unit. Aariable cost per unit is )1 ( and fixed costs total ) (*-0*4. /f sales are expected to be )02(-444- %hat is Cooper$s margin of safety< 7elected Ans%er: )12&-42( Correct Ans%er: )12&-42(
Nuestion 14 1 out of 1 points Bryant Company ma'es a product that sells for )04 per unit and has )* per unit in variable costs. Annual fixed costs are )1.-444. "eference: "ef &62 ;o% many units must be sold to earn a profit of )(1-444< 7elected Ans%er: &-444 Correct Ans%er: &-444 @hat is an externality< a benefit or cost that affects someone not directly involved in the production or consumption of a good or service Describe negative externalities. 1. costs imposed on individuals not directly involved in producing or consuming a good or service 2.causes the social cost of production of a good or service to exceed the private cost borne by the producer . causes output to exceed the economically efficient amount
Describe positive externalities. 1. benefits received by individuals not directly involved in producing or consuming a good or service 2. causes the social benefit from consuming a good or service to exceed the private benefit . causes output to be less than the economically efficient amount @hat is the result of negative and positive externalities< mar'et failure @hat is the underlying cause of externalities and other forms of mar'et failure< The absence of private property rights or the lac' of sufficient enforcement of existing property rights @hen are private solutions possible and efficient< if there are lo% transactions costs Describe the command and control approach. the government sets specific 2uantitative limits Describe rivalry. occurs %hen consumption of one unit of a good precludes its consumption by someone else Describe excludability. means that anyone %ho does not pay for a good cannot consume it Describe tragedy of the commons. +ne person$s use of a common resource can impose costs on others @hat is a private cost< a cost borne by the producer of a good or service @hat is a social cost< the total cost of production- including both the private cost and any external cost @hat is a private benefit< the benefit received by the consumer of a good or service @hat is a social benefit< the total benefit from consuming a goodincluding both the private benefit and any external benefit @hat are property rights< the rights individuals or businesses have to the exclusive use of their propertyincluding the right to buy or sell it. @hat is mar'et failure< situations %here the mar'et fails to produce the efficient level of output Describe the Coase Theorem. 1. if transactions costs are lo%- private bargaining %ill result in an efficient solution to the problem of externalities 2. services. 7uccessful application of the Coase Theorem re2uires that the bargaining parties have full information regarding the costs and benefits associated %ith the externalities and are %illing to accept a reasonable agreement @hat are transaction costs< the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods and services Describe #igovian tax and subsidy. 1. cause consumers and firms to internali,e the externalities associated %ith production and consumption 2. The tax or subsidy %ould be e2ual to the dollar amount of the externality @hat is a private good< a good that is both rival and excludable @hat is a common resource< a good that is rival but not excludable @hat is a public good< a good that is both nonrivalrous and nonexcludable Describe free riding< 1. benefiting from a good %ithout paying for it 2. Because of free riders- public goods are usually supplied by government rather than private firms.
1. @hat is the cost that affects someone %ho is not directly involved in the production or consumption of a good called< a. #rivate cost b. /ndirect cost c. An externality d. All of the above fit that definition c. An externality 2. @hat is the term used to describe the total cost of producing a good< a. #rivate cost b. 7ocial cost c. 1xternality d. All of the above fit that definition. b. 7ocial cost . @hat is the difference bet%een private benefit and social benefit< a. An external benefit b. #rivate cost c. 7ocial cost d. A negative externality a. An external benefit &. @hat is the benefit received by the consumer of a good or service called< a. #rivate benefit b. 7ocial benefit c. #rivate cost d. A positive externality a. #rivate benefit 14. Dill in the blan's. @hen a negative externality is present in producing a good or servicePPPPPPPPPPP of the good or service %ill be produced at mar'et e2uilibrium. a. too much b. too little c. the optimal 2uantity d. none a. too much 11. @hat is the situation called in %hich the mar'et fails to produce the efficient level of output< a. An externality b. !ar'et failure c. 1xternal dise2uilibrium d. The Coase Theorem b. !ar'et failure 12. @hen %e tal' about property rights in the discussion of externalities- %hich rights do %e refer to< a. The rights of individuals to pollute b. The rights of individuals to have exclusive use of their property c. The rights of individuals to buy but not sell their property d. All of the above b. The rights of individuals to have exclusive use of their property 1 . @hat are the sources of externalities and mar'et failure< a. /ncomplete property rights b. The difficulty of enforcing property rights in certain situations. c. Both a. and b. d. ?ac' of understanding of the mar'et system c. Both a. and b. 1&. @hat type of solution to externalities is the Coase Theorem< a. A private solution to externalities b. A public solution to externalities c. The only solution to externalities d. The least preferred solution a. A private solution to externalities
1(. @hich of the follo%ing statements is correct according to "onald Coase$s argument for dealing %ith externalities and mar'et failure< a. /n some situations- a private solution to the problem of externalities can be found. b. +nly public solutions exist for solving externalities. c. Completely eliminating an externality is almost al%ays the most efficient solution. d. The only cure to externalities is taxation. a. /n some situations- a private solution to the problem of externalities can be found 1*. @hich of the follo%ing is correct< a. Completely eliminating an externality is usually not economically efficient. b. As reductions in pollution increase- the additional benefits %ill decline. c. @hen levels of pollution are high- the marginal benefit of reducing pollution is also high. d. All of the above d. All of the above 1.. The net benefit to society from reducing pollution is e2ual to a. the sum of the benefits of reducing pollution and the costs. b. the difference bet%een the benefits and the costs. c. the additional benefit plus the additional costs. d. the 2uantity of pollution- such as the tons of reduction in sulfur dioxide. b. the difference bet%een the benefits and the costs. 1. An externality is A9 a cost paid for by the producer of a good or service. a benefit reali,ed by the purchaser of a good or service. C9 a benefit or cost experienced by someone %ho is not a producer or consumer of a good or service. D9 anything that is external or not relevant to the production of a good or service. C9 a benefit or cost experienced by someone %ho is not a producer or consumer of a good or service 2. @hich of the follo%ing is a source of mar'et failure< A9 a lac' of government intervention in a mar'et unforeseen circumstances %hich leads to the ban'ruptcy of many firms C9 an ine2uitable income distribution D9 incomplete property rights or inability to enforce property rights D9 incomplete property rights or inability to enforce property rights . @hat is a mar'et failure< A9 /t refers to a brea'do%n in a mar'et economy because of %idespread corruption in government. /t refers to a situation %here an entire sector of the economy 8for example- the airline industry9 collapses because of some unforeseen event. C9 /t refers the inability of the mar'et to allocate resources efficiently up to the point %here marginal social benefit e2uals marginal social cost. D9 /t refers to the inability of the mar'et to allocate resources efficiently up to the point %here marginal social benefit e2uals marginal private cost C9 /t refers the inability of the mar'et to allocate resources efficiently up to the point %here marginal social benefit e2uals marginal social cost. &. @hich of the follo%ing activities create a negative externality< A9 graduating from college 'eeping a :un'ed car par'ed on your front la%n
C9 cleaning up the side%al' on your bloc' D9 repainting the house you live in to improve its appearance 'eeping a :un'ed car par'ed on your front la%n (. A negative externality exists if A9 there are price controls in a mar'et. the marginal social cost of producing a good or service exceeds the private cost. C9 there are 2uantity controls in a mar'et. D9 the marginal private cost of producing a good or service exceeds the social cost the marginal social cost of producing a good or service exceeds the private cost. *. #rivate costs A9 are borne by producers of a good %hile social costs are borne by those %ho cannot afford to purchase the good. are borne by consumers of a good %hile social costs are borne by government. C9 are borne by producers of a good %hile social costs are borne by government. D9 are borne by producers of a good %hile social costs are borne by society at large. D9 are borne by producers of a good %hile social costs are borne by society at large. . An external cost can be calculated as the difference bet%een A9 the social cost of production and the social benefit of production. the private cost of production and the social benefit of production. C9 the social cost of production and the private cost of production. D9 a producer$s cost of production and the price at %hich the good is sold. C9 the social cost of production and the private cost of production 0. The social cost of cutting trees for fire%ood in a government forest is A9 the increased li'elihood of flooding as more trees are cut. the marginal costs of cutting the last tree. C9 opportunity cost to the individual of cutting the %ood. D9 the increased li'elihood of flooding as more trees are cut plus the private cost of cutting the trees. D9 the increased li'elihood of flooding as more trees are cut plus the private cost of cutting the trees 3. @hich of the follo%ing represents the economic benefit of production %hen firms produce goods that create positive externalities< A9 the difference bet%een social benefits and private benefits created by the goods. the sum of private benefits from consumption. C9 the external benefits created by the goods. D9 the sum of private benefits and external benefits created by the goods. D9 the sum of private benefits and external benefits created by the goods. 14. A positive externality causes A9 the marginal social benefit to be e2ual to the marginal private cost of the last unit produced. the marginal private benefit to exceed the marginal social cost of the last unit produced. C9 the marginal social benefit to be less than the marginal private cost of the last unit produced. D9 the marginal social benefit to exceed the marginal private cost of the last unit produced. D9 the marginal social benefit to exceed the marginal private cost of the last unit produce 1&. @hen there is a negative externality in a free mar'etA9 too little of the good is produced and consumed. an economically efficient level of the good is produced and consumed. C9 a productively efficient level of the good is produced and consumed. D9 too much of the good is produced and consumed. D9 too much of the good is produced and
consumed 24. @hich of the follo%ing conditions holds in an economically efficient competitive mar'et e2uilibrium< A9 There are no positive and no negative external effects from consumption and production. The marginal benefit of the last unit produced and consumed is maximi,ed. C9 #roducer and consumer surplus are exactly e2ual in si,e. D9 The dead%eight loss is positive but at a minimum. A9 There are no positive and no negative external effects from consumption and production. 21. A mar'et demand curve reflects the A9 social benefits of consuming a product. the sum of private and social benefits of consuming a product. C9 private benefits of consuming a product. D9 external benefits of consuming a product C9 private benefits of consuming a product. 22. @hich of the follo%ing statements is false< A9 7ocial benefits are external benefits minus private benefits. 7ocial costs are private costs and any external costs. C9 #rivate benefits are received by the consumer of the good or service. D9 #rivate costs are borne by the producer of the good or service. A9 7ocial benefits are external benefits minus private benefits. 2.. /n %hich of these situations is there no dead%eight loss< A9 free mar'et production of a private good %ith a negative externality free mar'et consumption of a private good %ith a positive externality C9 consumption of a common resource %ithout government restrictions D9 free mar'et production and consumption of a private good %ithout any externalities D9 free mar'et production and consumption of a private good %ithout any externalities 20. 1conomists argue that the level of pollution should be A9 ignored because it has al%ays been present since the beginning of history. best determined by elected officials %ho can spea' on behalf of the public. C9 reduced completely to ,ero because by definition- it is a negative external effect. D9 reduced to the point %here the marginal benefit of pollution reduction is e2ual to the marginal cost of pollution reduction to society. D9 reduced to the point %here the marginal benefit of pollution reduction is e2ual to the marginal cost of pollution reduction to society 23. The Coase theorem states that A9 government intervention is al%ays needed if externalities are present. a free mar'et e2uilibrium is the best solution to address externalities. C9 if transactions costs are lo%- private bargaining %ill result in an efficient solution to the problem of externalities. D9 assigning property rights is the only thing the government should do in a mar'et economy C9 if transactions costs are lo%- private bargaining %ill result in an efficient solution to the problem of externalities. 4. /f the paint on your house %as eaten a%ay by the fumes from a factory nearby and you hired a la%yer to sue the polluting firm- your legal fees %ould be considered A9 external costs. social costs of the pollution.
C9 marginal benefits. D9 transaction costs D9 transaction costs. 1. Consider the follo%ing characteristics: a. lo% transaction costs b. small levels of pollution c. high levels of pollution d. clear assignment of property rights. @hich of the above are assumptions behind the Coase Theorem< A9 a and d a- b- and d C9 a- c- and d D9 a only A9 a and d 2. /n the city of Alvare,- %ith the exception of guide dogs for blind people- all dogs are banned from its three public par's- regardless of %hether the animals are leashed. !any residents are pushing for a change in policy. Canine lover 7ara 5orthridge observed- CThere are 044 or more homes here. There are three par's %ithin 14 minutes- and almost everyone has a dog- but %e can$t ta'e our dogs there.C +thers fear that allo%ing dogs %ould detract from their en:oyment of the par's. Tim Cortis retorted- C@e$re not preventing dog lovers from en:oying the par'- :ust come %ithout your dog.C @hich of the follo%ing is a %ay of dealing %ith the problem by assigning property rights to a particular group< A9 impose a fee only for dog6o%ners to use the public par's> non dog o%ners do not pay a fee impose a t%o6tier entry fee system 6 a lo%er fee for non dog o%ners and a higher fee for dog o%ners C9 dedicate some par's- or at least one par'- exclusively for the use of visitors bringing dogs to the par'. D9 allo% dog o%ners to bring their dogs to the par' but insist that they 'eep %atch over their dogs C9 dedicate some par's- or at least one par'- exclusively for the use of visitors bringing dogs to the par' . /n the Fnited 7tates- many bee'eepers travel from state to state- renting out their bee colonies to farmers for pollination services. This is an example of A9 a tradable exchange contract. a #igouvian solution to a positive externality problem. C9 command and control policy. D9 a Coasian solution to a positive externality problem. D9 a Coasian solution to a positive externality problem &. @hat does the phrase Cinternali,ing an external costC mean< A9 forcing producers to factor into their production costs- the cost of the externalities created in the production of their output prohibiting economic activities that create externalities C9 limiting the extent to %hich domestic firms can outsource production D9 finding a %ay to address cross6border pollution A9 forcing producers to factor into their production costs- the cost of the externalities created in the
production of their output (. An advantage of imposing a tax on the producer that generates pollution is that A9 it %ill eliminate pollution. the government can 'eep tabs on exactly %hat is produced in an industry. C9 a producer can pass the cost of the pollution to consumers. D9 it forces the polluting producer to internali,e the external cost of the pollution. D9 it forces the polluting producer to internali,e the external cost of the pollution *. 7uppose a tax e2ual to the value of the marginal external cost at the optimal output is imposed on a pollution generating good. All of the follo%ing %ill result from the tax except A9 a decrease in mar'et supply of the good. an increase in the e2uilibrium mar'et price. C9 a decrease in the e2uilibrium 2uantity produced and consumed. D9 an increase in the demand for the good D9 an increase in the demand for the good. .. Eovernments can increase the consumption of a product that creates positive externalities by A9 assigning property rights to the producers of the product. taxing the production and consumption of the product. C9 convincing everyone to consume the good. D9 subsidi,ing the production of the product so that the supply is increased and mar'et price is reduced D9 subsidi,ing the production of the product so that the supply is increased and mar'et price is reduced. 3. Eovernment imposed 2uantitative limits on the amount of pollution firms are allo%ed is an example of A9 a tradable emission allo%ance system of pollution control. the #igovian method of pollution control. C9 Coasian solution to pollution reduction. D9 command and control approach to pollution reduction D9 command and control approach to pollution reduction /ssuing mar'etable emission allo%ance permits to polluting firms A9 gives the industry the right to a specific level of pollution. generates income for the government. C9 has the same impact as a subsidy on production. D9 encourages more pollution. A9 gives the industry the right to a specific level of pollution &1. Compared to the command and control approach to pollution control- the tradable emissions allo%ance system is A9 less efficient- because the tradable emissions allo%ance system gives firms the right to pollute a certain amount. less efficient- because it does not raise funds for the government %hereas under the command and control approach- firms are penali,ed for non6compliance. C9 more efficient- because firms %ith lo% costs of pollution control %ould pollute the least and sell their extra permits to other firms %ith higher costs of pollution control. D9 more efficient- because there are implementation and monitoring costs %ith the tradable emissions allo%ance system. C9 more efficient- because firms %ith lo% costs of pollution control %ould
pollute the least and sell their extra permits to other firms %ith higher costs of pollution control. Anyone can purchase sulfur dioxide emissions allo%ances on the Chicago !ercantile 1xchange. 7everal environmental groups have raised money to buy allo%ances 8%hich it subse2uently destroys9. As part of their fund6raising- these groups have urged contributors to buy the allo%ances as gifts. As one ne%spaper story put it- CDor the environmentalist in your life- here$s a gift that is sold by the ton- fits in an envelope and %ill last forever.C 7ource for 2uote: "andall 1d%ards- CDear 7anta: #lease Bring !e 7ulfur Dioxide for Christmas-C Columbus Dispatch- December 13- 1333. @hat %ould be the impact on the price of the emission allo%ances in the mar'et< A9 The price rises. The price falls but not to ,ero. C9 The price remains unchanged because the allo%ances purchased by the environmental groups are destroyed. D9 The price falls to ,ero. A9 The price rises. & . Fnder the 1uropean Fnion$s tradable carbon emissions rights scheme- utilities are given a set level of permits to emit carbon dioxide. /f a utility %ants to pollute more than its allo%ance it could buy more permits in the mar'et. Fnder %hat situation %ill a utility that %ants to pollute more than its allo%ance not purchase additional permits< A9 if there is an excess demand for permits in the mar'et if it is cheaper to s%itch from heavy polluting energies to cleaner fuels than to purchase pollution permits C9 if it is cheaper to burn heavy polluting energies than to s%itch to cleaner fuels D9 if the mar'et price of a permit is so lo% that it has virtually no resale value if it is cheaper to s%itch from heavy polluting energies to cleaner fuels than to purchase pollution permits A product is considered to be nonexcludable if A9 you cannot 'eep those %ho did not pay for the item from en:oying its benefits. your consumption of the product reduces the 2uantity available for others to consume. C9 you can 'eep those %ho did not pay for the item from en:oying its benefits. D9 it is :ointly o%ned by all members of a community A9 you cannot 'eep those %ho did not pay for the item from en:oying its benefits. (. @hich of the follo%ing displays these t%o characteristics: rivalry and nonexcludability< A9 a private good. a common resource. C9 a 2uasi6public good. D9 a public good. a common resource . @hich of the follo%ing displays nonrivalry and nonexcludability in consumption< A9 2uasi6public goods public goods C9 common resources
D9 private goods public goods .. @hich of the follo%ing is an example of a product that is nonexcludable and rivalrous< A9 free concert 8%ith limited seating9 in a par' flu vaccinations C9 automobiles D9 national defense A9 free concert 8%ith limited seating9 in a par' 0. Common resources differ from public goods in that A9 common resources are collectively o%ned by a group of people %hile public goods are government o%ned. unli'e public goods- common resources are rivalrous in consumption. C9 common resources are resources that cannot be rene%ed but the production of public goods can be increased any time. D9 common resources are non6excludable %hile public goods are excludable to those %ho do not pay for the good. B9 unli'e public goods- common resources are rivalrous in consumption &3. /n economics- the term Cfree6riderC refers to A9 one %ho %aits for other s to produce a good and then en:oys its benefits %ithout paying for it. B9 a supervisor %ho delegates menial time6consuming activities to others C9 a person %ho evades taxes. D9 one %ho volunteers her services. A9 one %ho %aits for other s to produce a good and then en:oys its benefits %ithout paying for it (4. ;o% does the construction of a mar'et demand curve for a private good differ from that for a public good< A9 The mar'et demand curve for a private good is determined by adding up the 2uantities demanded by each consumer at each price but the mar'et demand curve for a public good is determined by adding up the price each consumer is %illing to pay for each 2uantity of the good. B9 There is no difference> in both cases the demand curve is determined by adding up the 2uantities demanded by each consumer at each price C9 There is no difference> in both cases the demand curve is determined by adding up the price each consumer is %illing to pay for each 2uantity of the good. D9 The mar'et demand curve for a private good is determined by adding up the price each consumer is %illing to pay for each 2uantity of the good but the mar'et demand curve for a public good is determined by adding up but the 2uantities demanded by each consumer at each price. A9 The mar'et demand curve for a private good is determined by adding up the 2uantities demanded by each consumer at each price but the mar'et demand curve for a public good is determined by adding up the price each consumer is %illing to pay for each 2uantity of the good. (1. The efficient output level of a public good occurs %here the A9 greatest number of free riders occurs. B9 marginal cost of producing the last unit is e2ual to the marginal benefit reali,ed by consumers.
C9 marginal cost of production is at its lo%est. D9 total cost of production is affordable. B9 marginal cost of producing the last unit is e2ual to the marginal benefit reali,ed by consumers. (2. Dor6profit producers %ill produce only private goods because A9 buyers %ill be %illing to pay for the goods since the benefits are excludable. B9 the cost of production can be easily determined easily found. C9 mar'ets exist for private goods but not for public goods. D9 all external benefits can be internali,ed using mar'et prices. A9 buyers %ill be %illing to pay for the goods since the benefits are excludable. ( . According to an article in the @all 7treet Bournal- economist #aul "omer of 7tanford Fniversity has argued: CThe mar'et mechanism and property rights are excellent at conserving scarce resources and putting them to the most profitable use. They aren$t so good at encouraging the production and distribution of ne% ideas%hich are critical to progress.C 7ource: David @essel- C#recepts from #rofessor 7ummers-C @all 7treet Bournal- +ctober 1.- 2442. @hat characteristics of the production and distribution of ne% ideas might ma'e it difficult for the mar'et to produce the optimal amount< A9 rivalry and non6excludability B9 rivalry and excludability C9 rivalry and excludability D9 non6rivalry and non6excludability D9 non6rivalry and non6excludability (&. The Ctragedy of the commonsC refers to the phenomenon %here A9 individuals are free riders. B9 there is rivalry in consumption. C9 people do not internali,e an externality. D9 people overuse a common resource D9 people overuse a common resource. ((. @hich of the follo%ing exemplifies the tragedy of the commons< A9 The #leasant ;ill community is gro%ing so fast that the city$s only post office is not able to 'eep pace %ith the population gro%th in the community. B9 "esidents in the northern coast of California receive only one public broadcasting signal %hich may be eliminated altogether if government funding is cut. C9 Canadian citi,ens receive free universal health care administered by provincial governments. D9 The !alaysian tapir- distinguished for its unusual coloration- is a target for poachers %ho hunt it for its tough and leathery hide. D9 The !alaysian tapir- distinguished for its unusual coloration- is a target for poachers %ho hunt it for its tough and leathery hide. (*. Consider the stoc' of ocean tuna %hich is massively overfished. /t is rational for an individual to exploit the resource rather than to conserve the stoc' because A9 the social cost of harvesting the fish is lo%er than the private cost. B9 the private cost of harvesting the fish is lo%er than the social cost. C9 the private benefit of harvesting tuna is lo%er than the social benefit of harvesting it. D9 the private benefit of harvesting tuna is higher than the social benefit of harvesting it. B9 the
private cost of harvesting the fish is lo%er than the social cost *4. The basic cause of dead%eight losses from the existence of common resources and externalities is A9 a lac' of clearly defined and enforceable property rights. B9 the absence of government intervention. C9 the use of a mar'et system to deal %ith scarcity. D9 the self interested rationality of human beings. A9 a lac' of clearly defined and enforceable property rights. *1. Elobal %arming refers to the effect of global pollutants such as carbon dioxide on climates on the earth. Climate6induced changes in temperatures affect- among other things- agriculture. @hich of the follo%ing is a reason %hy policyma'ers are still debating if this problem should be addressed and ho% it should be addressed< A9 7cientists agree about the damage caused by carbon emissions but disagree about the methods of reducing emissions. B9 The marginal cost of reducing carbon emissions is 'no%n %ith certainly but the marginal benefit from reduction is not 'no%n %ith certainty. C9 There is much disagreement about all aspects of the problem: ho% much carbon emissions contribute to damage from climate change %hich in turn informs the benefits from reduction- and %hat methods to use %hich in turn determines the cost of reduction D9 The marginal cost of reducing carbon emissions is not 'no%n %ith certainly but the marginal benefit from reduction is 'no%n %ith certainty C9 There is much disagreement about all aspects of the problem: ho% much carbon emissions contribute to damage from climate change %hich in turn informs the benefits from reduction- and %hat methods to use %hich in turn determines the cost of reduction *2. #rivate producers have no incentive to provide public goods because A9 once produced- it %ill not be possible to exclude to those %ho do not pay for the good B9 they cannot avoid the tragedy of the commons. C9 the government subsidy granted is usually insufficient to enable private producer to ma'e a profit. D9 production of huge 2uantities of public goods entails huge fixed costs. A9 once produced- it %ill not be possible to exclude to those %ho do not pay for the good 7et Champions There are no high scores or champions for this set yet. Lou can sign up or log in to be the firstf #ractice 1xam +ne 6 !icro Dall 2411 7tudent: PPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPP 1. @hen economists say that people act rationally in their self interest- they mean that individuals: A. loo' for and pursue opportunities to increase their utility.
B. generally disregard the interests of others. C. are mainly creatures of habit. D. are usually impulsive and unpredictable. 2. A person should consume more of something %hen its marginal: A. benefit exceeds its marginal cost. B. cost exceeds its marginal benefit. C. cost e2uals its marginal benefit. D. benefit is still positive. . !arginal costs exist because: A. the decision to engage in one activity means forgoing some other activity. B. %ants are scarce relative to resources. C. households and businesses ma'e rational decisions. D. most decisions do not involve sacrifices or tradeoffs. &. 1ven though local ne%spapers are very inexpensive- people rarely buy more than one of them each day. This fact: A. is an example of irrational behavior. B. implies that reading should be taught through phonics rather than the %hole language method. C. contradicts the economic perspective. D. implies that- for most people- the marginal benefit of reading a second ne%spaper is less than the marginal cost. (. /n deciding %hether to study for an economics 2ui, or go to a movie- one is confronted by the idea8s9 of: A. scarcity and opportunity costs. B. money and real capital. C. complementary economic goals. D. full production. *. @hich of the follo%ing most closely relates to the idea of opportunity costs< A. tradeoffs. B. economic gro%th. C. technological change. D. capitalism. .. 1conomic theories: A. are useless because they are not based on laboratory experimentation. B. that are true for individual economic units are never true for the economy as a %hole. C. are generali,ations based on a careful observation of facts. D. are abstractions and therefore of no application to real situations. 0. !acroeconomics approaches the study of economics from the vie%point of: A. the entire economy. B. governmental units. C. the operation of specific product and resource mar'ets. D. individual firms.
3. Any combination of goods lying outside of the budget line: A. implies that the consumer is not spending all his income. B. yields less utility than any point on the budget line. C. yields less utility than any point inside the budget line. D. is unattainable- given the consumer$s income.
14. "efer to the above graphs. Assume that pi,,a is measured in slices and beer in pints. /n %hich of the graphs is the opportunity cost of a pint of beer e2ual to one slice of pi,,a< A. graph A B. graph B C. graph C D. graph D 11. A production possibilities curve sho%s: A. that resources are unlimited. B. that people prefer one of the goods more than the other. C. the maximum amounts of t%o goods that can be produced- assuming the full use of available resources. D. combinations of capital and labor necessary to produce specific levels of output. 12. The typical production possibilities curve is: A. an upsloping line that is bo%ed out from the origin. B. a do%nsloping line that is bo%ed in to%ard the origin. C. a do%nsloping line that is bo%ed out from the origin. D. a straight upsloping line. 1 . The construction of a production possibilities curve assumes: A. the 2uantities of all resources are unlimited. B. technology is fixed. C. some resources are unemployed. D. there is no inflation in the economy. Ans%er the 2uestion on the basis of the follo%ing production possibilities tables for t%o countries- 5orth Cantina and 7outh Cantina:
1&. "efer to the above tables. /f 5orth Cantina is producing at production alternative B- the opportunity cost of the eleventh unit of consumer goods %ill be: A. 14 units of capital goods. B. 1J& of a unit of capital goods. C. 0 units of capital goods. D. 1J0 of a unit of capital goods. 1(. @hich of the follo%ing is a distinguishing feature of a mar'et system< A. public o%nership of all capital. B. central planning.
C. %ide6spread private o%nership of capital. D. a circular flo% of goods- resources- and money. 1*. 1conomic systems differ according to %hich t%o main characteristics< A. @ho o%ns the factors of production- and the methods used to coordinate economic activity. B. The technology used in production- and the 2uantity and 2uality of natural resources. C. ;o% goods are produced- and %ho gets them. D. The political system in place- and the degree of scarcity facing the economy. 1.. The regulatory mechanism of the mar'et system is: A. self6interest. B. private property. C. competition. D. speciali,ation. 10. 7peciali,ation6the division of labor6enhances productivity and efficiency by: A. allo%ing %or'ers to ta'e advantage of existing differences in their abilities and s'ills. B. avoiding the time loss involved in shifting from one production tas' to another. C. allo%ing %or'ers to develop s'ills by %or'ing on one- or a limited number- of tas's. D. all of the means identified in the other ans%ers. 13. /f consumer desire for product K increases- all of the follo%ing %ill occur except: A. an increase in the profits of industry K. B. an increase in the 2uantity of resources employed by industry K. C. an increase in the output of industry K. D. a decrease in the 2uantity of resources employed in industry K. 24. The mar'et system$s ans%er to the fundamental 2uestion C@ho %ill get the goods and services<C is essentially: A. CThose %illing and able to pay for them.C B. CThose %ho physically produced them.C C. CThose %ho most need them.C D. CThose %ho get utility from them.C 21. @hich of the follo%ing best describes the invisible6hand concept< A. The desires of resource suppliers and producers to further their o%n self6interest %ill automatically further the public interest. B. The non6substitutability of resources creates a conflict bet%een private and public interests and calls for government intervention. C. The mar'et system is the best system for overcoming the scarce resources6unlimited %ants problem. D. Central direction by the government %ill improve resource allocation in a capitalistic economy. 22. /n the simple circular flo% model: A. households are buyers of resources. B. businesses are sellers of final products. C. households are sellers of final products. D. there are real flo%s of goods- services- and resources- but not money flo%s.
2 . A mar'et: A. reflects upsloping demand and do%nsloping supply curves. B. entails the exchange of goods- but not services. C. is an institution that brings together buyers and sellers. D. al%ays re2uires face6to6face contact bet%een buyer and seller. 2&. 1conomists use the term CdemandC to refer to: A. a particular price62uantity combination on a stable demand curve. B. the total amount spent on a particular commodity over a fixed time period. C. an upsloping line on a graph that relates consumer purchases and product price. D. a schedule of various combinations of mar'et prices and amounts demanded. 2(. @hen the price of 5i'e soccer balls fell- "onaldo purchased more 5i'e soccer balls and fe%er Adidas soccer balls. @hich of the follo%ing best explains "onaldo$s decision to buy more 5i'e soccer balls< A. the substitution effect B. the income effect C. an increase in the demand for 5i'e soccer balls D. the price effect 2*. @hich of the follo%ing %ill not cause the demand for product G to change< A. a change in the price of close6substitute product B B. an increase in incomes of buyers of product G C. a change in the price of G D. a change in consumer tastes for G 2.. /f Q is an inferior good- an increase in money income %ill shift the: A. supply curve for Q to the left. B. supply curve for Q to the right. C. demand curve for Q to the left. D. demand curve for Q to the right. 20. A decrease in the price of digital cameras %ill: A. cause the demand curve for memory cards to become vertical. B. shift the demand curve for memory cards to the right. C. shift the demand curve for memory cards to the left. D. not affect the demand for memory cards. 23. A decrease in the demand for recreational fishing boats might be caused by an increase in the: A. income of sports fishers. B. price of outboard motors. C. si,e and number of fish available. D. price of sailing boats.
4. "efer to the above diagram. A decrease in supply is depicted by a: A. move from point x to point y.
B. shift from 71 to 72. C. shift from 72 to 71. D. move from point y to point x. 1. 7uppose product K is an input in the production of product L . #roduct L in turn is a substitute for product Q. An increase in the price of K can be expected to: A. decrease the demand for Q. B. increase the demand for Q. C. have no effect on the demand for Q. D. decrease the supply of Q. 2. An increase in the excise tax on cigarettes raises the price of cigarettes by shifting the: A. demand curve for cigarettes right%ard. B. demand curve for cigarettes left%ard. C. supply curve for cigarettes right%ard. D. supply curve for cigarettes left%ard. . /f the supply and demand curves for a product both decrease- then e2uilibrium: A. 2uantity must fall and e2uilibrium price must rise. B. price must fall- but e2uilibrium 2uantity may rise- fall- or remain unchanged. C. 2uantity must decline- but e2uilibrium price may rise- fall- or remain unchanged. D. 2uantity and e2uilibrium price must both decline.
&. /n the above mar'et- economists %ould call a government6set minimum price of )(4 a: A. price ceiling. B. price floor. C. e2uilibrium price. D. fair price. (. The basic formula for the price elasticity of demand coefficient is: A. absolute decline in 2uantity demandedJabsolute increase in price. B. percentage change in 2uantity demandedJpercentage change in price. C. absolute decline in priceJabsolute increase in 2uantity demanded. D. percentage change in priceJpercentage change in 2uantity demanded. *. @hich of the follo%ing is not characteristic of the demand for a commodity that is elastic< A. The relative change in 2uantity demanded is greater than the relative change in price. B. Buyers are relatively sensitive to price changes. C. Total revenue declines if price is increased. D. The elasticity coefficient is less than one. .. The price elasticity of demand for %idgets is 4.04. Assuming no change in the demand curve for %idgets- a 1* percent increase in sales implies a: A. 1 percent reduction in price. B. 12 percent reduction in price. C. &4 percent reduction in price. D. 24 percent reduction in price.
0. The price elasticity of demand is generally: A. negative- but the minus sign is ignored. B. positive- but the plus sign is ignored. C. positive for normal goods and negative for inferior goods. D. positive because price and 2uantity demanded are inversely related. 3. The concept of price elasticity of demand measures: A. the slope of the demand curve. B. the number of buyers in a mar'et. C. the extent to %hich the demand curve shifts as the result of a price decline. D. the sensitivity of consumer purchases to price changes. &4. A firm can sell as much as it %ants at a constant price. Demand is thus: A. perfectly inelastic. B. perfectly elastic. C. relatively inelastic. D. relatively elastic. &1. @hich of the follo%ing statements is not correct< A. /f the relative change in price is greater than the relative change in the 2uantity demanded associated %ith it- demand is inelastic. B. /n the range of prices in %hich demand is elastic- total revenue %ill diminish as price decreases. C. Total revenue %ill not change if price varies %ithin a range %here the elasticity coefficient is unity. D. Demand tends to be elastic at high prices and inelastic at lo% prices. &2. /f a firm finds that it can sell )1 -444 %orth of a product %hen its price is )( per unit and )11-444 %orth of it %hen its price is )*- then: A. the demand for the product is elastic in the )*6)( price range. B. the demand for the product must have increased. C. elasticity of demand is 4..&. D. the demand for the product is inelastic in the )*6)( price range. & . /n %hich of the follo%ing cases %ill total revenue increase< A. price falls and demand is inelastic B. price falls and supply is elastic C. price rises and demand is inelastic D. price rises and demand is elastic &&. 7uppose that the price of peanuts falls from ) to )2 per bushel and that- as a result- the total revenue received by peanut farmers changes from )1* to )1& billion. Thus: A. the demand for peanuts is elastic. B. the demand for peanuts is inelastic. C. the demand curve for peanuts has shifted to the right. D. no inference can be made as to the elasticity of demand for peanuts. &(. The demand for autos is li'ely to be:
A. less price elastic than the demand for ;onda Accords. B. more price elastic than the demand for ;onda Accords. C. of the same price elasticity as the demand for ;onda Accords. D. perfectly inelastic. &*. @e %ould expect the cross elasticity of demand bet%een dress shirts and ties to be: A. positive- indicating normal goods. B. positive- indicating complementary goods. C. negative- indicating substitute goods. D. negative- indicating complementary goods.
&.. 7uppose that a 14 percent increase in the price of normal good L causes a 24 percent increase in the 2uantity demanded of normal good K. The coefficient of cross elasticity of demand is: A. negative and therefore these goods are substitutes. B. negative and therefore these goods are complements. C. positive and therefore these goods are substitutes. D. positive and therefore these goods are complements. &0. @hich of the follo%ing is an example of mar'et failure< A. negative externalities B. positive externalities C. public goods D. all of these &3. /f the demand curve reflects consumers$ full %illingness to pay- and the supply curve reflects all costs of production- then %hich of the follo%ing is true< A. The benefit surpluses shared bet%een consumers and producers %ill be maximi,ed. B. The benefit surpluses received by consumers and producers %ill be e2ual. C. There %ill be no consumer or producer surplus. D. Consumer surplus %ill be maximi,ed- and producer surplus %ill be minimi,ed. (4. Amanda buys a ruby for ) 4 for %hich she %as %illing to pay ) &4. The minimum acceptable price to the seller- Tony- %as )1&4. Amanda experiences: A. a consumer surplus of )14 and Tony experiences a producer surplus of )134. B. a producer surplus of )244 and Tony experiences a consumer surplus of )14. C. a consumer surplus of )*.4 and Tony experiences a producer surplus of )244. D. a producer surplus of )14 and Tony experiences a consumer surplus of )134. (1. An efficiency loss 8or dead%eight loss9: A. is measured as the combined loss of consumer surplus and producer surplus. B. results from producing a unit of output for %hich the maximum %illingness to pay exceeds the minimum acceptable price. C. can result from underproduction- but not from overproduction. D. can result from overproduction- but not from underproduction. (2. 8?ast @ord9 /n a cap6and6trade program:
A. government fixes the price of pollution rights and firms choose ho% many permits to purchase. B. government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other. C. each firm is provided a fixed number of permits for a particular pollutant and no individual firm is allo%ed to ac2uire additional permits. D. firms can emit %hatever type of pollutant they %ant- so long as the total tonnage does not exceed a government established 2uantity. ( . 5onexcludability describes a condition %here: A. one person$s consumption of a good does not prevent consumption of the good by others. B. there is no effective %ay to 'eep people from using a good once it comes into being. C. sellers can %ithhold the benefits of a good from those un%illing to pay for it. D. there is no potential for free6riding behavior.
#ractice 1xam +ne 6 !icro Dall 2411 Gey 1. @hen economists say that people act rationally in their self interest- they mean that individuals: A. loo' for and pursue opportunities to increase their utility. B. generally disregard the interests of others. C. are mainly creatures of habit. D. are usually impulsive and unpredictable. 2. A person should consume more of something %hen its marginal: A. benefit exceeds its marginal cost. B. cost exceeds its marginal benefit. C. cost e2uals its marginal benefit. D. benefit is still positive. . !arginal costs exist because: A. the decision to engage in one activity means forgoing some other activity. B. %ants are scarce relative to resources. C. households and businesses ma'e rational decisions. D. most decisions do not involve sacrifices or tradeoffs. &. 1ven though local ne%spapers are very inexpensive- people rarely buy more than one of them each day. This fact: A. is an example of irrational behavior. B. implies that reading should be taught through phonics rather than the %hole language method. C. contradicts the economic perspective. D. implies that- for most people- the marginal benefit of reading a second ne%spaper is less than the marginal cost. (. /n deciding %hether to study for an economics 2ui, or go to a movie- one is confronted by the idea8s9 of: A. scarcity and opportunity costs.
B. money and real capital. C. complementary economic goals. D. full production. *. @hich of the follo%ing most closely relates to the idea of opportunity costs< A. tradeoffs. B. economic gro%th. C. technological change. D. capitalism. .. 1conomic theories: A. are useless because they are not based on laboratory experimentation. B. that are true for individual economic units are never true for the economy as a %hole. C. are generali,ations based on a careful observation of facts. D. are abstractions and therefore of no application to real situations. 0. !acroeconomics approaches the study of economics from the vie%point of: A. the entire economy. B. governmental units. C. the operation of specific product and resource mar'ets. D. individual firms. 3. Any combination of goods lying outside of the budget line: A. implies that the consumer is not spending all his income. B. yields less utility than any point on the budget line. C. yields less utility than any point inside the budget line. D. is unattainable- given the consumer$s income.
14. "efer to the above graphs. Assume that pi,,a is measured in slices and beer in pints. /n %hich of the graphs is the opportunity cost of a pint of beer e2ual to one slice of pi,,a< A. graph A B. graph B C. graph C D. graph D 11. A production possibilities curve sho%s: A. that resources are unlimited. B. that people prefer one of the goods more than the other. C. the maximum amounts of t%o goods that can be produced- assuming the full use of available resources. D. combinations of capital and labor necessary to produce specific levels of output. 12. The typical production possibilities curve is: A. an upsloping line that is bo%ed out from the origin. B. a do%nsloping line that is bo%ed in to%ard the origin. C. a do%nsloping line that is bo%ed out from the origin. D. a straight upsloping line.
1 . The construction of a production possibilities curve assumes: A. the 2uantities of all resources are unlimited. B. technology is fixed. C. some resources are unemployed. D. there is no inflation in the economy.
Ans%er the 2uestion on the basis of the follo%ing production possibilities tables for t%o countries- 5orth Cantina and 7outh Cantina:
1&. "efer to the above tables. /f 5orth Cantina is producing at production alternative B- the opportunity cost of the eleventh unit of consumer goods %ill be: A. 14 units of capital goods. B. 1J& of a unit of capital goods. C. 0 units of capital goods. D. 1J0 of a unit of capital goods. 1(. @hich of the follo%ing is a distinguishing feature of a mar'et system< A. public o%nership of all capital. B. central planning. C. %ide6spread private o%nership of capital. D. a circular flo% of goods- resources- and money. 1*. 1conomic systems differ according to %hich t%o main characteristics< A. @ho o%ns the factors of production- and the methods used to coordinate economic activity. B. The technology used in production- and the 2uantity and 2uality of natural resources. C. ;o% goods are produced- and %ho gets them. D. The political system in place- and the degree of scarcity facing the economy. 1.. The regulatory mechanism of the mar'et system is: A. self6interest. B. private property. C. competition. D. speciali,ation. 10. 7peciali,ation6the division of labor6enhances productivity and efficiency by: A. allo%ing %or'ers to ta'e advantage of existing differences in their abilities and s'ills. B. avoiding the time loss involved in shifting from one production tas' to another. C. allo%ing %or'ers to develop s'ills by %or'ing on one- or a limited number- of tas's. D. all of the means identified in the other ans%ers. 13. /f consumer desire for product K increases- all of the follo%ing %ill occur except: A. an increase in the profits of industry K. B. an increase in the 2uantity of resources employed by industry K. C. an increase in the output of industry K. D. a decrease in the 2uantity of resources employed in industry K.
24. The mar'et system$s ans%er to the fundamental 2uestion C@ho %ill get the goods and services<C is essentially: A. CThose %illing and able to pay for them.C B. CThose %ho physically produced them.C C. CThose %ho most need them.C D. CThose %ho get utility from them.C 21. @hich of the follo%ing best describes the invisible6hand concept< A. The desires of resource suppliers and producers to further their o%n self6interest %ill automatically further the public interest. B. The non6substitutability of resources creates a conflict bet%een private and public interests and calls for government intervention. C. The mar'et system is the best system for overcoming the scarce resources6unlimited %ants problem. D. Central direction by the government %ill improve resource allocation in a capitalistic economy. 22. /n the simple circular flo% model: A. households are buyers of resources. B. businesses are sellers of final products. C. households are sellers of final products. D. there are real flo%s of goods- services- and resources- but not money flo%s. 2 . A mar'et: A. reflects upsloping demand and do%nsloping supply curves. B. entails the exchange of goods- but not services. C. is an institution that brings together buyers and sellers. D. al%ays re2uires face6to6face contact bet%een buyer and seller. 2&. 1conomists use the term CdemandC to refer to: A. a particular price62uantity combination on a stable demand curve. B. the total amount spent on a particular commodity over a fixed time period. C. an upsloping line on a graph that relates consumer purchases and product price. D. a schedule of various combinations of mar'et prices and amounts demanded. 2(. @hen the price of 5i'e soccer balls fell- "onaldo purchased more 5i'e soccer balls and fe%er Adidas soccer balls. @hich of the follo%ing best explains "onaldo$s decision to buy more 5i'e soccer balls< A. the substitution effect B. the income effect C. an increase in the demand for 5i'e soccer balls D. the price effect 2*. @hich of the follo%ing %ill not cause the demand for product G to change< A. a change in the price of close6substitute product B B. an increase in incomes of buyers of product G C. a change in the price of G D. a change in consumer tastes for G
2.. /f Q is an inferior good- an increase in money income %ill shift the: A. supply curve for Q to the left. B. supply curve for Q to the right. C. demand curve for Q to the left. D. demand curve for Q to the right.
20. A decrease in the price of digital cameras %ill: A. cause the demand curve for memory cards to become vertical. B. shift the demand curve for memory cards to the right. C. shift the demand curve for memory cards to the left. D. not affect the demand for memory cards. 23. A decrease in the demand for recreational fishing boats might be caused by an increase in the: A. income of sports fishers. B. price of outboard motors. C. si,e and number of fish available. D. price of sailing boats.
4. "efer to the above diagram. A decrease in supply is depicted by a: A. move from point x to point y. B. shift from 71 to 72. C. shift from 72 to 71. D. move from point y to point x. 1. 7uppose product K is an input in the production of product L . #roduct L in turn is a substitute for product Q. An increase in the price of K can be expected to: A. decrease the demand for Q. B. increase the demand for Q. C. have no effect on the demand for Q. D. decrease the supply of Q. 2. An increase in the excise tax on cigarettes raises the price of cigarettes by shifting the: A. demand curve for cigarettes right%ard. B. demand curve for cigarettes left%ard. C. supply curve for cigarettes right%ard. D. supply curve for cigarettes left%ard. . /f the supply and demand curves for a product both decrease- then e2uilibrium: A. 2uantity must fall and e2uilibrium price must rise. B. price must fall- but e2uilibrium 2uantity may rise- fall- or remain unchanged. C. 2uantity must decline- but e2uilibrium price may rise- fall- or remain unchanged. D. 2uantity and e2uilibrium price must both decline.
&. /n the above mar'et- economists %ould call a government6set minimum price of )(4 a: A. price ceiling. B. price floor. C. e2uilibrium price. D. fair price. (. The basic formula for the price elasticity of demand coefficient is: A. absolute decline in 2uantity demandedJabsolute increase in price. B. percentage change in 2uantity demandedJpercentage change in price. C. absolute decline in priceJabsolute increase in 2uantity demanded. D. percentage change in priceJpercentage change in 2uantity demanded. *. @hich of the follo%ing is not characteristic of the demand for a commodity that is elastic< A. The relative change in 2uantity demanded is greater than the relative change in price. B. Buyers are relatively sensitive to price changes. C. Total revenue declines if price is increased. D. The elasticity coefficient is less than one. .. The price elasticity of demand for %idgets is 4.04. Assuming no change in the demand curve for %idgets- a 1* percent increase in sales implies a: A. 1 percent reduction in price. B. 12 percent reduction in price. C. &4 percent reduction in price. D. 24 percent reduction in price. 0. The price elasticity of demand is generally: A. negative- but the minus sign is ignored. B. positive- but the plus sign is ignored. C. positive for normal goods and negative for inferior goods. D. positive because price and 2uantity demanded are inversely related. 3. The concept of price elasticity of demand measures: A. the slope of the demand curve. B. the number of buyers in a mar'et. C. the extent to %hich the demand curve shifts as the result of a price decline. D. the sensitivity of consumer purchases to price changes. &4. A firm can sell as much as it %ants at a constant price. Demand is thus: A. perfectly inelastic. B. perfectly elastic. C. relatively inelastic. D. relatively elastic.
&1. @hich of the follo%ing statements is not correct< A. /f the relative change in price is greater than the relative change in the 2uantity demanded associated %ith it- demand is inelastic.
B. /n the range of prices in %hich demand is elastic- total revenue %ill diminish as price decreases. C. Total revenue %ill not change if price varies %ithin a range %here the elasticity coefficient is unity. D. Demand tends to be elastic at high prices and inelastic at lo% prices. &2. /f a firm finds that it can sell )1 -444 %orth of a product %hen its price is )( per unit and )11-444 %orth of it %hen its price is )*- then: A. the demand for the product is elastic in the )*6)( price range. B. the demand for the product must have increased. C. elasticity of demand is 4..&. D. the demand for the product is inelastic in the )*6)( price range. & . /n %hich of the follo%ing cases %ill total revenue increase< A. price falls and demand is inelastic B. price falls and supply is elastic C. price rises and demand is inelastic D. price rises and demand is elastic &&. 7uppose that the price of peanuts falls from ) to )2 per bushel and that- as a result- the total revenue received by peanut farmers changes from )1* to )1& billion. Thus: A. the demand for peanuts is elastic. B. the demand for peanuts is inelastic. C. the demand curve for peanuts has shifted to the right. D. no inference can be made as to the elasticity of demand for peanuts. &(. The demand for autos is li'ely to be: A. less price elastic than the demand for ;onda Accords. B. more price elastic than the demand for ;onda Accords. C. of the same price elasticity as the demand for ;onda Accords. D. perfectly inelastic. &*. @e %ould expect the cross elasticity of demand bet%een dress shirts and ties to be: A. positive- indicating normal goods. B. positive- indicating complementary goods. C. negative- indicating substitute goods. D. negative- indicating complementary goods. &.. 7uppose that a 14 percent increase in the price of normal good L causes a 24 percent increase in the 2uantity demanded of normal good K. The coefficient of cross elasticity of demand is: A. negative and therefore these goods are substitutes. B. negative and therefore these goods are complements. C. positive and therefore these goods are substitutes. D. positive and therefore these goods are complements. &0. @hich of the follo%ing is an example of mar'et failure< A. negative externalities B. positive externalities
C. public goods D. all of these
&3. /f the demand curve reflects consumers$ full %illingness to pay- and the supply curve reflects all costs of production- then %hich of the follo%ing is true< A. The benefit surpluses shared bet%een consumers and producers %ill be maximi,ed. B. The benefit surpluses received by consumers and producers %ill be e2ual. C. There %ill be no consumer or producer surplus. D. Consumer surplus %ill be maximi,ed- and producer surplus %ill be minimi,ed. (4. Amanda buys a ruby for ) 4 for %hich she %as %illing to pay ) &4. The minimum acceptable price to the seller- Tony- %as )1&4. Amanda experiences: A. a consumer surplus of )14 and Tony experiences a producer surplus of )134. B. a producer surplus of )244 and Tony experiences a consumer surplus of )14. C. a consumer surplus of )*.4 and Tony experiences a producer surplus of )244. D. a producer surplus of )14 and Tony experiences a consumer surplus of )134. (1. An efficiency loss 8or dead%eight loss9: A. is measured as the combined loss of consumer surplus and producer surplus. B. results from producing a unit of output for %hich the maximum %illingness to pay exceeds the minimum acceptable price. C. can result from underproduction- but not from overproduction. D. can result from overproduction- but not from underproduction. (2. 8?ast @ord9 /n a cap6and6trade program: A. government fixes the price of pollution rights and firms choose ho% many permits to purchase. B. government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other. C. each firm is provided a fixed number of permits for a particular pollutant and no individual firm is allo%ed to ac2uire additional permits. D. firms can emit %hatever type of pollutant they %ant- so long as the total tonnage does not exceed a government established 2uantity. ( . 5onexcludability describes a condition %here: A. one person$s consumption of a good does not prevent consumption of the good by others. B. there is no effective %ay to 'eep people from using a good once it comes into being. C. sellers can %ithhold the benefits of a good from those un%illing to pay for it. D. there is no potential for free6riding behavior. Test 2 practice !CN 8Ans%ers are at the end9 1. /f the demand for product K is inelastic- a & percent increase in the price of K %ill: A. decrease the 2uantity of K demanded by more than & percent. B. decrease the 2uantity of K demanded by less than & percent.
C. increase the 2uantity of K demanded by more than & percent. D. increase the 2uantity of K demanded by less than & percent.
2. 7uppose Aiyanna$s #i,,eria currently faces a linear demand curve and is charging a very high price per pi,,a and doing very little business. Aiyanna no% decides to lo%er pi,,a prices by ( percent per %ee' for an indefinite period of time. @e can expect that each successive %ee': A. demand %ill become more price elastic. B. price elasticity of demand %ill not change as price is lo%ered. C. demand %ill become less price elastic. D. the elasticity of supply %ill increase.
. "efer to the above diagram and assume a single good. /f the price of the good increased from )(..4 to )*. 4 along D1- the price elasticity of demand along this portion of the demand curve %ould be: A. 4.0. B. 1.4. C. 1.2. D. 2.4.
&. The elasticity of supply of product K is unitary if the price of K rises by: A. ( percent and 2uantity supplied rises by . percent. B. 0 percent and 2uantity supplied rises by 0 percent. C. 14 percent and 2uantity supplied stays the same. D. . percent and 2uantity supplied rises by ( percent.
(. /t ta'es a considerable amount of time to increase the production of por'. This implies that: A. a change in the demand for por' %ill not affect its price in the short run. B. the short6run supply curve for por' is less elastic than the long6run supply curve for por'.
C. an increase in the demand for por' %ill elicit a larger supply response in the short run than in the long run. D. the long6run supply curve for por' is less elastic than the short6run supply curve for por'.
*. The supply curve of a one6of6a6'ind original painting is: A. relatively elastic. B. relatively inelastic. C. perfectly inelastic. D. perfectly elastic.
.. @e %ould expect the cross elasticity of demand bet%een dress shirts and ties to be: A. positive- indicating normal goods. B. positive- indicating complementary goods. C. negative- indicating substitute goods. D. negative- indicating complementary goods.
0. 7uppose that a 14 percent increase in the price of normal good L causes a 24 percent increase in the 2uantity demanded of normal good K. The coefficient of cross elasticity of demand is: A. negative and therefore these goods are substitutes. B. negative and therefore these goods are complements. C. positive and therefore these goods are substitutes. D. positive and therefore these goods are complements.
3. @hich of the follo%ing goods %ill least li'ely suffer a decline in demand during a recession< A. Dinner at a nice restaurant B. i#ods C. Toothpaste
D. #lasma screen and ?CD TAs
14. Eenerally spea'ing- the demand for luxury goods is more price elastic than is the demand for necessities. True Dalse 11. @hen the percentage change in price is greater than the resulting percentage change in 2uantity demanded: A. a decrease in price %ill increase total revenue. B. demand may be either elastic or inelastic. C. an increase in price %ill increase total revenue. D. demand is elastic.
12. /f a firm finds that it can sell )1 -444 %orth of a product %hen its price is )( per unit and )11-444 %orth of it %hen its price is )*- then: A. the demand for the product is elastic in the )*6)( price range. B. the demand for the product must have increased. C. elasticity of demand is 4..&. D. the demand for the product is inelastic in the )*6)( price range.
1 . @hich of the follo%ing generali,ations is not correct< A. The larger an item is in one$s budget- the greater the price elasticity of demand. B. The price elasticity of demand is greater for necessities than it is for luxuries. C. The larger the number of close substitutes available- the greater %ill be the price elasticity of demand for a particular product. D. The price elasticity of demand is greater the longer the time period under consideration.
1&. !arginal utility can be: A. positive- but not negative. B. positive or negative- but not ,ero.
C. positive- negative- or ,ero. D. decreasing- but not negative.
1(. 7uppose that !FxJ#x exceeds !FyJ#y. To maximi,e utility the consumer %ho is spending all her money income should buy: A. less of K only if its price rises. B. more of L only if its price rises. C. more of L and less of K. D. more of K and less of L .
1*. @hen a consumer shifts purchases from product K to product L the marginal utility of: A. K falls and the marginal utility of L rises. B. K rises and the marginal utility of L falls. C. both K and L rises. D. both K and L falls.
1.. Diminishing marginal utility explains %hy: A. the income effect exceeds the substitution effect. B. the substitution effect exceeds the income effect. C. supply curves are upsloping. D. demand curves are do%nsloping.
10. According to prospect theory- firms are more li'ely to shrin' pac'ages than raise prices because: A. consumers feel the loss of a price increase more than they feel the loss of buying a smaller pac'age for their money. B. they don$t understand that consumers recogni,e price increases easily- regardless of %hat form they ta'e.
C. consumers associate smaller pac'ages %ith higher 2uality luxury goods. D. consumers are generally trying to do%nsi,e their purchases and lead simpler lives.
13. #rospect theory and the %or' of behavioral economists confirm that consumers are economically rational. True Dalse 24. /f the price of A is )12 and the price of B is ) - the budget line tells us that a consumer in effect can trade: A. 12 units of A for of B.
B. 1 unit of A for & of B. C. 1 unit of A for of B.
D. 1 unit of B for & of A.
21. AA is Al$s indifference curve and BB is Betty$s. Al and Betty have the same budget line- ??. This information implies that: A. Al$s demand for K is greater than Betty$s. B. Al$s demand for L is greater than Betty$s. C. Al and Betty have the same demand for both products. D. Al %ill buy some of K- but Betty %ill not.
22. /n the above diagram:
A. the consumer is indifferent bet%een points A and B- but neither point maximi,es his utility. B. the consumer is indifferent bet%een points A and B and either point %ill maximi,e his utility. C. any combination of K and L entailing more of L and less of K than sho%n at B %ould be preferred. D. any combination of K and L entailing more of K and less of L than sho%n at A %ould be
preferred.
2 . C1ssentialC %ater is cheaper than CnonessentialC diamonds because:
A. ne% industrial uses for diamonds have been discovered. B. the supply of %ater is great relative to demand and the supply of diamonds is small relative to demand. C. although the total utility of diamonds is greater- their marginal utility is small. D. the supply of diamonds is great relative to demand and the supply of %ater is small relative to demand.
2&. @hy do people tend to eat more at all6you6can6eat buffet restaurants than at restaurants %here each item is purchased separately<
A. +nce the all6you6can6eat meal is purchased- consumers vie% additional trips bac' to the buffet as having a price of ,ero. B. !FJ# is greater at all6you6can6eat restaurants. C. #eople %ho eat at all6you6can6eat restaurants do not experience diminishing marginal utility. D. Dood at all6you6can6eat restaurants tends to have fe%er calories- so consumers feel the need to consume a greater volume of food.
2(. "efer to the above diagram. The budget line shift that moves the consumer$s e2uilibrium from point A to point B suggests:
A. an increase in the demand for product K. B. a decrease in the demand for product K. C. no change in the demand for product K. D. that K is an inferior good.
test 2 practice Gey 1. B 2. C .C &. B (. B *. C .. D 0. C 3. C 14. T"F1 11. C 12. A 1 .B 1&. C 1(. D 1*. B 1.. D 10. A 13. DA?71 24. B 21. B 22. A 2 .B 2&. A
2(. B
7hare this set M 7hare on Daceboo' M 7hare on T%itter M M About this set Created by: !idlightstar on !arch 21- 2412 7ub:ects: 1conomy Description: Consumer Behavior ?og in to favorite or report as inappropriate. #op out Discuss 5o !essages Lou must log in to discuss this set. Chapter * 8!C9 Both 7ides is the satisfaction or pleasure one gets from consuming it The utility of a good or service: 1J.* #revie% our ne% flashcards modef 7tudy: 7peller ?earn Test Eames: 7catter 7pace "ace Tools: #rint 1xport Copy Combine 1mbed +rder by .* terms Terms Definitions is the satisfaction or pleasure one gets from consuming it The utility of a good or service: positive- negative- or ,ero !arginal utility can be: negative !ary says- CLou %ould have to pay me )(4 to attend that pro %restling event.C Dor !ary- the marginal utility of that event is: utility The ability of a good or service to satisfy %ants is called:
satisfies consumer %ants A product has utility if it: beyond some point additional units of a product %ill yield less and less extra satisifacion to a consumer The la% of diminishing marginal utility states that: increase the marginal utility of the last unit consumed of this good /f the price of product K risesthen the resulting decline in the amount purchased %ill: change in total utility obtained by consuming one more unit of a good !arginal utility is the: satisfaction that a consumer derives from a good or service Ftility refers to the: summing the marginal utilities of each unit consumed Total utility may be detrmined by: is positive- but may be either increasing or decreasing /f total utility is increasing- marginal utility: ,ero @here total utility is at a maximum- marginal utility is: demand curves slope do%n%ard The la% of diminishing marginal utility explains %hy: Alex may have to lo%er the price to convince Gara to buy a second slice @hile eating at Alex$s C#i,,a by the sliceC restaurant.- Gara experiences diminishing marginal utility. 7he gained 14 units of satisfaction from her first slice pi,,a consumed- and %ould only recieve ( units of satisfaction from consuing a second slice. Based on this information %e can conclude that: consumers behave rationally- attempting to maximi,e their satisfaction The theory of consumer behavior assumes that: marginal utility obtained from the last dollar spent on each product is the same To maximi,e utility a consumer should allocate money income so that the: more of K and less of L 7uppose that !FxJ#x exceeds !FyJ#y. To maximi,e utility the consumer %ho is spending all her money income should buy: more of B and less of A Ben is exhausting his money income consuming products A and B in such 2uantities that !FaJ#a = ( and !FbJ#b = 0. Ben should purchase: their marginal utilities are the same 7uppose you have a limited money income and you are purchasing products products A and B %hose prices happen to be the same. To maximi,e your utility you should purchase A and B in such amounts that: !FaJ#a = !FbJ#b = !FcJ#c ... = !FnJ#n A consumer is maximi,ing her utility %ith a particular money income %hen: should buy less B and more A 7uppose that !s. Thomson is currently exhausting her money income by purchasing 14 units of A and 0 units of B at prices of )2 and )& respectively. The marginal utility of hte last units of A and B are 1* and 2& respectively. These data suggest that !s. Thomson: the marginal utility of the last dollar spent on each good purchased %ill be the same /f a rational consumer is in e2uilibrium- %hich of the follo%ing conditions %ill hold true< ratios of the marginal utility of each product purchased divided by its price are e2ual A consumer %ho has a limited budget %ill maximi,e utility or satisfaction %hen the: decrease the marginal utility per dollar spend on A An increase in the price of product A %ill: total utility The theory of consumer behavior assumes that consumers attempt to maximi,e: K rises and the marginal utility of L falls @hen a consumer shifts purchases from product K to product L the marginal utility of: has a higher Cmarginal utility to price ratioC for the hoc'ey game than for the play #rashanth decides to buy a ).( tic'et to a particular 5e% Lor' professional hoc'ey game rather than )(4 tic'et for a particular Broad%ay play. @e can conclude that #rashanth: demand curves are do%nsloping Diminishing marginal utility explains %hy: they all help explain the do%nsloping demand curve @hat do the income effect- the substitution effect- and diminishing marginal utility have in common< marginal utility diminishes as more of a product is consumed A consumer$s demand curve for a product is do%nsloping because one should consume less of time6intensive goods /n introducing the opportunity cost of time into
the theory of consumer %e find that- all else e2ual: Apple introduced ne% features to entice previous buyers to purchase ne% models ;o% did Apple overcome consumers$ diminishing marginal utility for i#ods< essential goods may be cheap %hile nonessential goods may be expensive The diamond6%ater paradox arises because: the price of a product is related to its marginal utility- not its total utility The diamond6%ater paradox occurs because: the supply of %ater is great relative to demand and the supply of diamonds is small relative to demand C1ssentialC %ater is cheaper than CnonessentialC diamonds because: increases the amount of health care consumed by reducing the price of additional units of care The fact that most medical purchases are financed through insurance: once the all6you6can6eat meal is purchased- consumers vie% additional trips bac' to the buffet as having a price of ,ero %ho do people tend to eat more at all6you6can6eat buffet restaurants than at restaurants %here each item is purchased separately<
*. /f a product is in surplus supply- %e can conclude that its price: A. is belo% the e2uilibrium level. B. is above the e2uilibrium level. C. %ill rise in the near future. D. is in e2uilibrium. B .. /f the supply of a product decreases and the demand for that product simultaneously increases- %e can conclude that: A. e2uilibrium price must rise- but e2uilibrium 2uantity may either rise- fall- or remain unchanged. B. e2uilibrium price must rise and e2uilibrium 2uantity must fall. C. e2uilibrium price and e2uilibrium 2uantity must both increase. D. e2uilibrium price and e2uilibrium 2uantity must both decline. A 0. The rationing function of prices refers to the: A. tendency of supply and demand to shift in opposite directions. B. fact that ration coupons are needed to alleviate %artime shortages of goods. C. capacity of a competitive mar'et to e2uate the 2uantity demanded and the 2uantity supplied. D. ability of the mar'et system to generate an e2uitable distribution of income. C 3. /f there is a shortage of product K- %e can predict that: A. fe%er resources %ill be allocated to the production of this good. B. the price of the product %ill rise. C. the price of the product %ill decline. D. the supply curve %ill shift to the left and the demand curve to the right- thereby eliminating the shortage. B &4. /n the follo%ing 2uestion- you are as'ed to determine- other things being e2ual- the effects of a given change in a determinant of demand or supply for product K upon: 8i9 the demand 8D9 foror supply 879 of- K8ii9 the e2uilibrium price 8#9 of K and 8iii9 the e2uilibrium 2uantity 8N9 of K. An increase in incomeif K is a normal good- %ill:
A. increase D- increase #- and increase N. B. increase D- increase #- and decrease N. C. increase 7- increase #- and increase N. D. decrease D- increase #- and increase N. A &1. /n the follo%ing 2uestion you are as'ed to determine- other things being e2ual- the effects of a given change in a determinant of demand or supply for product K upon: 8i9 the demand 8D9 foror supply 879 of- K8ii9 the e2uilibrium price 8#9 of K and 8iii9 the e2uilibrium 2uantity 8N9 of K. An increase in the tastes and preferences for K %ill: A. increase 7- decrease #- and increase N. B. decrease 7- decrease #- and decrease N. C. increase D- increase #- and increase N. D. decrease D- decrease #- and decrease N. C &2. Eiven a do%n6sloping demand curve and an up6sloping supply curve for a product- a decrease in resource prices %ill: A. increase e2uilibrium price and 2uantity. B. decrease e2uilibrium price and 2uantity. C. decrease e2uilibrium price and increase e2uilibrium 2uantity. D. increase e2uilibrium price and decrease e2uilibrium 2uantity. C & . /f an Australian importer can purchase EB#14 444 for AFD24 444- then the rate of exchange: A. in Australia %ill be AFD1 e2uals EB#2. B. in Australia %ill be AFD2 e2uals EB#1. C. in Ereat Britain %ill be AFD1 e2uals EB#2. D. in Ereat Britain %ill be AFD4.( e2uals EB#1. B &&. The Australian supply of British pounds is: A. do%n6sloping- because a lo%er dollar price of pounds means that Australian goods are cheaper to the British. B. up6sloping- because a higher dollar price of pounds means that Australian goods are cheaper to the British. C. up6sloping- because a lo%er dollar price of pounds means that Australian goods are cheaper to the British. D. do%n6sloping- because a higher dollar price of pounds means that Australian goods are cheaper to the British. B &(. A depreciation of the Australian dollar %ill tend to: A. decrease the prices of both Australian imports and exports. B. increase the prices of both Australian imports and exports. C.decrease the prices of the goods that Australians import- but increase the prices to foreigners of the goods that Australians export. D.increase the prices of the goods that Australians import- but decrease the prices to foreigners of the goods that Australians export. D &*. Assume that Drance and Britain have floating exchange rates. +ther things being unchangedif economic gro%th is more rapid in Drance than in Britain: A. gold bullion %ill flo% out of Drance. B. the franc %ill depreciate. C. the pound %ill depreciate. D. the franc %ill appreciate. B &.. Assume that Drance and Britain have floating exchange rates. +ther things being unchangedif the price level is stable in Britain but Drance experiences rapid inflation:
A. gold bullion %ill flo% into Drance. B. the franc %ill depreciate. C. the pound %ill depreciate. D. the franc %ill appreciate. B &0. 7urpluses drive competitive prices up> shortages drive them do%n. A. True B. Dalse B &3. /f demand increases and supply simultaneously decreases- e2uilibrium price %ill rise. A. True B. Dalse B (4. The rationing function of prices refers to the fact that the government must distribute any surplus goods that may be left in a competitive mar'et. A. True B. Dalse B (1. Consumers buy more of normal goods as incomes rise. A. True B. Dalse B (2. Toothpaste and toothbrushes are substitute goods. A. True B. Dalse B 7et Champions There are no high scores or champions for this set yet. Lou can sign up or log in to be the firstf Demand- 7upply- and !ar'et 12uilibrium &2 A57@1"7 T+ 15D6+D6C;A#T1" NF17T/+57 61 1xplain the la% of demand. @hy does a de mand curve slope do%n%ard< ;o% is a mar'et demand curve derived from individual demand curves< As prices change because of a change in supply for a commodity- buyers %ill change the 2uantity they demand of that item. /f the price drops- a larger 2uantity %ill be demanded. /f the price rises- a lesser 2uantity %ill be demanded. The demand curve slopes do%n%ard because of dimi nishing marginal utility- and the substitution and income effects. Because successive units of a good provide less additional utility than the previous units- buyers %ill only pay for these smalle r amounts of utility if the price is lo%ered. @hen the price of a commodity decreases relative to that of substitutes- a buyer %ill substitute the no% cheaper commodity for those %hose prices have not changed. At the same time- the decreased price of the commodity under discussion %ill ma'e the buyer %ealthier in real terms. !ore can be bought of this commodity 8as %ell as of others %hose prices have not changed9. Thus- the substitution and income
effects reinforce each other: !ore %ill be bought of a normal 8or superior9 commodity as its price decreases. +n a graph %ith price on the vertical axis and 2uantity on the hori,ontal- this is sho%n as a de mand curve sloping do%n%ard from left to right. The mar'et demand curve is derived by hori,ontally summing the individual demand curves. 62 @hat are the determinants of demand< @hat happens to the demand curve %hen each of these determinants changes< Distinguish bet%een a ch ange in demand and a change in the 2uantity demanded- noting the cause8s9 of each. The fundamental determinant of demand is th e price of the commodity under consideration: a change in price causes movement along the comm odityTs demand curve. This movement is called a change in 2uantity demanded. Decre ased price leads to movement do%n the demand curve: There is an increase in 2uantity demande d. /ncreased price leads to movement up the demand curve: There is a decrease in 2uantity demanded. /n addition- there are determinants of demand%hich are factors that may shift the demand curvei.e.- cause a Xchange in demand.Y These are the nu mber of buyers- the tastes 8or desire9 of the buyers for the commodity- the income of the buye rs- the changes in price of related commodities 8substitutes and complements9- and expectations of the buyers regarding the future price of the commodity under discussion. The follo%ing %ill lead to in creased demand: more buyers- greater desire for the commodityhigher incomes 8assuming a normal good9- lo%er incomes 8assuming an inferior good9- an increased price of substitutes- a decreased price of complements- and an expectation of higher future prices or incomes. This increased dema nd %ill sho% as a shift of the entire demand curve to the right. The reverse of all the above %ill lead to decreas ed demand and %ill sho% as a shift of the entire demand curve to the left. 6 8 Gey Nuestion 9 @hat effect %ill each of the follo%ing have on the demand for small automobiles such as the !ini Cooper and 7mart car< a. 7mall automobiles become more fashionable. b. The price of large automobiles rises 8%ith th
e price of small autos remaining the same9. c. /ncome declines and small autos are an inferior good. d. Consumers anticipate the price of small auto s %ill greatly come do%n in the near future. e. The price of gasoline substantially drops. Demand increases in 8a9- 8b9- and 8c 9> decreases in 8d9. The last one 8e9 is ambiguous. As autos and gas are complements- one could argue that the decrease in gas prices %ould stimulate demand Demand- 7upply- and !ar'et 12uilibrium & for all cars- including small ones. ;o%ever- one c ould also argue that small cars are attractive to consumers because of fuel efficiency- and that a decrease in gas prices effectively reduces the price of the Xgas gu,,lingY substitutes. That %ould encourage consumers to s%itch from smaller to larger cars 87FAs9- and demand for small au tomobiles %ould fall. ZThis presents a good illustration of the complexity of many of these changes.[ 6& 1xplain the la% of supply. @hy does the supply curve slope up%ard< ;o% is the mar'et supply curve derived from the supply curves of individual producers< As prices rise because of increased demand fo r a commodity- producers find it more and more profitable to increase the 2uantity they offer for sale> that is- the supply curve %ill slope up%ard from left to right. Clearly- firms %ould rather sell at a higher price than at a lo%er price. !oreover- it is necessary for firms to demand a higher price as they increase production. This comes about because as they produce more and mo re- they start to run up against capacity constraints and costs rise. At any given time- a plant has a given si,e. As production increasesthe firm %ill need to add an extra shift and then a third shift- both perhaps at higher %ages. /t may run out of %arehouse space and have to rent at higher cost from another firm. /t may have to pay extra to get increasingly urge nt ra% material- and so on. The mar'et supply curve is derived by hori,ontally adding the individual supply curves. 6( @hat are the determinants of supply< @hat happens to the su pply curve %hen each of these determinants changes< Distinguish bet%een a ch ange in supply and a change in the 2uantity supplied- noting the cause8s9 of each.
The fundamental determinant of supply is the price of the commodity. As price increases- the 2uantity supplied increases. An increase in pri ce causes a movement up a given supply curve. A decrease in price causes a movement do%n a given supply curve. The non6price determinants of supply are: resource 8input9 prices- technology- taxes and subsidies- prices of other related goods- expectations - and the number of sellers. /f one or more of these change- there %ill be a change in supply and the %hole supply curve %ill shift to the right or the left. The follo%ing %ill cause an increase in supply: a decrease in resource 8input9 prices> improved 8lo%er cost9 technology> a decrease in business ta xes- an increase in subsidies to business> a decrease in the price of another commodity that this firm %as ma'ing- provided that commodity is a substitute in production 8the firm can s%itch from the no% lo%er priced one to our commodity9> an expectation of lo%er prices in the future> and an increase in the number of sellers. The increase in supply caused by the noted change in one or more of the above %ill cause the entire supply curve to shift to the right. !o re %ill no% be supplied at any given price. Alternatively expressedany given amount %ill no% be supplied at a lo%er price. The reverse of any or all the above changes in the determinants of de mand %ill cause a decrease in demand and %ill be sho%n as a shift of the supply curve to the left. ?ess %ill no% be supplied at any given price. Alternatively expressedany given amount %ill no% be supplied at a higher price. 6* 8 Gey Nuestion 9 @hat effect %ill each of the follo%ing have on the supply of automobile tires< a. A technological advance in the methods of producing tires. b. A decline in the number of firms in the tire industry. c. An increase in the price of rubber used in the production of tires. d. The expectation that the e2uilibrium price of auto tires %ill be lo%er in the future than it is currently. Demand- 7upply- and !ar'et 12uilibrium && e. A decline in the price of large tires used fo r semi6truc's and earth hauling rigs 8%ith no
change in the price of auto tires9. f. The levying of a per6unit tax in each auto tire sold. g. The granting of a (46cent6per6unit subsidy for each auto tire produced. 7upply increases in 8a9- 8d9- 8e9- and 8g 9> decreases in 8b9- 8c9- and 8f9. 6. X/n the corn mar'et- demand often exceeds s upply and supply sometimes exceeds demand.Y XThe price of corn rises and falls in response to cha nges in supply and demand.Y /n %hich of these t%o statements are the terms XsupplyY and XdemandY used correctly< 1xplain. /n the first statement XsupplyY and XdemandY are used incorrectly. 7upply and demand are both schedules or curves that intersect %here 2uantity supplied and 2uantity demanded are e2ual. +ne cannot tal' of curves that intersect as exceeding or not exceeding each other. 7upply andJor demand can change 8the entire curv es can shift9. 1ach ti me this happens- it %ill create a ne% intersection of the t%o curves that % ill lead to changes in the e2uilibrium 2uantity and price of corn. Thus- the terms XsupplyY a nd XdemandY are used correctly in the second statement. 60 8 Gey Nuestion 9 7uppose the total demand for %heat and the total supply of %heat per month in the Gansas City grain mar'et are as follo%s: Thousands of bushels demanded #rice per bushel Thousand of bushels supplied 7urplus 8I9 or shortage 869 0( 04 .( .4 *( *4 ) .&4
..4 &.44 &. 4 &.*4 &.34 .2 . .( .. .3 01 PPPPP PPPPP PPPPP PPPPP PPPPP PPPPP a. @hat is the e2uilibrium price< @hat is the e2uilibrium 2uantity< Dill in the surplus6shortage column and use it to explain %hy your ans%ers are correct. b. Eraph the demand for %heat and the supply of %heat. Be sure to label the axes of your graph correctly. ?abel e2uilibrium price # and the e2uilibrium 2uantity N . c. @hy %ill ) .&4 not be the e2uilibrium price in this mar'et< @hy not )&.34< X7urpluses drive prices up> shortages drive them do%n.Y Do you agree< Data from top to bottom: 61 > 6.> 4> I.> I1&> and I21. Demand- 7upply- and !ar'et 12uilibrium &. At a price of )&.*4- buyers only %ant to pur chase *(-444 bushels- but selle rs %ant to sell .3-444 bushels- resulting in a surplus of 1&-444 bushels . The floor prevents the price from falling to eliminate the surplus. 7ee the graph belo%. 61( @hat do economists mean %hen they say that Xprice floors and ceilings stifle the rationing function of prices and distort resource allocationY< @hen unrestrained- prices rise and fall to corr ect imbalances bet%een the 2uantity supplied and 2uantity demanded in a mar'et. /f sellers find th emselves at a given price %ith more output than consumers are %illing to purchase- the price %ill fa ll. ?i'e%ise- if the mar'et is not offering enough of a good to satisfy cons
umer demand- the price %ill rise. #rice floors and ceilings prevent price movements to correct these imbalances. @hen a price is set above e2uilibrium 8i.e. a price floor9- sellers %ill produce more than th e mar'et can support- diverting resources a%ay from more highly valued uses. #rice ceilings r esult in an underallocation of resources to%ard a particular good- %here the excess demand 8shorta ge9 reveals that consumers value the good 8and therefore the resources used to produce it9 more than %hat the mar'et currently offers. Demand- 7upply- and !ar'et 12uilibrium &0 61* Advanced analysis: Assume that the de mand for a commodity is represented by the e2uation #= 14 6 .2Nd and supply by the e2uation # = 2 I .2Ns - %here N d and N s are 2uantity demanded and 2uantity supplied- respectively- and # is price. Fsing the e2uilibrium condition N s = N d - solve the e2uations to determine e2uilibrium price. 5o% determine e2uilibrium 2uantity. Eraph the t%o e2uations to substantiate your ans%ers. Demand is # = 14 S 2 N d Therefore ( # = (4 S N d = (4 S (
# 7upply is # =2I2 N s Therefore ( # = 14 I N s and N s = S14 I ( # 7ubstitute N d and N s into N s =N d e2uilibrium condition (4 S ( # = S14 I ( # *4 = 14 # and * = # 5o% substitute # = * in either N d or N s to determine e2uilibrium 2uantity N d = (4 S ( #
= (4 S (8*9 = 24 or N s = S14 I ( # = S14 I (8*9 = 24 61. 8 ?ast @ord 9 @hat is the current overall number of candidates %aiting for an organ transplant< 8Dor the ans%er- visit the Fnited 5et%or' for +rgan 7haring %ebsite%%%.unos.org .9 Dor %hat transplant organ is the %aiting list the longest< 87elect XDataY and XAt a glance.Y9 Do you favor the establishment of a legal mar'et for transplant organs< @hy or %hy not< As of Buly 244*- there %ere nearly 33-444 on th e %aiting list- %ith 'idneys having the longest list 8about .1-4449. Ans%ers to the other 2uestions %ill vary. 4 2 & * 0 14 12 1& 424&4*4 #rice Nuantity Nuestion 61( 7upply Demand Demand- 7upply- and !ar'et 12uilibrium &3 #rivate mar'ets do not allocate resources in the most economically desirable %ay !ar'et failure is said to occur %henever: the demand and supply curves don$t reflect consumers$ full %illingness to pay for a good or service Demand6side mar'et failures occur %hen: demand6side mar'et failure #eople en:oy outdoor holiday lighting displays- and %ould be %illing to pay to see these displays- but can$t be made to pay. Because those %ho put up lights are unable to charge others to vie% them- they don$t put up as many lights as people %ould li'e. This is an example of a: the demand and supply curves don$t reflect the full cost of producing a good or service 7upply6 side mar'et failures occur %hen: costs more to produce than it provides in benefits Drom soceity$s perspective- in the presence of
a supply6side mar'et failure- the last unit of a good produced typically: supply6side mar'et failure the trains of the transcontinental rail%ay company- %hen shipping goods- sometimes emit spar's that start fies along the trac's and damage the property of others. /f transcontinental does not pay for the damage it causes- %hat has occurred< 7upply curves must reflect all costs of production- and demand curves must reflect consumers$ full %illingness to pay @hat t%o conditions must hold for a competitive mar'et to produce efficient outcomes< the benefit surpluses shared bet%een consumers and producers %ill be maximi,ed /f the demand curve reflects consumers$ full %illingess to pay- and the supply curve reflects all costs of production- then %hich of the follo%ing is true< is the difference bet%een the maximum prices consumers are %illing to pay for a product and the lo%er e2uilibrium price Consumer surplus: is the difference bet%een he minimum prices producers are %illng to accept for a product and the higher e2uilibrium price #roducer surplus: under the demand curve and above the actual price Eraphically- if the supply and demand curves are linear- consumer surplus is measured as the triangle: above the supply curve and belo% the actual price Eraphically- producer surplus is measured as the area: e2uals the marginal cost of producing that particular unit A producer$s minimum acceptable price for a particular unit fo a good: the combined amounts of consumer surplus and produceer surplus are maximi,ed allocative efficiency occurs only at that output %here: the maximum %illingnes to pay for the last unit of output e2uals the minimum acceptable price of that unit of output At the output level defining allocative efficiency: the maximum %illingness to pay for the last unit of output e2uals the minimum acceptable price of that unit of output At the output %here the combined amounts of consumer and producer surplus are largest: is measured as the combined loss of consumer surplus and producer surplus An efficiency loss 8or dead%eight loss9: maximum %illingness to pay exceeds minimum acceptable price An efficiency loss 8or dead%eight loss9 declines in si,e %hen a unit of output is produced for %hich: nonrivalry and nonexcludability The t%o main characteristics of a public good are: public goods 5onrivalry and nonexcludability are the main characteristics of: has benefits available to all- including nonpayers Fnli'e a private good- a public good: is available to all and cannot be denied to anyone A public good: private firms cannot stop consumers %ho are un%illing to pay for such goods from benefiting from them The mar'et system does not produce public because: is nonrivalry and nonexcludability #ublic goods are those for %hich there: nonrival in consumption /f one person$s consumption of a good does not preclude another$s consumption- the good is said to be: there is no effective %ay to 'eep people from using a good once it comes into being 5onexcludability describes a condition %here: the mar'et demand for a public good is nonexistent or understated Because of the free6rider problem: marginal benefit e2uals marginal cost At the optimal 2uantity of a public good: summing vertically the individual demand curves for the public good A demand curve for a public good is determined by: the rd unit should be produced 7uppose that !ic' and Cher are the only t%o members of society and are %illing to pay )14 and )0- respectively- for the rd unit of a public good. Also-
assume that the marginal cost of the rd unit is )1.. @e can conclude that: compare the benefits and costs associated %ith any economic pro:ect or activity Cost6benefit analysis attempts to: the optimal pro:ect si,e is the one for %hich !B = !C accoding to the marginal6cost6marginal6 benefit rule: %henever they over6or underallocate resources to a pro:ect 1conomists consider governments to be C%asteful:C the benefits associated %ith a product exceed those accruing to people %ho consume it A positive externality or spillover benefit occurs %hen: the total cost of producing a good exceeds the cost borne by the producer A negaitve externality or spilloveer cost occurs %hen: price and output %ould increase /f a good that generates positive externalities %ere produced and priced to ta'e into account these spillover benefits- then its: resources and currently underallocated to the provision of holiday lighting in Anyto%n 7uppose that the anyto%n city government as's private citi,ens to donate money to support the to%n$s annual holiday lighting display. Assuming that the citi,ens of Anyto%n en:oy the lighting displaythe re2uest for donations suggests that: benefit of abatemnt e2uals its marginal cost of abatement The socially optimal amount of pollution abatement occurs %here society$s marginal: diminishing marginal utility The marginal benefit to society of reducing pollution declines %ith increases in pollution abatement because of the la% of: diminishing returns The marginal cost to society of reducing pollution rises %ith increases in pollution abatement because of the la% of: diminishing returns The !C curves in the above diagram slope up%ard because of the la% of: those en:oying the art to Cfree rideC since they cannot be made to bear any of the cost 7uppose that 7usie creates a %or' of art and displays it in a public place. 1conomists %ould expect: people %ill understate their en:oyment of the art in order to Cfree rideC Brinley puts on an art sho% in a public space- as'ing for donations based on ho% much people en:oy his %or'. 1conomists %ould expect that: private individuals can often negotiate their o%n resolution of externality problems According to the Coase Theorem: Darcy and "achel to negotiate a mutually agreeable level of volume andJor selection of music Darcy and "achel live do%n the hal from each other in the same dorm. Darcy li'e to play her music loudly do%n the hall- and "achel finds the music annoying. A coase theorem solution for this problem %ould be for: the coase theorem 7uppose that a large tree on Betty$s property is bloc'ing Chuc'$s vie% of the la'e belo%. Betty accepts Chuc'$s offer to pay Betty )144 for the right to cut do%n the tree. This situation describes: government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other /n a cap6and6trade program: assigns a property right to polluting the atmosphere A cap6and6trade program: prefer a carbon tax to cap6and6trade for reducing carbon dioxide emissions Because there are so many sources of carbon dioxide- ma'ing monitoring difficult and costly- many economists:
A nation$s production possibilities curve is bo%ed out from the origin because: resources are not e2ually efficient in producing every good.
32. "efer to the above table. /f the economy is producing at production alternative C- the opportunity cost of the tenth unit of consumer goods %ill be: A. & units of capital goods. B. 2 units of capital goods. C. units of capital goods. D. 1J of a unit of capital goods. D. 1J of a unit of capital goods. 3 . "efer to the above table. As compared to production alternative D- the choice of alternative C %ould: A. tend to generate a more rapid gro%th rate. B. be unattainable. C. entail unemployment. D. tend to generate a slo%er gro%th rate. A. tend to generate a more rapid gro%th rate. 3&. "efer to the above table. A total output of units of capital goods and & units of consumer goods: A. is irrelevant because the economy is capable of producing a larger total output. B. %ill result in the maximum rate of gro%th available to this economy. C. %ould involve an inefficient use of the economy$s scarce resources. D. is unobtainable in this economy. C. %ould involve an inefficient use of the economy$s scarce resources. 3(. "efer to the above table. Dor this economy to produce a total output of units of capital goods and 1 units of consumer goods it must: A. achieve economic gro%th. B. use its resources more efficiently than the data in the table no% indicate. C. allocate its available resources most efficiently among alternative uses. D. achieve the full employment of available resources. A. achieve economic gro%th. 3*. "efer to the above table. Dor these data the la% of increasing opportunity costs is reflected in the fact that: A. the amount of consumer goods that must be sacrificed to get more capital goods diminishes beyond a point. B. larger and larger amounts of capital goods must be sacrificed to get additional units of consumer goods. C. the production possibilities data %ould graph as a straight do%nsloping line. D. the economy$s resources are presumed to be scarce. B. larger and larger amounts of capital goods must be sacrificed to get additional units of consumer goods. @hen an economy is operating under conditions of full employment- the production of more of commodity A %ill mean the production of less of commodity B because: resources are limited. The production possibilities curve is a frontier bet%een %hat< a frontier bet%een all combinations of t%o goods that can be produced and those combinations that cannot be produced. Assume an economy is operating at some point on its production possibilities curve- %hich sho%s civilian and military goods. /f the output of military goods is increased- the output of civilian goods: must be decreased. Any point inside the production possibilities curve indicates: that more output could be produced %ith available resources. 141. "efer to the above diagram. +ther things e2ual- this economy %ill achieve the most rapid rate of gro%th if: A. the ratio of capital to consumer goods is minimi,ed. B. it chooses point C. C. it chooses point B. D. it chooses point A. D. it chooses point A.
142. "efer to the above diagram. This economy %ill experience unemployment if it produces at point: A. A. B. B. C. C. D. D. D. D. /n dra%ing the production possibilities curve %e assume that: technology is fixed. @hich of the follo%ing is assumed in constructing a typical production possibilities curve< production technology is fixed. /f the production possibilities curve %ere a straight do%n6sloping line- this %ould suggest that: resources are perfectly shiftable bet%een the production of these t%o goods. Assume an economy is incurring unemployment. The effect of resolving this problem %ill be to: move the level of actual output to the economy$s production possibilities curve. 14.. @hich of the follo%ing is not correct< A typical production possibilities curve: A. indicates ho% much of t%o products a society can produce. B. reveals ho% much each additional unit of one product %ill cost in terms of the other product. C. specifies ho% much of each product society should produce. D. indicates that to produce more of one product society must forgo larger and larger amounts of the other product. C. specifies ho% much of each product society should produce. A point inside a production possibilities curve best illustrates: unemployment. 143. "efer to the above diagram. This production possibilities curve is constructed so that: A. resources are presumed to be perfectly shiftable bet%een bread and tractors. B. the opportunity cost of bread diminishes as more bread is produced. C. the opportunity cost of tractors increases as more bread is produced. D. the opportunity cost of both bread and tractors increases as more of each is produced. D. the opportunity cost of both bread and tractors increases as more of each is produced. 114. "efer to the above diagram. 7tarting at point A- the opportunity cost of producing each successive unit of tractors is: A. a constant 2 units of bread. B. 2- &- *- and 0 units of bread. C. 0- *- &- and 2 units of bread. D. the reciprocal of the output of tractors. B. 2- &- *- and 0 units of bread. 111. "efer to the above diagram. 7tarting at point 1- the production of successive units of bread %ill cost: A. a constant 0 units of tractors. B. a constant * units of tractors. C. 1J0- 1J*- 1J&- and 1J2 units of tractors. D. 1J2- 1J&- 1J*- and 1J0 units of tractors. C. 1J0- 1J*- 1J&- and 1J2 units of tractors. /n dra%ing a production possibilities curve %e hold constant: both technology and resource supplies. The construction of a production possibilities curve assumes: technology is fixed. /f an economy is operating inside its production possibilities curve for consumer goods and capital goods- it: can produce more of both consumer goods and capital goods by using resources that are currently idle. 11(. "efer to the above diagram. #oints A- B- C- D- and 1 sho%: A. that the opportunity cost of bicycles increases- %hile that of computers is constant. B. combinations of bicycles and computers that society can produce by using its resources efficiently. C. that the opportunity cost of computers increases- %hile that of bicycles is constant.
D. that society$s demand for computers is greater than its demand for bicycles. B. combinations of bicycles and computers that society can produce by using its resources efficiently. 11*. "efer to the above diagram. This production possibilities curve is: A. convex to the origin because opportunity costs are constant. B. linear because opportunity costs are constant. C. concave to the origin because of increasing opportunity costs. D. convex to the origin because of increasing opportunity costs. C. concave to the origin because of increasing opportunity costs. 11.. "efer to the above diagram. /f society is currently producing 3 units of bicycles and & units of computers and it no% decides to increase computer output to *- the cost: A. %ill be & units of bicycles. B. %ill be 2 units of bicycles. C. %ill be ,ero because unemployed resources are available. D. of doing so cannot be determined from the information given. A. %ill be & units of bicycles. 110. "efer to the above diagram. The combination of computers and bicycles sho%n by point E is: A. attainable- but too costly. B. unattainable- given currently available resources and technology. C. attainable- but involves unemployment. D. irrelevant because it is inconsistent %ith consumer preferences. B. unattainable- given currently available resources and technology. 113. "efer to the above diagram. /f society is currently producing the combination of bicycles and computers sho%n by point D- the production of 2 more units of bicycles: A. cannot be achieved because resources are fully employed. B. %ill cost 1 unit of computers. C. %ill cost 2 units of computers. D. %ill cause some resources to become unemployed. B. %ill cost 1 unit of computers. 124. "efer to the above diagram. The combination of computers and bicycles sho%n by point D: A. is unattainable- given currently available resources and technology. B. is attainable- but implies that the economy is not using all its resources. C. is irrelevant because it is inconsistent %ith consumer preferences. D. suggests that opportunity costs are constant. B. is attainable- but implies that the economy is not using all its resources. 121. "efer to the above diagram. The movement do%n the production possibilities curve from point A to point 1 suggests that the production of: A. computers- but not bicycles- is sub:ect to increasing opportunity costs. B. bicycles- but not computers- is sub:ect to increasing opportunity costs. C. both bicycles and computers are sub:ect to constant opportunity costs. D. both bicycles and computers are sub:ect to increasing opportunity costs. D. both bicycles and computers are sub:ect to increasing opportunity costs. The la% of increasing opportunity costs states that: if society %ants to produce more of a particular good- it must sacrifice larger and larger amounts of other goods to do so. @hat does the concept of opportunity cost suggest< suggests that the use of resources in any particular line of production means that alternative outputs must be forgone. The la% of increasing opportunity costs exists because: resources are not e2ually efficient in producing various goods. The la% of increasing opportunity costs is reflected in a production possibilities curve that is: concave to the origin. +pportunity cost is best defined as: the amount of one product that must be given up to produce
one more unit of another product. /f the output of product K is such that marginal benefit e2uals marginal cost: the correct amount of resources is being allocated to K$s production. 120. "efer to the above diagram for athletic shoes. The optimal output of shoes is: A. N1. B. N2. C. N . D. greater than N . B. N2. 123. "efer to the above diagram for athletic shoes. /f the current output of shoes is N1- then: A. society %ould consider additional units of shoes to be more valuable than alternative uses of those resources. B. society %ould consider additional units of shoes to be less valuable than alternative uses of those resources. C. society %ould experience a net loss by producing more shoes. D. resources are being allocated efficiently to the production of shoes. A. society %ould consider additional units of shoes to be more valuable than alternative uses of those resources. 1 4. "efer to the above diagram for athletic shoes. /f the current output of shoes is N - then: A. resources are being allocated efficiently to the production of shoes. B. society %ould consider additional units of shoes to be more valuable than alternative products. C. society %ould consider additional units of shoes to be less valuable than alternative products. D. society %ould experience a net gain by producing more shoes. C. society %ould consider additional units of shoes to be less valuable than alternative products. 1 1. "efer to the above diagram for athletic shoes. /f the current output of shoes is N - then: A. society should produce fe%er shoes to achieve the optimal allocation of resources. B. society should produce more shoes to achieve the optimal allocation of resources. C. resources are being allocated efficiently to the production of shoes. D. shoes are more valuable to society than alternative products A. society should produce fe%er shoes to achieve the optimal allocation of resources. 7uppose that an economy is producing on its production possibilities curve- but is not producing 2uantities of each good %here the marginal benefit e2uals the marginal cost for each good. ;o% can this economy improve its allocation< by producing more of one good and less of the other. The optimal allocation of resources is found: %here !B = !C. The basic difference bet%een consumer goods and capital goods is that consumer goods satisfy %ants directly %hile capital goods satisfy %ants indirectly. @hich of the follo%ing %ould be most li'ely to shift the production possibilities curve to the right< A. a sudden and substantial expansion of consumer %ants B. an improvement in the literacy level and general level of education C. a decline in the si,e of the population and labor force D. shifting resources from the production of capital goods to the production of consumer goods B. an improvement in the literacy level and general level of education @hich of the follo%ing %ill shift the production possibilities curve to the right< A. an increase in the unemployment rate from * to 0 percent B. a decline in the efficiency %ith %hich the present labor force is allocated C. a decrease in the unemployment rate from 0 to * percent D. a technological advance that allo%s farmers to produce more output from given inputs D. a technological advance that allo%s farmers to produce more output from given inputs +ther things e2ual- %hich of the follo%ing %ould shift an economy$s production possibilities curve to the left<
A. the discovery of a lo%6cost means of generating and storing solar energy B. the entrance of more %omen into the labor force C. a la% re2uiring mandatory retirement from the labor force at age (( D. an increase in the proportion of total output that consists of capital or investment goods C. a la% re2uiring mandatory retirement from the labor force at age (( 1 0. "efer to the above diagram. The concept of opportunity cost is best represented by the: A. shift of the production possibilities curve from ##1 to ##2. B. move from B on ##1 to 1 on ##2. C. move from B on ##1 to C on ##1. D. move from D inside ##1 to B on ##1. C. move from B on ##1 to C on ##1. 1 3. "efer to the above diagram. @hich of the follo%ing positions relative to ##1 %ould be the most li'ely to result in a future production possibilities curve of ## - rather than ##2< A. A. B. B. C. C. D. D. A. A. 1&4. "efer to the above diagram. An improvement in technology %ill: A. shift the production possibilities curve from ##1 to ##2. B. shift the production possibilities curve from ##2 to ##1. C. move the economy from A to C along ##1. D. move the economy from A- B- or C on ##1 to D. A. shift the production possibilities curve from ##1 to ##2. @hich of the follo%ing statements- if any- is correct for a nation that is producing only consumer and capital goods< +ther things e2ual- the more capital goods a nation produces- the greater %ill be its future gro%th rate. 8Consider This9 A direct cost of going to college is: A. tuition- %hile an indirect cost 8opportunity cost9 is boo's and other supplies. B. forgone income %hile in college- %hile an indirect cost 8opportunity cost9 is tuition. C. tuition- %hile an indirect cost 8opportunity cost9 is forgone income %hile in college. D. boo's and supplies- %hile an indirect cost 8opportunity cost9 is food and housing. C. tuition%hile an indirect cost 8opportunity cost9 is forgone income %hile in college. 8Consider This9 An exception to the advice Cgo to college- stay in college- and earn a degreeC occurs %hen: A. tuition expenses are high and rising. B. the opportunity cost of attending college is extraordinarily high. C. the price of textboo's is high and rising. D. the economy is gro%ing rapidly and :obs are plentiful. B. the opportunity cost of attending college is extraordinarily high. /f %e say that t%o variables are directly related- this means that: an increase in one variable is associated %ith an increase in the other variable. /f %e say that t%o variables are inversely related- this means that: an increase in one variable is associated %ith a decrease in the other. @hich of the follo%ing statements is correct< A. The value of the independent variable is determined by the value of the dependent variable. B. The value of the dependent variable is determined by the value of the independent variable. C. The dependent variable designates the CcauseC and the independent variable the Ceffect.C D. Dependent variables graph as upsloping lines> independent variables graph as do%nsloping lines. B. The value of the dependent variable is determined by the value of the independent variable.
/f t%o variables are inversely related- then as the value of one variable: increases- the value of the other decreases. /f a positive relationship exists bet%een x and y: the relationship %ill graph as an upsloping line. The slope of a straight line can be determined by: comparing the absolute vertical change to the absolute hori,ontal change bet%een t%o points on the line. 1(4. "efer to the above diagram. The variables K and L are: A. inversely related. B. directly related. C. unrelated. D. negatively related. B. directly related. 1(1. "efer to the above diagram. The vertical intercept: A. is &4. B. is (4. C. is *4. D. cannot be determined from the information given. B. is (4. 1(2. "efer to the above diagram. The slope of the line: A. is 6 1J&. B. is I 1J&. C. is .&4. D. cannot be determined from the information given. B. is I 1J&. 1( . "efer to the above diagram. The e2uation that sho%s the relationship bet%een L and K is: A. L = (4 I 1J& K. B. K = 1J&L . C. L = .&K. D. L = 1J& K 6 (4. A. L = (4 I 1J& K. Assume a household %ould consume )144 %orth of goods and services per %ee' if its %ee'ly income %ere ,ero and %ould spend an additional )04 per %ee' for each )144 of additional income. ?etting C represent consumption and L represent income- the e2uation that summari,es this relationship is: C = 144 I .0L . /f the e2uation y = ( I *x %as graphed- the slope %ould be %hat< slope %ould be I*. /f the e2uation y = 1( 6 &x %as plotted- the slope %ould be %hat< slope %ould be 6&. /f the e2uation y = 614 I 2.(x %as plotted: A. the vertical intercept %ould be 614. B. the slope %ould be 6..(. C. it %ould graph as a do%nsloping line. D. the slope %ould be 614. A. the vertical intercept %ould be 614. 1(0. The movement from line A to line A$ represents a change in: A. the slope only. B. the intercept only. C. both the slope and the intercept. D. neither the slope nor the intercept. B. the intercept only. 1(3. /n the above diagram variables x and y are: A. both dependent variables. B. directly related. C. inversely related. D. unrelated. C. inversely related. 1*4. /n the above diagram the vertical intercept and slope are: A. & and 61 1J respectively. B. and 61 1J respectively.
C. and I J& respectively. D. & and I J& respectively. A. & and 61 1J respectively. 1*1. "efer to the above diagram. The slope of curve QQ at point A is approximately: A. I2. B. I2 1J2. C. 62 1J2. D. I&. B. I2 1J2. 1*2. "efer to the above diagram. The slope of curve QQ at point B is: A. infinity. B. ,ero. C. I1. D. 61. B. ,ero. 1* . "efer to the above diagram. The slope of curve QQ at point C is approximately: A. 6&. B. 62. C. 62 2J(. D. I . C. 62 2J(. 1*&. The slope of a line parallel to the vertical axis is: A. ,ero. B. one. C. infinite. D. one6half. C. infinite. 1*(. The slope of a line parallel to the hori,ontal axis is: A. ,ero. B. one. C. infinite. D. one6half. A. ,ero. 7hare this set M 7hare on Daceboo' M 7hare on T%itter M M About this set Created by: su2iyuan12 on 7eptember 2- 2412 ?og in to favorite or report as inappropriate. #op out Discuss 5o !essages Lou must log in to discuss this set. econ314 chapter Both 7ides 1. A mar'et: A. reflects up6sloping demand and do%n6sloping supply curves. B. entails the exchange of goods- but not services. C. is an institution that brings together buyers and sellers. D. al%ays entails face6to6face contact bet%een buyer and seller. C
1J(2 #revie% our ne% flashcards modef 7tudy: 7peller ?earn Test Eames: 7catter 7pace "ace Tools: #rint 1xport Copy Combine 1mbed +rder by (2 terms Terms Definitions 1. A mar'et: A. reflects up6sloping demand and do%n6sloping supply curves. B. entails the exchange of goods- but not services. C. is an institution that brings together buyers and sellers. D. al%ays entails face6to6face contact bet%een buyer and seller. C 2. The la% of demand states that: A. price and 2uantity demanded are inversely related. B. the larger the number of buyers in a mar'et- the lo%er the product price. C. price and 2uantity demanded are directly related. D. consumers %ill buy more of a given product at high prices than they %ill at lo% prices. A . "epresented graphically- the mar'et demand curve is: A. steeper than any individual demand curve that comprises it. B. greater than the sum of the individual demand curves. C. the hori,ontal sum of individual demand curves. D. the vertical sum of individual demand curves. C &. 1conomists use the term $demand$ to refer to: A. a particular price62uantity combination on a stable demand curve. B. the total amount spent on a particular commodity over a stipulated time period. C. an up6sloping line on a graph that relates consumer purchases and product price. D. a schedule of various combinations of mar'et prices and 2uantities demanded. D (. @hen the price of a product increases- a consumer is able to buy less of it %ith a given money income. This describes: A. the cost effect. B. the inflationary effect. C. the income effect. D. the substitution effect. C *. An increase in the price of a product %ill reduce the amount purchased because: A. supply curves are up6sloping. B. the higher price means that real incomes have risen.
C. consumers %ill substitute other products for the one %hose price has risen. D. consumers substitute relatively high6priced products for relatively lo%6priced products. C .. The construction of demand and supply curves assumes that the primary variable that influences decisions to produce and purchase goods is: A. price. B. expectations. C. preferences. D. incomes. A 0. Alyssa rents ( movies per month %hen the price is ) .44 each and . movies per month %hen the price is )2.(4. Alyssa has demonstrated the: A. la% of price. B. la% of supply. C. actions of an irrational consumer. D. la% of demand. D 3. A demand curve is: A. the do%n%ard6sloping line relating the price of the good to the 2uantity demanded. B. the up%ard6sloping line relating price to 2uantity supplied. C. the curve that relates income to 2uantity demanded. D. sho%ing the same relationship bet%een t%o goods as a production possibilities frontier. A 14. /f the number of buyers in the mar'et decreases- the: A. demand in the mar'et %ill increase. B. demand in the mar'et %ill decrease. C. supply in the mar'et %ill increase. D. supply in the mar'et %ill decrease. B 11. A mar'et demand is: A. a vertical summation of individual demand curves. B. a hori,ontal summation of individual demand curves. C. not responsive to change in tastes and preferences. D. determined solely by the number of buyers and sellers in the mar'et. B 12. A higher price for batteries %ould tend to: A. increase the demand for flashlights. B. increase the demand for electricity. C. decrease the demand for electricity. D. D: increase the demand for batteries. B 1 . @hich of the follo%ing %ill not cause the demand for product G to change< A. A change in the price of close6substitute product B. B. An increase in consumer incomes. C. A change in the price of G. D. A change in consumer tastes. C 1&. @hich of the follo%ing %ould not shift the demand curve for beef< A. A %idely publicised study that indicates beef increases one$s cholesterol. B. A reduction in the price of cattle feed. C. An effective advertising campaign by por' producers. D. A change in the incomes of beef consumers. B 1(. /f the price of product ? increases- the demand curve for close6substitute product B %ill: A. shift do%n%ard to%ard the hori,ontal axis. B. shift to the left.
C. shift to the right. D. remain unchanged. C 1*. T%o goods are complements if a decrease in the price of one good: A. increases the 2uantity demanded of the other good. B. reduces the demand for the other good. C. reduces the 2uantity demanded of the other good. D. raises the demand for the other good. D 1.. /f goods A and B are complements- an increase in the price of A %ill result in: A. more of good A sold. B. more of good B sold. C. less of good B sold. D. no difference in the 2uantity sold of either good. C 10. /f the price of G declines- the demand curve for the complementary product B %ill: A. shift to the left. B. decrease. C. shift to the right. D. remain unchanged. C 13. @hich of the follo%ing is most li'ely to be an inferior good< A. Dur coats. B. Fsed clothing. C. 7tea'. D. Butter. B 24. /f K is a normal good- a rise in money income %ill shift the: A. supply curve for K to the left. B. supply curve for K to the right. C. demand curve for K to the left. D. demand curve for K to the right. D 21. /f consumer incomes increase- the demand for product K: A. %ill necessarily remain unchanged. B. may shift either to the right or left. C. %ill necessarily shift to the right. D. %ill necessarily shift to the left. B 22. Lou love peanut butter. Lou hear on the ne%s that (4H of the peanut crop in the 7outh has been %iped out%hich %ill cause the price to double by the end of the year. As a result: A. your demand for peanut butter %ill increase by the end of the year. B. your demand for peanut butter increases today. C. your demand for peanut butter falls as you loo' for a substitute good. D. you decide to give up peanut butter completely. B 2 . The term $2uantity demanded$ refers to: A. the entire series of prices and 2uantities that comprise the demand schedule. B. a situation %here the income and substitution effects do not apply. C. the amount of a product that %ill be purchased at some specific price. D. none of the above. C 2&. The la% of supply indicates that: A. producers %ill offer more of a product at high prices than they %ill at lo% prices. B. the product supply curve is do%n6sloping. C. consumers %ill purchase less of a good at high prices than they %ill at lo% prices. D. producers %ill offer more of a product at lo% prices than they %ill at high prices. A
2(. The supply of a good is negatively related to the: A. price of inputs used to ma'e the good. B. demand for the good by consumers. C. price of the good itself. D. amount of profit a firm can expect to receive from sale of the good. A 2*. A left%ard shift of a product supply curve might be caused by: A. an improvement in the relevant techni2ue of production. B. a decline in the prices of needed inputs. C. an increase in consumer incomes. D. some firms leaving an industry. D 2.. /f the number of sellers in a mar'et increases- the: A> demand in that mar'et %ill increase. B. supply in that mar'et %ill increase. C. supply in that mar'et %ill decrease. D. demand in that mar'et %ill decrease. Ans%er: B 20. ?ead is an important input in the production of crystal. /f the price of lead decreases- all else e2ual- %e %ould expect the supply of: A. crystal to be unaffected. B. crystal to decrease. C. crystal to increase. D. lead to increase. C 23. An improvement in production technology %ill: A. tend to increase e2uilibrium price. B. shift the supply curve to the left. C. shift the supply curve to the right. D. shift the demand curve to the left. C 4. $Because of unseasonably cold %eather- the supply of oranges has substantially decreased.$ This statement indicates that: A. consumers %ill be %illing and able to buy fe%er oranges at each possible price. B. the e2uilibrium 2uantity of oranges %ill rise. C. the amount of oranges that %ill be available at various prices has declined. D. the price of oranges %ill fall. C 1. An increase in the price of oranges %ould lead to: A. an increased supply of oranges. B. a reduction in the prices of inputs used in orange production. C. an increased demand for oranges. D. a movement up the supply curve for oranges. D 2. At the e2uilibrium price: A. buyers have an incentive to buy more. B. it is possible for there to be a shortage. C. firms have an incentive to increase production. D. the plans of buyers and sellers in the mar'et are mutually consistent D . @hich of the follo%ing statements is incorrect< A. /f demand increases and supply decreases- e2uilibrium price %ill rise. B. /f supply increases and demand decreases- e2uilibrium price %ill fall. C. /f demand decreases and supply increases- e2uilibrium price %ill rise. D. /f supply declines and demand remains constant- e2uilibrium price %ill rise. C
&. /n %hich of the follo%ing instances %ill the effect upon e2uilibrium price be indeterminate> that isdependent on the magnitude of the given shifts in supply and demand< A. Demand rises and supply rises. B. 7upply falls and demand remains constant. C. Demand rises and supply falls. D. 7upply rises and demand falls. A (. The data belo% sho%s supply and demand data for %heat: #8)9NdNs ( &( .. & (4 . (* *0 2 *1 *1 1 *. (. "efer to the above information. 12uilibrium price %ill be: A. )&. B. ) . C. )2. D. )1. C
1conomics may best be defined as: A. the interaction bet%een macro and micro considerations. B. the study of the behaviour of people and institutions in the production- distribution and consumption of scarce goods. C. the empirical testing of value :udgments through the use of induction and deduction. D. the use of policy to refute facts and hypotheses. B 2. The study of economics is primarily concerned %ith: A. 'eeping private businesses from losing money. B. demonstrating that capitalistic economies are superior to socialistic economies. C. choices that are made in see'ing to use scarce resources efficiently. D. determining the most e2uitable distribution of society$s output. C . 1conomic theories: A. are useless because they are not based upon laboratory experimentation. B. that are true for individual economic units are never true for the economy as a %hole. C. are generalisations based upon a careful observation of facts. D. are abstractions and therefore have no application to real situations. C &. @hich of the follo%ing is a correct statement< A. 1conomic concepts or la%s that are valid during depression are necessarily valid during prosperity. B.Though not 2uantitatively exact- economic la%s are useful because they allo% us to ma'e predictions that are meaningful and useful. C.1conomics is as scientific as physics and chemistry because economic la%s are as 2uantitatively precise as the la%s of physics or chemistry. D. 7ince economics is concerned %ith 2uestions of $ought$- it is a branch of applied ethics and is not scientific. B (. Eenerally spea'ing- it may be said that the inductive method: A. begins %ith hypotheses that are tested against real6%orld facts.
B. confuses correlation %ith cause and effect. C. moves from facts to generalisations or theory. D. cannot be applied to economic analysis. C *. The deductive method: A. begins %ith hypotheses that are tested against real6%orld facts. B. confuses correlation %ith cause and effect. C. begins %ith facts and moves to generalisations or theory. D. applies to the physical sciences but not to social sciences. A .. /n constructing models- economists: A. ma'e simplified assumptions. B. include all available information. C. must use mathematical e2uations. D. attempt to duplicate the real %orld. A 0. 1conomic models: A. are of limited use because they cannot be tested empirically. B. are limited to variables that are directly related to one another. C. emphasise basic economic relationships by abstracting from the complexities of the real %orld. D. are unrealistic and therefore are of no practical conse2uence. C 3. The term ceteris paribus means: A. if event A precedes event B- A has caused B. B. economics deals %ith facts- not values. C. other things being e2ual. D. prosperity inevitably follo%s recession. C 14. The basic purpose of the ceteris paribus assumption is to: A. allo% one to reason about the relationship bet%een t%o variables- %ithout the intrusion of other variables. B. allo% one to focus upon micro variables by ignoring macro variables. C. allo% one to focus upon macro variables by ignoring micro variables. D. determine %hether K causes L or vice versa. A 11. A $hypothesis$ is: A. a fundamental truth %hich all economists accept. B. a tentative- untested principle. C. the same as a normative statement. D. al%ays the result of induction. B 12. The term ceteris paribus means that: A. the associated statement is normative. B. many variables affect the variable under consideration. C. a number of relevant variables are assumed to be constant. D. %hen variable K increases- so does the related variable. C 1 . !icroeconomics is concerned %ith: A. the aggregate or total levels of income- employment and output. B. a detailed examination of specific economic units %hich comprise the economic system. C. the concealment of detailed information about specific segments of the economy. D. the establishment of an overall vie% of the operation of the economic system. B 1&. !acroeconomics approaches the study of economics from the vie%point of: A. the entire economy. B. governmental units. C. the operation of specific product and resource mar'ets.
D. individual firms. A 1(. @hich of the follo%ing is a microeconomic statement< A. The real domestic output increased by 2.(H last year. B. Fnemployment %as *.0H of the labour force last year. C. The price of %heat declined last year. D. The general price level increased by &H last year. C 1*. @hich of the follo%ing is a macroeconomic statement< A. The gross profit of all Australian businesses %as )102 billion last year. B. The price of beef declined by H last year. C. Eeneral !otors$ profit increased in 1300. D. The productivity of steel%or'ers increased by 1H in 1332. A 1.. A normative statement is one that: A. is based on the la% of averages. B. pertains only to microeconomics. C. pertains only to macroeconomics. D. is based upon value :udgments. D 10. A positive statement is: A. derived by induction. B. derived by deduction. C. sub:ective and based upon a value :udgment. D. ob:ective and based upon facts. D 13. $1conomics is concerned %ith using scarce productive resources efficiently in attempting to satisfy society$s material %ants.$ This statement is: A. positive- but incorrect. B. positive and correct. C. normative- but incorrect. D. normative and correct. B 24. Dean says that- $The imposition of a tax on beer %ill raise its price$. Gylie argues that $Taxes should be imposed on beer because university students drin' too much$. @e can conclude that: A. Dean$s statement is normative- but Gylie$s is positive. B. Gylie$s statement is normative- but Dean$s is positive. C. both statements are normative. D. both statements are positive. B 21. Achieving full employment is most li'ely to conflict %ith the goal of: A. price level stability. B. economic gro%th. C. an e2uitable distribution of income. D. economic security. A 22. Assume the relationship bet%een unemployment and inflation is such that a lo% rate of unemployment results in a high rate of inflation- and vice versa. +n the basis of this relationship- %e can say that: A. the goals of full employment and price level stability are compatible. B. the goals of full employment and price level stability are conflicting. C. society should see' to eliminate inflation- even if it means a high level D. of unemployment. 1. society should see' to eliminate unemployment- even if it means a high rate D. of inflation. B
2 . The $fallacy of composition$ states that: A. because economic systems are comprised of so many diverse economic units- economic la%s are necessarily inexact. B. the anticipation of a particular event can affect the nature or composition of the event- %hen it occurs. C. %hat is true for the individual must necessarily be true for the group. D. because event A precedes event B- A is necessarily the cause of B. C 2&. The $post6hoc$ fallacy states that: A. because event A precedes event B- A is necessarily the cause of B. B. the very attempt to accomplish a certain ob:ective may create conditions that prohibit the achievement of that goal. C. events may drastically alter plans> therefore- intentions and actual accomplishments may differ considerably. D. generalisations that are accurate at the level of microeconomics may be inaccurate at the level of macroeconomics. A 2(. The safest %ay for an individual to leave a burning theatre is to run for the nearest exit. /t istherefore- also the best means of escape for a large audience. This illustrates: A. the $post6hoc$ fallacy. B. @agner$s la%. C. the fallacy of composition. D. the fallacy of limited decisions. C 2*. @hich of the follo%ing pertains to the notion that generalisations %hich apply to individuals are not al%ays valid for a group< A. The la% of large numbers. B. The la% of averages. C. The fallacy of composition. D. The post6hoc fallacy. C 2.. The $post6hoc$ fallacy states that: A. positive statements are al%ays follo%ed by normative :udgments. B. normative statements can never be proven true or false. C. if one acts on one$s expectations- those expectations %ill al%ays be fulfilled. D. cause and effect can be determined merely by observing the se2uence of events. D 20. @hich of the follo%ing best illustrates the post6hoc fallacy< A. Because it %as 4 degrees today- / %or'ed up a s%eat playing tennis. B. / too' the day off %or' to go to the beach and that$s %hy it rained. C. Because it rained at the football game- my ne% s%eater got %et. D. Because / have studied diligently this semester- my grade average has improved. B 23. 1conomics deals primarily %ith the concept of: A. scarcity. B. poverty. C. change. D. po%er. A 4. 7carcity exists %hen: A. there is less than an infinite amount of a resource or good. B. society can meet the %ants of every individual.
C. there is less of a good or resource available than people %ish to have. D. the government fails to produce goods. C 1. A rational decision ma'er ta'es an action only if: A. marginal benefit is less than the marginal cost. B. marginal benefit is greater than the marginal cost. C. average benefit is greater than the average cost. D. marginal benefit is greater than the average cost but less than the marginal cost. B 2. !a'ing decisions $at the margin$ means that people: A. ma'e those decisions that do not impose a marginal cost. B. evaluate ho% easily a decision can be reversed if problems arise. C. compare the marginal costs and marginal benefits of each decision. D. can ignore the cost of forgoing an alternative. C . +ne difficulty economists face that some other scientists do not- is that: A. unli'e other sciences- economic studies must include the largest economic player- the government. B. economists receive less government funding than other scientists. C. corporations are reluctant to disclose information necessary for economic research. D. experiments are often difficult in economics. D &. A macroeconomist %ould study each of the follo%ing- except the: A. impact of minimum %age la%s on employment in the fast food industry. B. effect of changes in savings rates on ED#. C. impact of monetary policy on the rate of inflation. D. effect of tax policy on the rate of economic gro%th. A (. The fact that economic generalisations are abstract renders them impractical and useless. A. True B. Dalse B *. /f economic theories are solidly based upon relevant facts- then there can be no 2uestion as to the character of appropriate economic policy. A. True B. Dalse True Dalse B .. #ositive statements are expressions of value :udgments. A. True B. Dalse B 0. The primary ob:ective of economic science is to help businesspeople operate their firms profitably. A. True B. Dalse B 3. The basic goals of Australian capitalism are al%ays complementary- in that the achievement of any one goal simultaneously furthers the attainment of other basic goals. A. True B. Dalse B &4. A rational decision ma'er ta'es an action if and only if the marginal cost exceeds the marginal benefit. A. True B. Dalse B &1. 1conomics is the study of ho% fairly goods and services are distributed %ithin society.
A. True B. Dalse B &2. 7carcity means that there is less of a good or resource available than people %ish to have. A. True B. Dalse B Dor economists- the %ord CutilityC means pleasure and satisfaction /n economics- the pleasure- happiness- or satisfaction received from a product is called %hat< utility @hen economists say that people act rationally in their self interest- they mean that individuals do %hat< loo' for and pursue opportunities to increase their utility According to 1merson: C@ant is a gro%ing giant %hom the coat of ;ave %as never large enough to cover.C According to economists- C@antC exceeds C;aveC because %hat< productive resources are limited According to economists- economic self6interest is %hat< a reality that underlies economic behavior @hen entering a building- 7am diverts his path to go through an open door rather than ma'e the physical effort to open the closed door that is directly in his path. This is an example of %hat< marginal benefit6marginal cost analysis Boe sold gold coins for )1444 that he bought a year ago for )1444. ;e says- CAt least / didn$t lose any money on my financial investment.C ;is economist friend points out that in effect he did lose money- because he could have received a percent return on the )1444 if he had bought a ban' certificate of deposit instead of the coins. The economist$s analysis in this case incorporates the idea of %hat< opportunity costs A person should consume more of something %hen its marginal means %hat< benefit exceeds its marginal cost 1conomics may best be defined as %hat< the social science concerned %ith ho% individualsinstitutions- and society ma'e optimal choices under conditions of scarcity The study of economics is primarily concerned %ith %hat< choices that are made in see'ing the best use of resources The economic perspective refers to %hat< the ma'ing of purposeful decisions in a context of marginal costs and marginal benefits. %hat does the economic perspective entail< a comparison of marginal benefits and marginal costs in decision ma'ing @hat does purposeful behavior suggest< individuals %ill ma'e different choices because of different desired outcomes #urposeful behavior means that: people %eigh costs and benefits to ma'e decisions. 1conomics involves marginal analysis because: most decisions involve changes from the present situation @hy should you decide to go to a movie< if the marginal benefit of the movie exceeds its marginal cost. !arginal costs exist because: the decision to engage in one activity means forgoing some other activity. The assertion that CThere is no free lunchC means %hat< all production involves the use of scarce resources and thus the sacrifice of alternative goods. Consumers spend their incomes to get the maximum benefit or satisfaction from the goods and services they purchase. @hat is this a reflection of< purposeful behavior /f someone produced too much of a good- this %ould suggest that: the good %as produced to the point %here its marginal cost exceeded its marginal benefit.
1ven though local ne%spapers are very inexpensive- people rarely buy more than one of them each day. @hat does this fact imply< implies that- for most people- the marginal benefit of reading a second ne%spaper is less than the marginal cost. /n deciding %hether to study for an economics 2ui, or go to a movie- one is confronted by the idea8s9 of %hat< scarcity and opportunity costs @hich one of the follo%ing expressions best states the idea of opportunity cost< CThere is no such thing as a free lunch.C @hat is an economic explanation for %hy most college6aged movie stars do not attend college< the opportunity cost in terms of reduced income is too great 7uppose that a university decides to spend )1 million to upgrade personal computers and scientific e2uipment for faculty rather than spend )1 million to expand par'ing for students. This example illustrates %hat< +pportunity costs @hich of the follo%ing most closely relates to the idea of opportunity costs< tradeoffs 1conomists contend that most economic decisions are %hat< purposeful Alex sees that his neighbors$ la%ns all need mo%ing. ;e offers to provide the service in exchange for a %age of )24 per hour. 7ome neighbors accept Alex$s offer and others refuse. 1conomists %ould describe Alex$s behavior as: rational self6interest- because he attempting to increase his o%n income by identifying and satisfying someone else$s %ants. Gara %as out :ogging and despite being tired- decided to run one more mile. Based on her actions- economists %ould conclude that Gara: decided that the marginal benefit of running one more mile %ould out%eigh the cost of the additional mile. @hat are 1conomic theories< are generali,ations based on a careful observation of facts. /n constructing models- %hat do economists do< ma'e simplifying assumptions @hat do 1conomic models do< emphasi,e basic economic relationships by purposefully simplifying the complexities of the real %orld. @hat does the term Cceteris paribusC mean< other things e2ual @hat is the basic purpose of the other6things6e2ual assumption< allo% one to reason about the relationship bet%een variables K and L %ithout the intrusion of variable Q. 7uppose an economist says that C+ther things e2ual- the lo%er the price of bananas- the greater the amount of bananas purchased.C This statement indicates that: all factors other than the price of bananas 8for example- consumer tastes and incomes9 are assumed to be constant. The term Cother things e2ualC means that: a number of relevant variables are assumed to be constant !acroeconomics approaches the study of economics from the vie%point of: the entire economy @hat is associated %ith macroeconomics< an empirical investigation of the general price level and unemployment rates since 1334 The problems of aggregate inflation and unemployment are: ma:or topics of macroeconomics. @hich of the follo%ing statements pertains to macroeconomics< A. Because the minimum %age %as raised- !rs. +lsen decided to enter the labor force. B. A decline in the price of soybeans caused farmer @ane' to plant more land in %heat. C. 5ational income gre% by 2.. percent last year. D. The #ump'in Center 7tate Ban' increased its interest rate on consumer loans by 1 percentage point. C. 5ational income gre% by 2.. percent last year. @hat can !acroeconomics best be described as< study of the large aggregates of the economy or the economy as a %hole. @hat is !icroeconomics is concerned %ith< a detailed examination of specific economic units that ma'e up the economic system. !icroeconomics: is concerned %ith individual economic units and specific mar'ets. @hich of the follo%ing is a macroeconomic statement<
A. The gross profits of all F.7. businesses %ere )102 billion last year. B. The price of beef declined by percent last year. C. Eeneral !otors$ profits increased last year. D. The productivity of steel%or'ers increased by 1 percent last year. A. The gross profits of all F.7. businesses %ere )102 billion last year. @hich of the follo%ing is a microeconomic statement< A. The real domestic output increased by 2.( percent last year. B. Fnemployment %as *.0 percent of the labor force last year. C. The price of personal computers declined last year. D. The general price level increased by & percent last year. C. The price of personal computers declined last year. @hich of the follo%ing statements is true< A. !icroeconomics focuses on specific decision6ma'ing units of the economy> macroeconomics examines the economy as a %hole. B. !acroeconomics focuses on specific decision6ma'ing units of the economy> microeconomics examines the economy as a %hole. C. 1very topic in economics is either a microeconomic or a macroeconomic issue> a topic cannot be both. D. Topics in microeconomics have public policy implications> topics in macroeconomics do not. A. !icroeconomics focuses on specific decision6ma'ing units of the economy> macroeconomics examines the economy as a %hole. A normative statement is one that: is based on value :udgments. @hich of the follo%ing is a normative statement< A. The temperature is high today. B. The humidity is high today. C. /t is too hot to play tennis today. D. /t %ill cool off later this evening. C. /t is too hot to play tennis today. A positive statement is one that is: ob:ective and is based on facts. @hich of the follo%ing is a positive statement< A. The humidity is too high today. B. /t is too hot to :og today. C. The temperature is 32 degrees today. D. 7ummer evenings are nice %hen it cools off. C. The temperature is 32 degrees today. @hat are 5ormative statements concerned %ith< %hat ought to be. @hat are #ositive statements concerned %ith< %hat is. !ost of the disagreement among economists involves: 5ormative statements Ben says that CAn increase in the tax on beer %ill raise its price.C ;olly argues that CTaxes should be increased on beer because college students drin' too much.C @e can conclude that: ;olly$s statement is normative- but Ben$s is positive. @hat is the economi,ing problem< the need to ma'e choices because economic %ants exceed economic means. The economi,ing problem is one of deciding ho% to ma'e the best use of: limited resources to satisfy virtually unlimited %ants. @hen the economist says that economic %ants are insatiable- this means that: these %ants are virtually unlimited and therefore incapable of complete satisfaction. @hy does the scarcity problem persist< persists because economic %ants exceed available productive resources. The alternative combination of t%o goods %hich a consumer can purchase %ith a given money income is sho%n by %hat< a budget line.
@hat does a budget line sho%< all possible combinations of t%o goods that can be purchasedgiven money income and the prices of the goods. *1. "efer to the budget line sho%n in the diagram above. /f the consumer$s money income is )24- the: A. prices of C and D cannot be determined. B. price of C is )2 and the price of D is )&. C. consumer can obtain a combination of ( units of both C and D. D. price of C is )& and the price of D is )2. D. price of C is )& and the price of D is )2. *2. "efer to the budget line sho%n in the diagram above. /f the consumer$s money income is )24- %hich of the follo%ing combination of goods is unattainable< A. & units of C- and * units of D. B. ( units of C- and no units of D. C. 1 unit of C- and 0 units of D. D. 2 units of C- and * units of D. A. & units of C- and * units of D. * . "efer to the budget line sho%n in the diagram above. The absolute value of the slope of the budget line is: A. !FCJ!FD. B. one6half. C. #DJ#C. D. #CJ#D. D. #CJ#D. /n moving along a given budget line: the prices of both products and money income are assumed to be constant. An increase in money income does %hat< shifts the consumer$s budget line to the right. **. The shift of the budget line from cd to ab in the above figure is consistent %ith: A. decreases in the prices of both ! and 5. B. an increase in the price of ! and a decrease in the price of 5. C. a decrease in money income. D. an increase in money income. a decrease in money income. Any combination of goods lying outside of the budget line is %hat< is unattainable- given the consumer$s income. *0. 7uppose you have a money income of )14- all of %hich you spend on Co'e and popcorn. /n the above diagram- the prices of Co'e and popcorn respectively are: A. ).(4 and )1.44. B. )1.44 and ).(4. C. )1.44 and )2.44. D. ).&4 and ).(4. A. ).(4 and )1.44. A budget line sho%s the: alternative combinations of t%o goods that a consumer can purchase %ith a given money income. +ther things e2ual- an increase in a consumer$s money income does %hat< shifts her budget line right%ard because she can no% purchase more of both products. @hat does the slope of a budget line reflect< price ratio of the t%o products .2. 7uppose 1lroy$s budget line is as sho%n on the above diagram. /f his tastes change in favor of Co'e and against popcorn- the budget line %ill: be unaffected. Assume the price of product L 8the 2uantity of %hich is on the vertical axis9 is )1( and the price of product K 8the 2uantity of %hich is on the hori,ontal axis9 is ) . Also assume that money income is )*4. The absolute value of the slope of the resulting budget line: is 1J(. 7uppose that Bulia receives a )24 gift card for the local coffee shop- %here she only buys lattes and muffins. /f the price of a latte is )& and the price of a muffin is )2- then %e can conclude that Bulia: can buy ( lattes or 14 muffins if she chooses to buy only one of the t%o goods.
@hich of the follo%ing is a land resource< A. a computer programmer B. a computer C. silicon 8sand9 used to ma'e computer chips D. a piece of soft%are used by a firm C. silicon 8sand9 used to ma'e computer chips @hich of the follo%ing is a labor resource< A. a computer programmer B. a computer C. silicon 8sand9 used to ma'e computer chips D. a piece of soft%are used by a firm A. a computer programmer @hich of the follo%ing is a capital resource< A. a computer programmer B. a corporate bond issued by a computer manufacturer C. silicon 8sand9 used to ma'e computer chips D. a piece of soft%are used by a firm D. a piece of soft%are used by a firm The four factors of production are: land- labor- capital- and entrepreneurial ability @hich of the follo%ing lists includes only capital resources 8and therefore no labor or land resources9< A. an ice arena> a professional hoc'ey player> hoc'ey uniforms. B. the o%ner of a ne% startup firm> a chemistry lab> a researcher. C. a hydroelectric dam> %ater behind the dam> po%er lines. D. autos o%ned by a car rental firm> computers at the car rental agency> the vans that shuffle rental customers to and from the airport. D. autos o%ned by a car rental firm> computers at the car rental agency> the vans that shuffle rental customers to and from the airport. @hy is money not an economic resource< money- as such- is not productive. 1conomic resources are also called: factors of production. @hich of the follo%ing is real capital< A. a pair of stoc'ings B. a construction crane C. a savings account D. a share of /B! stoc' B. a construction crane The main function of the entrepreneur is to: innovate @hich of the follo%ing is not a main function of the entrepreneur< A. ma'e routine pricing decisions. B. innovate. C. assume the ris' of economic losses. D. ma'es strategic business decisions. A. ma'e routine pricing decisions. The production possibilities curve illustrates the basic principle that: if all the resources of an economy are in use- more of one good can be produced only if less of another good is produced. @hich of the follo%ing %ill not produce an out%ard shift of the production possibilities curve< A. an upgrading of the 2uality of a nation$s human resources B. the reduction of unemployment C. an increase in the 2uantity of a society$s labor force D. the improvement of a society$s technological 'no%ledge B. the reduction of unemployment Fnemployment is illustrated by %hat< by a point inside the production possibilities curve. /f the production possibilities curve is a straight line: economic resources are perfectly substitutable bet%een the production of the t%o products. A production possibilities curve illustrates: 7carcity
A production possibilities curve sho%s: the maximum amounts of t%o goods that can be produced assuming the full use of available resources.
&. @hich of the follo%ing is not an economic cost< A. %ages. B. rents. C. economic profits. D. payments made to the entrepreneur for organi,ing production.
AAC7B: Analytical 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: Dive fundamental 2uestions (. /f competitive industry Q is ma'ing substantial economic profit- output %ill: A. fall in industry Q- and firms %ill li'ely leave the mar'et. B. fall in all industries except industry Q. C. expand in industry Q- as more resources %ill move to that industry. D. expand in industry Q- but no ne% firms %ill enter the mar'et.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Application ?earning +b:ective: 26 ?earning +b:ective: 26& Topic: Dive fundamental 2uestions *. Drom society$s point of vie% the economic function of profits and losses is to: A. promote the e2ual distribution of real assets and %ealth. B. achieve full employment and price level stability. C. contribute to a more e2ual distribution of income. D. reallocate resources from less desired to more desired uses.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 ?earning +b:ective: 26& Topic: Dive fundamental 2uestions
.. /n a mar'et economy a significant change in consumers$ desire for product K %ill: A. alter the profits or losses received by certain firms. B. cause a reallocation of scarce resources. C. cause some industries to expand and others to contract. D. do all of these.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Application ?earning +b:ective: 26 ?earning +b:ective: 26& Topic: Dive fundamental 2uestions 0. 1conomic profits in an industry suggest the industry: A. can earn more profits by increasing product price. B. should be larger to better satisfy consumers$ desire for the product. C. has excess production capacity. D. is the si,e that consumers %ant it to be.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Analysis ?earning +b:ective: 26 Topic: Dive fundamental 2uestions 3. 1conomic profits and losses: A. are both considered by economists to be a part of production costs. B. are essential to the reallocation of resources from less desired goods to more desired goods. C. have no influence on the composition of the domestic output. D. e2uali,e the distribution of income in the long run.
AAC7B: Analytical 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 ?earning +b:ective: 26& Topic: Dive fundamental 2uestions
&4. /f consumer desire for product K increases- all of the follo%ing %ill occur except: A. an increase in the profits of industry K. B. an increase in the 2uantity of resources employed by industry K. C. an increase in the output of industry K. D. a decrease in the 2uantity of resources employed in industry K.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Application ?earning +b:ective: 26 ?earning +b:ective: 26& Topic: Dive fundamental 2uestions &1. An increase in consumer desire for stra%berries is most li'ely to: A. increase the number of stra%berry pic'ers needed by farmers.
B. reduce the supply of stra%berries. C. reduce the number of people %illing to pic' stra%berries. D. reduce the need for stra%berry pic'ers.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Application ?earning +b:ective: 26 ?earning +b:ective: 26& Topic: Dive fundamental 2uestions &2. /f competitive industry L is incurring substantial losses- output %ill: A. expand as resources move to%ard industry L . B. contract as resources move to%ard industry L . C. contract as resources move a%ay from industry L . D. expand as resources move a%ay from industry L .
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 ?earning +b:ective: 26& Topic: Dive fundamental 2uestions
& . The economic function of profits and losses is to: A. bring about a more e2ual distribution of income. B. signal that resources should be reallocated. C. eliminate small firms and reduce competition. D. tell government %hich industries need to be subsidi,ed.
AAC7B: Analytical 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 ?earning +b:ective: 26& Topic: Dive fundamental 2uestions &&. /n a competitive economy- prices: A. influence consumers in their purchases of goods and services. B. influence businesses in their purchases of economic resources. C. influence %or'ers in ma'ing occupational choices. D. do all of these.
AAC7B: Analytical 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: Dive fundamental 2uestions
&(. /f a competitive industry is neither expanding nor contracting- %e %ould expect: A. total revenue to be ,ero. B. economic profits to be ,ero. C. total opportunity cost to be ,ero. D. more resources to flo% to that industry.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: Dive fundamental 2uestions
&*. 7uppose industry A is reali,ing substantial economic profit. @hich of the follo%ing best describes %hat %ill happen in this competitive mar'et< A. Dirms %ill leave the industry and output %ill fall. B. Dirms %ill enter the industry and output %ill fall. C. Dirms %ill leave the industry and output %ill rise. D. Dirms %ill enter the industry and output %ill rise.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Application ?earning +b:ective: 26& Topic: Dive fundamental 2uestions &.. The competitive mar'et system: A. encourages innovation because government provides tax brea's and subsidies to those %ho develop ne% products or ne% productive techni2ues. B. discourages innovation because it is difficult to ac2uire additional capital in the form of ne% machinery and e2uipment. C. discourages innovation because firms %ant to get all the profits possible from existing machinery and e2uipment. D. encourages innovation because successful innovators are re%arded %ith economic profits.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26& Topic: Dive fundamental 2uestions &0. /n a mar'et economy the distribution of output %ill be determined primarily by: A. consumer needs and preferences. B. the 2uantities and prices of the resources that households supply. C. government regulations that provide a minimum income for all. D. a social consensus as to %hat distribution of income is most e2uitable.
AAC7B: Analytical 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: Dive fundamental 2uestions
&3. The most efficient combination of resources in producing any output is the combination that: A. comes closest to using the same 2uantities of land- labor- capital- and entrepreneurial ability. B. can be obtained for the smallest money outlay. C. uses the smallest total 2uantity of all resources. D. conserves most on the use of labor.
AAC7B: Analytical 7'ills Bloom$s: Gno%ledge ?earning +b:ective: 26 Topic: Dive fundamental 2uestions Ans%er the next 2uestion8s9 using the follo%ing data %hich sho% all available techni2ues for producing 24 units of a particular commodity:
(4. "efer to the above data. /n vie% of the indicated resource prices- the economically most efficient production techni2ue8s9 is 8are9 techni2ue8s9: A. O1. B. O2 and O&. C. O . D. O1 and O .
AAC7B: Analytical 7'ills Bloom$s: Analysis ?earning +b:ective: 26 Topic: Dive fundamental 2uestions
(1. "efer to the above data. Assuming that the firm is motivated by self6interest and that the 24 units %hich can be produced %ith each techni2ue can be sold for )2 per unit- the firm %ill: A. reali,e an economic profit of )14. B. reali,e an economic profit of )&. C. not earn any economic profit. D. close do%n rather than incur a loss by producing.
AAC7B: Analytical 7'ills Bloom$s: Application ?earning +b:ective: 26 Topic: Dive fundamental 2uestions
(2. "efer to the above data. /f a ne% production techni2ue is developed that enables a firm to produce 24 units of output %ith units of land- of labor- 1 of capital- and 2 of entrepreneurial ability- this techni2ue %ould: A. not be adopted because- although it reduces production costs- it does not increase profit. B. be adopted because it %ould lo%er production costs and increase economic profit. C. not be adopted because it entails higher production costs than other available techni2ues. D. be adopted- even though economic profits %ould be reduced slightly.
AAC7B: Analytical 7'ills Bloom$s: Analysis ?earning +b:ective: 26 Topic: Dive fundamental 2uestions Ans%er the next 2uestion8s9 on the basis of the follo%ing information: 7uppose 4 units of product A can be produced by employing :ust labor and capital in the four %ays sho%n belo%. Assume the prices of labor and capital are )2 and ) respectively.
( . "efer to the above information. @hich techni2ue is economically most efficient in producing A< A. / B. // C. /// D. /A
AAC7B: Analytical 7'ills Bloom$s: Analysis ?earning +b:ective: 26 Topic: Dive fundamental 2uestions (&. "efer to the above information. /f the price of product A is )4.(4- the firm %ill reali,e: A. an economic profit of )&. B. an economic profit of )2. C. an economic profit of )*. D. a loss of ) .
AAC7B: Analytical 7'ills Bloom$s: Application ?earning +b:ective: 26 Topic: Dive fundamental 2uestions ((. /n a competitive mar'et economy firms %ill select the least6cost production techni2ue because:
A. such choices %ill result in the full employment of available resources. B. to do so %ill maximi,e the firms$ profits. C. this %ill prevent ne% firms from entering the industry. D. Cdollar votingC by consumers mandates such a choice.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: Dive fundamental 2uestions
(*. The mar'et system$s ans%er to the fundamental 2uestion C@hat %ill be produced<C is essentially: A. CEoods and services that are profitable.C B. C?o% cost goods and services.C C. CEoods and service that can be produced using large amounts of capital.C D. CEoods and services that possess lasting value.C
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: Dive fundamental 2uestions (.. The mar'et system$s ans%er to the fundamental 2uestion C;o% %ill the goods and services be produced<C is essentially: A. C@ith as much machinery as possible.C B. CFsing the latest technology.C C. CBy exploiting labor.C D. CFsing the least6cost production techni2ues.C
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: Dive fundamental 2uestions (0. The mar'et system$s ans%er to the fundamental 2uestion C@ho %ill get the goods and services<C is essentially: A. CThose %illing and able to pay for them.C B. CThose %ho physically produced them.C C. CThose %ho most need them.C D. CThose %ho get utility from them.C
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26
Topic: Dive fundamental 2uestions
(3. The mar'et system$s ans%er to the fundamental 2uestion C;o% %ill the system accommodate change<C is essentially: A. CThrough government leadership and direction.C B. CThrough the guiding function of prices and the incentive function of profits.C C. CThrough training and retraining programs.C D. CThrough random trial and error.C
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26& Topic: Dive fundamental 2uestions *4. The mar'et system$s ans%er to the fundamental 2uestion C;o% %ill the system promote progress<C is essentially: A. CThrough government funded research programs.C B. CThrough the redistribution of income to promote greater e2uality.C C. CThrough training and retraining programs.C D. CThrough the profit potential that encourages development of ne% technology.C
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26& Topic: Dive fundamental 2uestions *1. The advent of DADs has virtually demolished the mar'et for videocassettes. This is an example of: A. creative destruction. B. derived demand. C. capital accumulation. D. the difference bet%een normal and economic profits.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Application ?earning +b:ective: 26& Topic: Dive fundamental 2uestions
*2. Consumer sovereignty refers to the: A. fact that resource prices are higher than product prices in capitalistic economies. B. idea that the pursuit of self6interest is in the public interest. C. idea that the decisions of producers must ultimately conform to consumer demands.. D. fact that a Dederal agency exists to protect consumers from harmful and defective products.
AAC7B: Analytical 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: Dive fundamental 2uestions * . The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a mar'et economy. This statement best describes the concept of: A. derived demand. B. consumer sovereignty. C. the invisible hand. D. mar'et failure.
AAC7B: Analytical 7'ills Bloom$s: Gno%ledge ?earning +b:ective: 26 Topic: Dive fundamental 2uestions *&. @hich of the follo%ing is not one of the five fundamental 2uestions< A. @hat prices %ill be charged for goods and services< B. @ho %ill get the goods and services< C. @hat goods and services %ill be produced< D. ;o% %ill the system promote progress<
AAC7B: Analytical 7'ills Bloom$s: Gno%ledge ?earning +b:ective: 26 7tatus: 5e% Topic: Dive fundamental 2uestions
*(. CConsumer sovereigntyC means that: A. buyers can dictate the prices at %hich goods and services %ill be purchased. B. advertising is ineffective because consumers already 'no% %hat they %ant. C. buyers control the 2uality of goods and services through regulatory agencies. D. buyers determine %hat %ill be produced based on their Cdollar votesC for the goods and services offered by sellers.
AAC7B: Analytical 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 7tatus: 5e% Topic: Dive fundamental 2uestions **. @hich of the follo%ing best describes the invisible6hand concept< A. The desires of resource suppliers and producers to further their o%n self6interest %ill
automatically further the public interest. B. The nonsubstitutability of resources creates a conflict bet%een private and public interests and calls for government intervention. C. The mar'et system is the best system for overcoming the scarce resources6unlimited %ants problem. D. Central direction by the government %ill improve resource allocation in a capitalistic economy.
AAC7B: Analytical 7'ills Bloom$s: Gno%ledge ?earning +b:ective: 26 Topic: /nvisible hand *.. The invisible hand refers to the: A. fact that the F.7. tax system redistributes income from rich to poor. B. notion that- under competition- decisions motivated by self6interest promote the social interest. C. tendency of monopolistic sellers to raise prices above competitive levels. D. fact that government controls the functioning of the mar'et system.
AAC7B: Analytical 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: /nvisible hand
*0. The invisible6hand concept suggests that: A. mar'et failures imply the need for a national economic plan. B. big businesses are inherently more efficient than small businesses. C. the competitiveness of a capitalistic mar'et economy invariably diminishes over time. D. assuming competition- private and public interests %ill coincide.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: /nvisible hand *3. The invisible6hand concept suggests that: A. changes in product demands are only randomly reflected in changes in the demands for resources. B. profit maximi,ation is inconsistent %ith an efficient allocation of resources. C. government action is necessary to correct for mar'et failures. D. %hen firms maximi,e their profits- society$s output %ill also be maximi,ed.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding
?earning +b:ective: 26 Topic: /nvisible hand .4. T%o ma:or virtues of the mar'et system are that it: A. allocates resources efficiently and allo%s economic freedom. B. results in an e2uitable personal distribution of income and al%ays maintains full employment. C. results in price level stability and a fair personal distribution of income. D. eliminates discrimination and minimi,es environmental pollution.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: /nvisible hand
.1. The mar'et system: A. produces considerable inefficiency in the use of scarce resources. B. effectively harnesses the incentives of %or'ers and entrepreneurs. C. is inconsistent %ith freedom of choice in the long run. D. has slo%ly lost ground to emerging command systems.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 Topic: /nvisible hand .2. According to the concept of the Cinvisible hand-C if 7usie opens and operates a profitable childcare center- then: A. government should regulate the business to ensure 2uality. B. the profit 7usie earns indicates that she is overcharging for her services. C. she has served society$s interests by providing a desired good or service. D. this demonstrates that consumer sovereignty is not present in this mar'et.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Application ?earning +b:ective: 26 7tatus: 5e% Topic: /nvisible hand . . The invisible hand promotes society$s interests because: A. individuals pursuing their self6interest %ill try to produce goods and services that people in society %ant and are %illing to purchase. B. individuals %ill produce goods for others out of concern for their fello% human beings. C. it ma'es sure that everyone %ins from competition in the mar'et. D. government regulation pushes business into producing the right mix of goods and services.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 26 7tatus: 5e% Topic: /nvisible hand
.&. The coordination problem in the centrally planned economies refers to the idea that: A. planners had to direct re2uired inputs to each enterprise. B. the price level and the level of employment %ere inversely related. C. the immediate effect of more investment %as less consumption. D. exports had to be e2ual to imports for a central plan to %or'.
AAC7B: Analytical 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 261 Topic: Demise of the command systems .(. CFnder central planning- some group has to decide ho% to get the necessary inputs produced in the right amounts and delivered to the right places at the right time. This is a nearly impossible tas' %ithout mar'ets and profits.C This 2uotation best identifies the: A. incentive problem under central planning. B. coordination problem under central planning. C. self6sufficiency dilemma under communism. D. resource overcommitment problem under communism.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Application ?earning +b:ective: 261 Topic: Demise of the command systems .*. CBecause the outputs of many industries are the inputs to other industries- the failure of any single industry to fulfill the output 2uantities specified in the central plan caused a chain6reaction of adverse repercussions on production.C This 2uotation best identifies the: A. incentive problem under central planning. B. self6sufficiency dilemma under communism. C. resource overcommitment problem under communism. D. coordination problem under central planning.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Application ?earning +b:ective: 261 Topic: Demise of the command systems
... The incentive problem under communist central planning refers to the idea that: A. planners had to direct re2uired inputs to each enterprise. B. %or'ers- managers- and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing ne% and improved products. C. the immediate effect of more investment %as less consumption. D. exports had to be e2ual to imports for a central plan to %or'.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 261 Topic: Demise of the command systems .0. 7uppose that an individual sees a tremendous opportunity to produce and sell a ne% productbut dismisses the idea because there is no %ay to exploit this opportunity for personal gain. This situation best identifies the: A. coordination problem under communist central planning. B. self6sufficiency dilemma under communism. C. asymmetric information problem under communism. D. incentive problem under communist central planning.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Application ?earning +b:ective: 261 Topic: Demise of the command systems .3. 7hortages and unmet demand provide opportunities for individuals and firms to profit under capitalism- but they present no such opportunities under central planning. This reality represents central planning$s: A. incentive problem. B. coordination problem. C. paradox of value. D. K6efficiency problem.
AAC7B: "eflective Thin'ing 7'ills Bloom$s: Fnderstanding ?earning +b:ective: 261 Topic: Demise of the command systems
04. /nnovation lagged in the centrally planned economies because:
Type: T Topic: 1: &1. !/: 1. 1 (. The above data are for:
A9 the long run. C9 both the short run and the long run. the short run. D9 the intermediate mar'et period only. Ans%er: B Type: T Topic: 1: &136&24 !/: 1.(61.* 1 *. "efer to the above data. At ( units of output average fixed cost- average variable cost- and average total cost are: A9 )14- )*4- and ).4 respectively. C9 )14- ).4- and )04 respectively. )(4- )&4- and )34 respectively. D9 )(- )2(- and ) 4 respectively. Ans%er: A Type: T Topic: 1: &13 !/: 1.( 1 .. "efer to the above data. The marginal cost of the fifth unit of output is: A9 )04. )34. C9 )(4. D9 )24. Ans%er: A Type: T Topic: 1: &136&24 !/: 1.(61.* 1 0. "efer to the above data. /f product price is ).(- the firm %ill produce: A9 units of output. & units of output. C9 ( units of output. D9 * units of output. Ans%er: B Type: T Topic: 1: &136&24 !/: 1.(61.* 1 3. "efer to the above data. Eiven the ).( product price- at its optimal output the firm %ill: A9 reali,e a )2( economic profit. C9 incur a )2( loss. reali,e a ) 4 economic profit. D9 reali,e a ) 4 loss. Ans%er: B
Type: A Topic: 1: &2& !/: 104 1&4. A purely competitive firm$s short6run supply curve is: A9 the up%ard sloping portion of its marginal cost curve. the up%ard sloping portion of its average variable cost curve. C9 its marginal cost curve above average variable cost. D9 its average total cost curve. Ans%er: C Type: A Topic: 1: &2& !/: 104 1&1. /n the short run- a purely competitive firm %ill earn a normal profit %hen: A9 # = AAC. # V !C. C9 that firm$s !" = mar'et e2uilibrium price. D9 # = ATC. Ans%er: D Fse the follo%ing to ans%er 2uestions 1&261&.: The follo%ing table applies to a purely competitive industry composed of 144 identical firms.
Type: T Topic: 1: &2( !/: 101 1&2. "efer to the above table. The e2uilibrium price in this purely competitive mar'et is:
A9 )(. )&. C9 ) . D9 )2. Ans%er: C Type: T Topic: 1: &2( !/: 101 1& . "efer to the above table. At the e2uilibrium price- each of the 144 firms in this industry %ill produce: A9 *44-444 units of output. C9 *-444 units of output *4-444 units of output. D9 *44 units of output. Ans%er: C Type: T Topic: 1: &2(6&2* !/: 1016102 1&&. "efer to the above table. Dor each of the 144 firms in this industry- marginal revenue and total revenue %ill be: A9 )& and )&44- respectively. C9 )& and )24-444- respectively. ) and ) 4-444- respectively. D9 ) and )10-444- respectively. Ans%er: D Type: T Topic: 1: &2(6&2* !/: 1016102 1&(. "efer to the above table. /f each of the 144 firms in the industry is maximi,ing its profiteach must have a marginal cost of: A9 )(. )&. C9 ) . D9 )2. Ans%er: C Type: T Topic: 1: &2(6&2* !/: 1016102 1&*. "efer to the above table. /f each of the 144 firms in the industry is maximi,ing its profit and earning only a normal profiteach must have a total cost of: A9 )10-444. )24-444. C9 )22-444. D9 )2&-444. Ans%er: A Type: T Topic: 1: &2(6&2* !/: 1016102 1&.. "efer to the above table. /f each of the 144 firms in the industry is maximi,ing its profit and earning only a normal profiteach must have an average total cost of: A9 )2. ) . C9 )&. D9 )(. Ans%er: B #rofit maximi,ing in long run Type: A Topic: & 1: &2. !/: 10 1&0. 7uppose a firm in a purely competitive mar'et discovers that the price of its product is above its minimum AAC point but every%here belo% ATC. Eiven this- the firm: A9 minimi,es losses by producing at the minimum point of its AAC curve. maximi,es profits by producing %here !" = ATC. C9 should close do%n immediately. D9 should continue producing in the short run- but leave the industry in the long run. Ans%er: D Type: A Topic: & 1: &2. !/: 10 1&3. @hich of the follo%ing is true concerning purely competitive industries< A9 There %ill be economic losses in the long run because of cut6throat competition.
1conomic profits %ill persist in the long run if consumer demand is strong and stable. C9 /n the short run- firms may incur economic losses or earn economic profits- but in the long run they earn normal profits. D9 There are economic profits in the long run- but not in the short run. Ans%er: C Type: A Topic: & 1: &20 !/: 10& 1(4. /f a purely competitive firm is producing at the !" = !C output level and earning an economic profit- then: A9 the selling price for this firm is above the mar'et e2uilibrium price. ne% firms %ill enter this mar'et. C9 some existing firms in this mar'et %ill leave. D9 there must be price fixing by the industry$s firms. Ans%er: B Type: A Topic: & 1: &2. !/: 10 1(1. ?ong6run competitive e2uilibrium: A9 is reali,ed only in constant6cost industries. C9 is not economically efficient. %ill never change once it is reali,ed. D9 results in ,ero economic profits. Ans%er: D
Type: A Topic: & 1: &20 !/: 10& 1(2. @e %ould expect an industry to expand if firms in that industry are: A9 earning normal profits. C9 incurring economic losses. earning economic profits. D9 earning accounting profits. Ans%er: B Type: A Topic: & 1: &226&2 !/: 1.061.3 1( . @hich of the follo%ing statements is correct< A9 1conomic profits induce firms to enter an industry> losses encourage firms to leave. 1conomic profits induce firms to leave an industry> profits encourage firms to leave. C9 1conomic profits and losses have no significant impact on the gro%th or decline of an industry. D9 5ormal profits %ill cause an industry to expand. Ans%er: A Type: A Topic: & 1: & 4 !/: 10* 1(&. 7uppose a purely competitive increasing6cost industry is in long6run e2uilibrium. 5o% assume that a decrease in consumer demand occurs. After all resulting ad:ustments have been completed- the ne% e2uilibrium price: A9 and industry output %ill be less than the initial price and output. %ill be greater than the initial price- but the ne% industry output %ill be less than the original output. C9 %ill be less than the initial price- but the ne% industry output %ill be greater than the original output. D9 and industry output %ill be greater than the initial price and output. Ans%er: A
Type: A Topic: & 1: & 4 !/: 10* 1((. @hich of the follo%ing statements is correct< A9 The long6run supply curve for a purely competitive increasing6cost industry %ill be upsloping. The long6run supply curve for a purely competitive increasing6cost industry %ill be perfectly elastic. C9 The long6run supply curve for a purely competitive industry %ill be less elastic than the industry$s short6run supply curve. D9 The long6run supply curve for a purely competitive decreasing6cost industry %ill be upsloping. Ans%er: A Type: A Topic: & 1: &23 !/: 10( 1(*. A constant6cost industry is one in %hich: A9 a higher price per unit %ill not result in an increased output. if 144 units can be produced for )144- then 1(4 can be produced for )1(4- 244 for )244- and so forth. C9 the demand curve and therefore the unit price and 2uantity sold seldom change. D9 the total cost of producing 244 or 44 units is no greater than the cost of producing 144 units. Ans%er: B Type: A Topic: & 1: & 2 !/: 100 1(.. @hich of the follo%ing %ill not hold true for a competitive firm in long6run e2uilibrium< A9 # e2uals ADC # e2uals minimum ATC C9 !C e2uals minimum ATC D9 # e2uals !C Ans%er: A
Type: A Topic: & 1: & 4 !/: 10* 1(0. Assume a purely competitive increasing6cost industry is initially in long6run e2uilibrium and that an increase in consumer demand occurs. After all economic ad:ustments have been completed product price %ill be: A9 lo%er- but total output %ill be larger than originally. higher and total output %ill be larger than originally. C9 lo%er and total output %ill be smaller than originally. D9 higher- but total output %ill be smaller than originally. Ans%er: B Type: A Topic: & 1: & 4 !/: 10* 1(3. Assume a purely competitive- increasing6cost industry is in long6run e2uilibrium. /f a decline in demand occurs- firms %ill: A9 leave the industry- price %ill decrease- and 2uantity produced %ill increase. enter the industry and price and 2uantity %ill both increase. C9 leave the industry and price and output %ill both increase. D9 leave the industry and price and output %ill both decline. Ans%er: D Type: A Topic: & 1: &2. !/: 10 1*4. @hen a purely competitive firm is in long6run e2uilibrium: A9 marginal revenue exceeds marginal cost. price e2uals marginal cost.
C9 total revenue exceeds total cost. D9 minimum average total cost is less than the product price. Ans%er: B Type: A Topic: & 1: &2. !/: 10 1*1. A purely competitive firm: A9 must earn a normal profit in the short run. cannot earn economic profit in the long run. C9 may reali,e either economic profit or losses in the long run. D9 cannot earn economic profit in the short run. Ans%er: B Type: A Topic: & 1: &23 !/: 10( 1*2. A constant6cost industry is one in %hich: A9 resource prices fall as output is increased. resource prices rise as output is increased. C9 resource prices remain unchanged as output is increased. D9 small and large levels of output entail the same total costs. Ans%er: C Type: A Topic: & 1: & 4 !/: 10* 1* . An increasing6cost industry is associated %ith: A9 a perfectly elastic long6run supply curve. C9 a perfectly inelastic long6run supply curve. an upsloping long6run supply curve. D9 an upsloping long6run demand curve. Ans%er: B
Fse the follo%ing to ans%er 2uestions 1*&61**:
Type: E Topic: & 1: &2* !/: 102 1*&. "efer to the above diagrams- %hich pertain to a purely competitive firm producing output 2 and the industry in %hich it operates. @hich of the follo%ing is correct< A9 The diagrams portray neither long6run nor short6run e2uilibrium. The diagrams portray both long6run and short6run e2uilibrium. C9 The diagrams portray short6run e2uilibrium- but not long6run e2uilibrium. D9 The diagrams portray long6run e2uilibrium- but not short6run e2uilibrium. Ans%er: C Type: E Topic: & 1: &2.6&20 !/: 10 610& 1*(. "efer to the above diagrams- %hich pertain to a purely competitive firm producing output 2 and the industry in %hich it operates. /n the long run %e should expect: A9 firms to enter the industry- mar'et supply to rise- and product price to fall. firms to leave the industry- mar'et supply to rise- and product price to fall. C9 firms to leave the industry- mar'et supply to fall- and product price to rise. D9 no change in the number of firms in this industry. Ans%er: C
Type: E Topic: & 1: & 2 !/: 100 1**. "efer to the above diagrams- %hich pertain to a purely competitive firm producing output 2 and the industry in %hich it operates. The predicted long6run ad:ustments in this industry might be offset by: A9 a decline in product demand. an increase in resource prices. C9 a technological improvement in production methods. D9 entry of ne% firms into the industry. Ans%er: C Type: A Topic: & 1: &2. !/: 10 1*.. Assume a purely competitive firm is maximi,ing profit at some output at %hich long6run average total cost is at a minimum. Then: A9 the firm is earning an economic profit. there is no tendency for the firm$s industry to expand or contract. C9 allocative but not productive efficiency is being achieved. D9 other firms %ill enter this industry. Ans%er: B
Type: A Topic: & 1: & 4 !/: 10* 1*0. An increasing6cost industry is the result of: A9 higher resource prices %hich occur as the industry expands. a change in the industry$s minimum efficient scale. C9 K6inefficiency. D9 the la% of diminishing returns. Ans%er: A Type: A Topic: & 1: &2. !/: 10 1*3. A purely competitive firm is precluded from ma'ing economic profit in the long run because: A9 it is a Cprice ta'er.C C9 of unimpeded entry to the industry. its demand curve is perfectly elastic. D9 it produces a differentiated product. Ans%er: C Type: A Topic: & 1: &206&23 !/: 10&610( 1.4. /f a purely competitive constant6cost industry is reali,ing economic profits- %e can expect industry supply to: A9 increase- output to increase- price to decrease- and profits to decrease. increase- output to increase- price to increase- and profits to decrease. C9 decrease- output to decrease- price to increase- and profits to increase. D9 increase- output to decrease- price to decrease- and profits to decrease. Ans%er: A Type: A Topic: & 1: &2. !/: 10 1.1. Assume that a decline in consumer demand occurs in a purely competitive industry %hich is initially in long6run e2uilibrium. @e can: A9 predict that the ne% price %ill be greater than the original price. predict that the ne% price %ill be less than the original price.
C9 predict that the ne% price %ill be the same as the original price. D9 not compare the original and the ne% price %ithout 'no%ing about cost conditions in the industry. Ans%er: D Type: D Topic: & 1: & 46& 1 !/: 10*610. 1.2. A decreasing6cost industry is one in %hich: A9 contraction of the industry %ill decrease unit costs. input prices fall or technology improves as the industry expands. C9 the long6run supply curve is perfectly elastic. D9 the long6run supply curve is upsloping. Ans%er: B Type: A Topic: & 1: & 46& 1 !/: 10*610. 1. . @hen compact disc 8CD9 players first came on the mar'et- they sold for over )1-444. 5o% they cost only )144. These facts imply that: A9 the CD industry %as once competitive- but is no% monopolistic. fe%er firms produce CD players than %as the case five or ten years ago. C9 the demand curve for CD players has shifted left%ard. D9 the CD player industry is a decreasing6cost industry. Ans%er: D
Type: A Topic: & 1: & 1 !/: 10. 1.&. 7uppose that an industry$s long6run supply curve is do%nsloping. This suggests that: A9 it is an increasing6cost industry. relevant inputs have become more expensive as the industry has expanded. C9 technology has become less efficient as a result of the industry$s expansion. D9 it is a decreasing6cost industry. Ans%er: D Type: A Topic: & 1: & 46& 1 !/: 10*610. 1.(. 7uppose an increase in product demand occurs in a decreasing6cost industry. As a result: A9 the ne% long6run e2uilibrium price %ill be lo%er than the original long6run e2uilibrium price. B9 e2uilibrium 2uantity %ill decline. C9 firms %ill eventually leave the industry. D9 the ne% long6run e2uilibrium price %ill be higher than the original price. Ans%er: A Type: C Topic: & 1: &236& 4 !/: 10(610* 1.*. #urely competitive industry K has constant costs and its product is an inferior good. The industry is currently in long6run e2uilibrium. The economy no% goes into a recession and average incomes decline. The result %ill be: A9 an increase in output and in the price of the product. B9 an increase in output- but not in the price- of the product. C9 a decrease in the output- but not in the price- of the product. D9 a decrease in output and in the price of the product. Ans%er: B
Type: A Topic: & 1: & 4 !/: 10* 1... 7uppose losses cause industry K to contract and- as a result- the prices of relevant inputs decline. /ndustry K is: A9 a constant6cost industry. C9 an increasing6cost industry. B9 a decreasing6cost industry. D9 encountering K6inefficiency. Ans%er: C
Fse the follo%ing to ans%er 2uestions 1.0610 :
Type: E Topic: & 1: &24 !/: 1.* 1.0. "efer to the above diagram sho%ing the average total cost curve for a purely competitive firm. 7uppose this firm is maximi,ing its total profit and the mar'et price is )1(. The firm$s per unit profit is: A9 )(. B9 )244. C9 a positive amount less than )(. D9 a positive amount more than )244. Ans%er: C Type: E Topic: & 1: &24 !/: 1.* 1.3. "efer to the above diagram sho%ing the average total cost curve for a purely competitive firm. 7uppose that total variable cost is ) 44 at &4 units of output. At that level of outputaverage fixed cost: A9 is )2.(4. B9 is )&. C9 is )144. D9 cannot be determined from the information provided. Ans%er: A Type: E Topic: & 1: &24 !/: 1.* 104. "efer to the above diagram sho%ing the average total cost curve for a purely competitive firm. 7uppose that average variable cost is )0 at &4 units of output. At that level of output- total fixed cost: A9 is )2. B9 is )&4. C9 is )04. D9 cannot be determined from the information provided. Ans%er: C Type: E Topic: & 1: &1(6&1*- &2. !/: 1.161.2- 10 101. "efer to the above diagram sho%ing the average total cost curve for a purely competitive firm. At the long6run e2uilibrium level of output- this firm$s total revenue: A9 is )14. B9 is )&4. C9 is )&44. D9 cannot be determined from the information provided. Ans%er: C Type: E Topic: & 1: &24- &2. !/: 1.*- 10 102. "efer to the above diagram sho%ing the average total cost curve for a purely competitive firm. At the long6run e2uilibrium level of output- this firm$s total cost: A9 is )14. B9 is )&4. C9 is )&44. D9 cannot be determined from the information provided. Ans%er: C Type: E Topic: & 1: &2. !/: 10 10 . "efer to the above diagram sho%ing the average total cost curve for a purely competitive firm. At the long6run e2uilibrium level of output- this firm$s economic profit: A9 is ,ero. B9 is )&44. C9 is )244. D9 cannot be determined from the information provided.
Ans%er: A Type: A Topic: & 1: &2. !/: 10 10&. The !" = !C rule applies: A9 in the short run- but not in the long run. C9 in both the short run and the long run. B9 in the long run- but not in the short run. D9 only to a purely competitive firm. Ans%er: C Type: A Topic: & 1: & 4 !/: 10* 10(. /f the long6run supply curve of a purely competitive industry slopes up%ard- this implies that the prices of relevant resources: A9 %ill fall as the industry expands. C9 rise as the industry contracts. B9 are constant as the industry expands. D9 rise as the industry expands. Ans%er: D Fse the follo%ing to ans%er 2uestions 10*610.:
Type: E Topic: & 1: & 4 !/: 10* 10*. "efer to the above diagram. ?ine 819 reflects the long6run supply curve for: A9 a constant6cost industry. C9 an increasing6cost industry. B9 a decreasing6cost industry. D9 technologically progressive industry. Ans%er: C Type: E Topic: & 1: &23 !/: 10( 10.. "efer to the above diagram. ?ine 829 reflects the long6run supply curve for: A9 a constant6cost industry. C9 an increasing6cost industry. B9 a decreasing6cost industry. D9 technologically progressive industry. Ans%er: A #ure competition and efficiency Type: A Topic: ( 1: & 2 !/: 100 100. Allocative efficiency is achieved %hen the production of a good occurs %here: A9 # = minimum ATC. B9 # = !C. C9 # = minimum AAC. D9 total revenue is e2ual to TDC. Ans%er: B
Type: A Topic: ( 1: & 2 !/: 100 103. A firm is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit. This means the firm is: A9 producing more output than allocative efficiency re2uires. B9 producing less output than allocative efficiency re2uires. C9 achieving productive efficiency. D9 producing an inefficient output- but %e cannot say %hether output should be increased or decreased. Ans%er: B Type: A Topic: ( 1: & 1 !/: 10.
134. "esources are efficiently allocated %hen production occurs %here: A9 marginal cost e2uals average variable cost. C9 price is e2ual to marginal cost. B9 price is e2ual to average revenue. D9 price is e2ual to average variable cost. Ans%er: C Type: D Topic: ( 1: & 2 !/: 100 131. The term productive efficiency refers to: A9 any short6run e2uilibrium position of a competitive firm. B9 the production of the product6mix most desired by consumers. C9 the production of a good at the lo%est average total cost. D9 fulfilling the condition # = !C. Ans%er: C Type: A Topic: ( 1: & 2 !/: 100 132. /f the price of product L is )2( and its marginal cost is )10: A9 L is being produced %ith the least6cost combination of resources. B9 society %ill reali,e a net gain if less of L is produced. C9 resources are being underallocated to L . D9 resources are being overallocated to L . Ans%er: C Type: D Topic: ( 1: & 2 !/: 100 13 . The term allocative efficiency refers to: A9 the level of output that coincides %ith the intersection of the !C and AAC curves. B9 minimi,ation of the ADC in the production of any good. C9 the production of the product6mix most desired by consumers. D9 the production of a good at the lo%est average total cost. Ans%er: C Type: A Topic: ( 1: & !/: 103 13&. Fnder pure competition in the long run: A9 neither allocative efficiency nor productive efficiency are achieved. B9 both allocative efficiency and productive efficiency are achieved. C9 productive efficiency is achieved- but allocative efficiency is not. D9 allocative efficiency is achieved- but productive efficiency is not. Ans%er: B
Type: A Topic: ( 1: & 2 !/: 100 13(. /f for a firm # = minimum ATC = !C- then: A9 neither allocative efficiency nor productive efficiency is being achieved. B9 productive efficiency is being achieved- but allocative efficiency is not. C9 both allocative efficiency and productive efficiency are being achieved. D9 allocative efficiency is being achieved- but productive efficiency is not. Ans%er: C Fse the follo%ing to ans%er 2uestions 13*6241:
Type: E Topic: ( 1: & 1 !/: 10. 13*. The above diagram portrays: A9 a competitive firm that should shut do%n in the short run. B9 the e2uilibrium position of a competitive firm in the long run. C9 a competitive firm that is reali,ing an economic profit. D9 the loss6minimi,ing position of a competitive firm in the short run. Ans%er: B Type: E Topic: ( 1: & 1 !/: 10. 7tatus: 5e% 13.. "efer to the above diagram. /f this competitive firm produces output N- it %ill: A9 suffer an economic loss. B9 earn a normal profit. C9 earn an economic profit. D9 achieve productive efficiency- but not allocative efficiency. Ans%er: B Type: E Topic: ( 1: & !/: 103 130. "efer to the above diagram. By producing output level N: A9 neither productive nor allocative efficiency are achieved. B9 both productive and allocative efficiency are achieved. C9 allocative efficiency is achieved- but productive efficiency is not. D9 productive efficiency is achieved- but allocative efficiency is not. Ans%er: B
Type: E Topic: ( 1: & 2 !/: 100 133. "efer to the above diagram. At output level N1: A9 neither productive nor allocative efficiency are achieved. B9 both productive and allocative efficiency are achieved. C9 allocative efficiency is achieved- but productive efficiency is not. D9 productive efficiency is achieved- but allocative efficiency is not. Ans%er: A Type: E Topic: ( 1: & 2 !/: 100 244. "efer to the above diagram. At output level N1: A9 resources are overallocated to this product and productive efficiency is not reali,ed. B9 resources are underallocated to this product and productive efficiency is not reali,ed. C9 productive efficiency is achieved- but resources are underallocated to this product. D9 productive efficiency is achieved- but resources are overallocated to this product. Ans%er: B Type: E Topic: ( 1: & 26& !/: 1006103 241. "efer to the above diagram. At output level N2: A9 resources are overallocated to this product and productive efficiency is not reali,ed. B9 resources are underallocated to this product and productive efficiency is not reali,ed. C9 productive efficiency is achieved- but resources are underallocated to this product. D9 productive efficiency is achieved- but resources are overallocated to this product. Ans%er: A
Type: A Topic: ( 1: & 2 !/: 100 242. Assume that society places a higher value on the last unit of K produced than the value of the resources used to produce that unit. @ith no spillovers- this information means that: A9 total cost is greater than total revenue. C9 marginal cost is greater than price. B9 price is greater than marginal cost. D9 resources are being overallocated to K. Ans%er: B Type: A Topic: ( 1: & 26& !/: 1006103 24 . /f production is occurring %here marginal cost exceeds price- the purely competitive firm %ill: A9 maximi,e profit- but resources %ill be underallocated to the product. B9 maximi,e profit- but resources %ill be overallocated to the product. C9 fail to maximi,e profit and resources %ill be overallocated to the product. D9 fail to maximi,e profit and resources %ill be underallocated to the product. Ans%er: C Type: A Topic: ( 1: & 2 !/: 100 24&. /f a purely competitive firm is producing %here price exceeds marginal cost- then: A9 the firm %ill fail to maximi,e profit- but resources %ill be efficiently allocated. B9 the firm %ill fail to maximi,e profit and resources %ill be overallocated to the product. C9 the firm %ill fail to maximi,e profit and resources %ill be underallocated to the product. D9 resources %ill be underallocated to the product- but the firm %ill maximi,e profit. Ans%er: C
Type: A Topic: ( 1: & 2 !/: 100 7tatus: 5e% 24(. @hich of the follo%ing conditions is true for a purely competitive firm in long6run e2uilibrium< A9 # V !C = minimum ATC. C9 # = !C = minimum ATC. B9 # V !C V minimum ATC. D9 # W !C W minimum ATC. Ans%er: C Consider This Nuestions Type: A 1: &2 !/: 1.3 7tatus: 5e% 24*. 8Consider This9 An unprofitable motel %ill stay open in the short6run if: A9 price 8average nightly room rate9 exceeds average variable cost. B9 marginal revenue exceeds marginal cost. C9 price 8average nightly room rate9 exceeds average fixed cost. D9 marginal revenue exceeds price. Ans%er: A Type: A 1: &2 !/: 1.3 7tatus: 5e% 24.. 8Consider This9 An other%ise unprofitable motel located on a largely abandoned road%ay might be able to stay open for several years by: A9 increasing its nightly room rates. B9 reducing or eliminating its annual maintenance expenses. C9 charging room rates that exceed marginal revenue.
D9 eliminating its fixed costs- including its opportunity costs. Ans%er: B ?ast @ord Nuestions Fse the follo%ing to ans%er 2uestions 2406214:
Type: E 1: & & !/: 134 240. 8?ast @ord9 "efer to the above graph of the mar'et for asparagus. At the mar'et price of )2area A I B represents: A9 total consumer utility. C9 consumer surplus. B9 total revenue to sellers. D9 returns to capital and to labor. Ans%er: A Type: E 1: & & !/: 134 243. 8?ast @ord9 "efer to the above graph of the mar'et for asparagus. At the mar'et price of )2area A represents: A9 total consumer utility. B9 total revenue to sellers. C9 consumer surplus. D9 economic profit. Ans%er: C Type: E 1: & & !/: 134 214. 8?ast @ord9 /n long6run e2uilibrium- purely competitive mar'ets: A9 minimi,e total cost. B9 maximi,e consumer surplus. C9 yield economic profits to most sellers. D9 inevitably degenerate into monopoly in increasing cost industries. Ans%er: B TrueJDalse Nuestions Type: A 1: &1* !/: 1.2 211. /n maximi,ing profit a firm %ill al%ays produce that output %here total revenues are at a maximum. Ans%er: Dalse Type: A 1: &22 !/: 1.0 212. /n the short run a competitive firm %ill al%ays choose to shut do%n if product price is less than the lo%est attainable average total cost. Ans%er: Dalse Type: A 1: &2. !/: 10 21 . After all long6run ad:ustments have been completed- a firm in a competitive industry %ill produce that level of output %here average total cost is at a minimum. Ans%er: True Type: A 1: & 46& 1 !/: 10*610. 21&. The long6run supply curve for a decreasing6cost industry is do%nsloping.
Ans%er: True Type: A 1: &24 !/: 1.* 21(. A competitive firm %ill produce in the short run so long as its price exceeds its average fixed cost. Ans%er: Dalse Type: A 1: & 2 !/: 100 21*. !arginal cost is a measure of the alternative goods %hich society forgoes in using resources to produce an additional unit of some specific product. Ans%er: True
Type: A 1: &1(6&1* !/: 1.161.2 21.. #rice and marginal revenue are identical for an individual purely competitive seller. Ans%er: True Type: A 1: & 2 !/: 100 210. Because the e2uilibrium position of a purely competitive seller entails an e2uality of price and marginal costs- competition produces up to an efficient allocation of economic resources. Ans%er: True Type: A 1: &2 6&2& !/: 1.36104 213. The short6run supply curve slopes up%ard because producers must be compensated for rising marginal costs. Ans%er: True Type: A 1: &2( !/: 101 224. The demand curve for a purely competitive industry is perfectly elastic- but the demand curves faced by individual firms in such an industry are do%nsloping. Ans%er: Dalse Type: A 1: &1.6&10 !/: 1. 61.& 221. The total revenue curve of a competitive seller graphs as a straight- upsloping line. Ans%er: True Type: D 1: &1* !/: 1.2 222. !arginal revenue is the addition to total revenue resulting from the sale of one more unit of output. Ans%er: True Fse the follo%ing to ans%er 2uestions 22 62 1:
Type: E 1: &136&24 !/: 1.(61.* 22 . "efer to the above diagram. This firm %ill maximi,e profits by producing output D. Ans%er: Dalse
!ultiple Choice Nuestions Dour mar'et models Type: A Topic: 1 1: &1& !/: 1.4 1. 1conomists %ould describe the F.7. automobile industry as: A9 purely competitive. an oligopoly. C9 monopolistically competitive. D9 a pure monopoly. Ans%er: B Type: A Topic: 1 1: &1& !/: 1.4 2. /n %hich of the follo%ing mar'et structures is there clear6cut mutual interdependence %ith respect to price6output policies< A9 pure monopoly oligopoly C9 monopolistic competition D9 pure competition Ans%er: B Type: A Topic: 1 1: &1& !/: 1.4 . @hich of the follo%ing industries most closely approximates pure competition< A9 agriculture farm implements C9 clothing D9 steel Ans%er: A Type: D Topic: 1 1: &1& !/: 1.4 &. 1conomists use the term imperfect competition to describe: A9 all industries %hich produce standardi,ed products. any industry in %hich there is no nonprice competition. C9 a pure monopoly only. D9 those mar'ets %hich are not purely competitive. Ans%er: D Type: A Topic: 1 1: &1& !/: 1.4 (. /n %hich of the follo%ing industry structures is the entry of ne% firms the most difficult< A9 pure monopoly oligopoly C9 monopolistic competition D9 pure competition Ans%er: A Type: A Topic: 1 1: &1& !/: 1.4 *. An industry comprised of &4 firms- none of %hich has more than percent of the total mar'et for a differentiated product is an example of: A9 monopolistic competition oligopoly C9 pure monopoly D9 pure competition Ans%er: A Type: A Topic: 1 1: &1 6&1& !/: 1*361.4 .. A one6firm industry is 'no%n as: A9 monopolistic competition oligopoly C9 pure monopoly D9 pure competition Ans%er: C Type: A Topic: 1 1: &1& !/: 1.4 0. An industry comprised of four firms- each %ith about 2( percent of the total mar'et for a product is an example of:
A9 monopolistic competition oligopoly C9 pure monopoly D9 pure competition Ans%er: B Type: A Topic: 1 1: &1 6&1& !/: 1*361.4 3. An industry comprised of a very large number of sellers producing a standardi,ed product is 'no%n as: A9 monopolistic competition oligopoly C9 pure monopoly D9 pure competition Ans%er: D Type: A Topic: 1 1: &1& !/: 1.4 14. An industry comprised of a small number of firms- each of %hich considers the potential reactions of its rivals in ma'ing price6output decisions is called: A9 monopolistic competition oligopoly C9 pure monopoly D9 pure competition Ans%er: B #ure competition defined> demand curve Type: A Topic: 2 1: &1& !/: 1.4 11. @hich of the follo%ing statements applies to a purely competitive producer< A9 /t %ill not advertise its product. /n long6run e2uilibrium it %ill earn an economic profit. C9 /ts product %ill have a brand name. D9 /ts product is slightly different from those of its competitors. Ans%er: A
Type: A Topic: 2 1: &1& !/: 1.4 12. A purely competitive seller is: A9 both a Cprice ma'erC and a Cprice ta'er.C C9 a Cprice ta'er.C neither a Cprice ma'erC nor a Cprice ta'er.C D9 a Cprice ma'er.C Ans%er: C Type: A Topic: 2 1: &1& !/: 1.4 1 . @hich of the follo%ing is not characteristic of pure competition< A9 price strategies by firms C9 no barriers to entry a standardi,ed product D9 a larger number of sellers Ans%er: A Type: A Topic: 2 1: &1& !/: 1.4 1&. @hich of the follo%ing is not a basic characteristic of pure competition< A9 considerable nonprice competition C9 a standardi,ed or homogeneous product no barriers to the entry or exodus of firms D9 a large number of buyers and sellers Ans%er: A Type: A Topic: 2 1: &1( !/: 1.1 1(. The demand schedule or curve confronted by the individual purely competitive firm is: A9 relatively elastic- that is- the elasticity coefficient is greater than unity. perfectly elastic. C9 relatively inelastic- that is- the elasticity coefficient is less than unity.
D9 perfectly inelastic. Ans%er: B Type: A Topic: 2 1: &1(6&1* !/: 1.161.2 1*. @hich of the follo%ing is characteristic of a purely competitive seller$s demand curve< A9 #rice and marginal revenue are e2ual at all levels of output. Average revenue is less than price. C9 /ts elasticity coefficient is 1 at all levels of output. D9 /t is the same as the mar'et demand curve. Ans%er: A Fse the follo%ing to ans%er 2uestions 1.613: /n ans%ering the next 2uestion8s9- assume a graph in %hich dollars are measured on the vertical axis and output on the hori,ontal axis. Type: E Topic: 2 1: &1(6&1* !/: 1.161.2 1.. "efer to the above information. Dor a purely competitive firm total revenue: A9 graphs as a straight- upsloping line. C9 is a straight line- parallel to the hori,ontal axis. is a straight line- parallel to the vertical axis. D9 graphs as a straight- do%nsloping line. Ans%er: A
Type: E Topic: 2 1: &1* !/: 1.2 10. "efer to the above information. Dor a purely competitive firm marginal revenue: A9 graphs as a straight- upsloping line. C9 is a straight line- parallel to the hori,ontal axis. is a straight line- parallel to the vertical axis. D9 graphs as a straight- do%nsloping line. Ans%er: C Type: E Topic: 2 1: &1* !/: 1.2 13. "efer to the above information. Dor a purely competitive firm: A9 marginal revenue %ill graph as an upsloping line. the demand curve %ill lie above the marginal revenue curve. C9 the marginal revenue curve %ill lie above the demand curve. D9 the demand and marginal revenue curves %ill coincide. Ans%er: D Type: A Topic: 2 1: &1(6&1* !/: 1.161.2 24. /f a firm in a purely competitive industry is confronted %ith an e2uilibrium price of )(- its marginal revenue: A9 may be either greater or less than )(. C9 %ill be less than )(. %ill also be )(. D9 %ill be greater than )(. Ans%er: B Type: A Topic: 2 1: &1& !/: 1.4 21. #rice is constant or given to the individual firm selling in a purely competitive mar'et because: A9 the firm$s demand curve is do%nsloping. of product differentiation reinforced by extensive advertising.
C9 each seller supplies a negligible fraction of total supply. D9 there are no good substitutes for its product. Ans%er: C Type: A Topic: 2 1: &1(6&1* !/: 1.161.2 22. Dor a purely competitive seller- price e2uals: A9 average revenue. marginal revenue. C9 total revenue divided by output. D9 all of the above. Ans%er: D Type: A Topic: 2 1: &1( !/: 1.1 2 . Dor a purely competitive firm total revenue: A9 is price times 2uantity sold. increases by a constant absolute amount as output expands. C9 graphs as a straight upsloping line from the origin. D9 has all of the above characteristics. Ans%er: D Type: A Topic: 2 1: &1* !/: 1.2 2&. The marginal revenue curve of a purely competitive firm: A9 lies belo% the firm$s demand curve. increases at an increasing rate as output expands. C9 is hori,ontal at the mar'et price. D9 is do%nsloping because price must be reduced to sell more output. Ans%er: C Type: A Topic: 2 1: &1( !/: 1.1 2(. The demand curve in a purely competitive industry is PPPPPP- %hile the demand curve to a single firm in that industry is PPPPPP. A9 perfectly inelastic- perfectly elastic C9 do%nsloping- perfectly inelastic do%nsloping- perfectly elastic D9 perfectly elastic- do%nsloping Ans%er: B Type: A Topic: 2 1: &1( !/: 1.1 2*. A perfectly elastic demand curve implies that the firm: A9 must lo%er price to sell more output. can sell as much output as it chooses at the existing price. C9 reali,es an increase in total revenue %hich is less than product price %hen it sells an extra unit. D9 is selling a differentiated 8heterogeneous9 product. Ans%er: B Type: A Topic: 2 1: &1(6&1* !/: 1.161.2 2.. The vertical distance bet%een the hori,ontal axis and any point on a pure competitor$s demand curve measures: A9 total revenue. total cost. C9 product price- marginal revenue- and average revenue. D9 the 2uantity demanded. Ans%er: C
Type: A Topic: 2 1: &1* !/: 1.2 20. The fact that a purely competitive firm$s total revenue curve is linear and upsloping to the right implies that: A9 product price increases as output increases. product price decreases as output increases. C9 product price is constant at all levels of output. D9 marginal revenue declines as more output is produced. Ans%er: C Type: A Topic: 2 1: &1( !/: 1.1 23. @hich of the follo%ing statements is correct< A9 The demand curve for a purely competitive firm is perfectly elastic- but the demand curve for a purely competitive industry is do%nsloping. The demand curve for a purely competitive firm is do%nsloping- but the demand curve for a purely competitive industry is perfectly elastic. C9 The demand curves are do%nsloping for both a purely competitive firm and a purely competitive industry. D9 The demand curves are perfectly elastic for both a purely competitive firm and a purely competitive industry. Ans%er: A
Fse the follo%ing to ans%er 2uestions 46 1:
Type: E Topic: 2 1: &1* !/: 1.2 4. "efer to the above diagram- %hich pertains to a purely competitive firm. Curve A represents: A9 total revenue and marginal revenue. C9 total revenue and average revenue. marginal revenue only. D9 total revenue only. Ans%er: D Type: E Topic: 2 1: &1(6&1* !/: 1.161.2 1. "efer to the above diagram- %hich pertains to a purely competitive firm. Curve C represents: A9 total revenue and marginal revenue. C9 total revenue and average revenue. marginal revenue only. D9 average revenue and marginal revenue. Ans%er: D Type: A Topic: 2 1: &1* !/: 1.2 2. A purely competitive seller$s average revenue curve coincides %ith: A9 its marginal revenue curve only. its demand curve only. C9 both its demand and marginal revenue curves. D9 neither its demand nor its marginal revenue curve. Ans%er: C Type: D Topic: 2 1: &1* !/: 1.2 . !arginal revenue is the:
A9 change in product price associated %ith the sale of one more unit of output. change in average revenue associated %ith the sale of one more unit of output. C9 difference bet%een product price and average total cost. D9 change in total revenue associated %ith the sale of one more unit of output. Ans%er: D Type: A Topic: 2 1: &1* !/: 1.2 &. !arginal revenue for a purely competitive firm: A9 is greater than price. C9 is e2ual to price. is less than price. D9 may be either greater or less than price. Ans%er: C
#rofit maximi,ing in short run Type: A Topic: 1: &1* !/: 1.2 (. Dirms see' to maximi,e: A9 per unit profit. total revenue. C9 total profit. D9 mar'et share. Ans%er: C Type: A Topic: 1: &10 !/: 1.& *. A competitive firm in the short run can determine the profit6maximi,ing 8or loss6minimi,ing9 output by e2uating: A9 price and average total cost. C9 marginal revenue and marginal cost. price and average fixed cost. D9 price and marginal revenue. Ans%er: C Type: A Topic: 1: &1. !/: 1. .. /n the short run a purely competitive firm that see's to maximi,e profit %ill produce: A9 %here the demand and the ATC curves intersect. %here total revenue exceeds total cost by the maximum amount. C9 that output %here economic profits are ,ero. D9 at any point %here the total revenue and total cost curves intersect. Ans%er: B Fse the follo%ing to ans%er 2uestions 06&1:
Type: E Topic: 1: &1.6&10 !/: 1. 61.& 0. "efer to the above short6run data. Total fixed cost for this firm is: A9 about )*.. ) 44. C9 )244. D9 )144. Ans%er: C
Type: E Topic: 1: &1. !/: 1. 3. "efer to the above short6run data. The shape of the total cost curve reflects: A9 diminishing opportunity costs. C9 increasing and diminishing returns. the la% of rising fixed costs. D9 economies and diseconomies of scale.
Ans%er: C Type: E Topic: 1: &10 !/: 1.& &4. "efer to the above short6run data. The profit6maximi,ing output for this firm is: A9 above &&4 units. &&4 units. C9 24 units. D9 144 units. Ans%er: C Type: E Topic: 1: &10 !/: 1.& &1. "efer to the above short6run data. @hich of the follo%ing is correct< A9 This firm %ill maximi,e its profit at &&4 untis of output. B9 Any level of output bet%een 144 and &&4 units %ill yield an economic profit. C9 This firm$s marginal revenue rises %ith output. D9 Any level of output less than 144 units or greater than &&4 units is profitable. Ans%er: B Type: A Topic: 1: &1. !/: 1. &2. A competitive firm %ill maximi,e profits at that output at %hich: A9 total revenue exceeds total cost by the greatest amount. B9 total revenue and total cost are e2ual. C9 price exceeds average total cost by the largest amount. D9 the difference bet%een marginal revenue and price is at a maximum. Ans%er: A Fse the follo%ing to ans%er 2uestions & 6&0:
Type: E Topic: 1: &10 !/: 1.& & . Curve 819 in the above diagram is a purely competitive firm$s: A9 total cost curve. C9 marginal revenue curve B9 total revenue curve. D9 total economic profit curve. Ans%er: D
Type: E Topic: 1: &1* !/: 1.2 &&. Curve 829 in the above diagram is a purely competitive firm$s A9 total cost curve. C9 marginal revenue curve B9 total revenue curve. D9 total economic profit curve. Ans%er: C Type: E Topic: 1: &10 !/: 1.& &(. Curve 8 9 in the above diagram is a purely competitive firm$s A9 total cost curve. C9 marginal revenue curve. B9 total revenue curve. D9 total economic profit curve. Ans%er: B Type: E Topic: 1: &10 !/: 1.& &*. Curve 8&9 in the above diagram is a purely competitive firm$s: A9 total cost curve. B9 total revenue curve. C9 marginal revenue curve. D9 total profit curve.
Ans%er: A Type: E Topic: 1: &10 !/: 1.& &.. "efer to the above diagram. +ther things e2ual- an increase of product price %ould be sho%n as: A9 an increase in the steepness of curve 8 9- an up%ard shift in curve 829- and up%ard shift in curve 819. B9 a decrease in the steepness of curve 8 9- a do%n%ard shift in curve 829- and an up%ard shift in curve 819. C9 an do%n%ard shift in curve 8&9 and an up%ard shift in curve 819- %ith no changes in lines 829 and 8 9. D9 an up%ard shift in line 829 only. Ans%er: A Type: E Topic: 1: &10 !/: 1.& &0. The firm represented by the above diagram %ould maximi,e its profit %here: A9 curves 829 and 819 intersect. B9 curve 819 touches the hori,ontal axis for the second time. C9 the vertical distance bet%een curves 8 9 and 8&9 is the greatest. D9 curves 8 9 and 8&9 intersect. Ans%er: C Type: D Topic: 1: &1.6&10 !/: 1. 61.& &3. A firm reaches a brea'6even point 8normal profit position9 %here: A9 marginal revenue cuts the hori,ontal axis. B9 marginal cost intersects the average variable cost curve. C9 total revenue e2uals total variable cost. D9 total revenue and total cost are e2ual. Ans%er: D Type: A Topic: 1: &13 !/: 1.( (4. The !" = !C rule applies: A9 to firms in all types of industries. C9 only to monopolies. B9 only %hen the firm is a Cprice ta'er.C D9 only to purely competitive firms. Ans%er: A Type: A Topic: 1: &10 !/: 1.& (1. @hen a firm is maximi,ing profit it %ill necessarily be: A9 maximi,ing profit per unit of output. B9 maximi,ing the difference bet%een total revenue and total cost. C9 minimi,ing total cost. D9 maximi,ing total revenue. Ans%er: B Type: A Topic: 1: &13 !/: 1.( (2. The !" = !C rule can be restated for a purely competitive seller as # = !C because: A9 each additional unit of output adds exactly its price to total revenue. B9 the firm$s average revenue curve is do%nsloping. C9 the mar'et demand curve is do%nsloping.
D9 the firm$s marginal revenue and total revenue curves %ill coincide. Ans%er: A Type: A Topic: 1: &2& !/: 104 ( . /n the short run the individual competitive firm$s supply curve is that segment of the: A9 average variable cost curve lying belo% the marginal cost curve. B9 marginal cost curve lying above the average variable cost curve. C9 marginal revenue curve lying belo% the demand curve. D9 marginal cost curve lying bet%een the average total cost and average variable cost curves. Ans%er: B Type: A Topic: 1: &2& !/: 104 (&. @hich of the follo%ing is not a valid generali,ation concerning the relationship bet%een price and costs for a purely competitive seller in the short run< A9 #rice must be at least e2ual to average total cost. B9 #rice times 2uantity produced must be e2ual to or greater than total variable cost for some level of output or the firm %ill close do%n in the short run. C9 #rice may be e2ual to- greater than- or less than average total cost. D9 #rice must be e2ual to or greater than minimum average variable cost for the firm to continue producing. Ans%er: A Type: A Topic: 1: &10 !/: 1.& ((. Assume the KLQ Corporation is producing 24 units of output. /t is selling this output in a purely competitive mar'et at )14 per unit. /ts total fixed costs are )144 and its average variable cost is ) at 24 units of output. This corporation: A9 should close do%n in the short run. C9 is reali,ing a loss of )*4. B9 is maximi,ing its profits. D9 is reali,ing an economic profit of )&4. Ans%er: D
(*. A purely competitive firm$s short6run supply curve is: A9 perfectly elastic at the minimum average total cost. upsloping and e2ual to the portion of the marginal cost curve that lies above the average variable cost curve. C9 upsloping and e2ual to the portion of the marginal cost curve that lies above the average total cost curve. D9 upsloping only %hen the industry has constant costs. Ans%er: B Type: A Topic: 1: &2& !/: 104 (.. 7uppose you find that the price of your product is less than minimum AAC. Lou should: A9 minimi,e your losses by producing %here # = !C. maximi,e your profits by producing %here # = !C. C9 close do%n because- by producing- your losses %ill exceed your total fixed costs. D9 close do%n because total revenue exceeds total variable cost. Ans%er: C
Type: A Topic: 1: &22 !/: 1.0 (0. /f a purely competitive firm shuts do%n in the short run: A9 its loss %ill be ,ero. it %ill reali,e a loss e2ual to its total variable costs. C9 it %ill reali,e a loss e2ual to its total fixed costs. D9 it %ill reali,e a loss e2ual to its total costs. Ans%er: C Type: A Topic: 1: &22 !/: 1.0 (3. A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its: A9 total variable costs. total costs. C9 total fixed costs. D9 marginal costs. Ans%er: A Fse the follo%ing to ans%er 2uestions *46*&: Ans%er the next 2uestion8s9 on the basis of the follo%ing data confronting a firm:
Type: T Topic: 1: &1* !/: 1.2 *4. "efer to the above data. This firm is selling its output in a8n9: A9 imperfectly competitive mar'et. C9 purely competitive mar'et. monopolistic mar'et. D9 oligopolistic mar'et. Ans%er: C Type: T Topic: 1: &2& !/: 104 *1. "efer to the above data. /f the firm$s minimum average variable cost is )14- the firm$s profit6 maximi,ing level of output %ould be: A9 2. . C9 &. D9 (. Ans%er: B Type: T Topic: 1: &1. !/: 1. *2. "efer to the above data. At the profit6maximi,ing output the firm$s total revenue is: A9 )&0. ) 2. C9 )04. D9 )*&. Ans%er: A Type: T Topic: 1: &1. !/: 1. * . "efer to the above data. At the profit6maximi,ing output the firm$s total cost is: A9 )&0. ) 2. C9 )04. D9 )*&. Ans%er: B Type: T Topic: 1: &1. !/: 1. *&. "efer to the above data. The firm$s: A9 economic profit is )12. economic profit is )1*. C9 loss is )1&. D9 economic profit is ) . Ans%er: B Type: A Topic: 1: &2& !/: 104
*(. /n the short run a purely competitive firm %ill al%ays ma'e an economic profit if: A9 # = ATC. # V AAC. C9 # = !C. D9 # V ATC. Ans%er: D Type: A Topic: 1: &2& !/: 104 **. 7uppose that at (44 units of output marginal revenue is e2ual to marginal cost. The firm is selling its output at )( per unit and average total cost at (44 units of output is )*. +n the basis of this information %e: A9 can say that the firm should close do%n in the short run. can say that the firm can produce and reali,e an economic profit in the short run. C9 cannot determine %hether the firm should produce or shut do%n in the short run. D9 can assume the firm is not using the most efficient technology. Ans%er: C Type: A Topic: 1: &2& !/: 104 *.. /f a firm is confronted %ith economic losses in the short run- it %ill decide %hether or not to produce by comparing: A9 marginal revenue and marginal cost. C9 total revenue and total cost. price and minimum average variable cost. D9 total revenue and total fixed cost. Ans%er: B
Type: A Topic: 1: &2& !/: 104 *0. A firm finds that at its !" = !C output- its TC = )1444- TAC = )044- TDC = )244- and total revenue is )344. This firm should: A9 shut do%n in the short run. produce because the resulting loss is less than its TDC. C9 produce because it %ill reali,e an economic profit. D9 li2uidate its assets and go out of business. Ans%er: B Type: A Topic: 1: &2& !/: 104 *3. The lo%est point on a purely competitive firm$s short6run supply curve corresponds to: A9 the minimum point on its ATC curve. C9 the minimum point on its ADC curve. the minimum point on its AAC curve. D9 the minimum point on its !C curve. Ans%er: B Fse the follo%ing to ans%er 2uestions .46. :
Type: E Topic: 1: &2 6&2& !/: 1.36104 .4. "efer to the above diagram for a purely competitive producer. The lo%est price at %hich the firm should produce 8as opposed to shutting do%n9 is: A9 #1. #2. C9 # . D9 #&. Ans%er: B Type: E Topic: 1: &2 6&2& !/: 1.36104 .1. "efer to the above diagram for a purely competitive producer. The firm %ill produce at a loss
at all prices: A9 above #1. above # . C9 above #&. D9 bet%een #2 and # . Ans%er: D Type: E Topic: 1: &2& !/: 104 .2. "efer to the above diagram for a purely competitive producer. /f product price is # : A9 the firm %ill maximi,e profit at point d. C9 economic profits %ill be ,ero. the firm %ill earn an economic profit. D9 ne% firms %ill enter this industry. Ans%er: C Type: E Topic: 1: &2& !/: 104 . . "efer to the above diagram for a purely competitive producer. The firm$s short6run supply curve is: A9 the abcd segment of the !C curve. C9 the cd segment of the !C curve. the bcd segment of the !C curve. D9 not sho%n. Ans%er: B Type: A Topic: 1: &2& !/: 104 .&. The short6run supply curve of a purely competitive producer is based on its: A9 AAC curve. ATC curve. C9 ADC curve. D9 !C curve. Ans%er: D Type: A Topic: 1: &2& !/: 104 .(. +n a per unit basis economic profit can be determined as the difference bet%een: A9 marginal revenue and product price. C9 marginal revenue and marginal cost. product price and average total cost. D9 average fixed cost and product price. Ans%er: B Type: A Topic: 1: &2 6&2& !/: 1.36104 .*. /n the short run a purely competitive seller %ill shut do%n if: A9 it cannot produce at an economic profit. price is less than average variable cost at all outputs. C9 price is less than average fixed cost at all outputs. D9 there is no point at %hich marginal revenue and marginal cost are e2ual. Ans%er: B Fse the follo%ing to ans%er 2uestions ..601:
Type: E Topic: 1: &2& !/: 104 ... "efer to the above diagram. To maximi,e profit or minimi,e losses this firm %ill produce: A9 G units at price C. D units at price B. C9 1 units at price A. D9 1 units at price B. Ans%er: C
Type: E Topic: 1: &24 !/: 1.* .0. "efer to the above diagram. At the profit6maximi,ing output- total revenue %ill be: A9 4A;1. 4BE1. C9 4CD1. D9 ABE1.
Ans%er: A Type: E Topic: 1: &24 !/: 1.* .3. "efer to the above diagram. At the profit6maximi,ing output- total fixed cost is e2ual to: A9 4A;1. 4BE1. C9 4CD1. D9 BCDE. Ans%er: D Type: E Topic: 1: &24 !/: 1.* 04. "efer to the above diagram. At the profit6maximi,ing output- total variable cost is e2ual to: A9 4A;1. 4CD1. C9 4BE1. D9 ABE;. Ans%er: B Type: E Topic: 1: &24 !/: 1.* 01. "efer to the above diagram. At the profit6maximi,ing output- the firm %ill reali,e: A9 a loss e2ual to BCDE. C9 an economic profit of ACD;. a loss e2ual to ACD;. D9 an economic profit of ABE;. Ans%er: D Type: A Topic: 1: &24 !/: 1.* 02. /f a purely competitive firm is producing at some level less than the profit6maximi,ing outputthen: A9 price is necessarily greater than average total cost. fixed costs are large relative to variable costs. C9 price exceeds marginal revenue. D9 marginal revenue exceeds marginal cost. Ans%er: D
Fse the follo%ing to ans%er 2uestions 0 60.: Ans%er the next 2uestion8s9 on the basis of the follo%ing cost data for a firm that is selling in a purely competitive mar'et:
Type: T Topic: 1: &21 !/: 1.. 0 . "efer to the above data. /f the mar'et price for the firm$s product is )12- the competitive firm %ill produce: A9 & units at a loss of )143. C9 0 units at a loss of )&0.04. & units at an economic profit of ) 1..(. D9 ,ero units at a loss of )144. Ans%er: D Type: T Topic: 1: &24 !/: 1.* 0&. "efer to the above data. /f the mar'et price for the firm$s product is ) 2- the competitive firm %ill produce: A9 0 units at an economic profit of )1*. ( units at a loss of )14. C9 0 units at a loss e2ual to the firm$s total fixed cost. D9 . units at an economic profit of )&1.(4.
Ans%er: A Type: T Topic: 1: &21 !/: 1.. 0(. "efer to the above data. /f the mar'et price for the firm$s product is )20- the competitive firm %ill: A9 produce & units at a loss of )1..&4. C9 close do%n in the short run. produce . units at a loss of )1&.44. D9 produce * units at a loss of )2 .04. Ans%er: B
Type: T Topic: 1: &2 !/: 1.3 0*. "efer to the above data. @hich of the follo%ing is the firm$s short6run supply schedule<
Ans%er: C Type: T Topic: 1: &2( !/: 101 0.. "efer to the above data. /f there %ere 1-444 identical firms in this industry and total or mar'et demand is as sho%n belo%- e2uilibrium price %ill be:
A9 ) 2. )&2. C9 ) *. D9 )1 . Ans%er: C Type: A Topic: 1: &2 6&2& !/: 1.36104 00. /f at the !C = !" output- AAC exceeds price: A9 ne% firms %ill enter this industry. the firm should produce the !C = !" output and reali,e an economic profit. C9 the firm should shut do%n in the short run. D9 the firm should expand its plant. Ans%er: C
Fse the follo%ing to ans%er 2uestions 0363&:
Type: E Topic: 1: &2& !/: 104 03. "efer to the above diagram. The profit6maximi,ing output: A9 is n. is '. C9 is h. D9 cannot be determined from the information given. Ans%er: A Type: E Topic: 1: &2& !/: 104 34. "efer to the above diagram. At the profit6maximi,ing outputaverage variable cost is: A9 ef. fg. C9 na. D9 ac. Ans%er: C Type: E Topic: 1: &2& !/: 104
31. "efer to the above diagram. At the profit6maximi,ing output- total profit is: A9 efbc. fgab. C9 egac. D9 4fbn. Ans%er: A Type: E Topic: 1: &2& !/: 104 32. "efer to the above diagram. Dor any level of output- total fixed cost: A9 is fgab. is 4gan. C9 is ba. D9 is efbc. Ans%er: A Type: E Topic: 1: &2& !/: 104 3 . "efer to the above diagram. The short6run supply curve for this firm is the: A9 entire !C curve. segment of the AAC curve lying to the right of the !C curve. C9 segment of the !C curve lying above the ATC curve. D9 segment of the !C curve lying above the AAC curve. Ans%er: D
Type: E Topic: 1: &1* !/: 1.2 3&. "efer to the above diagram. This firm is selling its product in a8n9: A9 purely competitive mar'et. C9 monopsonistic mar'et. imperfectly competitive mar'et. D9 monopolistic mar'et. Ans%er: A Type: A Topic: 1: &2 6&2& !/: 1.36104 3(. /n the short run a purely competitive seller %ill shut do%n if product price: A9 e2uals average revenue. is greater than !C. C9 is less than AAC. D9 is less than ATC. Ans%er: C Type: A Topic: 1: &2 6&2& !/: 1.36104 3*. The short6run shut6do%n point for a purely competitive firm occurs: A9 at any point %here price is less than the minimum AAC. bet%een the t%o brea'6even points. C9 at any point %here total revenue is less than total cost. D9 at any point %here the firm is not ma'ing an economic profit. Ans%er: A Type: A Topic: 1: &2. !/: 10 3.. /n a purely competitive industry: A9 there %ill be no economic profits in either the short run or the long run. B9 economic profits may persist in the long run if consumer demand is strong and stable. C9 there may be economic profits in the short run- but not in the long run. D9 there may be economic profits in the long run- but not in the short run. Ans%er: C Type: A Topic: 1: &2& !/: 104 30. The short6run supply curve for a purely competitive industry can be found by: A9 multiplying the AAC curve of the representative firm by the number of firms in the industry. B9 adding hori,ontally the AAC curves of all firms.
C9 summing hori,ontally the segments of the !C curves lying above the AAC curve for all firms. D9 adding hori,ontally the immediate mar'et period supply curves of each firm. Ans%er: C Type: A Topic: 1: &13 !/: 1.( 33. DA7; Airlines is considering the addition of a flight from "ed Cloud to David City. The total cost of the flight %ould be )1144 of %hich fixed costs are )044. 1xpected revenues from the flight are )*44. DA7; should: A9 not add this flight because only flights %hich cover their full costs are profitable. B9 not add this flight because it is not profitable at the margin. C9 add this flight because marginal revenue exceeds marginal costs. D9 not add this flight because total costs exceed total revenue. Ans%er: C
Type: A Topic: 1: &21 !/: 1.. 144. /n contrast to American firms- Bapanese firms fre2uently ma'e lifetime employment commitments to their %or'ers and agree not to lay them off %hen product demand is %ea'. +ther things being e2ual- %e %ould expect Bapanese firms to: A9 face more elastic product demand curves than American firms. B9 have relatively greater variable costs than American firms. C9 discontinue production at higher product prices than %ould American firms. D9 continue to produce in the short run at lo%er prices than %ould American firms. Ans%er: D Type: A Topic: 1: &21 !/: 1.. 141. Assume for a competitive firm that !C = AAC at )12- !C = ATC at )24- and !C = !" at )1*. This firm %ill: A9 reali,e a profit of )& per unit of output. B9 maximi,e its profit by producing in the short run. C9 minimi,e its losses by producing in the short run. D9 shut do%n in the short run. Ans%er: C Type: A Topic: 1: &10 !/: 1.& 142. The principle that a firm should produce up to the point %here the marginal revenue from the sale of an extra unit of output is e2ual to the marginal cost of producing it is 'no%n as the: A9 output6maximi,ing rule. B9 profit6maximi,ing rule. C9 shut6do%n rule. D9 brea'6even rule. Ans%er: B Type: A Topic: 1: &13 !/: 1.( 14 . /f a purely competitive firm is producing at the # = !C output and reali,ing an economic profit- at that output: A9 marginal revenue is less than price. C9 ATC is being minimi,ed. B9 marginal revenue exceeds ATC. D9 total revenue e2uals total cost. Ans%er: B Type: A Topic: 1: &10 !/: 1.& 14&. /f a profit6see'ing competitive firm is producing its profit6maximi,ing output and its total
fixed costs fall by 2( percent- the firm should: A9 use more labor and less capital to produce a larger output. B9 not change its output. C9 reduce its output. D9 increase its output. Ans%er: B
Fse the follo%ing to ans%er 2uestions 14(6140:
Type: E Topic: 1: &2& !/: 104 14(. "efer to the above diagram. At #2- this firm %ill: A9 produce && units and reali,e an economic profit. B9 produce && units and earn only a normal profit. C9 produce ** units and earn only a normal profit. D9 shut do%n in the short run. Ans%er: B Type: E Topic: 1: &2& !/: 104 14*. "efer to the above diagram. At #1- this firm %ill produce: A9 &. units and brea' even. C9 ** units and earn only a normal profit. B9 &. units and reali,e an economic profit. D9 2& units and earn only a normal profit. Ans%er: B Type: E Topic: 1: &2 6&2& !/: 1.36104 14.. "efer to the above diagram. At #&- this firm %ill: A9 shut do%n in the short run. C9 produce 4 units and earn only a normal profit. B9 produce 4 units and incur a loss. D9 produce 14 units and earn only a normal profit. Ans%er: A Type: E Topic: 1: &2 6&2& !/: 1.36104 140. "efer to the above diagram. At # - this firm %ill: A9 produce 1& units and reali,e an economic profit. B9 produce *2 units and earn only a normal profit. C9 produce &4 units and incur a loss. D9 shut do%n in the short run. Ans%er: C Type: A Topic: 1: &2 6&2& !/: 1.36104 143. The loss of a purely competitive firm %hich shuts do%n in the short run: A9 is e2ual to its total variable costs. C9 is e2ual to its total fixed costs. B9 is ,ero. D9 cannot be determined. Ans%er: C Type: A Topic: 1: &2 6&2& !/: 1.36104 114. The A:ax !anufacturing Company is selling in a purely competitive mar'et. /ts output is 144 units %hich sell at )& each. At this level of output total cost is )*44- total fixed cost is )144- and marginal cost is )&. The firm should:
A9 reduce output to about 04 units. C9 continue to produce 144 units. B9 expand its production. D9 produce ,ero units of output. Ans%er: D Type: A Topic: 1: &13 !/: 1.( 111. The !" = !C rule can be restated for a purely competitive seller as # = !C because: A9 each additional unit of output adds exactly its constant price to total revenue. B9 the firm$s average revenue curve is do%nsloping. C9 the mar'et demand curve is do%nsloping. D9 the firm$s marginal revenue and total revenue curves %ill coincide. Ans%er: A Type: A Topic: 1: &21 !/: 1.. 112. /f a purely competitive firm is maximi,ing economic profit: A9 it is necessarily maximi,ing per6unit profit. B9 it may or may not be maximi,ing per unit profit. C9 then per6unit profit %ill be minimi,ed. D9 it is necessarily overallocating resources to its product. Ans%er: B Fse the follo%ing to ans%er 2uestions 11 611(: Ans%er the next 2uestion8s9 on the basis of the follo%ing cost data for a purely competitive seller:
Type: T Topic: 1: &1. !/: 1. 11 . "efer to the above data. /f product price is )*4- the firm %ill: A9 shut do%n. B9 produce & units and reali,e a )124 economic profit. C9 produce * units and reali,e a )144 economic profit. D9 produce units and incur a )&4 loss. Ans%er: C
Type: T Topic: 1: &1. !/: 1. 11&. "efer to the above data. /f product price is )&(- the firm %ill: A9 shut do%n. B9 produce & units and reali,e a )124 economic profit. C9 produce ( units and reali,e a )1( economic profit. D9 produce * units and reali,e a )144 economic profit. Ans%er: C Type: T Topic: 1: &22 !/: 1.0 11(. "efer to the above data. /f product price is )2(- the firm %ill: A9 shut do%n and incur a )34 loss. B9 shut do%n and incur a )(4 loss. C9 produce units and incur a )*( loss.
D9 produce & units and reali,e a )14 economic profit. Ans%er: B Type: A Topic: 1: &22 !/: 1.0 11*. /f total revenue is less than total variable costs at the !" = !C output- a purely competitive firm should: A9 shut do%n. C9 produce and may or may not reali,e a profit. B9 produce- but %ill necessarily reali,e a loss. D9 increase its output. Ans%er: A Type: A Topic: 1: &1. !/: 1. 11.. Assume a purely competitive firm is selling 244 units of output at ) each. At this output its total fixed cost is )144 and its total variable cost is ) (4. This firm: A9 is maximi,ing its profit. B9 is ma'ing a profit- but not necessarily the maximum profit. C9 is incurring losses. D9 should shut do%n in the short run. Ans%er: B
Type: E Topic: 1: &2& !/: 104 110. "efer to the above diagram. This firm %ill earn only a normal profit if product price is: A9 #1. B9 #2. C9 # . D9 #&. Ans%er: C Type: E Topic: 1: &2& !/: 104 113. "efer to the above diagram. The firm %ill reali,e an economic profit if price is: A9 #1. B9 #2. C9 # . D9 #&. Ans%er: D Type: E Topic: 1: &2 6&2& !/: 1.36104 124. "efer to the above diagram. The firm %ill produce at a loss if price is: A9 #1. B9 #2. C9 # . D9 #&. Ans%er: B Type: E Topic: 1: &2 6&2& !/: 1.36104 121. "efer to the above diagram. The firm %ill shut do%n at any price less than: A9 #1. B9 #2. C9 # . D9 #&. Ans%er: A Type: E Topic: 1: &2& !/: 104 7tatus: 5e% 122. "efer to the above diagram. The firm$s supply curve is the segment of the: A9 !C curve above its intersection %ith the AAC curve. B9 !C curve above its intersection %ith the ATC curve. C9 AAC curve above its intersection %ith the !C curve.
D9 ATC curve above its intersection %ith the !C curve. Ans%er: A
Fse the follo%ing to ans%er 2uestions 12 61 2: Ans%er the next 2uestion8s9 on the basis of the follo%ing cost data for a firm that is selling in a purely competitive mar'et.
Type: E Topic: 1: &42 !/: 1(0 7tatus: 5e% 12 . "efer to the above data. The marginal cost column reflects: A9 the la% of diminishing returns. C9 diseconomies of scale. B9 the la% of diminishing marginal utility. D9 economies of scale. Ans%er: A Type: E Topic: 1: 306 33 !/: 1(&61(( 7tatus: 5e% 12&. "efer to the above data. At * units of output- total fixed cost is PPPP and total cost is PPPP: A9 )2(> )(4. B9 )(4> ) 44. C9 )144- )244. D9 )1(4> ) 44. Ans%er: D Type: E Topic: 1: 306 33 !/: 1(&61(( 7tatus: 5e% 12(. "efer to the above data. At units of output- total variable cost is PPPP and total cost is PPPP: A9 )24> ).4. B9 )*4> )214. C9 )24- )214. D9 )*4> ) (4. Ans%er: B Type: E Topic: 1: 306 33 !/: 1(&61(( 7tatus: 5e% 12*. "efer to the above data. @e can infer that- at ,ero output- this firm$s total fixed- total variable- and total costs are: A9 ,ero- ,ero- and ,ero- respectively. C9 )1(4- )2(- and )1.(- respectively. B9 ,ero- )2(- and )1.(- respectively. D9 )1(4- ,ero- and )1(4- respectively. Ans%er: D Type: E Topic: 1: &136&24 !/: 1.(61.* 7tatus: 5e% 12.. "efer to the above data. /f the mar'et price for this firm$s product is )0*.3(- it %ill produce: A9 3 units at an economic profit of ,ero. C9 3 units at an economic profit of )201.(2. B9 * units at a loss of )34. D9 0 units at an economic profit of )1 4.&0. Ans%er: C
Type: E Topic: 1: &136&24 !/: 1.(61.* 7tatus: 5e% 120. "efer to the above data. /f the mar'et price for this firm$s product is )*0.4.- it %ill produce: A9 0 units at an economic profit of ,ero. C9 3 units at an economic profit of )201.(2. B9 * units at a loss of )34. D9 0 units at an economic profit of )1 4.&0. Ans%er: D Type: E Topic: 1: &216&22 !/: 1..61.0 7tatus: 5e% 123. "efer to the above data. /f the mar'et price for this firm$s product is ) (- it %ill produce:
A9 * units at a loss of )1(4. C9 3 units at an economic profit of )201.(2. B9 * units at a loss of )34. D9 0 units at an economic profit of )1 4.&0. Ans%er: B Type: E Topic: 1: &216&22 !/: 1..61.0 7tatus: 5e% 1 4. "efer to the above data. /f the mar'et price for this firm$s product is )2&- it %ill produce: A9 & units at a loss of )1(4. C9 units at an economic profit of ,ero. B9 * units at a loss of )34. D9 & units at a loss of )1 0. Ans%er: D Type: E Topic: 1: &226&2 !/: 1.061.3 7tatus: 5e% 1 1. "efer to the above data. /f the mar'et price for this firm$s product is )1&- it %ill produce: A9 4 units at a loss of )1(4. C9 units at an economic profit of ,ero. B9 units at a loss of )1*0. D9 & units at a loss of )1 0. Ans%er: A Type: E Topic: 1: &2& !/: 104 7tatus: 5e% 1 2. "efer to the above data. The firm$s supply schedule is reflected in the: A9 marginal cost data for the fourth through tenth units of output. B9 marginal cost data for the first through tenth units of output. C9 average total cost data for the seventh through tenth units of output. D9 average variable cost data for fifth through tenth units of output. Ans%er: A Type: A Topic: 1: &1. !/: 1. 1 . A purely competitive seller should produce 8rather than shut do%n9 in the short run: A9 only if total revenue exceeds total cost. B9 only if total cost exceeds total revenue. C9 if total revenue exceeds total cost or if total cost exceeds total revenue by some amount less than total fixed cost. D9 if total cost exceeds total revenue by some amount greater than total fixed cost. Ans%er: C Type: A Topic: 1: &1.6&10 !/: 1. 61.& 1 &. /n the short run a purely competitive firm %ill maximi,e profit by producing that output at %hich: A9 total revenue exceeds total cost by a maximum amount. B9 total revenue exceeds total cost by a minimum amount. C9 total revenue and total cost are e2ual. D9 total fixed cost e2uals total variable cost. Ans%er: A
Type: A Topic: * 1: *0 !/: 12& 1((. 7uppose that %hen your income increases from )20-444 to ) 4-444 per year- your purchases of K increase from & to ( units because of that income increase. Thus: A9 K is an inferior good. K is a substitute good.
C9 the income effect exceeds the substitution effect. D9 the demand for K is elastic %ith respect to income. Ans%er: D Fse the follo%ing to ans%er 2uestions 1(*61* :
Type: E Topic: * 1: *. !/: 12 1(*. "efer to the above diagrams. The case of substitute goods is represented by figure: A9 A. B. C9 C. D9 D. Ans%er: D Type: E Topic: * 1: *0 !/: 12& 1(.. "efer to the above diagrams. The case of a normal good is represented by figure8s9: A9 A. B. C9 C. D9 D. Ans%er: A Type: E Topic: * 1: *0 !/: 12& 1(0. "efer to the above diagrams. The case of an inferior good is represented by figure8s9: A9 A only. B only. C9 C. D9 D. Ans%er: B Type: E Topic: * 1: *. !/: 12 1(3. "efer to the above diagrams. The case of complementary goods is represented by figure: A9 A. B. C9 C. D9 D. Ans%er: C
Type: E Topic: * 1: *0 !/: 12& 1*4. "efer to the above diagrams. /n %hich case %ould the coefficient of income elasticity be positive< A9 A. B. C9 C. D9 D. Ans%er: A Type: E Topic: * 1: *0 !/: 12& 1*1. "efer to the above diagrams. /n %hich case %ould the coefficient of income elasticity be negative< A9 A. B. C9 C. D9 D. Ans%er: B Type: E Topic: * 1: *0 !/: 12& 1*2. "efer to the above diagrams. /n %hich case %ould the coefficient of cross elasticity of demand be positive< A9 A. B. C9 C. D9 D. Ans%er: D Type: E Topic: * 1: *0 !/: 12& 1* . "efer to the above diagrams. /n %hich case %ould the coefficient of cross elasticity of
demand be negative< A9 A B C9 C D9 D Ans%er: C Type: A Topic: * 1: *. !/: 12 1*&. 7uppose that a 14 percent increase in the price of normal good L causes a 24 percent increase in the 2uantity demanded of normal good K. The coefficient of cross elasticity of demand is: A9 negative and therefore these goods are substitutes. negative and therefore these goods are complements. C9 positive and therefore these goods are substitutes. D9 positive and therefore these goods are complements. Ans%er: C Type: A Topic: * 1: *. !/: 12 1*(. 7uppose that a 24 percent increase in the price of normal good L causes a 14 percent decline in the 2uantity demanded of normal good K. The coefficient of cross elasticity of demand is: A9 negative and therefore these goods are substitutes. negative and therefore these goods are complements. C9 positive and therefore these goods are substitutes. D9 positive and therefore these goods are complements. Ans%er: B Type: A Topic: * 1: *0 !/: 12& 1**. Assume that a & percent increase in income in the economy produces an 0 percent increase in the 2uantity demanded of good K. The coefficient of income elasticity of demand is: A9 negative and therefore K is an inferior good. C9 positive and therefore K is an inferior good. negative and therefore K is a normal good. D9 positive and therefore K is a normal good. Ans%er: D
Type: A Topic: * 1: *0 !/: 12& 1*.. Assume that a percent increase in income in the economy produces a 1 percent decline in the 2uantity demanded of good K. The coefficient of income elasticity of demand for good K is: A9 negative and therefore K is an inferior good. C9 positive and therefore K is an inferior good. negative and therefore K is a normal good. D9 positive and therefore K is a normal good. Ans%er: A Consider This Nuestions Type: D 1: (0 !/: 11& 7tatus: 5e% 1*0. 8Consider This9 1lastic demand is analogous to a PPPPPPPPPP and inelastic demand to a PPPPPPPPP. A9 normal %rench> soc'et %rench C9 Ace bandage> firm rubber tie6do%n tight rubber band> loose rubber band D9 one6foot ruler> tape measure Ans%er: C Type: D 1: (0 !/: 11& 7tatus: 5e%
1*3. 8Consider This9 1lasticity can be thought of as degree of relative: A9 video brightness. price bounce. C9 audio volume. D9 2uantity stretch. Ans%er: D ?ast @ord Nuestions Type: A 1: *3 !/: 12( 7tatus: 5e% 1.4. 8?ast @ord9 7uppose that a firm has Cpricing po%erC and can segregate its mar'et into t%o distinct groups based on differences in elasticities of demand. The firm might charge: A9 a lo%er price to the group that has the less elastic demand. a higher price to the group that has the less elastic demand. C9 the same price to both groups but include a CfreeC related product for the group that has an inelastic demand. D9 the same price to both groups but ma'e it difficult for the group %ith the more elastic demand to gain access to the product. Ans%er: B Type: A 1: *3 !/: 12( 7tatus: 5e% 1.1. 8?ast @ord9 !icrosoft charges a substantially lo%er price for a soft%are upgrade than for the initial purchase of the soft%are. This implies that !icrosoft vie%s the demand curve for the soft%are upgrade to be: A9 more elastic than the demand for the original soft%are. upsloping rather than do%nsloping. C9 less elastic than the demand for the original soft%are. D9 of less value than the original soft%are. Ans%er: A
Type: A 1: *3 !/: 12( 7tatus: 5e% 1.2. 8?ast @ord9 @hich of the follo%ing is not an example of pricing based on group differences in elasticity of demand< A9 7enior6citi,en discounts at restaurants and motels. Cash rebates for purchases of automobiles. C9 Children discounts for admissions to theme par's. D9 Discounted student prices for visits to museums. Ans%er: B TrueJDalse Nuestions Type: A 1: (3 !/: 11( 7tatus: 5e% 1. . A linear demand curve has a constant elasticity over the full range of the curve. Ans%er: Dalse Type: A 1: *( !/: 121 7tatus: 5e% 1.&. The greater the ease of shifting resources from product K to L in the production process- the greater is the elasticity of supply of product L . Ans%er: True Type: 1 1: *( !/: 121 7tatus: 5e%
1.(. /f the elasticity coefficient of supply is 4..- supply is elastic. Ans%er: Dalse Type: D 1: ** !/: 122 7tatus: 5e% 1.*. Anti2ues tend to have highly inelastic supply curves. Ans%er: True Type: A 1: *2 !/: 110 1... The smaller the number of good substitutes for a product- the greater %ill be the price elasticity of demand for it. Ans%er: Dalse Type: A 1: * !/: 113 1.0. /f the demand for %heat is highly price inelastic- an extraordinarly large crop may reduce farm incomes. Ans%er: True Type: A 1: *2 !/: 110 1.3. Eenerally spea'ing- the demand for luxury goods is more price elastic than is the demand for necessities. Ans%er: True Type: A 1: *2 !/: 110 104. Eenerally spea'ing- the smaller the percentage of one$s total budget devoted to a particular product- the more price elastic %ill be the demand for that product. Ans%er: Dalse Type: A 1: *1 !/: 11. 101. /f price and total revenue are directly related- demand is inelastic. Ans%er: True Type: A 1: *16 *2 !/: 11.6110 102. /f price changes and total revenue changes in the opposite direction- demand is relatively elastic. Ans%er: True Fse the follo%ing to ans%er 2uestions 10 610(: Ans%er the next 2uestion8s9 on the basis of the follo%ing demand and supply data:
Type: A 1: &06&3 !/: &06&3 10 . "efer to the above data. The e2uilibrium price of this product is some%here bet%een )* and ).. Ans%er: True Type: T 1: (3 !/: 11( 10&. "efer to the above data. The demand for this product is elastic in the )06). price range.
Ans%er: True Type: T 1: *( !/: 121 10(. "efer to the above data. The supply of this product is inelastic in the )*6)( price range. Ans%er: Dalse Type: T 1: *. !/: 12 10*. Cross elasticity of demand measures the effect of a change in the price of one product on the 2uantity demanded of another product. Ans%er: True Type: D 1: *0 !/: 12& 10.. /ncome elasticity measures the effect of a change in income on the purchases of some good or service. Ans%er: True Type: D 1: *0 !/: 12& 100. /f the coefficient of income elasticity of demand is positive- the product is an inferior good. Ans%er: Dalse
Type: A 1: *. !/: 12 103. /f the coefficient of cross elasticity of demand is positive- the t%o products are complementary goods. Ans%er: Dalse Type: A 1: *0 !/: 12& 134. An income elasticity coefficient of 61.0 means the product is a normal good. Ans%er: Dalse Type: A 1: *. !/: 12 131. A cross elasticity of demand coefficient of I2.( indicates that the t%o products are substitutes. Ans%er: True Type: A 1: *. !/: 12 132. @e %ould expect the coefficient of cross elasticity of demand for DAD players and DADs to be positive. Ans%er: Dalse 7ummer 244 !BA (41641 1conomics 7urvey Tong !oc' 1xam 8no credit9 #art /. !ultiple Choice 8+ne point each9 /dentify the letter of choice that best completes the statement or ans%ers the 2uestion.
Fse the follo%ing to ans%er 2uestion 1: Ans%er the next 2uestion8s9 on the basis of the follo%ing data. All figures are in billions of dollars.
1. The gross domestic product for the above economy is: A9 )144. )3(. C9 )114. D9 )14.. 2. The total amount of income earned by F.7. resource suppliers in a year is measured by: A9 gross domestic product. national income. C9 personal income. D9 disposable income. . The term Creal ED#C refers to: A9 the value of the domestic output after ad:ustments have been made for environmental pollution and changes in the distribution of income. ED# data that embody changes in the price level- but not changes in physical output. C9 ED# data that reflect changes in both physical output and the price level. D9 ED# data that have been ad:usted for changes in the price level. &. ED# differs from 5D# in that: A9 ED# is based on gross exports- %hile 5D# is based on net exports. ED# includes- but 5D# excludes- indirect business taxes. C9 net investment is used in calculating ED# and gross investment is used in calculating 5D#. D9 gross investment is used in calculating ED# and net investment is used in calculating 5D#. (. A nation$s stoc' of capital goods %ill decline %hen: A9 gross investment exceeds net investment. net investment is positive- but less than gross investment. C9 depreciation exceeds gross investment. D9 gross investment exceeds depreciation. *. Consumption of fixed capital 8depreciation9 can be determined by: A9 adding indirect business taxes to 5D#. subtracting 5D# from ED#. C9 subtracting net investment from ED#. D9 adding net investment to gross investment. .. /f personal income exceedes national income in a particular year- %e can conclude that: A9 transfer payments exceeded the sum of social security contributions- corporate income taxesand indirect business taxes. the sum of social security contributions- corporate income taxes- and undistributed corporate profits exceeded transfer payments.
C9 consumption of fixed capital and indirect business taxes exceeded personal taxes. D9 transfer payments exceeded the sum of social security contributions- corporate income taxesand undistributed corporate profits. 0. The consumption schedule is such that: A9 both the A#C and the !#C increase as income rises. the A#C is constant and the !#C declines as income rises. C9 the !#C is constant and the A#C declines as income rises. D9 the !#C and A#C must be e2ual at all levels of income. 3. The &(6degree line on a chart relating consumption and income sho%s: A9 all points %here the !#C is constant. all points at %hich saving and income are e2ual. C9 all the points at %hich consumption and income are e2ual. D9 the amounts households %ill plan to save at each possible level of income. Fse the follo%ing to ans%er 2uestion 14: Ans%er the next 2uestion8s9 on the basis of the follo%ing data for a hypothetical economy.
14. "efer to the above data. The marginal propensity to consume is: A9 .04. ..(. C9 .24. D9 .2(. 11. A specific investment %ill be underta'en if the expected rate of return- r- exceeds the interest rate- i. A9 True b9 Dalse 12. The vertical distance bet%een the hori,ontal axis and any point on a nondiscriminating monopolist$s demand curve measures: A9 the 2uantity demanded. product price and average revenue. C9 total revenue. D9 product price and marginal revenue.
Fse the follo%ing to ans%er 2uestion 1 : Ans%er the next 2uestion8s9 on the basis of the follo%ing demand and cost data for a pure monopolist:
1 . "efer to the above data. 12uilibrium price for the monopolist %ill be: A9 )(.44
)2.34. C9 ) . (. D9 )&.(4. 1&. 5atural monopoly may result %here products produce substantial net%or' effects and can be simultaneously consumed by a large number of consumers. A9 True Dalse Fse the follo%ing to ans%er 2uestion 1(:
1(. "efer to the above diagrams. /f dra%n- Dirm A$s average revenue curve %ould lie belo% its demand curve. A9 True Dalse
Fse the follo%ing to ans%er 2uestion 1*: Ans%er the next 2uestion8s9 on the basis of the follo%ing cost data for a purely competitive seller:
1*. "efer to the above data. /f product price is )*4- the firm %ill: A9 shut do%n. produce & units and reali,e a )124 economic profit. C9 produce * units and reali,e a )144 economic profit. D9 produce units and incur a )&4 loss. 1.. @hich of the follo%ing industries most closely approximates pure competition< A9 agriculture farm implements C9 clothing D9 steel 10. A one6firm industry is 'no%n as: A9 monopolistic competition oligopoly C9 pure monopoly D9 pure competition 13. A firm finds that at its !" = !C output- its TC = )1444- TAC = )044- TDC = )244- and total revenue is )344. This firm should: A9 shut do%n in the short run. produce because the resulting loss is less than its TDC. C9 produce because it %ill reali,e an economic profit. D9 li2uidate its assets and go out of business.
Fse the follo%ing to ans%er 2uestion 24: Ans%er the next 2uestion8s9 on the basis of the follo%ing cost data for a firm that is selling in a purely competitive mar'et:
24. "efer to the above data. /f the mar'et price for the firm$s product is )12- the competitive firm %ill produce: A9 & units at a loss of )143. & units at an economic profit of ) 1..(. C9 0 units at a loss of )&0.04. D9 ,ero units at a loss of )144. Fse the follo%ing to ans%er 2uestion 21: Fse the follo%ing cost information for the Creamy Crisp Donut Company to ans%er the next 2uestion8s9: 1ntrepreneur$s potential earnings as a salaried %or'er = )(4-444 Annual lease on building = )22-444 Annual revenue from operations = ) 04-444 #ayments to %or'ers = )124-444 Ftilities 8electricity- %ater- disposal9 costs = )0-444 1ntrepreneur$s potential economic profit from the next best entrepreneurial activity = )04-444 1ntrepreneur$s forgone interest on personal funds used to finance the business = )*-444 21. "efer to the above data. Creamy Crisp$s explicit costs are: A9 )20*-444. )1(4-444. C9 )3&-444. D9 )1(*-444. Fse the follo%ing to ans%er 2uestion 22:
22. The above diagram suggests that: A9 %hen marginal product is ,ero- total product is at a minimum. %hen marginal product lies above average product- average product is rising. C9 %hen marginal product lies belo% average product- average product is rising. D9 %hen total product is at a maximum- so is marginal product and average product. 2 . A demand curve %hich is parallel to the hori,ontal axis is: A9 perfectly inelastic perfectly elastic C9 relatively inelastic D9 relatively elastic
Fse the follo%ing to ans%er 2uestion 2&: /n the follo%ing 2uestion8s9 you are as'ed to determine- other things e2ual- the effects of a given change in a determinant of demand or supply for product K upon 819 the demand 8D9 for- or supply 879 of- K- 829 the e2uilibrium price 8#9 of K and 8 9 the e2uilibrium 2uantity 8N9 of K. 2&. "efer to the above. An improvement in the technology used to produce K %ill: A9 decrease 7- increase #- and decrease N. B9 decrease 7- increase #- and increase N. C9 increase 7- decrease #- and increase N. D9 decrease D- decrease #- and decrease N. Fse the follo%ing to ans%er 2uestion 2(:
2(. "efer to the above diagram. @hich of the follo%ing is a positive statement< A9 A point inside the production possibilities curve is superior to a point on the curve because the former re2uires less %or' effort. B9 Because any society should stress economic gro%th as its ma:or goal- point D is superior to point C. C9 #oint B is preferable to point C because the ultimate goal of economic activity is to maximi,e consumption. D9 Eiven its resources and technology- this society is incapable of simultaneously producing units of tractors and 1( units of bread. 2*. Allocative efficiency involves determining: A9 %hich output6mix %ill result in the most rapid rate of economic gro%th. B9 %hich production possibilities curve reflects the lo%est opportunity costs. C9 the point on the production possibilities curve that %ill maximi,e society$s satisfaction. D9 the optimal rate of technological progress. 2.. Dor most producing firms: A9 marginal cost rises as output is carried to a certain level- and then begins to decline. B9 total costs rise as output is carried to a certain level- and then begin to decline. C9 average total costs decline as output is carried to a certain level- and then begin to rise. D9 average total costs rise as output is carried to a certain level- and then begin to decline.
20. The lo%est point on a purely competitive firm$s short6run supply curve corresponds to: A9 the minimum point on its ATC curve. B9 the minimum point on its AAC curve. C9 the minimum point on its ADC curve. D9 the minimum point on its !C curve. Fse the follo%ing to ans%er 2uestion 23:
23. "efer to the above diagram. The 2uantity difference bet%een areas A and C for the indicated price reduction measures: A9 marginal cost. B9 marginal revenue. C9 monopoly price. D9 a %elfare or efficiency loss. 4.
The consumption schedule in the above diagram indicates that: A9 consumers %ill maximi,e their satisfaction %here the consumption schedule and &(g line intersect. B9 up to a point consumption exceeds income- but then falls belo% income. C9 the !#C falls as income increases. D9 households consume as much as they earn. #art //. 7hort Nuestions 1. The follo%ing table sho%s nominal ED# and an appropriate price index for a group of selected years.
5ominal ED#- #rice /ndex Lear Billions 8133* = 1449 13*4 13*0 13.0 1300 1330 )(2..&4 22.13 311.( 2*.23 223(.3 &0.22 &.&2.( 04.22 0.34.2 14 .22
a9 Compute real ED# for the years 13.0 and 1330. b9 @hat is the gro%th rate of real ED# bet%een 1300 and 1330< c9 @hat is the inflation rate bet%een 13*0 and 13.0< 2. Do you agree or disagree %ith the statement that: XA monopolist al%ays charges the highest possible price.Y 1xplain.
. Complete the accompanying table.
?evel of output and income 8ED# = D/9 Consumption 7aving A#C A#7 !#C !#7 )&04 )PPP )S0 PPPP PPPP PPP PPP (24 PPP 4 PPPP PPPP PPP PPP (*4 PPP 0 PPPP PPPP PPP PPP *44 PPP 1* PPPP PPPP PPP PPP *&4 PPP 2& PPPP PPPP PPP PPP *04 PPP 2 PPPP PPPP PPP PPP .24 PPP &4 PPPP PPPP PPP PPP .*4 PPP &0 PPPP PPPP PPP PPP 044 PPP (* PPPP PPPP PPP PPP 8a9 Fsing the belo% graphs- sho% the consumption and saving schedules graphically. 8b9 ?ocate the brea'6even level of income. ;o% is it possible for households to dissave at very lo% income levels< bbbbb The 1nd bbbbb Ans%er Gey 66 !oc' 7ummer 244 1. C 2. B .D &. D (. C *. B .. D 0. C 3. C 14. A 11. True 12. B 1 .D 1&. True 1(. Dalse 1*. C 1.. A 10. C 13. B 24. D 21. B 22. B 2 .B 2&. C 2(. D 2*. C 2.. C
20. B 23. B 4. B
#rice elasticity of demand Type: D Topic: 1 1: (* !/: 112 1. The price elasticity of demand coefficient measures: A9 buyer responsiveness to price changes. the extent to %hich a demand curve shifts as incomes change. C9 the slope of the demand curve. D9 ho% far business executives can stretch their fixed costs. Ans%er: A Type: 1 Topic: 1 1: (* !/: 112 2. The basic formula for the price elasticity of demand coefficient is: A9 absolute decline in 2uantity demandedJabsolute increase in price. percentage change in 2uantity demandedJpercentage change in price. C9 absolute decline in priceJabsolute increase in 2uantity demanded. D9 percentage change in priceJpercentage change in 2uantity demanded. Ans%er: B Type: D Topic: 1 1: (* !/: 112 . The demand for a product is inelastic %ith respect to price if: A9 consumers are largely unresponsive to a per unit price change. the elasticity coefficient is greater than 1. C9 a drop in price is accompanied by a decrease in the 2uantity demanded. D9 a drop in price is accompanied by an increase in the 2uantity demanded. Ans%er: A Type: A Topic: 1 1: (. !/: 11 &. /f the price elasticity of demand for a product is 2.(- then a price cut from )2.44 to )1.04 %ill: A9 increase the 2uantity demanded by about 2.( percent. decrease the 2uantity demanded by about 2.( percent. C9 increase the 2uantity demanded by about 2( percent. D9 increase the 2uantity demanded by about 2(4 percent. Ans%er: C Type: A Topic: 1 1: (. !/: 11 (. 7uppose that as the price of L falls from )2.44 to )1.34 the 2uantity of L demanded increases from 114 to 110. Then the price elasticity of demand is: A9 &.44. 2.43. C9 1. .. D9 .3&. Ans%er: C Type: D Topic: 1 1: (. !/: 11 *. @hich of the follo%ing is not characteristic of the demand for a commodity that is elastic< A9 The relative change in 2uantity demanded is greater than the relative change in price.
Buyers are relatively sensitive to price changes. C9 Total revenue declines if price is increased. D9 The elasticity coefficient is less than one. Ans%er: D Type: A Topic: 1 1: (. !/: 11 .. /f the demand for product K is inelastic- a & percent increase in the price of K %ill: A9 decrease the 2uantity of K demanded by more than & percent. decrease the 2uantity of K demanded by less than & percent. C9 increase the 2uantity of K demanded by more than & percent. D9 increase the 2uantity of K demanded by less than & percent. Ans%er: B Type: A Topic: 1 1: (. !/: 11 0. /f a firm can sell -444 units of product A at )14 per unit and (-444 at )0- then: A9 the price elasticity of demand is 4.&&. C9 the price elasticity of demand is 2.2(. A is a complementary good. D9 A is an inferior good. Ans%er: C Type: A Topic: 1 1: (.6 (0 !/: 11 611& 3. A perfectly inelastic demand schedule: A9 rises up%ard and to the right- but has a constant slope. can be represented by a line parallel to the vertical axis. C9 cannot be sho%n on a t%o6dimensional graph. D9 can be represented by a line parallel to the hori,ontal axis. Ans%er: B
Type: C Topic: 1 1: (. !/: 11 14. The larger the coefficient of price elasticity of demand for a product- the: A9 larger the resulting price change for an increase in supply. more rapid the rate at %hich the marginal utility of that product diminishes. C9 less competitive %ill be the industry supplying that product. D9 smaller the resulting price change for an increase in supply. Ans%er: D Type: A Topic: 1 1: (3 !/: 11( 11. !ost demand curves are relatively elastic in the upper6left portion because the original price: A9 and 2uantity from %hich the percentage changes in price and 2uantity are calculated are both large. and 2uantity from %hich the percentage changes in price and 2uantity are calculated are both small. C9 from %hich the percentage price change is calculated is small and the original 2uantity from %hich the percentage change in 2uantity is calculated is large. D9 from %hich the percentage price change is calculated is large and the original 2uantity from %hich the percentage change in 2uantity is calculated is small. Ans%er: D Type: A Topic: 1 1: (. !/: 11
12. The price elasticity of demand for %idgets is 4.04. Assuming no change in the demand curve for %idgets- a 1* percent increase in sales implies a: A9 1 percent reduction in price. C9 &4 percent reduction in price. 12 percent reduction in price. D9 24 percent reduction in price. Ans%er: D Type: A Topic: 1 1: (3 !/: 11( 1 . 7uppose Aiyanna$s pi,,eria currently faces a linear demand curve and is charging a very high price per pi,,a and doing very little business. Aiyanna no% decides to lo%er pi,,a prices by ( percent per %ee' for an indefinite period of time. @e can expect that each successive %ee': A9 demand %ill become more price elastic. price elasticity of demand %ill not change as price is lo%ered. C9 demand %ill become less price elastic. D9 the elasticity of supply %ill increase. Ans%er: C Type: A Topic: 1 1: (0 !/: 11& 1&. The price elasticity of demand of a straight6line demand curve is: A9 elastic in high6price ranges and inelastic on lo%6price ranges. elastic- but does not change at various points on the curve. C9 inelastic- but does not change at various points on the curve. D9 1 at all points on the curve. Ans%er: A Type: C Topic: 1 1: (3 !/: 11( 1(. A left%ard shift in the supply curve of product K %ill increase e2uilibrium price to a greater extent the: A9 more elastic the supply curve. C9 more elastic the demand for the product. larger the elasticity of demand coefficient. D9 more inelastic the demand for the product. Ans%er: D
Type: A Topic: 1 1: (3 !/: 11( 1*. /f the demand for bacon is relatively elastic- a 14 percent decline in the price of bacon %ill: A9 decrease the amount demanded by more than 14 percent. increase the amount demanded by more than 14 percent. C9 decrease the amount demanded by less than 14 percent. D9 increase the amount demanded by less than 14 percent. Ans%er: B Type: A Topic: 1 1: (. !/: 11 1.. The price elasticity of demand is: A9 negative- but the minus sign is ignored. positive- but the plus sign is ignored. C9 positive for normal goods and negative for inferior goods. D9 positive because price and 2uantity demanded are inversely related. Ans%er: A Type: A Topic: 1 1: (3 !/: 11(
10. Dor a linear demand curve: A9 elasticity is constant along the curve. C9 demand is elastic at lo% prices. elasticity is unity at every point on the curve. D9 demand is elastic at high prices. Ans%er: D Type: A Topic: 1 1: (3 !/: 11( 13. The price of product K is reduced from )144 to )34 and- as a result- the 2uantity demanded increases from (4 to *4 units. Therefore demand for K in this price range: A9 has declined. is of unit elasticity. C9 is inelastic. D9 is elastic. Ans%er: D Fse the follo%ing to ans%er 2uestion 24:
Type: E Topic: 1 1: (3 !/: 11( 24. The above diagram sho%s t%o product demand curves. +n the basis of this diagram %e can say that: A9 over range #1#2 price elasticity of demand is greater for D1 than for D2. over range #1#2 price elasticity of demand is greater for D2 than for D1. C9 over range #1#2 price elasticity is the same for the t%o demand curves. D9 not enough information is given to compare price elasticities. Ans%er: A Type: A Topic: 1 1: (3 !/: 11( 21. 7uppose %e find that the price elasticity of demand for a product is .( %hen its price is increased by 2 percent. @e can conclude that 2uantity demanded: A9 increased by . percent. C9 decreased by 3 percent. decreased by . percent. D9 decreased by 12 percent. Ans%er: B Type: A Topic: 1 1: (3 !/: 11( 22. The price elasticity of demand for beef is about 4.*4. +ther things e2ual- this means that a 24 percent increase in the price of beef %ill cause the 2uantity of beef demanded to: A9 increase by approximately 12 percent. C9 decrease by approximately 2 percent. decrease by approximately 12 percent. D9 decrease by approximately 2* percent. Ans%er: B Type: A Topic: 1 1: (3 !/: 11( 2 . The elasticity of demand: A9 is infinitely large for a perfectly inelastic demand curve. tends to be inelastic in high6price ranges and elastic in lo%6price ranges. C9 tends to be elastic in high6price ranges and inelastic in lo%6price ranges. D9 is the same at each price62uantity combination on a stable demand curve. Ans%er: C Type: D Topic: 1 1: (. !/: 11 2&. /f a demand for a product is elastic- the value of the price elasticity coefficient is: A9 ,ero. greater than one. C9 e2ual to one. D9 less than one.
Ans%er: B Type: D Topic: 1 1: (* !/: 112 2(. The concept of price elasticity of demand measures: A9 the slope of the demand curve. the number of buyers in a mar'et. C9 the extent to %hich the demand curve shifts as the result of a price decline. D9 the sensitivity of consumer purchases to price changes. Ans%er: D
Fse the follo%ing to ans%er 2uestions 2*620:
Type: E Topic: 1 1: (3 !/: 11( 2*. "efer to the above diagram. Bet%een prices of )(..4 and )*. 4: A9 D1 is more elastic than D2. C9 D1 and D2 have identical elasticities. D2 is an inferior good and D1 is a normal good. D9 D2 is more elastic than D1 Ans%er: A Type: E Topic: 1 1: (3 !/: 11( 2.. "efer to the above diagram and assume a single good. /f the price of the good decreases from )*. 4 to )(..4- consumer spending %ould: A9 decrease if demand %ere D1 only. C9 decrease if demand %ere either D1 or D2. decrease if demand %ere D2 only. D9 increase if demand %ere either D1 or D2. Ans%er: B Type: E Topic: 1 1: (3 !/: 11( 20. "efer to the above diagram and assume a single good. /f the price of the good increased from )(..4 to )*. 4 along D1- the price elasticity of demand along this portion of the demand curve %ould be: A9 4.0. 1.4. C9 1.2. D9 2.4. Ans%er: C Type: A Topic: 1 1: (3 !/: 11( 23. 7uppose the price of local cable TA service increased from )1*.24 to )13.04 and as a result the number of cable subscribers decreased from 22&-444 to 1.*-444. Along this portion of the demand curve- price elasticity of demand is: A9 4.0. 1.2. C9 1.*. D9 0.4 Ans%er: B Type: A Topic: 1 1: (3 !/: 11( 4. /f the price of hand calculators falls from )14 to )3 and- as a result- the 2uantity demanded increases from 144 to 12(- then: A9 demand is elastic. demand is inelastic. C9 demand is of unit elasticity. D9 not enough information is given to ma'e a statement about elasticity.
Ans%er: A Type: A Topic: 1 1: (0 !/: 11& 1. A perfectly inelastic demand curve: A9 has a price elasticity coefficient greater than unity. has a price elasticity coefficient of unity throughout. C9 graphs as a line parallel to the vertical axis. D9 graphs as a line parallel to the hori,ontal axis. Ans%er: C Type: A Topic: 1 1: (3 !/: 11( 2. !oving up%ard on a do%n%ard6sloping straight6line demand curve- %e find that price elasticity: A9 is constant. C9 decreases continuously. increases continuously. D9 may either increase or decrease. Ans%er: B Fse the follo%ing to ans%er 2uestions 6 .:
Ans%er the next 2uestion8s9 on the basis of the follo%ing demand schedule:
Type: T Topic: 1 1: (3 !/: 11( . "efer to the above data. /f this demand schedule %ere graphed- %e %ould find that: A9 its slope diminishes as %e move southeast do%n the curve. its slope diminishes as %e move north%est up the curve. C9 its slope is constant throughout. D9 the data is inconsistent %ith the la% of demand. Ans%er: C Type: T Topic: 1 1: (3 !/: 11( &. "efer to the above data. The price elasticity of demand is relatively elastic: A9 in the )*6)& price range. C9 in the ) 6)1 price range. over the entire )*6)1 price range. D9 in the )*6)( price range only. Ans%er: A Type: T Topic: 1 1: (3 !/: 11( (. "efer to the above data. The price elasticity of demand is relatively inelastic: A9 in the )*6)& price range. C9 in the ) 6)1 price range. over the entire )*6)1 price range. D9 in the )*6)( price range only. Ans%er: C
Type: T Topic: 1 1: (3 !/: 11( *. "efer to the above data. The price elasticity of demand is unity: A9 throughout the entire price range because the slope of the demand curve is constant. in the )&6) price range only. C9 over the entire ) 6)1 price range.
D9 over the entire )*6)& price range. Ans%er: B Type: T Topic: 1 1: (3 !/: 11( .. "efer to the above data. @hich of the follo%ing is correct< A9 Although the slope of the demand curve is constant- price elasticity declines as %e move from high to lo% price ranges. Although the slope of the demand curve is constant- price elasticity increases as %e move from high to lo% price ranges. C9 Although the demand curve is concave to the origin- price elasticity of demand is constant throughout. D9 A steep slope means demand is inelastic> a flat slope means demand is elastic. Ans%er: A Type: A Topic: 1 1: (3 !/: 11( 0. /f the price elasticity of demand for gasoline is 4.24: A9 the demand for gasoline is linear. a rise in the price of gasoline %ill reduce total revenue. C9 a 14 percent rise in the price of gasoline %ill decrease the amount purchased by 2 percent. D9 a 14 percent fall in the price of gasoline %ill increase the amount purchased by 24 percent. Ans%er: C Type: T Topic: 1 1: (3 !/: 11( 3. /n %hich price range of the accompanying demand schedule is demand elastic<
A9 )&6) ) 6)2 C9 )26)1 D9 belo% )1 Ans%er: A Total revenue test Type: A Topic: 2 1: *1 !/: 11. &4. @hen the percentage change in price is greater than the resulting percentage change in 2uantity demanded: A9 a decrease in price %ill increase total revenue. C9 an increase in price %ill increase total revenue. demand may be either elastic or inelastic. D9 demand is elastic. Ans%er: C
Type: A Topic: 2 1: *46 *1 !/: 11*611. &1. 7uppose the price elasticity coefficients of demand are 1.& - 4.*.- 1.11- and 4.23 for products @- K- L- and Q respectively. A 1 percent decrease in price %ill increase total revenue in the case8s9 of: A9 @ and L . B9 L and Q. C9 K and Q. D9 Q and @. Ans%er: A Fse the follo%ing to ans%er 2uestions &26&&:
Type: E Topic: 2 1: *1 !/: 11. &2. 7uppose that the above total revenue curve is derived from a particular linear demand curve. That demand curve must be: A9 inelastic for price declines that increase 2uantity demanded from * units to . units. B9 elastic for price declines that increase 2uantity demanded from * units to . units. C9 inelastic for price increases that reduce 2uantity demanded from & units to units. D9 elastic for price increases that reduce 2uantity demanded from 0 units to . units. Ans%er: A Type: E Topic: 2 1: *4 !/: 11* & . 7uppose that the above total revenue curve is derived from a particular linear demand curve. That demand curve must be: A9 inelastic for price declines that increase 2uantity demanded from 2 units to units. B9 elastic for price declines that increase 2uantity demanded from ( units to * units. C9 inelastic for price increases that reduce 2uantity demanded from & units to units. D9 elastic for price increases that reduce 2uantity demanded from & units to units. Ans%er: D
Type: E Topic: 2 1: *1 !/: 11. &&. 7uppose that the above total revenue curve is derived from a particular linear demand curve. That demand curve must be: A9 inelastic for price declines that increase 2uantity demanded from 2 units to units. B9 elastic for price declines that increase 2uantity demanded from ( units to * units. C9 unit elastic for price increases that reduce 2uantity demanded from ( units to & units.. D9 inelastic for price increases that reduce 2uantity demanded from & units to units. Ans%er: C Type: A Topic: 2 1: *4 !/: 11* &(. @hich of the follo%ing statements is not correct< A9 /f the relative change in price is greater than the relative change in the 2uantity demanded associated %ith it- demand is inelastic. B9 /n the range of prices in %hich demand is elastic- total revenue %ill diminish as price decreases. C9 Total revenue %ill not change if price varies %ithin a range %here the elasticity coefficient is unity. D9 Demand tends to be elastic at high prices and inelastic at lo% prices. Ans%er: B Type: A Topic: 2 1: *4 !/: 11* &*. /n %hich of the follo%ing instances %ill total revenue decline< A9 price rises and supply is elastic C9 price rises and demand is inelastic B9 price falls and demand is elastic D9 price rises and demand is elastic Ans%er: D Type: A Topic: 2 1: *46 *1 !/: 11*611. &.. /f a firm$s demand for labor is elastic- a union6negotiated %age increase %ill:
A9 necessarily be inflationary. C9 cause the firm$s total payroll to decline. B9 cause the firm$s total payroll to increase. D9 cause a shortage of labor. Ans%er: C Type: A Topic: 2 1: *46 *1 !/: 11*611. &0. The /llinois Central "ailroad once as'ed the /llinois Commerce Commission for permission to increase its commuter rates by 24 percent. The railroad argued that declining revenues made this rate increase essential. +pponents of the rate increase contended that the railroad$s revenues %ould fall because of the rate hi'e. /t can be concluded that: A9 both groups felt that the demand %as elastic but for different reasons. B9 both groups felt that the demand %as inelastic but for different reasons. C9 the railroad felt that the demand for passenger service %as inelastic and opponents of the rate increase felt it %as elastic. D9 the railroad felt that the demand for passenger service %as elastic and opponents of the rate increase felt it %as inelastic. Ans%er: C
Type: A Topic: 2 1: *4 !/: 11* &3. /f a firm finds that it can sell )1 -444 of a product %hen its price is )( per unit and )11-444 of it %hen its price is )*- then: A9 the demand for the product is elastic in the )*6)( price range. B9 the demand for the product must have increased. C9 elasticity of demand is 4..&. D9 the demand for the product is inelastic in the )*6)( price range. Ans%er: A Type: C Topic: 2 1: *1 !/: 11. (4. 7uppose the price elasticity of demand for bread is 4.24. /f the price of bread falls by 14 percent- the 2uantity demanded %ill increase by: A9 2 percent and total expenditures on bread %ill rise. B9 2 percent and total expenditures on bread %ill fall. C9 24 percent and total expenditures on bread %ill fall. D9 24 percent and total expenditures on bread %ill rise. Ans%er: B Fse the follo%ing to ans%er 2uestions (16(2:
Type: E Topic: 2 1: *1 !/: 11. (1. "efer to the above diagram %hich is a rectangular hyperbola- that is- a curve such that each rectangle dra%n from any point on the curve %ill be of identical area. /f this rectangular hyperbola %as a demand curve- %e could say that it %ould be: A9 elastic at high prices and inelastic at lo% prices. C9 impossible to generali,e about its elasticity. B9 elastic at lo% prices and inelastic at high prices. D9 of unit elasticity throughout. Ans%er: D
Type: E Topic: 2 1: *1 !/: 11. (2. "efer to the above diagram %hich is a rectangular hyperbola- that is- a curve such that each rectangle dra%n from any point on the curve %ill be of identical area. /n comparing the price elasticity and the slope of this demand curve %e can conclude that the: A9 slope of a demand curve measures its elasticity. B9 elasticity of a demand curve measures its slope. C9 slope and elasticity of the curve are both constant throughout. D9 slope of the curve varies- but its elasticity is constant. Ans%er: D
Type: A Topic: 2 1: *1 !/: 11. ( . Eigantic 7tate Fniversity raises tuition for the purpose of increasing its revenue so that more faculty can be hired. E7F is assuming that the demand for education at E7F is: A9 decreasing. B9 relatively elastic. C9 perfectly elastic. D9 relatively inelastic. Ans%er: D Type: A Topic: 2 1: *1 !/: 11. (&. /f the demand for farm products is price inelastic- a good harvest %ill cause farm revenues to: A9 increase. B9 decrease. C9 be unchanged. D9 either increase or decrease- depending on %hat happens to supply. Ans%er: B Type: A Topic: 2 1: *4 !/: 11* ((. +ther things the same- if a price change causes total revenue to change in the opposite direction- demand is: A9 perfectly inelastic. B9 relatively elastic. C9 relatively inelastic. D9 of unit elasticity. Ans%er: B Type: A Topic: 2 1: *1 !/: 11. (*. /f the price elasticity of demand for a product is unity- a decrease in price %ill: A9 have no effect upon the amount purchased. B9 increase the 2uantity demanded and increase total revenue. C9 increase the 2uantity demanded- but decrease total revenue. D9 increase the 2uantity demanded- but total revenue %ill be unchanged. Ans%er: D Type: A Topic: 2 1: *1 !/: 11. (.. /f a price reduction reduces a firm$s total revenue: A9 the demand for the product is inelastic in this price range. B9 the product is an inferior good. C9 in this price range the elasticity coefficient of demand is greater than 1. D9 this price decline %ill increase the firm$s profits. Ans%er: A Type: A Topic: 2 1: *1 !/: 11.
(0. /n %hich of the follo%ing cases %ill total revenue increase< A9 price falls and demand is inelastic C9 price rises and demand is inelastic B9 price falls and supply is elastic D9 price rises and demand is elastic Ans%er: C Type: A Topic: 2 1: *46 *1 !/: 11*611. (3. A manufacturer of fro,en pi,,as found that total revenue decreased %hen price %as lo%ered from )( to )&. /t %as also found that total revenue decreased %hen price %as raised from )( to )*. ThusA9 the demand for pi,,a is elastic above )( and inelastic belo% )(. B9 the demand for pi,,a is elastic both above and belo% )(. C9 the demand for pi,,a is inelastic above )( and elastic belo% )(. D9 )( is not the e2uilibrium price of pi,,a. Ans%er: A Fse the follo%ing to ans%er 2uestions *46*1:
Type: E Topic: 2 1: *4 !/: 11* *4. "efer to the above diagram. /n the #1#2 price range demand is: A9 of unit elasticity. B9 relatively inelastic. C9 relatively elastic. D9 perfectly elastic. Ans%er: C Type: E Topic: 2 1: *4 !/: 11* *1. "efer to the above diagram. /n the # #& price range demand is: A9 of unit elasticity. B9 relatively inelastic. C9 relatively elastic. D9 perfectly elastic. Ans%er: B Type: A Topic: 2 1: *4 !/: 11* *2. /f the demand for a product is elastic- then total revenue %ill: A9 increase %hether price increases or decreases. C9 fall as price falls. B9 be constant in response to a price change. D9 rise as price falls. Ans%er: D Type: A Topic: 2 1: *1 !/: 11. * . The total6revenue test for elasticity: A9 is e2ually applicable to both demand and supply. B9 does not apply to demand because price and 2uantity are inversely related. C9 does not apply to supply because price and 2uantity are directly related. D9 applies to the short6run supply curve- but not to the long6run supply curve. Ans%er: C Type: A Topic: 2 1: *1 !/: 11. *&. /f the Fniversity Chamber !usic 7ociety decides to raise tic'et prices to provide more funds to finance concerts- the 7ociety is assuming that the demand for tic'ets is: A9 parallel to the hori,ontal axis. B9 shifting to the left. C9 inelastic. D9 elastic. Ans%er: C
Type: A Topic: 2 1: *1 !/: 11. *(. The state legislature has cut Eigantic 7tate Fniversity$s appropriations. E7F$s Board of "egents decides to increase tuition and fees to compensate for the loss of revenue. The board is assuming that the: A9 demand for education at E7F is elastic. B9 demand for education at E7F is inelastic. C9 coefficient of price elasticity of demand for education at E7F is unity. D9 coefficient of price elasticity of demand for education at E7F is greater than unity. Ans%er: B Type: A Topic: 2 1: *4 !/: 11* **. @hich of the follo%ing is correct< A9 /f demand is elastic- an increase in price %ill increase total revenue. B9 /f demand is elastic- a decrease in price %ill decrease total revenue. C9 /f demand is elastic- a decrease in price %ill increase total revenue. D9 /f demand is inelastic- an increase in price %ill decrease total revenue. Ans%er: C Type: A Topic: 2 1: *1 !/: 11. *.. 7uppose that the price of peanuts falls from ) to )2 per bushel and that- as a result- the total revenue received by peanut farmers changes from )1* to )1& billion. Thus: A9 the demand for peanuts is elastic. B9 the demand for peanuts is inelastic. C9 the demand curve for peanuts has shifted to the right. D9 no inference can be made as to the elasticity of demand for peanuts. Ans%er: B Type: A Topic: 2 1: *1 !/: 11. *0. @hich of the follo%ing is correct< A9 /f the demand for a product is inelastic- a change in price %ill cause total revenue to change in the opposite direction. B9 /f the demand for a product is inelastic- a change in price %ill cause total revenue to change in the same direction. C9 /f the demand for a product is inelastic- a change in price may cause total revenue to change in either the opposite or the same direction. D9 The price elasticity coefficient applies to demand- but not to supply. Ans%er: B
+ash expenditures a firm ma1es to pay for resources are called#
9xplicit costs
Which would "e an implicit cost for a firm? The cost#

Mf wages foregone by the owner of the firm
2f a firm)s revenues Oust cover all its opportunity costs& then#

9conomic profit is zero
An industry is expected to expand if firms in the industry are earning positive#

9conomic profits
2n the short run#

Mutput is raised or reduced by changing the levels of variable inputs
Which is most li1ely to "e a long5run adOustment for a firm that manufactures cars on an assem"ly line "asis?
+ change in production to a redesigned and retooled facility
According to the law of diminishing marginal returns#

The additional output generated by additional units of an input will diminish
Ciminishing marginal returns occurs as a firm adds more varia"le inputs to at least one fixed input "ecause#
+s more variable inputs are hired" the amount of the fixed input per variable input decreases
The law of diminishing returns in a manufacturing plant of a fixed capacity implies that& eventually& employing one#
More wor5er will decrease the average amount of output per wor5er
The marginal product of la"or curve graphically shows the change in total product resulting from a#
Mne-unit increase in the /uantity of a particular resource used" holding constant other resources
When a "a1ery manager reports that at her "a1ery& productivity of her '. wor1ers last month was '&7(( loaves per wor1er& she is referring to the#
+verage product of labor
The range of diminishing marginal productivity "egins when#

Marginal product reaches its maximum
At the Amarillo ;iano +ompany& the average product of la"or stays constant at .& regardless of how much la"or is employed. This implies that#
The marginal product of labor is constant
At what point does marginal product equal average product?

Bhere average product is e/ual to its maximum value
With fixed costs of ,8((& a firm has average total costs of ,0 and average varia"le costs of ,-..(. 2ts output quantity must "e#
8!! units
At an output of '&((( units per year& a firm)s varia"le costs are ,.&((( and its average fixed costs are ,0. 2ts total costs per year are#
$8"!!!
The range over which average varia"le cost is increasing is the same as the range over which#
+verage product is decreasing
2f the long5run average total cost curve for a firm is horizontal in the relevant range of production& then it indicates that there#
+re constant returns to scale
Formal profit is an implicit cost.
True
2n the long run& a firm can increase its output quantity& "ut it will "e limited "y the size of its existing production plant.
0alse
When diminishing marginal returns starts occurring& the addition of successive units of a varia"le resource to a fixed resource will cause the firm)s production to diminish.
0alse
/arginal product is highest where marginal cost is lowest.

True
/utual interdependence would tend to limit control over price in which mar1et model?
Mligopoly
9nder which mar1et model are the conditions of entry into the mar1et easiest?
#ure competition
Local electric or gas utility companies mostly operate in which mar1et model?
#ure monopoly
The steel and automo"ile industries would "e examples of which mar1et model?
Mligopoly
Which idea is inconsistent with pure competition?

#roduct differentiation
Which characteristic would "est "e associated with pure competition?

#rice ta5ers
2n a purely competitive industry& each firm#

'an easily enter or exit the industry
Which is true under conditions of pure competition?

Ko single firm can influence the mar5et price by changing its output
;rice is constant or 3given3 to the individual firm selling in a purely competitive mar1et "ecause#
9ach seller supplies a negligible fraction of total demand and supply
A purely competitive firm does not try to sell more of its product "y lowering its price "elow the mar1et price "ecause#
=t can sell all it wants to at the mar5et price
The demand curve faced "y a purely competitive firm#

=s the same as its marginal revenue curve
%am owns a firm that produces tomatoes in a purely competitive mar1et. The firm)s demand curve is#
+ horizontal line
2n pure competition& each extra unit of output that a firm sells will yield a marginal revenue that is#
9/ual to the price
2n a graph for a firm in pure competition with the quantity of output measured on the horizontal axis& the total revenue curve is#
;pward-sloping
Which is necessarily true for a purely competitive firm in short5run equili"rium?

Marginal revenue less marginal cost e/uals zero
A firm sells a product in a purely competitive mar1et. The marginal cost of the product at the current output of '&((( units is ,-..(. The minimum possi"le average varia"le cost is ,-.((. The mar1et price of the product is ,-..(. To maximize profit or minimize losses& the firm should#
'ontinue producing $"!!! units
T5%hirt >nterprises is selling in a purely competitive mar1et. 2t is producing 0((( units& selling them for ,-.(( each. At this level of output& the average total cost is -..( and the average varia"le cost is ,-.-(. 6ased on these data& the firm should#
@hut down in the short run
2n pure competition& price is determined where the industry#

:emand and supply curves intersect
2f there are many firms in an industry& then it must "e a purely competitive mar1et.
0alse
2n short5run equili"rium& a competitive firm cannot earn economic profits.

0alse
Which of the following distinguishes the short run from the long run in pure competition?
0irms can enter and exit the mar5et in the long run" but not in the short run.
2n a purely competitive industry#

there may be economic profits in the short run" but not in the long run.
%uppose a firm in a purely competitive mar1et discovers that the price of its product is a"ove its minimum A*+ point "ut everywhere "elow AT+. Miven this& the firm#
should continue producing in the short run" but leave the industry in the long run if the situation persists.
We would expect an industry to expand if firms in that industry are#

earning economic profits.
Which of the following will not hold true for a competitive firm in long5run equili"rium?
# e/uals +0'
Assume a purely competitive increasing5cost industry is initially in long5run equili"rium and that an increase in consumer demand occurs. After all economic adOustments have "een completed product price will "e#
higher and total output will be larger than originally.
Assume a purely competitive& increasing5cost industry is in long5run equili"rium. 2f a decline in demand occurs& firms will#
leave the industry and price and output will both decline.
An increasing5cost industry is the result of#

higher resource prices which occur as the industry expands.
9nder what conditions would an increase in demand lead to a lower long5run equili"rium price?
The firms in the mar5et are part of a decreasing-cost industry.
2n a decreasing5cost industry#
lower demand leads to higher long-run e/uilibrium prices.
When L+C televisions first came on the mar1et& they sold for at least ,'&(((& and some for much more. Fow many units can "e purchased for under ,8((. These facts imply that#
the H': television industry is a decreasing-cost industry.
;urely competitive industry 4 has constant costs and its product is an inferior good. The industry is currently in long5run equili"rium. The economy now goes into a recession and average incomes decline. The result will "e#
an increase in output" but not in the price" of the product.
%uppose losses cause industry 4 to contract and& as a result& the prices of relevant inputs decline. 2ndustry 4 is#
an increasing-cost industry.
9nder pure competition in the long run#

both allocative efficiency and productive efficiency are achieved.
2f for a firm ; @ minimum AT+ @ /+& then#

both allocative efficiency and productive efficiency are being achieved.
2f a purely competitive firm is producing where price exceeds marginal cost& then#
the firm will fail to maximize profit and resources will be underallocated to the product.
Allocative efficiency occurs whenever#

it is impossible to produce a net benefit for society by changing the combination of goods and services produced.
>ntrepreneurs in purely competitive industries#

innovate to lower operating costs and generate short-run economic profits.
2nnovations that lower production costs or create new products#

often generate short-run economic profits that do not last into the long run.
The theory of creative destruction was advanced many years ago "y#
Joseph @chumpeter.
+reative destruction is least "eneficial to#

wor5ers in the 4destroyed4 industries.
Which of the following is an example of creative destruction?

+utomobile production causes the wagon industry to shut down.
+onsider This! The average life expectancy of a 9.%. "usiness is approximately#

$!.2 years.
+onsider This! Approximately what percentage of start5up firms in the 9.%. go "an1rupt within the first two years?
22
+onsider This! Which of the following statements is true a"out 9.%. firms?
Mver half are ban5rupt within the first five years after starting up.
6arriers to entering an industry#

are the basis for monopoly.
What do economies of scale& the ownership of essential raw materials& and patents have in common?
They are all barriers to entry.
With respect to the pure monopolist)s demand curve it can "e said that#
price exceeds marginal revenue at all outputs greater than $.
The demand curve faced "y a pure monopolist#

is less elastic than that faced by a single purely competitive firm.
The marginal revenue curve for a monopolist#

becomes negative when output increases beyond some particular level.
Which of the following is characteristic of a pure monopolist)s demand curve?
=t is the same as the mar5et demand curve.
6ecause the monopolist)s demand curve is downsloping#

price must be lowered to sell more output.
The pure monopolist)s demand curve is relatively elastic#

in the price range where marginal revenue is positive.
For a pure monopolist marginal revenue is less than price "ecause#

when a monopolist lowers price to sell more output" the lower price applies to all units sold.
2f a pure monopolist is operating in a range of output where demand is elastic#

marginal revenue will be positive but declining.
Which of the following is incorrect? 2mperfectly competitive producers#

do not compete with one another.
A pure monopolist#
will realize an economic profit if price exceeds +T' at the profit-maximizing2loss-minimizing level of output.
A pure monopolist)s short5run profit5maximizing or loss5minimizing position is such that price#

may be greater or less than +T'.
The supply curve of a pure monopolist#

does not exist because prices are not 4given4 to a monopolist.
An important economic pro"lem associated with pure monopoly is that& at the profit maximizing outputs& resources are#
underallocated because price exceeds marginal cost.
+omparing a pure monopoly and a purely competitive firm with identical costs& we would find in long5run equili"rium that the pure monopolist)s#
price and average total cost would be higher" but output would be lower.
There is some evidence to suggest that 45inefficiency is#

more li5ely to occur in monopolistic firms than in competitive firms.
;rice discrimination refers to#

the selling of a given product at different prices that do not reflect cost differences.
Which of the following is not a precondition for price discrimination?

The commodity involved must be a durable good.
2f a monopolist engages in price discrimination& it will#

charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic.
;rice discrimination is#

only illegal if used to lessen or eliminate competition.
A dilemma of regulation is that#

the regulated price that achieves allocative efficiency is also li5ely to result in losses.
+onsider This! +hildren are charged less than adults for admission to professional "ase"all games "ut are charged the same prices as adults at the concession stands. This pricing system occurs "ecause#
('onsider This* 'hildren are charged less than adults for admission to professional baseball games but are charged the same prices as adults at the concession stands. This pricing system occurs because<
Last Word! Ce6eers +onsolidated /ines mar1ets a"out#

&& percent of the world's rough-cut diamonds.
A pure monopolist will maximize profits "y producing at that output where price and marginal cost are equal.
0alse
All of the following can file antitrust charges under the %herman Act except#
the 0ederal 9nergy Fegulatory 'ommission.
Which of the following is least li1ely to violate the %herman Act or the +layton Act?
'ompetitive firms 0 and ? independently charge lower prices to fre/uent customers than to occasional customers.
A function of the Federal Trade +ommission is to#

investigate instances of faulty and misleading advertising.
Which of the following laws prohi"ited mergers "y stoc1 acquisition if the effect was to lessen competition?
'layton +ct of $A$)
Tying agreements#
obligate a purchaser of product 6 to also buy product 7 from the same seller.
The +eller5Pefauver Act of 'I.(#

amended the 'layton +ct.
;rice fixing#
is a per se violation of the antitrust laws.
The %herman Act#

declared monopoly and restraints of trade to be illegal.
2n which of the following cases did the final court decision result in a "rea1up of the firm into competing "usinesses?
@tandard Mil case
2n the /icrosoft antitrust case& the Federal government said in essence that#
Microsoft was a 4bad monopoly.4
2n the Alcoa case of 'I8. the courts held that#

the mere possession of monopoly power is a violation of the antitrust laws.
2n the 9.%. %teel case of 'I-( the courts held that#

although ;.@. @teel possessed monopoly power" it had not violated the @herman +ct because it had not unreasonably used that power.
Which one of the following is most li1ely to increase the <erfindahl index of a particular industry?
a horizontal merger
A merger "etween a ma1er of household detergents and a fast food chain would "e an example of#
a conglomerate merger.
A conglomerate merger#
can extend the line of products sold" extend the territories in which products are sold" or combine totally unrelated products.
+onspiracies to fix prices are#

per se violations of the antitrust laws.
+ritics of the regulation of natural monopolies contend that#

the industry may 4capture4 or control the regulatory commission.
The main purpose of industrial regulation is to#

lower price to average total cost such that the firm earns a fair return.
+ritics of industrial regulation say that such regulation#
perpetuates monopoly long after new technology has eroded natural monopoly.
The largest efficiency gains from deregulation have occurred in the#

airlines" truc5ing" and railroad industries.
%ocial regulation differs from industrial regulation in that#

social regulation applies to virtually all industries" while industrial regulation applies to a restricted number.
Which one of the following is concerned with social regulation?

9/ual 9mployment Mpportunity 'ommission
+onsider This! The +onsider This "ox 3Of +atfish and Art and Other Things in +ommon!3 lists examples of recent antitrust cases involving#
price fixing.
+onsider This! According to the +onsider This "ox on catfish and art& which of the following firms were recently convicted of price fixing?
@otheby's and 'hristy's (art auction houses*
Last Word! 2n -(('& /icrosoft was found guilty of violating#

@ections $ and 2 of the @herman +ct.
The average household income in the 9nited %tates in -((7 was#

$.8")2)
The percentage of total "efore5tax income received "y the top -( percent of households in -((7 was a"out#
&! percent
A Lorenz curve showing perfect equality in the distri"ution of income#

=s a straight line with a )&-degree angle
Which of the following is an example of a noncash transfer that is typically not included in the income5distri"ution data?
Medicare
%uppose that Dane earns ,'(&((( in year ' and ,'.&((( in year -& while Dim earns ,'.&((( in year ' and ,'(&((( in year -. 2s there income equality for the two individuals?
The annual data indicate ine/uality" but the two-year data indicate e/uality
Two maOor criticisms of the 6ureau of +ensus data as a portrayal of the degree of income inequality are that the income concept employed is too#
Karrow and the income accounting period is too short
The degree of inequality in income distri"ution "ased on single5year data is#

Mverstated because it does not ta5e into account income mobility
One of the maOor causes of income inequality is differences in#

9ducation
Which of the following would "e considered part of wealth?

'orporate stoc5 holdings
$easons for the growing income inequality in the 9nited %tates since 'IG( include the following& except#
=ncrease in the number of households headed by single or divorced women
3A more equal distri"ution of income in the 9nited %tates would result in greater total consumer satisfaction.3 This statement is "ased on the concept that#
=ncomes are subLect to diminishing marginal utility
Of the following groups& which had the highest incidence of poverty in -((7?
Gispanics
%ocial insurance programs partially replace income that has "een lost due to the following& except#
Fesignation from a Lob
Movernment programs that pay "enefits to those who are una"le to earn income "ecause of permanent disa"ilities or to those who have very low incomes and dependent children are called#
#ublic assistance programs
The Temporary Assistance for Feedy Families TAFF! program#

#ut a limit on receiving welfare payments and re/uired able-bodied adults to wor5 after receiving assistance for two years
One of the provisions of the Temporary Assistance for Feedy Families TAFF! program was to#
@et a &-year lifelong limit on welfare benefits
%uppose that a preOudiced white employer is willing to hire white wor1ers at a rate of ,'E?hour& and this employer has a discrimination coefficient of ,8. This implies that the employer would#
Gire a non-white wor5er only at a rate of $$22hour or less
%uppose that white wor1ers are getting paid ,-'?hour& while similarly5productive African5 American wor1ers are getting paid ,'7?hour. A preOudiced white employer with a discrimination coefficient of ,-8?hour will#
Kot hire +frican-+mericans at all" even if they offer to wor5 for free
>nding discrimination against minority groups in educational processes and in employment situations would cause total domestic output to#
Fise" because of an increase in the productivity of the labor force
2n statistical discrimination#
The average characteristics of the group are applied to individual members
The crowding model of occupational discrimination suggests that occupational segregation results in#
+ lower domestic output than would otherwise be the case
The Lorenz curve is a graph that relates income to household spending.

0alse
The %upplemental Futrition Assistance ;rogram formerly the food5stamp program! mostly pays out cash5vouchers to eligi"le households.
0alse
The Temporary Assistance for Feedy Families TAFF! that replaced the old Aid for Families with Cependent +hildren welfare program succeeded in reducing the num"er of welfare recipients and increasing the employment rate among single mothers.
True
2n -((7& a"out what percentage of 9.%. households had personal incomes of less than ,'(&(((?
+bout percent
The Lorenz curve is helpful in visualizing the#

:egree of ine/uality in the distribution of income
As the area "etween the Lorenz curve and diagonal gets larger& the Mini ratio#
Fises to reflect greater ine/uality
When taxes and transfer payments are ta1en into account& the distri"ution of income in the 9nited %tates#
=s more e/ually distributed
%ince 'IG(& the distri"ution of personal income in the 9nited %tates has#
Moved toward greater ine/uality
>ntitlement programs include#

8oth public assistance programs and social insurance programs
Which of the following statements applies to the %ocial %ecurity program?

=t is financed by payroll taxes on employees and employers
The earned income tax credit >2T+! is& in essence#

+ wage subsidy for low-income wor5ers to offset @ocial @ecurity taxes
Bhich of the following distinguishes the short run from the long run in pure competition< 0irms can enter and exit the mar5et in the long run" but not in the short run.
2 primary force encouraging the entry of new firms into a #;F9H7 'MM#9T=T=,9 =K:;@TF7 is< economic profits earned by firms already in the industry.
% =n a purely competitive industry< here may be economic profits in the short run" but not in the long run.
) @uppose a firm in a purely competitive mar5et discovers that the price of its product is above its minimum +,' point but everywhere below +T'. ?iven this" the firm should continue producing in the short run but leave the industry in the long run.
& Be would expect an industry to expand if firms in that industry are< earning economic profits
. +ssume a purely competitive" increasing-cost industry is in long-run e/uilibrium. =f a decline in demand occurs" firms will< leave the industry and price and output will both decline.
Bhen a purely competitive firm is in long-run e/uilibrium< price e/uals marginal cost
8 + constant-cost industry is one in which< resource prices remain unchanged as output is increased.
A $!. +n increasing-cost industry is associated with< 6. an upsloping long5run supply curve.
$!
Fefer to the above diagrams which pertain to a purely competitive firm producing output q and the industry in which it operates. Bhich of the following iscorrect> The diagrams portray short-run e/uilibrium" but not long-run e/uilibrium.
$$
Fefer to the above diagrams which pertain to a purely competitive firm producing output q and the industry in which it operates. =n the long run we should expect< firms to leave the industry" mar5et supply to fall" and product price to rise.
$2 + purely competitive firm is precluded from ma5ing economic profit in the long run because< of unimpeded entry to the industry.
$% ;nder what conditions would an increase in demand lead to a lower long-run e/uilibrium price> the firms in the mar5et are part of a decreasing-cost industry
$)
Fefer to the above diagram showing the average total cost curve for a purely competitive firm. +t the long-run e/uilibrium level of output" this firm's total revenue< is $)!!
$& The MF I M' rule applies< in both the short run and long run
$.
Fefer to the above diagram. Hine ($* reflects the long-run supply curve for< an increasing-cost industry.
Fefer to the above diagram. Hine (2* reflects the long-run supply curve for< a constant-cost industry.
$8
Fefer to the above diagram. Hine ($* reflects a situation where resource prices< increase as industry output expands.
$A
Fefer to the above diagram. Hine (2* reflects a situation where resource prices remain constant as industry output expands.
2!
+llocative efficiency is achieved when the production of a good occurs where< #IM'
2$ The term productive efficiency refers to< the production of a good at the lowest average total cost
22 ;nder pure competition in the long run< both allocative efficiency and productive efficiency are achieved.
2% )). =f for a firm P I minimum +T' I M'" then< +. "oth allocative efficiency and productive efficiency are "eing achieved.
2)
The above diagram portrays< the e/uilibrium position of a competitive firm in the long run.
2&
Fefer to the above diagram. =f this competitive firm produces output 3" it will< earn a normal profit.
2.
Fefer to the above diagram. +t output level Q$< neither productive nor allocative efficiency are achieved.
Fefer to the above diagram. +t output level Q$< resources are underallocated to this product and productive efficiency is not realized.
28
Fefer to the above diagram. +t output level Q2< resources are overallocated to this product and productive efficiency is not realized.
2A +llocative efficiency occurs whenever< it is impossible to produce a net benefit for society by changing the combination of goods and services produced.
%! Bhich of the following outcomes is consistent with a purely competitive mar5et in long-run e/uilibrium> consumer and producer surplus will be maximized.
%$ 9ntrepreneurs in purely competitive industries< innovate to lower operating costs and generate short-run economic profits.
%2 =nnovations that lower production costs or create new products< often generate short-run economic profits that do not last into the long run.
%% The process by which new firms and new products replace existing dominant firms and products is called< creative destruction
%) (Hast Bord* The entry of generic drugs into a previously monopolized pharmaceutical mar5et will< increase efficiency by increasing consumer surplus
%& (Hast Bord* #atents give pharmaceutical companies exclusive rights to produce and sell the patented medications< for a maximum of 2! years
40. Creative destruction is: A. the process by which large firms buy up small firms. B. the process by which new firms and new products replace existing dominant firms and products. C. a term coined many years ago by Adam Smith. D. is applicable to planned economies, but not to market economies. )$. Bhich of the following is correct> +. 8oth purely competitive and monopolistic firms are 4price ta5ers.4 8. 8oth purely competitive and monopolistic firms are 4price ma5ers.4 +. + purely competitive firm is a 4price ta5er"4 while a monopolist is a 4price ma5er.4 :. + purely competitive firm is a 4price ma5er"4 while a monopolist is a 4price ta5er.4 )2. Bhich of the following is a characteristic of pure monopoly> +. close substitute products 6. barriers to entry '. the absence of mar5et power :. 4price ta5ing4 )%. The nondiscriminating pure monopolist's demand curve< A. is the industry demand curve. 8. shows a direct or positive relationship between price and /uantity demanded. '. tends to be inelastic at high prices and elastic at low prices. :. is identical to its marginal revenue curve. )). Bhen a firm is on the inelastic segment of its demand curve" it can< +. increase total revenue by reducing price. 8. decrease total costs by decreasing price. +. increase profits by increasing price. :. increase total revenue by more than the increase in total cost by increasing price. +nswer the /uestion on the basis of the demand schedule shown below<
)&. Fefer to the above data. The marginal revenue obtained from selling the third unit of output is< +. $.. 8. $$. +. $%. :. $&.
).. 0or a pure monopolist marginal revenue is less than price because< +. the monopolist's demand curve is perfectly elastic. 8. the monopolist's demand curve is perfectly inelastic. +. when a monopolist lowers price to sell more output" the lower price applies to all units sold. :. the monopolist's total revenue curve is linear and slopes upward to the right. ) . + pure monopolist should never produce in the< +. elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price. 6. inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price. '. inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price. :. segment of its demand curve where the price elasticity coefficient is greater than one. +nswer the /uestion on the basis of the following table showing the demand schedule facing a nondiscriminating monopolist<
)8. Fefer to the above table. The monopolist will select its profit-maximizing level of output somewhere within the< +. %-& unit range of output. 6. $-% unit range of output. '. $-) unit range of output. :. 2-) unit range of output.
)A. Bhich of the above diagrams correctly portray a nondiscriminating pure monopolist's demand (D* and marginal revenue (MF* curves> +. + 6. 8 '. ' :. :
&!. Bhich of the above diagrams correctly portray the demand (D) and marginal revenue (MF* curves of a purely competitive seller> +. + 8. 8 +. ' :. : &$. @uppose that a pure monopolist can sell & units of output at $) per unit and . units at $%.A! per unit. The monopolist will produce and sell the sixth unit if its marginal cost is< +. $) or less. 8. $%.A! or less. '. $%.&! or less. C. $%.)! or less.
&2. Fefer to the above data for a nondiscriminating monopolist. This firm will maximize its profit by producing< +. % units. 6. ) units. '. & units. :. . units. &%. Fefer to the above data for a nondiscriminating monopolist. +t its profit-maximizing output" this firm's price will exceed its marginal cost by RRRR and its average total cost by RRR. +. $2!Q $2 .%% 8. $$!Q $$!.)! '. $2)Q $2 .%% C. $%!Q $2!.&! &). Fefer to the above data for a nondiscriminating monopolist. +t its profit-maximizing output" this firm's total costs will be< +. $%!!. 8. $2)8. +. $$A8. :. $$2..
&&. Fefer to the above data. +t its profit-maximizing output" this firm's total revenue will be< +. $%!!. 8. $$A8. '. $$8!. C. $28!. &.. Fefer to the above data for a nondiscriminating monopolist. +t its profit-maximizing output" this firm's total profit will be< A. $82. 8. zero. '. $&). :. $2 .
'. An industry comprised of 8( firms& none of which has more than 0 percent of the total mar1et for a differentiated product is an example of# A. monopolistic competition. 6. oligopoly. +. pure monopoly. C. pure competition.
+. monopolistic competition.
-. An industry comprised of a small num"er of firms& each of which considers the potential reactions of its rivals in ma1ing price5output decisions is called# A. monopolistic competition. 6. oligopoly. +. pure monopoly. C. pure competition.
8. oligopoly.
0. Which of the following is not a "asic characteristic of pure competition? A. considera"le nonprice competition 6. no "arriers to the entry or exit of firms +. a standardized or homogeneous product C. a large num"er of "uyers and sellers
+. considerable nonprice competition
8. Which of the following statements is correct? A. The demand curve for a purely competitive firm is perfectly elastic& "ut the demand curve for a purely competitive industry is downsloping. 6. The demand curve for a purely competitive firm is downsloping& "ut the demand curve for a purely competitive industry is perfectly elastic. +. The demand curves are downsloping for "oth a purely competitive firm and a purely competitive industry. C. The demand curves are perfectly elastic for "oth a purely competitive firm and a purely competitive industry.
+. The demand curve for a purely competitive firm is perfectly elastic" but the demand curve for a purely competitive industry is downsloping.
.. /arginal revenue is the# A. change in product price associated with the sale of one more unit of output. 6. change in average revenue associated with the sale of one more unit of output. +. difference "etween product price and average total cost. C. change in total revenue associated with the sale of one more unit of output.
:. change in total revenue associated with the sale of one more unit of output.
E. %uppose you find that the price of your product is less than minimum A*+. :ou should# A. minimize your losses "y producing where ; @ /+. 6. maximize your profits "y producing where ; @ /+. +. close down "ecause& "y producing& your losses will exceed your total fixed costs. C. close down "ecause total revenue exceeds total varia"le cost.
'. close down because" by producing" your losses will exceed your total fixed costs.
G. $efer to the a"ove diagram. To maximize profit or minimize losses this firm will produce# A. P units at price +. 6. C units at price D. +. > units at price A. C. > units at price 6.
'. 9 units at price +.
7. $efer to the a"ove diagram. At the profit5maximizing output& total revenue will "e# A. (A<>. 6. (6M>. +. (+F>. C. A6M>.
+. !+G9.
I. $efer to the a"ove diagram. At the profit5maximizing output& the firm will realize# A. a loss equal to 6+FM. 6. a loss equal to A+F<. +. an economic profit of A+F<. C. an economic profit of A6M<.
:. an economic profit of +8?G.
'(. $efer to the a"ove diagram. At ;-& this firm will# A. produce 88 units and realize an economic profit. 6. produce 88 units and earn only a normal profit. +. produce E7 units and earn only a normal profit. C. shut down in the short run.
8. produce )) units and earn only a normal profit.
''. $efer to the a"ove diagram. At ;'& this firm will produce# A. 8G units and "rea1 even. 6. 8G units and realize an economic profit. +. EE units and earn only a normal profit. C. -8 units and earn only a normal profit.
8. ) units and realize an economic profit.
'-. $efer to the a"ove diagram. At ;8& this firm will# A. shut down in the short run. 6. produce 0( units and incur a loss. +. produce 0( units and earn only a normal profit. C. produce '( units and earn only a normal profit.
+. shut down in the short run.
'0. $efer to the a"ove diagram. At ;0& this firm will# A. produce '8 units and realize an economic profit. 6. produce E- units and earn only a normal profit. +. produce 8( units and incur a loss. C. shut down in the short run.
'. produce )! units and incur a loss.
'8. 2f product price is ,E(& the firm will# A. shut down. 6. produce 8 units and realize a ,'-( economic profit. +. produce E units and realize a ,'(( economic profit. C. produce 0 units and incur a ,8( loss.
'. produce . units and realize a $$!! economic profit.
'.. 2f product price is ,8.& the firm will# A. shut down. 6. produce 8 units and realize a ,'-( economic profit. +. produce . units and realize a ,'. economic profit. C. produce E units and realize a ,'(( economic profit.
'. produce & units and realize a $$& economic profit.
'E. 2f product price is ,-.& the firm will# A. shut down and incur a ,I( loss. 6. shut down and incur a ,.( loss. +. produce 0 units and incur a ,E. loss. C. produce 8 units and realize a ,'( economic profit.
8. shut down and incur a $&! loss.
'G. The marginal cost column reflects# A. the law of diminishing returns. 6. the law of diminishing marginal utility. +. diseconomies of scale. C. economies of scale.
+. the law of diminishing returns.
'7. At E units of output& total fixed cost is QQQQ and total cost is QQQQ A. ,-.N ,.(. 6. ,.(N ,0((. +. ,'((N ,-((. C. ,'.(N ,0((.
:. $$&!Q $%!!.
'I. 2f the mar1et price for this firm)s product is ,7G& it will produce# A. I units at an economic profit of zero. 6. E units at a loss of ,I(.
+. I units at an economic profit of ,-7'.IG. C. 7 units at an economic profit of ,'0(.G-.

'. A units at an economic profit of $28$.A .
-(. 2f the mar1et price for this firm)s product is ,E7.'(& it will produce# A. 7 units at an economic profit of zero. 6. E units at a loss of ,I(. +. I units at an economic profit of ,-7'.IG. C. 7 units at an economic profit of ,'0(.G-.
:. 8 units at an economic profit of $$%!. 2.
-'. 2f the mar1et price for this firm)s product is ,-8& it will produce# A. 8 units at a loss of ,'.(. 6. E units at a loss of ,I(. +. 0 units at an economic profit of zero. C. 8 units at a loss of ,'07.
:. ) units at a loss of $$%8.
--. 2f the mar1et price for this firm)s product is ,'.& it will produce# A. ( units at a loss of ,'.(. 6. 0 units at a loss of ,'E7. +. 0 units at an economic profit of zero. C. 8 units at a loss of ,'07.
+. ! units at a loss of $$&!.
'. Which of the following is true concerning purely competitive industries? A. There will "e economic losses in the long run "ecause of cut5throat competition. 6. >conomic profits will persist in the long run if consumer demand is strong and sta"le. +. 2n the short run& firms may incur economic losses or earn economic profits& "ut in the long run they earn normal profits. C. There are economic profits in the long run& "ut not in the short run.
'. =n the short run" firms may incur economic losses or earn economic profits" but in the long run they earn normal profits.
-. A constant5cost industry is one in which# A. a higher price per unit will not result in an increased output. 6. if '(( units can "e produced for ,'((& then '.( can "e produced for ,'.(& -(( for ,-((& and so forth. +. the demand curve and therefore the unit price and quantity sold seldom change. C. the total cost of producing -(( or 0(( units is no greater than the cost of producing '(( units.
8. if $!! units can be produced for $$!!" then $&! can be produced for $$&!" 2!! for $2!!" and so forth.
0. The a"ove diagrams show a purely competitive firm producing output q and the industry in which it operates. Which of the following is correct? A. The diagrams portray neither long5run nor short5run equili"rium. 6. The diagrams portray "oth long5run and short5run equili"rium. +. The diagrams portray short5run equili"rium& "ut not long5run equili"rium. C. The diagrams portray long5run equili"rium& "ut not short5run equili"rium.
'. The diagrams portray short-run e/uilibrium" but not long-run e/uilibrium.
8. The a"ove diagrams show a purely competitive firm producing output q and the industry in which it operates. 2n the long run we should expect# A. firms to enter the industry& mar1et supply to rise& and product price to fall. 6. firms to leave the industry& mar1et supply to rise& and product price to fall. +. firms to leave the industry& mar1et supply to fall& and product price to rise. C. no change in the num"er of firms in this industry.
'. firms to leave the industry" mar5et supply to fall" and product price to rise.
.. The a"ove diagrams show a purely competitive firm producing output q and the industry in which it operates. The predicted long5run adOustments in this industry might "e offset "y# A. a decline in product demand. 6. an increase in resource prices. +. a technological improvement in production methods. C. entry of new firms into the industry.
'. a technological improvement in production methods.
E. When L+C televisions first came on the mar1et& they sold for at least ,'&((( and some for much more. Fow many units can "e purchased for under ,8((. These facts imply that# A. the L+C television industry was once competitive& "ut is now monopolistic. 6. fewer firms produce L+C televisions than was the case five or ten years ago. +. the demand curve for L+C televisions has shifted leftward. C. the L+C television industry is a decreasing5cost industry.
:. the H': television industry is a decreasing-cost industry.
G. The a"ove diagram shows the average total cost curve for a purely competitive firm. At the long5run equili"rium level of output& this firm)s total revenue# A. is ,'(. 6. is ,8(. +. is ,8((. C. cannot "e determined from the information provided.
'. is $)!!.
7. The a"ove diagram shows the average total cost curve for a purely competitive firm. At the long5run equili"rium level of output& this firm)s economic profit# A. is zero. 6. is ,8((. +. is ,-((. C. cannot "e determined from the information provided.
+. is zero.
I. The term allocative efficiency refers to# A. the level of output that coincides with the intersection of the /+ and A*+ curves. 6. minimization of the AF+ in the production of any good. +. the production of the product5mix most desired "y consumers. C. the production of a good at the lowest average total cost.
'. the production of the product-mix most desired by consumers.
'(. 9nder pure competition in the long run# A. neither allocative efficiency nor productive efficiency are achieved. 6. "oth allocative efficiency and productive efficiency are achieved.
+. productive efficiency is achieved& "ut allocative efficiency is not. C. allocative efficiency is achieved& "ut productive efficiency is not.
8. both allocative efficiency and productive efficiency are achieved.
''. 2f for a firm ; @ minimum AT+ @ /+& then# A. neither allocative efficiency nor productive efficiency is "eing achieved. 6. productive efficiency is "eing achieved& "ut allocative efficiency is not. +. "oth allocative efficiency and productive efficiency are "eing achieved. C. allocative efficiency is "eing achieved& "ut productive efficiency is not.
'. both allocative efficiency and productive efficiency are being achieved.
'-. 2n the a"ove diagram "y producing output level A# A. neither productive nor allocative efficiency are achieved. 6. "oth productive and allocative efficiency are achieved. +. allocative efficiency is achieved& "ut productive efficiency is not. C. productive efficiency is achieved& "ut allocative efficiency is not.
8. both productive and allocative efficiency are achieved.
'0. 2n the a"ove diagram at output level A'# A. resources are overallocated to this product and productive efficiency is not realized. 6. resources are underallocated to this product and productive efficiency is not realized. +. productive efficiency is achieved& "ut resources are underallocated to this product. C. productive efficiency is achieved& "ut resources are overallocated to this product.
8. resources are underallocated to this product and productive efficiency is not realized.
'8. 2n the a"ove diagram at output level A-# A. resources are overallocated to this product and productive efficiency is not realized. 6. resources are underallocated to this product and productive efficiency is not realized. +. productive efficiency is achieved& "ut resources are underallocated to this product. C. productive efficiency is achieved& "ut resources are overallocated to this product.
+. resources are overallocated to this product and productive efficiency is not realized.
'.. Allocative efficiency occurs whenever# A. consumer surplus is maximized. 6. it is impossi"le to produce a net "enefit for society "y changing the com"ination of goods and services produced. +. firms have maximized their profits. C. it is impossi"le to ma1e someone in society "etter off without ma1ing someone else worse off.
8. it is impossible to produce a net benefit for society by changing the combination of goods and services produced.
'E. 2n long5run equili"rium& purely competitive mar1ets# A. minimize total cost. 6. maximize the sum of consumer surplus and producer surplus. +. yield economic profits to most sellers. C. inevita"ly degenerate into monopoly in increasing cost industries.
8. maximize the sum of consumer surplus and producer surplus.
'G. >ntrepreneurs in purely competitive industries# A. have no incentive to innovate "ecause in the long run they will earn no economic profits. 6. innovate to lower operating costs and generate short5run economic profits.
+. utilize pricing strategies to generate short5run economic profits. C. rarely try to innovate "ecause of a lac1 of financial resources.
8. innovate to lower operating costs and generate short-run economic profits.
'7. +reative destruction is# A. the process "y which large firms "uy up small firms. 6. the process "y which new firms and new products replace existing dominant firms and products. +. a term coined many years ago "y Adam %mith. C. is applica"le to planned economies& "ut not to mar1et economies.
8. the process by which new firms and new products replace existing dominant firms and products.
'I. +onsider This! Which of the following statements is true a"out 9.%. firms? A. Over half are "an1rupt within the first two years after starting up. 6. Over half are "an1rupt within the first five years after starting up. +. Fearly E. percent last '( years or more. C. The life expectancy of a 9.%. firm is approximately -- years.
8. Mver half are ban5rupt within the first five years after starting up.
-(. Last Word! The entry of generic drugs into a previously monopolized pharmaceutical mar1et will# A. discourage the development of new drugs. 6. increase efficiency "y increasing consumer surplus. +. create inefficiency "y introducing chemically5inferior medications. C. not affect the mar1et price "ecause pharmaceutical firms are 3price ta1ers.3
8. increase efficiency by increasing consumer surplus.
'. Which of the following is correct? A. 6oth purely competitive and monopolistic firms are 3price ta1ers.3 6. 6oth purely competitive and monopolistic firms are 3price ma1ers.3 +. A purely competitive firm is a 3price ta1er&3 while a monopolist is a 3price ma1er.3 C. A purely competitive firm is a 3price ma1er&3 while a monopolist is a 3price ta1er.3
'. + purely competitive firm is a 4price ta5er"4 while a monopolist is a 4price ma5er.4
-. ;ure monopolists may o"tain economic profits in the long run "ecause# A. of advertising. 6. marginal revenue is constant as sales increase. +. of "arriers to entry. C. of rising average fixed costs.
'. of barriers to entry.
0. Which of the following "est approximates a pure monopoly? A. the foreign exchange mar1et 6. the Pansas +ity wheat mar1et +. the only "an1 in a small town C. the soft drin1 mar1et
'. the only ban5 in a small town
8. Large minimum efficient scale of plant com"ined with limited mar1et demand may lead to# A. natural monopoly. 6. patent monopoly.
+. government franchise monopoly. C. shared monopoly.

+. natural monopoly.
.. For an imperfectly competitive firm# A. total revenue is a straight& upsloping line "ecause a firm)s sales are independent of product price. 6. the marginal revenue curve lies a"ove the demand curve "ecause any reduction in price applies to all units sold. +. the marginal revenue curve lies "elow the demand curve "ecause any reduction in price applies to all units sold. C. the marginal revenue curve lies "elow the demand curve "ecause any reduction in price applies only to the extra unit sold.
'. the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold.
E. $efer to the a"ove diagram for a pure monopolist. 2f the monopolist is unregulated& it will maximize profits "y charging# A. a price a"ove ;0 and selling a quantity less than A0. 6. price ;0 and producing output A0. +. price ;- and producing output A-. C. price ;' and producing output A'.
8. price #% and producing output 3%.
G. $efer to the a"ove diagram for a pure monopolist. %uppose a regulatory commission is created to determine a legal price for the monopoly. 2f the commission see1s to provide the monopolist with a 3fair return&3 it will set price at# A. ;'. 6. ;0. +. ;-. C. ;8.
+. #$.
7. $efer to the a"ove diagram for a pure monopolist. 2f a regulatory commission see1s to achieve the socially optimal allocation of resources to this line of production& it will set a price of# A. ;'. 6. ;0. +. ;-. C. ;8.
'. #2.
I. $efer to the a"ove diagram for a pure monopolist. 2f a regulatory commission sets the price to achieve the socially optimal allocation of resources& it will have to# A. tax the monopolist ;0;' per unit to prevent the monopolist from realizing an economic profit. 6. su"sidize the monopolist or the monopolist will go "an1rupt in the long run. +. su"sidize the monopolist ;';8 per unit to allow the monopolist to "rea1 even. C. tax the monopolist ;';- per unit to prevent the monopolist from realizing an economic profit.
8. subsidize the monopolist or the monopolist will go ban5rupt in the long run.
'(. The profit5maximizing price for the monopolist will "e# A. ,..((. 6. ,-.I(. +. ,0.0.. C. ,8..(.
:. $).&!.
''. The profit5maximizing monopolist will realize a# A. profit of ,7..(. 6. profit of ,G..(. +. profit of ,'E. C. loss of ,'8.
'. profit of $$..
'-. $efer to the a"ove diagram. At the profit5maximizing level of output& total revenue will "e# A. F/ times (/. 6. (AD>. +. (>M+. C. (><6.
8. !+J9.
'0. $efer to the a"ove diagram. At the profit5maximizing level of output& total cost will "e# A. F/ times (/. 6. (AD>. +. (+M+. C. (6<>.
:. !8G9.
'8. $efer to the a"ove diagram. At the profit5maximizing level of output& the firm will realize# A. an economic profit of A6<D. 6. an economic profit of A+MD. +. a loss of M< per unit. C. a loss of D< per unit.
+. an economic profit of +8GJ.
'.. A pure monopolist is selling E units at a price of ,'-. 2f the marginal revenue of the seventh unit is ,.& then# A. price of the seventh unit is ,'(. 6. price of the seventh unit is ,''. +. price of the seventh unit is greater than ,'-. C. firm)s demand curve is perfectly elastic.
8. price of the seventh unit is $$$.
'E. 2n the short run& a monopolist)s economic profits# A. are always positive "ecause the monopolist is a price5ma1er. 6. are usually negative "ecause of government price regulation. +. are always zero "ecause consumers prefer to "uy from competitive sellers. C. may "e positive or negative depending on mar1et demand and cost conditions.
:. may be positive or negative depending on mar5et demand and cost conditions.
'G. 9nder which of the following situations would a monopolist increase profits "y lowering price and increasing output!# A. if it discovered that it was producing where /+ @ /$ 6. if it discovered that it was producing where its /+ curve intersects its demand curve +. if it discovered that it was producing where /+ R /$ C. under none of these circumstances "ecause a monopolist would never lower price
'. if it discovered that it was producing where M' V MF
'7. $efer to the a"ove diagrams. Firm A is a# A. pure competitor and Firm 6 is a pure monopoly. 6. pure competitor& as is Firm 6. +. pure monopoly and Firm 6 is a pure competitor. C. pure monopoly& as is Firm 6.
+. pure competitor and 0irm 8 is a pure monopoly.
'I. $efer to the a"ove diagrams. The demand for Firm 6)s product is# A. perfectly elastic over all ranges of output. 6. perfectly inelastic over all ranges of output. +. elastic for prices a"ove ,8 and inelastic for prices "elow ,8. C. inelastic for prices a"ove ,8 and inelastic for prices "elow ,8.
'. elastic for prices above $) and inelastic for prices below $).
-(. >conomic profit in the long run is# A. possi"le for "oth a pure monopoly and a pure competitor. 6. possi"le for a pure monopoly& "ut not for a pure competitor. +. impossi"le for "oth a pure monopolist and a pure competitor. C. only possi"le when "arriers to entry are nonexistent.
8. possible for a pure monopoly" but not for a pure competitor.
-'. Which of the following statements is correct? A. The pure monopolist will maximize profit "y producing at that point on the demand curve where elasticity is zero. 6. 2n see1ing the profit5maximizing output the pure monopolist underallocates resources to its production. +. The pure monopolist maximizes profits "y producing that output at which the differential "etween price and average cost is the greatest. C. ;urely monopolistic sellers earn only normal profits in the long run.
8. =n see5ing the profit-maximizing output the pure monopolist underallocates resources to its production.
--. +onfronted with the same unit cost data& a monopolistic producer will charge# A. the same price and produce the same output as a competitive firm. 6. a higher price and produce a larger output than a competitive firm. +. a higher price and produce a smaller output than a competitive firm. C. a lower price and produce a smaller output than a competitive firm.
'. a higher price and produce a smaller output than a competitive firm.
-0. +omparing a pure monopoly and a purely competitive firm with identical costs& we would find in long5run equili"rium that the pure monopolist)s# A. price& output& and average total cost would all "e higher. 6. price and average total cost would "e higher& "ut output would "e lower.
+. price& output& and average total cost would all "e lower. C. price and output would "e lower& "ut average total cost would "e higher.
8. price and average total cost would be higher" but output would be lower.
-8. $efer to the a"ove diagrams. With the industry structure represented "y diagram# A. A! there will "e only a normal profit in the long run& while in 6! an economic profit can persist. 6. A! price exceeds marginal cost& resulting in allocative inefficiency. +. 6! price equals marginal cost& resulting in allocative efficiency. C. 6! equili"rium price and quantity will "e e and h& respectively.
+. (+* there will be only a normal profit in the long run" while in (8* an economic profit can persist.
-.. $efer to the a"ove diagrams. With the industry structure represented "y diagram# A. 6! there will "e allocative efficiency. 6. A! economic profit can persist in the long run. +. 6! output will "e less than in diagram A!. C. 6! output will "e the same as in diagram A!.
'. (8* output will be less than in diagram (+*.
-E. There is some evidence to suggest that 45inefficiency is# A. a"sent whenever two or more producers are competing with one another. 6. not encountered in either competitive or monopolistic firms. +. more li1ely to occur in monopolistic firms than in competitive firms. C. more li1ely to occur in competitive firms than in monopolistic firms.
'. more li5ely to occur in monopolistic firms than in competitive firms.
-G. Which of the following conditions is not required for price discrimination? A. 6uyer with different elasticities must "e physically separate from each other. 6. The good or service cannot "e profita"ly resold "y original "uyers. +. The seller must "e a"le to segment the mar1et& that is& to distinguish "uyers with different elasticities of demand. C. The seller must possess some degree of monopoly power.
+. 8uyer with different elasticities must be physically separate from each other.
-7. +onsider This! +hildren are charged less than adults for admission to professional "ase"all games "ut are charged the same prices as adults at the concession stands. Which of the following conditions of price discrimination explain why this occurs? A. The seller must have some monopoly powerN that is& it must "e a"le to set the product price. 6. The seller must "e a"le to identify "uyers "y group characteristics such as age or income. +. Mroups must have different elasticities of demand for the product. C. The items cannot "e "ought "y people in the low5price group and transferred to mem"ers of the high5price group.
:. The items cannot be bought by people in the low-price group and transferred to members of the high-price group.
'. Which of the following is not a "asic characteristic of monopolistic competition? A. the use of trademar1s and "rand names 6. recognized mutual interdependence +. product differentiation C. a relatively large num"er of sellers
8. recognized mutual interdependence
-. A monopolistically competitive industry com"ines elements of "oth competition and monopoly. The monopoly element results from# A. the li1elihood of collusion. 6. high entry "arriers. +. product differentiation. C. mutual interdependence in decision ma1ing.
'. product differentiation.
0. 9se your "asic 1nowledge and your understanding of mar1et structures to answer this question. Which of the following companies most closely approximates a monopolistic competitor? A. %u"way %andwiches 6. ;itts"urgh ;late Mlass +. Ford /otor +ompany C. /icrosoft
+. @ubway @andwiches
8. The price elasticity of a monopolistically competitive firm)s demand curve varies# A. inversely with the num"er of competitors and the degree of product differentiation. 6. directly with the num"er of competitors and the degree of product differentiation. +. directly with the num"er of competitors& "ut inversely with the degree of product differentiation. C. inversely with the num"er of competitors& "ut directly with the degree of product differentiation.
'. directly with the number of competitors" but inversely with the degree of product differentiation.
.. The monopolistically competitive seller maximizes profit "y producing at the point where# A. total revenue is at a maximum. 6. average costs are at a minimum. +. marginal revenue equals marginal cost. C. price equals marginal revenue.
'. marginal revenue e/uals marginal cost.
E. >xcess capacity refers to the# A. amount "y which actual production falls short of the minimum AT+ output. 6. fact that entry "arriers artificially reduce the num"er of firms in an industry. +. differential "etween price and marginal costs which characterizes monopolistically competitive firms. C. fact that most monopolistically competitive firms encounter diseconomies of scale.
+. amount by which actual production falls short of the minimum +T' output.
G. $efer to the a"ove diagram for a monopolistically competitive firm in short5run equili"rium. The profit5maximizing output for this firm will "e# A. '((. 6. 'E(. +. '7(. C. -'(.
8. $.!.
7. $efer to the a"ove diagram for a monopolistically competitive firm in short5run equili"rium. This firm will realize an economic#
A. loss of ,0-(. 6. profit of ,87(. +. profit of ,-7(. C. profit of ,E((.

8. profit of $)8!.
I. 2f all monopolistically competitive firms in the industry have profit circumstances similar to the firm shown a"ove# A. new firms will enter the industry. 6. some firms will exit the industry. +. all firms will exit the industry. C. no firms will exit the industry.
8. some firms will exit the industry.
'(. $efer to the a"ove diagram for a monopolistically competitive firm. Long5run equili"rium price will "e# A. a"ove A. 6. >F. +. A. C. 6.
'. +.
''. 2n long5run equili"rium monopolistic competition entails# A. an efficient allocation of resources. 6. an overallocation of resources due to inadequate capacity. +. an underallocation of resources due to excess capacity. C. production at the minimum attaina"le average total cost.
'. an underallocation of resources due to excess capacity.
'-. $efer to the a"ove data. 2f columns '! and 0! of the demand data shown a"ove are this firm)s demand schedule& the profit5maximizing price will "e# A. ,I. 6. ,G. +. ,''. C. ,E.
+. $A.
'0. $efer to the a"ove data. 2f columns '! and 0! of the demand data shown a"ove are this firm)s demand schedule& economic profit will "e# A. ,'(. 6. ,'I. +. ,E. C. ,7.
:. $8.
'8. The economic inefficiencies of monopolistic competition may "e offset "y the fact that# A. advertising expenditures shift the average cost curve upward. 6. availa"le capacity is fully utilized. +. resources are optimally allocated to the production of the product. C. consumers have increased product variety.
:. consumers have increased product variety.
'.. 2n which of these continuums of degrees of competition highest to lowest! is oligopoly properly placed? A. pure competition& oligopoly& pure monopoly& monopolistic competition 6. oligopoly& pure competition& monopolistic competition& pure monopoly +. monopolistic competition& pure competition& pure monopoly& oligopoly C. pure competition& monopolistic competition& oligopoly& pure monopoly
:. pure competition" monopolistic competition" oligopoly" pure monopoly
'E. Oligopolistic industries are characterized "y# A. a few dominant firms and su"stantial entry "arriers. 6. a few dominant firms and no "arriers to entry. +. a large num"er of firms and low entry "arriers. C. a few dominant firms and low entry "arriers.
+. a few dominant firms and substantial entry barriers.
'G. The copper& aluminum& cement& and industrial alcohol industries are examples of# A. interproduct competition. 6. homogeneous oligopoly. +. monopolistic competition. C. differentiated oligopoly.
8. homogeneous oligopoly.
'7. Oligopoly is more difficult to analyze than other mar1et models "ecause# A. the num"er of firms is so large that mar1et "ehavior cannot "e accurately predicted. 6. the marginal cost and marginal revenue curves of an oligopolist play no part in the determination of equili"rium price and quantity. +. of mutual interdependence and the fact that oligopoly outcomes are less certain than in other mar1et models. C. unli1e the firms of other mar1et models& it cannot "e assumed that oligopolists are profit maximizers.
'. of mutual interdependence and the fact that oligopoly outcomes are less certain than in other mar5et models.
'I. $efer to the a"ove data. The four5firm concentration ratio for the a"ove industry is# A. '(( percent. 6. indeterminate& since we don)t 1now which four firms are included. +. 7( percent. C. -( percent.
'. 8! percent.
-(. $efer to the a"ove data. The <erfindahl 2ndex for the a"ove industry is# A. '&E((. 6. '&7((. +. '7&(((. C. 7(.
8. $"8!!.
-'. $efer to the a"ove data. %uppose that firms in this industry split up such that there were '(( firms& each with a one percent mar1et share. The four5firm concentration ratio and the <erfindahl 2ndex respectively would "e# A. '(( percent and '(&(((. 6. 8 percent and 8.
+. '(( percent and 'E. C. 8 percent and '((.

:. ) percent and $!!.
--. Mame theory# A. is the analysis of how people or firms! "ehave in strategic situations. 6. is "est suited for analyzing purely competitive mar1ets. +. reveals that mergers "etween rival firms are self5defeating. C. reveals that price5fixing among firms reduces profits.
+. is the analysis of how people (or firms* behave in strategic situations.
-0. 2f 6eta commits to a high5price policy& Alpha will gain the largest profit "y# A. also adopting a high5price policy. 6. adopting a low5price policy. +. adopting a low5price policy& "ut only if 6eta agrees to do the same. C. engaging in non5price competition only.
8. adopting a low-price policy.
-8. With independent pricing the outcome of this duopoly game will gravitate to cell# A. A. 6. 6. +. +. C. C.
+. +.
-.. 2f Alpha and 6eta engage in collusion& the outcome of the game will "e at cell# A. A. 6. 6. +. +. C. C.
:. :.
-E. $efer to the a"ove diagram. >quili"rium output is# A. O. 6. h. +. g. C. f.

'. g.
-G. $efer to the a"ove diagram. >quili"rium price is# A. e. 6. d. +. c. C. ".

8. d.
-7. $efer to the a"ove diagram. This firm)s demand and marginal revenue curves are "ased on the assumption that# A. the firm has no immediate rivals. 6. rivals will match "oth a price increase and a price decrease. +. rivals will match a price increase& "ut ignore a price decrease. C. rivals will ignore a price increase& "ut match a price decrease.
:. rivals will ignore a price increase" but match a price decrease.
-I. $efer to the a"ove diagram. 2n equili"rium the firm# A. is realizing an economic profit of ad per unit. 6. should close down in the short run. +. is incurring a loss. C. is realizing an economic profit of "d per unit.
+. is realizing an economic profit of ad per unit.
0(. +artels are difficult to maintain in the long run "ecause# A. they are illegal in all industrialized countries. 6. individual mem"ers may find it profita"le to cheat on agreements. +. it is more profita"le for the industry to charge a lower price and produce more output. C. entry "arriers are insignificant in oligopolistic industries.
8. individual members may find it profitable to cheat on agreements.
0'. 2f the several oligopolistic firms that comprise an industry "ehave collusively& the resulting price and output will most li1ely resem"le those of# A. "ilateral monopoly. 6. pure monopoly. +. monopolistic competition. C. pure competition.
8. pure monopoly.
0-. Other things equal& cartels and similar collusive arrangements are easier to esta"lish and maintain# A. when there are ample opportunities for the firms to ma1e secret price concessions to selected "uyers. 6. during periods of "usiness5cycle sta"ility and full employment. +. when the demand and cost conditions of the participating firms differ su"stantially. C. when the num"er of firms is relatively large.
8. during periods of business-cycle stability and full employment.
00. Advertising can enhance economic efficiency when it# A. increases "rand loyalty. 6. raises entry "arriers. +. increases consumer awareness of su"stitute products. C. "oosts average total cost.
'. increases consumer awareness of substitute products.
08. %uppose that a particular industry has a four5firm concentration ratio of 7. and a <erfindahl 2ndex of 0&(((. /ost li1ely& this industry would achieve# A. "oth productive efficiency and allocative efficiency. 6. allocative efficiency "ut not productive efficiency. +. neither productive efficiency nor allocative efficiency. C. productive efficiency "ut not allocative efficiency.
'. neither productive efficiency nor allocative efficiency.
'. 6roadly defined& technological advance# A. can occur in the short run& long run& or very long run. 6. comprises new and improved goods and services and new and improved ways of producing or distri"uting them.
+. includes invention& "ut not innovation or diffusion. C. includes product innovation& "ut not process innovation.
8. comprises new and improved goods and services and new and improved ways of producing or distributing them.
-. Technological advance is shown as a n!# A. movement from a point inside a production possi"ilities curve to a point on the curve. 6. movement along a production possi"ilities curve. +. outward shift of a production possi"ilities curve. C. inward shift of a production possi"ilities curve.
'. outward shift of a production possibilities curve.
0. The successful commercial introduction of a new product& the use of a new method& or the creation of a new form of "usiness enterprise is called# A. innovation. 6. invention. +. creative destruction. C. diffusion.
+. innovation.
8. Which of the following is a true statement? A. innovation normally follows invention and precedes diffusion. 6. invention normally follows diffusion and precedes innovation. +. diffusion normally follows invention and precedes innovation. C. innovation normally follows diffusion and precedes invention.
+. innovation normally follows invention and precedes diffusion.
.. 2nnovation# A. is the first discovery of a product or process& rather than its first successful commercial introduction. 6. includes new products& "ut not new production methods. +. is also 1nown as diffusion. C. can either increase or decrease the mar1et share of a large firm& depending on whether it is introduced "y the large firm or one of its competitors.
:. can either increase or decrease the mar5et share of a large firm" depending on whether it is introduced by the large firm or one of its competitors.
E. 2n the 9nited %tates& research and development spending as a percentage of MC; is# A. '.. to -.( percent& which is lower than that of most other industrial countries. 6. -.. to 0.( percent& which is higher than that of most other industrial countries. +. 8.. to ..( percent& which is lower than that of most other industrial countries. C. ... to E.( percent& which is higher than that of most other industrial countries.
8. 2.& to %.! percent" which is higher than that of most other industrial countries.
G. When economists view technological change as internal to the economy& they mean that it# A. occurs randomly. 6. occurs accidentally. +. arises deli"erately from the profit motive and competition. C. arises mainly from government su"sidies.
'. arises deliberately from the profit motive and competition.
7. >ntrepreneurs# A. include everyone engaged in $SC wor1.
6. are located in small enterprises only. +. differ from other innovators "ecause of the ris1s entrepreneurs must "ear. C. wor1 exclusively in government and university $SC la"oratories.
'. differ from other innovators because of the ris5s entrepreneurs must bear.
I. Few scientific 1nowledge mainly comes from university and government la"oratories& not private firms& "ecause# A. large corporations do not have funds availa"le to channel toward "asic research. 6. government pays scientists higher salaries than do private firms. +. entrepreneurs find it difficult to secure venture capital to finance innovation. C. "asic scientific principles& as such& cannot "e patented and do not always have commercial applica"ility.
:. basic scientific principles" as such" cannot be patented and do not always have commercial applicability.
'(. 2n exchange for a share of B:4)s profits if it succeeds& Firm A6+ provides development funds to newly formed B:4 which is developing an innovative product. A6+ funds are called QQQQQQQQQQQQ while B:4 is 1nown as a QQQQQQQQQQQQ. A. venture capitalN startup 6. retained earningsN entrepreneurial firm +. mutual fundsN startup C. transfer paymentsN entrepreneurial firm
+. venture capitalQ startup
''. %uppose a firm anticipates that an $SC expenditure of ,'(( million will result in a new production process that will reduce costs and thus create a one5time added profit of ,''million a year later. The firm)s expected rate of return is# A. (.'- percent. 6. ''- percent. +. '- percent. C. - percent.
'. $2 percent.
'-. A profit5maximizing firm should not underta1e a $SC proOect for which the# A. expected rate of return exceeds its interest5rate cost of funds. 6. interest5rate cost of funds exceeds the expected rate of return. +. expected returns are in the distant future. C. the expected returns& though potentially very large& are uncertain.
8. interest-rate cost of funds exceeds the expected rate of return.
'0. $efer to the a"ove data. The firm)s optimal amount of $SC spending is# A. ,-( million. 6. ,8( million. +. ,E( million. C. ,7( million.
:. $8! million.
'8. $efer to the a"ove data. At ,'(( million of $SC expenditures& the# A. marginal cost of $SC exceeds the marginal "enefit. 6. marginal "enefit of $SC exceeds the marginal cost. +. expected rate of return from $SC is negative. C. firm has exceeded its afforda"le level of $SC.
+. marginal cost of FY: exceeds the marginal benefit.
'.. A consumer will "uy a new product rather than an existing product# A. when the /9?; of the new product is less than the /9?; of the existing product. 6. when the su"stitution of the new product for the old product increases the consumer)s total utility. +. only if the new product has a lower price than the existing product. C. only if the /9 of the new product exceeds the /9 of the existing product.
8. when the substitution of the new product for the old product increases the consumer's total utility.
'E. $efer to the a"ove diagram which relates to Firm A. Which of the following would shift A)s average total cost curve from AT+' to AT+-? A. replacement of old equipment with new& more productive equipment em"odying technological advance 6. a decrease in the incomes of A)s customers +. a move along A)s total product curve not shown! C. the increase in the price of one of the maOor inputs used to produce A)s product
+. replacement of old e/uipment with new" more productive e/uipment embodying technological advance
'G. All of the following increase the expected rate of return on $SC expenditures& except# A. patents. 6. trademar1s. +. imitation "y others. C. trade secrets.
'. imitation by others.
'7. %uppose that /arlen Fisher has legal protection against anyone producing and selling a fishing lure identical to his unique5action 3/arFish3 lure& whatever the competitor might name the lure. This legal protection is most li1ely to "e a# A. trademar1. 6. restraining order. +. patent. C. copyright.
'. patent.
'I. %uppose that /arlen Fisher has legal protection against anyone producing and selling a fishing lure specifically named 3/arFish.3 This legal protection is most li1ely to "e a# A. trademar1. 6. restraining order. +. patent. C. copyright.
+. trademar5.
-(. %uppose that 6oo15+ost 6usters 6+6!& without authorization& reproduced a "est5selling novel and placed it for downloading on the 6+6 pay5for5use we"site. This action would violate the pu"lisher)s# A. profit rights. 6. patent. +. copyright. C. trademar1.
'. copyright.
-'. %uppose that a firm)s legal staff concludes that a new production process which a firm is developing is patenta"le. Mraphically& this new information would shift the firm)s expected rate of return curve on $SC to the# A. right and reduce its optimal amount of $SC. 6. right and increase its optimal amount of $SC. +. left and increase its optimal amount of $SC. C. left and reduce its optimal amount of $SC.
8. right and increase its optimal amount of FY:.
--. >ven where imitation is possi"le& a firm may gain advantage from "eing the first to introduce an innovative product "ecause of# A. long5lasting "rand5name recognition. 6. a time lag "etween innovation and imitation "y rivals. +. trade secrets that limit the a"ility of rivals to imitate the product. C. all of these.
:. all of these.
-0. Which of the following supports the contention that pure competitors have a wea1 incentive to engage in $SC? A. >ntry to purely competitive industries is easy and thus profit from innovation is quic1ly competed away. 6. 2n pure competition& products are already highly differentiated. +. /ost purely competitive industries are increasing5cost industries. C. ;ure competitors are happy to earn only a normal profit.
+. 9ntry to purely competitive industries is easy and thus profit from innovation is /uic5ly competed away.
-8. >conomists who contend that oligopolists have a strong incentive to engage in $SC say that# A. the undistri"uted profits of oligopolists give them a source of readily availa"le& relatively low cost funds for financing $SC. 6. entry "arriers ena"le oligopolists to sustain the profit it gains from innovation. +. the large size of oligopolists) $SC departments allows them to use very specialized& expensive $SC equipment and employ teams of specialized researchers. C. all of these are true.
:. all of these are true.
-.. The process "y which new firms and new products replace existing dominant firms and products is called# A. monopolistic competition. 6. the inverted59 process. +. process innovation. C. creative destruction.
:. creative destruction.
-E. +reative destruction is not automatic "ecause# A. there are maOor o"stacles to the entry of new innovative firms into concentrated industries. 6. consumer tastes are highly unsta"le. +. corporate ta1eovers increase dynamic competition. C. large firms rarely are technologically progressive.
+. there are maLor obstacles to the entry of new innovative firms into concentrated industries.
A;-T H P")CTCD TDST &irections: &o this test 3uic.l! and s.ip the 3uestions !ou do not .now the answers to$ This will allow !ou to isolate the topics that !ou need to devote the most time to stud!ing and give us more time in class to review them$ 1. /n %hich of the follo%ing industry structures is the entry of ne% firms the most difficult< A. pure monopoly B. oligopoly C. monopolistic competition D. pure competition 2. An industry comprised of a very large number of sellers producing a standardi,ed product is 'no%n as: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition. . @hich of the follo%ing is not a characteristic of pure competition< A. price strategies by firms B. a standardi,ed product C. no barriers to entry D. a larger number of sellers &. @hich of the follo%ing is not a basic characteristic of pure competition< A. considerable nonprice competition B. no barriers to the entry or exodus of firms C. a standardi,ed or homogeneous product D. a large number of buyers and sellers -n answering the next 3uestion1s2+ assume a graph in which dollars are measured on the vertical axis and output on the hori*ontal axis$ (. "efer to the above information. Dor a purely competitive firm- total revenue: A. graphs as a straight- upsloping line. B. is a straight line- parallel to the vertical axis. C. is a straight line- parallel to the hori,ontal axis. D. graphs as a straight- do%nsloping line. *. "efer to the above information. Dor a purely competitive firm- marginal revenue: A. graphs as a straight- upsloping line. B. is a straight line- parallel to the vertical axis. C. is a straight line- parallel to the hori,ontal axis. D. graphs as a straight- do%nsloping line. .. "efer to the above information. Dor a purely competitive firm: A. marginal revenue %ill graph as an upsloping line. B. the demand curve %ill lie above the marginal revenue curve. C. the marginal revenue curve %ill lie above the demand curve. D. the demand and marginal revenue curves %ill coincide. 0. #rice is constant or given to the individual firm selling in a purely competitive mar'et because: A. the firm$s demand curve is do%nsloping. B. of product differentiation reinforced by extensive advertising. C. each seller supplies a negligible fraction of total supply. D. there are no good substitutes for its product. 3. Dor a purely competitive seller- price e2uals: A. average revenue. B. marginal revenue. C. total revenue divided by output. D. all of these.
14. A perfectly elastic demand curve implies that the firm: A. must lo%er price to sell more output. B. can sell as much output as it chooses at the existing price. C. reali,es an increase in total revenue %hich is less than product price %hen it sells an extra unit. D. is selling a differentiated 8heterogeneous9 product. 11. A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its: A. total variable costs. B. total costs. C. total fixed costs. D. marginal costs. 12. /f a firm is confronted %ith economic losses in the short run- it %ill decide %hether or not to produce by comparing: A. marginal revenue and marginal cost. B. price and minimum average variable cost. C. total revenue and total cost. D. total revenue and total fixed cost.
1 . Curve 819 in the above diagram A. total cost curve. C. marginal revenue curve. 1&. Curve 829 in the above diagram A. total cost curve. C. marginal revenue curve. 1(. Curve 8 9 in the above diagram A. total cost curve. C. marginal revenue curve. 1*. Curve 8&9 in the above diagram A. total cost curve. C. marginal revenue curve.
is a purely competitive firm$s: B. total revenue curve. D. total economic profit curve. is a purely competitive firm$s: B. total revenue curve. D. total economic profit curve. is a purely competitive firm$s: B. total revenue curve. D. total economic profit curve. is a purely competitive firm$s: B. total revenue curve. D. total profit curve.
1.. "efer to the above diagram. +ther things e2ual- an increase of product price %ould be sho%n as: A. an increase in the steepness of curve 8 9- an up%ard shift in curve 829- and up%ard shift in curve 819. B. a decrease in the steepness of curve 8 9- a do%n%ard shift in curve 829- and an up%ard shift in curve 819. C. an do%n%ard shift in curve 8&9 and an up%ard shift in curve 819- %ith no changes in lines 829 and 8 9. D. an up%ard shift in line 829 only. 10. /n the short run the individual competitive firm$s supply curve is that segment of the: A. average variable cost curve lying belo% the marginal cost curve. B. marginal cost curve lying above the average variable cost curve. C. marginal revenue curve lying belo% the demand curve. D. marginal cost curve lying bet%een the average total cost and average variable cost curves. 13. /n the long run a pure monopolist %ill maximi,e profits by producing that output at %hich marginal cost is e2ual to: A. average total cost. B. marginal revenue. C. average variable cost. D. average cost. 24. 1conomic profit in the long run is: A. possible for both a pure monopoly and a pure competitor. B. possible for a pure monopoly- but not for a pure competitor. C. impossible for both a pure monopolist and a pure competitor. D. only possible %hen barriers to entry are nonexistent. 21. /f at the !C = !" output- AAC exceeds price: A. ne% firms %ill enter this industry. B. the firm should produce the !C = !" output and reali,e an economic profit. C. the firm should shut do%n in the short run. D. the firm should expand its plant.
)nswer the next 3uestions on the #asis of the following cost data for a firm selling in a purel! competitive mar.et:
22. "efer to the above data. /f the mar'et price for the firm$s product is )12- the competitive firm %ill produce: A. & units at a loss of )143. B. & units at an economic profit of ) 1..(. C. 0 units at a loss of )&0.04. D. ,ero units at a loss of )144. 2 . "efer to the above data. /f the mar'et price for the firm$s product is ) 2- the competitive firm %ill produce: A. 0 units at an economic profit of )1*. B. ( units at a loss of )14. C. 0 units at a loss e2ual to the firm$s total fixed cost. D. . units at an economic profit of )&1.(4. 2&. "efer to the above data. /f the mar'et price for the firm$s product is )20- the competitive firm %ill: A. produce & units at a loss of )1..&4. B. produce . units at a loss of )1&.44. C. close do%n in the short run. D. produce * units at a loss of )2 .04.
2(. "efer to the above diagram. This firm %ill earn only a normal profit if product price is: A. P1. B. P2. C. P . D. P&. 2*. "efer to the above diagram. The firm %ill reali,e an economic profit if price is: A. P1. B. P2. C. P . D. P&. 2.. "efer to the above diagram. The firm %ill produce at a loss if price is: A. less than P1. B. P2. C. P . D. P&. 20. "efer to the above diagram. The firm %ill shut do%n at any price less than: A. P1. B. P2. C. P . D. P&. 23. "efer to the above diagram. The firm$s supply curve is the segment of the: A. !C curve above its intersection %ith the AAC curve. B. !C curve above its intersection %ith the ATC curve. C. AAC curve above its intersection %ith the !C curve. D. ATC curve above its intersection %ith the !C curve. 4. /f the price of product L is )2( and its marginal cost is )10: A. L is being produced %ith the least6cost combination of resources. B. society %ill reali,e a net gain if less of L is produced. C. resources are being underallocated to L . D. resources are being overallocated to L . 1. #ure monopoly means: A. any mar'et in %hich the demand curve to the firm is do%nsloping. B. a standardi,ed product being produced by many firms. C. a single firm producing a product for %hich there are no close substitutes. D. a large number of firms producing a differentiated product.
2. "efer to the above diagram. This firm is selling in: A. a mar'et in %hich there are an extremely large number of other firms producing the same product. B. an imperfectly competitive mar'et. C. a mar'et in %hich demand is elastic at all prices. D. a purely competitive mar'et. . "efer to the above diagram. Demand is relatively elastic: A. in the P2P1 price range. B. in the 4P1 price range. C. in the P2P& price range. D. only at price P2. &. "efer to the above diagram. Demand is relatively inelastic: A. at price P . B. at any price belo% P2. C. in the P2P& price range. D. in the P2P range.
(. "efer to the above diagram. /f this someho% %as a costless product 8that is- the total cost of any level of output %as ,ero9- the firm %ould maximi,e profits by: A. selling the product at the highest possible price at %hich a positive 2uantity %ill be demanded. B. producing Q1 units and charging a price of P1. C. producing Q units and charging a price of P . D. producing Q2 units and charging a price of P2.
*. "efer to the above diagram. To maximi,e profits or minimi,e losses this firm should produce: A. E units and charge price C. B. E units and charge price A. C. M units and charge price N. D. L units and charge price LK. .. "efer to the above diagram. At the profit6maximi,ing level of output- total revenue %ill be: A. NM times 4M. B. 4AJE. C. 4EGC. D. 4EHB. 0. "efer to the above diagram. At the profit6maximi,ing level of output- total cost %ill be: A. NM times 4M. B. 4AJE. C. 4CGC. D. 4BHE. 3. "efer to the above diagram. At the profit6maximi,ing level of output- the firm %ill reali,e: A. an economic profit of ABHJ. B. an economic profit of ACGJ. C. a loss of GH per unit. D. a loss of JH per unit. &4. /f profits are maximi,ed 8or losses minimi,ed9- %hich of the follo%ing conditions are common to both unregulated monopoly and to pure competition< A. !C = P B. !C = ATC C. !" = !C D. P = !" &1. /n %hich one of the follo%ing mar'et models is K6inefficiency most li'ely to be the greatest< A. pure competition B. oligopoly C. monopolistic competition D. pure monopoly &2. The dilemma of regulation refers to the idea that: A. the regulated price %hich achieves allocative efficiency is also li'ely to result in persistent economic profits. B. the regulated price %hich results in a Cfair returnC restricts output by more than %ould unregulated monopoly. C. regulated pricing al%ays conflicts %ith the Cdue processC provision of the Constitution. D. the regulated price %hich achieves allocative efficiency is also li'ely to result in losses.
& . !onopolistic competition is characteri,ed by a: A. fe% dominant firms and lo% entry barriers. B. large number of firms and substantial entry barriers. C. large number of firms and lo% entry barriers. D. fe% dominant firms and substantial entry barriers. &&. A significant difference bet%een a monopolistically competitive firm and a purely competitive firm is that the: A. former does not see' to maximi,e profits. B. latter recogni,es that price must be reduced to sell more output. C. former sells similar- although not identical- products. D. former$s demand curve is perfectly inelastic. &(. The monopolistic competition model assumes that: A. allocative efficiency %ill be achieved. B. productive efficiency %ill be achieved. C. firms %ill engage in nonprice competition. D. firms %ill reali,e economic profits in the long run. &*. /n the long run- ne% firms %ill enter a monopolistically competitive industry: A. provided economies of scale are being reali,ed. B. even though losses are incurred in the short run. C. until minimum average total cost is achieved. D. until economic profits are ,ero. &.. +ther things e2ual- if more firms enter a monopolistically competitive industry: A. the demand curves facing existing firms %ould shift to the right. B. the demand curves facing existing firms %ould shift to the left. C. the demand curves facing existing firms %ould become less elastic. D. losses %ould necessarily occur. &0. /n %hich of these continuums of degrees of competition 8highest to lo%est9 is oligopoly properly placed< A. pure competition- oligopoly- pure monopoly- monopolistic competition B. oligopoly- pure competition- monopolistic competition- pure monopoly C. monopolistic competition- pure competition- pure monopoly- oligopoly D. pure competition- monopolistic competition- oligopoly- pure monopoly &3. +ligopolistic industries are characteri,ed by: A. a fe% dominant firms and substantial entry barriers. B. a fe% dominant firms and no barriers to entry. C. a large number of firms and lo% entry barriers. D. a fe% dominant firms and lo% entry barriers. (4. Concentration ratios measure the: A. geographic location of the largest corporations in each industry. B. degree to %hich product price exceeds marginal cost in various industries. C. percentage of total sales accounted for by the four largest firms in the industry. D. number of firms in an industry. (1. +ligopolistic firms engage in collusion to: A. minimi,e unit costs of production. B. reali,e allocative efficiency- that is- the P = !C level of output. C. earn greater profits. D. increase production.
1. For economists, the word "utility" means: A. versatility and flexibility. B. rationality. C. pleasure or satisfaction. D. purposefulness. 2. Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any money on my financial investment." His economist friend points out that in effect he did lose money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of: A. opportunity costs. B. marginal benefits that exceed marginal costs. C. imperfect information. D. normative economics. 3. The assertion that "There is no free lunch" means that: A. there are always tradeoffs between economic goals. B. all production involves the use of scarce resources and thus the sacrifice of alternative goods. C. marginal analysis is not used in economic reasoning. D. choices need not be made if behavior is rational. 4. The budget line shows: A. the amount of product A that a consumer is willing to give up to obtain one more unit of product B. B. all possible combinations of two goods that can be purchased, given money income and the prices of the goods. C. the minimum amount of two goods that a consumer can purchase with a given money income. D. all possible combinations of two goods that yield the same level of utility to the consumer.
5. Refer to the budget line shown in the diagram above. If the consumer's money income is $20, the: A. prices of C and D cannot be determined. B. price of C is $2 and the price of D is $4. C. consumer can obtain a combination of 5 units of both C and D. D. price of C is $4 and the price of D is $2. 6. Any point inside the production possibilities curve indicates: A. the presence of technological change. B. that resources are imperfectly substitutable among alternative uses.
C. the presence of inflationary pressures. D. that more output could be produced with available resources.
75.
125. Refer to the above table. If your taxable income is $8,000, your average tax rate is: A. 25 percent and the marginal rate on additional income is also 25 percent. B. 25 percent and the marginal rate on additional income is 40 percent. C. 25 percent and the marginal rate on additional income cannot be determined from the information given. D. 20 percent and the marginal rate on additional income is 30 percent. 126. Which of the following best reflects the ability-to-pay philosophy of taxation? A. a tax on residential property B. a progressive income tax C. an excise tax on gasoline D. an excise tax on coffee 127. The incidence of a tax pertains to: A. the degree to which it alters the distribution of income. B. how easy it is to evade the tax. C. who actually bears the burden of a tax. D. the progressiveness or regressiveness of tax rates. '. Mther things e/ual" in which of the following cases would economic profit be the greatest> A. 6. an unregulated monopolist +. a regulated monopolist charging a price e/ual
C. a regulated monopolist charging a price e/ual
-.
#urely competitive firms and pure monopolists are similar in that< A. 6. significant entry barriers are common to both. +. both are price ma5ers. C. both maximize profit where MF I M'.
0.
(Hast Bord* :e8eers 'onsolidated Mines mar5ets about< A. 6. 8! percent of the world's rough-cut diamonds. +. &! percent of the world's rough-cut diamonds. C. %% percent of the world's rough-cut diamonds.
8.
To maximize profit a pure monopolist must< maximize its A. total revenue. 6. maximize the difference between marginal revenue and
+. maximize the difference between total revenue and total C. produce where average total cost is at a minimum.
..
6-inefficiency refers to a situation in which a firm<
A.
is not as technologically progressive as it might b
6. encounters diseconomies of scale. +. fails to realize all existing economies of scale.
C. fails to achieve the minimum average total costs
E.
F-$ 02)!&2
Fefer to the above diagram for a nondiscriminating monopolist. Marginal revenue will be zero at output< A. q). 6. q%. +. q2. C. q$.
G.
The vertical distance between the horizontal axis and any point on a perfectly discriminating monopolist's demand curve measures< the /uantity A. demanded. 6. total revenue. +. product price and marginal revenue. C. average revenue and average total cost.
7.
=f a monopolist engages in perfect price discrimination" it will<
A.
realize a smaller profit.
6. charge a higher price where individual d demand is elastic.
+. produce a smaller output than when it di
C. charge a competitive price to all its custo
I.
F-2 02)$.
Fefer to the above diagram for a natural monopolist. =f a regulatory commission set a maximum price of P$" the monopolist would produce output< A. Q2 and realize a normal profit. 6. Q) and realize a normal profit. +. Q% and realize an economic profit. C. Q) and realize a loss.
'(.
The nondiscriminating monopolist's demand curve< A.
6. is perfectly elastic. +. coincides with its marginal revenue curve. C. is perfectly inelastic.
''.
Bhat do economies of scale" the ownership of essential raw
materials" and patents have in common> A. 6. They are all barriers to entry.
+. They all help explain why a monopolist'
C. They all help explain why the long-run a
'-.
F-2 02)$.
Fefer to the above diagram for a natural monopolist. =f a regulatory commission set a maximum price of P2" the monopolist would< A. produce output Q$ and realize an econom
6. produce output Q% and realize an econom +. close down in the short run.
C. produce output Q% and realize a normal p
'0.
=f a regulatory commission wants to provide a natural monopoly with a fair return" it should establish a price that is e/ual to< minimum A. average fixed cost. 6. average total cost. +. marginal cost. C. marginal revenue.
'8.
F-% 02)!A!
Fefer to the above diagram for a pure monopolist. Monopoly price will be< A. e. 6. c. +. b. C. a.
'..
+nswer the next /uestion(s* on the basis of th monopolist<

F-) F902)! 8
Fefer to the above data. The e/uilibrium level of output will be< A. ) units. 6. units.
+. . units. C. & units.
'E.
The pure monopolist's demand curve is< A.
6. of unit elasticity throughout. +. perfectly inelastic.
C. perfectly elastic.
'G.
=f a pure monopolist is producing at that output where P I +T'" then< its economic A. profits will be zero. 6. it will be realizing losses.
+. it will be producing less than the profit-maximizing level C. it will be realizing an economic profit.
'7.
+nswer the next /uestion on the basis of the f facing a nondiscriminating monopolist<
F-& F902)!.&
The monopolist will select its profit-maximizing level of output somewhere within the< A. %-& unit range of output. 6. $-% unit range of output. +. $-) unit range of output. C. 2-) unit range of output.
'I.
+ pure monopolist< A.
6. will realize an economic profit if +T' exceeds M
+. will realize an economic loss if M' intersects the C. always realizes an economic profit.
-(.
Bhen the pure monopolist's demand curve is elastic" marginal revenue< may be either A. positive or negative. 6. is zero. +. is negative. C. is positive.
-'.
#ure monopoly means< A.
6. a standardized product being produced by many firm
+. a single firm producing a product for which there are
C. a large number of firms producing a differentiated pr
--.
+ nondiscriminating pure monopolist's demand curve< is perfectly A. inelastic. 6. coincides with its marginal revenue curve. +. lies above its marginal revenue curve. C. lies below its marginal revenue curve.
-0.
The dilemma of regulation refers to the idea that< A.
6. the regulated price which results in a 4fa unregulated monopoly.
+. regulated pricing always conflicts with t
C. the regulated price which achieves alloc
-8.
F-. 02)!%)
Fefer to the above diagram. :emand is relatively inelastic< A. at price P%. 6. at any price below +. in the P2P) price range. C. in the P2P% price range.
-..
+nswer the next /uestion(s* on the basis of th monopolist<

F-) F902)! 8
Fefer to the above data. 9/uilibrium price for the monopolist will be< A. $&.!! 6. $2.A!. +. $%.%&. C. $).&!.
-E.
The demand curve faced by a pure monopolist< A.
6. is less elastic than that faced by a single purel
+. has the same elasticity as that faced by a sing
C. is more elastic than that faced by a single pur
-G.
@uppose that a pure monopolist can sell $! units of output at $& per unit and $$ units at $).A! per unit. The marginal revenue of the eleventh unit is< A. $%.A! . 6. $.$!. +. $&%.A!. C. $).A!.
-7.
The marginal revenue curve for a monopolist< is a straight" A. upward sloping curve. 6. rises at first" reaches a maximum" and then declines.
+. becomes negative when output increases beyond some C. is a straight line" parallel to the horizontal axis.
-I.
The MF I M' rule< applies only to A. pure competition. 6. applies only to pure monopoly.
+. does not apply to pure monopoly because price exce
C. applies both to pure monopoly and pure competition
0(.
F- 02)!2
Fefer to the above two diagrams for individual firms. =n 0igure 2 the firm's demand and marginal revenue curves are represented by< A. lines B and C respectively. 6. lines A and C respectively. +. lines A and B respectively. C. line B.
'.
=n an oligopolistic mar5et< one firm is A. always dominant. 6. products may be standardized or differentiated. +. the four largest firms account for 2! percent or less of total C. the industry is monopolistically competitive.
-.
'lear-cut mutual interdependence with respect to the price-output policies exists in< pure A. monopoly 6. oligopoly
+. monopolistic competition C. pure competition
0.
+ssume six firms comprising an industry have mar5et shares of %!" %!" $!" $!" $!" and $! percent. The Gerfindahl =ndex for this industry< A. is 2"&2&. 6. is $".!!. +. is 2"2!!. C. is 8!.
>. cannot be determined from the informati
8.
F-$ 02.!.%
The above diagram portrays< A. pure competition. 6. monopolistic competition. +. noncollusive oligopoly. C. pure monopoly. >. collusive oligopoly.
..
F-$ 02.!.%
Fefer to the above diagram. 9/uilibrium output is< A. j. 6. h. +. g.
C. f .
E.
F-$ 02.!.%
Fefer to the above diagram. 9/uilibrium price is< A. e. 6. d. +. c. C. b. >. a.
G.
F-$ 02.!.%
Fefer to the above diagram. This firm's demand and marginal revenue curves are based on the assumption that< A. the firm has no immediate rivals.
6. rivals will match both a price increase an
+. rivals will match a price increase" but ig
C. rivals will ignore a price increase" but m
7.
F-$ 02.!.%
Fefer to the above diagram. =n e/uilibrium the firm< A. is realizing an economic profit of 6. should close down in the short run. +. is realizing a loss. C. is realizing an economic profit of
I.
=n the ;nited @tates cartels are< A.
6. in violation of the antitrust laws.
+. concentrated in monopolistically competitive indu
C. encouraged by government policy so that firms ca
'(.
=f the several oligopolistic firms which comprise an industry behave collusively" the resulting price and output will most li5ely resemble those of< bilateral A. monopoly. 6. pure monopoly. +. monopolistic competition. C. pure competition.
''.
+dvertising can enhance economic efficiency when it< increases A. brand loyalty.
6. expands sales such that firms achieve substantial econom +. 5eeps new firms from entering profitable industries. C. is underta5en by pure competitors.
'-.
The conclusion that oligopoly is inefficient relative to the competitive ideal must be /ualified because< industry p A. a price e/u
6. over time oligopolistic industries may pr improvement of production techni/ues t
+. increased output due to persuasive adver caused by monopoly power.
C. many oligopolists sell their products in m competitive industries.
CHAPTER 25
'onopolistic Competition and Pligopol!
Topic
Question num#ers
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1. !onopolistic competition: definition> characteristics161. 2. Demand curve . #rice6output behavior &. 1fficiency aspects (. +ligopoly: definition> characteristics *. Concentration ratio> ;erfindahl /ndex .. Eame theory 0. Gin'ed6demand curve model 3. Collusion> cartels> price leadership 14. 11. 12. Consider This ?ast @ord True6Dalse 1062& 2(6.0 .3600 036112 11 61&4 1&161(* 1(.61.* 1..613& Advertising 13(6244 1fficiency aspects 241624& "evie% of four structures 24(622* 22.6220 22362 2 &62(0
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'ultiple Choice Questions
'onopolistic competition: definition9 characteristics
Type: D Topic: 1 1: &*4 !/: 21* 1. !onopolistic competition means: A9 a mar'et situation %here competition is based entirely on product differentiation and advertising. B9 a large number of firms producing a standardi,ed or homogeneous product. C9 many firms producing differentiated products. D9 a fe% firms producing a standardi,ed or homogeneous product. Ans%er: C
Type: A Topic: 1 1: &*1 !/: 21. 2. !onopolistic competition is characteri,ed by a: A9 fe% dominant firms and lo% entry barriers. B9 large number of firms and substantial entry barriers. C9 large number of firms and lo% entry barriers. D9 fe% dominant firms and substantial entry barriers. Ans%er: C
Type: A Topic: 1 1: &*1 !/: 21. . Fnder monopolistic competition entry to the industry is: A9 completely free of barriers. B9 more difficult than under pure competition but not nearly as difficult as under pure monopoly. C9 more difficult than under pure monopoly. D9 bloc'ed. Ans%er: B
Type: A Topic: 1 1: &*1 !/: 21. &. !onopolistic competition resembles pure competition because: A9 both industries emphasi,e nonprice competition. B9 in both instances firms %ill operate at the minimum point on their long6run average total cost curves. C9 both industries entail the production of differentiated products. D9 barriers to entry are either %ea' or nonexistent. Ans%er: D
Type: A Topic: 1 1: &*46&*1 !/: 21*621. (. @hich of the follo%ing is not a basic characteristic of monopolistic competition< A9 the use of trademar's and brand names C9 product differentiation B9 recogni,ed mutual interdependence Ans%er: B D9 a relatively large number of sellers
Type: D Topic: 1 1: &*16&*2 !/: 21.6210 *. 5onprice competition refers to: A9 competition bet%een products of different industries- for example- competition bet%een aluminum and steel in the manufacture of automobile parts. B9 price increases by a firm that are ignored by its rivals. C9 advertising- product promotion- and changes in the real or perceived characteristics of a product. D9 reductions in production costs that are not reflected in price reductions. Ans%er: C
Type: A Topic: 1 1: &*26&*
!/: 2106213
.. @hich of the follo%ing is not characteristic of monopolistic competition< A9 relatively large numbers of sellers B9 product differentiation Ans%er: C C9 production at minimum ATC in the long6run D9 relatively easy entry to the industry
Type: A Topic: 1 1: &*2 !/: 210 0. The boo' publishing- furniture- and clothing industries are each illustrations of: A9 countervailing po%er. B9 homogeneous oligopoly. Ans%er: C C9 monopolistic competition. D9 pure monopoly.
Type: A Topic: 1 1: &*1 !/: 21. 3. /f the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes: A9 the li'elihood of reali,ing economic profits in the long run %ould be enhanced. B9 individual firms %ould no% be operating at outputs %here their average total costs %ould be higher. C9 the industry %ould more closely approximate pure competition. D9 the li'elihood of collusive pricing %ould increase. Ans%er: C
Type: A Topic: 1 1: &*1 !/: 21. 14. 1conomic analysis of a monopolistically competitive industry is more complicated than that of pure competition because: A9 the number of firms in the industry is larger. B9 monopolistically competitive firms cannot reali,e an economic profit in the long run. C9 of product differentiation and conse2uent product promotion activities. D9 monopolistically competitive producers use strategic pricing strategies to combat rivals. Ans%er: C
Type: A Topic: 1 1: &*1 !/: 21. 11. A monopolistically competitive industry combines elements of both co !etition and monopoly element results from: A9 the li'elihood of collusion. B9 high entry barriers. Ans%er: C C9 product differentiation. D9 mutual interdependence in decision ma'ing. ono!oly. The
Type: D Topic: 1 1: &*2 !/: 210 12. 5onprice competition refers to: A9 lo% barriers to entry. B9 product development- advertising- and product pac'aging. C9 the differences in information %hich consumers have regarding various products. D9 an industry or firm in long6run e2uilibrium. Ans%er: B
Type: A Topic: 1 1: &*1 !/: 21. 1 . A significant difference bet%een a monopolistically competitive firm and a purely competitive firm is that the: A9 former does not see' to maximi,e profits. B9 latter recogni,es that price must be reduced to sell more output. C9 former sells similar- although not identical- products. D9 former$s demand curve is perfectly inelastic. Ans%er: C
Type: A Topic: 1 1: &*4 !/: 21* 1&. A monopolistically competitive industry combines elements of both co !etition and correct to say that the competitive element results from: ono!oly. /t is
A9 a relatively large number of firms and the monopolistic element from product differentiation. B9 product differentiation and the monopolistic element from high entry barriers. C9 a perfectly elastic demand curve and the monopolistic element from lo% entry barriers. D9 a highly inelastic demand curve and the monopolistic element from advertising and product promotion. Ans%er: A
Type: A Topic: 1 1: &*1 !/: 21. 1(. !onopolistically competitive and purely competitive industries are similar in that: A9 both are assured of short6run economic profits. B9 both produce differentiated products. C9 the demand curves facing individual firms are perfectly elastic in both industries. D9 there are fe%- if any- barriers to entry. Ans%er: D
Type: A Topic: 1 1: &*2 !/: 210 1*. The monopolistic competition model predicts that: A9 allocative efficiency %ill be achieved. B9 productive efficiency %ill be achieved. C9 firms %ill engage in nonprice competition. D9 firms %ill reali,e economic profits in the long run. Ans%er: C
Type: C Topic: 1 1: &*4 !/: 21* 1.. Fse your basic 'no%ledge and your understanding of mar'et structures to ans%er this 2uestion. @hich of the follo%ing companies most closely approximates a monopolistic competitor< A9 7ub%ay 7and%iches Ans%er: A B9 #ittsburgh #late Elass C9 Dord !otor Company D9 !icrosoft.
&emand curve
Type: D Topic: 2 1: &*2 !/: 210 10. A monopolistically competitive firm has a: A9 highly elastic demand curve. B9 highly inelastic demand curve. Ans%er: A C9 perfectly inelastic demand curve. D9 perfectly elastic demand curve.
Type: A Topic: 2 1: &*2 !/: 210 13. The monopolistically competitive seller$s demand curve %ill become more elastic the: A9 more significant the barriers to entering the industry. B9 greater the degree of product differentiation. C9 larger the number of competitors. D9 smaller the number of competitors. Ans%er: C
Type: A Topic: 2 1: &*2 !/: 210 24. The larger the number of firms and the smaller the degree of product differentiation the: A9 greater the divergence bet%een the demand and the marginal revenue curves of the monopolistically competitive firm. B9 larger %ill be the monopolistically competitive firm$s fixed costs. C9 less elastic is the monopolistically competitive firm$s demand curve. D9 more elastic is the monopolistically competitive firm$s demand curve. Ans%er: D
Type: A Topic: 2 1: &*2 !/: 210 21. The demand curve of a monopolistically competitive producer is: A9 less elastic than that of either a pure monopolist or a pure competitor. B9 less elastic than that of a pure monopolist- but more elastic than that of a pure competitor. C9 more elastic than that of a pure monopolist- but less elastic than that of a pure competitor. D9 more elastic than that of either a pure monopolist or a pure competitor. Ans%er: C
Type: A Topic: 2 1: &*26&*
!/: 2106213
22. A monopolistically competitive firm$s marginal revenue curve: A9 is do%nsloping and coincides %ith the demand curve. B9 coincides %ith the demand curve and is parallel to the hori,ontal axis. C9 is do%nsloping and lies belo% the demand curve. D9 does not exist because the firm is a Cprice ma'er.C Ans%er: C
Type: A Topic: 2 1: &*26&*
!/: 2106213
2 . /n comparing the demand curve of a pure monopolist %ith that of a monopolistically competitive firm- %e %ould expect the monopolistic competitor to have a: A9 perfectly elastic demand curve and the monopolist to have a perfectly inelastic demand curve. B9 generally more elastic demand curve. C9 generally less elastic demand curve. D9 demand curve %hose elasticity coefficient is 1 at all possible prices. Ans%er: B
Type: A Topic: 2 1: &*2 !/: 210 2&. The price elasticity of a monopolistically competitive firm$s demand curve varies: A9 inversely %ith the number of competitors and the degree of product differentiation. B9 directly %ith the number of competitors and the degree of product differentiation. C9 directly %ith the number of competitors- but inversely %ith the degree of product differentiation. D9 inversely %ith the number of competitors- but directly %ith the degree of product differentiation. Ans%er: C
Price-output #ehavior
Type: A Topic:
1: &*& !/: 224 7tatus: 5e%
2(. /n short6run e2uilibrium- a monopolistically competitive firm sets it price: A9 e2ual to marginal revenue. B9 e2ual to marginal cost. Ans%er: C C9 above marginal cost. D9 belo% marginal cost.
Type: A Topic:
1: &*& !/: 224 7tatus: 5e%
2*. /n long6run e2uilibrium- a monopolistically competitive firm sets it price: A9 above marginal cost. B9 belo% marginal cost. Ans%er: A C9 e2ual to marginal revenue. D9 e2ual to marginal cost.
Type: A Topic:
1: &*& !/: 224 7tatus: 5e%
2.. /n short6run e2uilibrium- the price charged by the monopolistically competitive firm: A9 must be less than ATC. B9 must be more than ATC. C9 may be either e2ual to ATC- less than ATC- or more than ATC. D9 must be e2ual to ATC. Ans%er: C
Type: A Topic:
1: &*& !/: 224 7tatus: 5e%
20. /n long6run e2uilibrium- the price charged by the monopolistically competitive firm: A9 must be less than ATC. B9 must be more than ATC. C9 may be either e2ual to ATC- less than ATC- or more than ATC. D9 %ill be e2ual to ATC. Ans%er: D
Type: A Topic:
1: &*& !/: 224
23. !onopolistically competitive firms: A9 reali,e normal profits in the short run but losses in the long run. B9 incur persistent losses in both the short run and long run. C9 may reali,e either profits or losses in the short run- but reali,e normal profits in the long run. D9 persistently reali,e economic profits in both the short run and long run. Ans%er: C
Type: A Topic:
1: &*& !/: 224
4. The monopolistically competitive seller maximi,es profit by producing at the point %here: A9 total revenue is at a maximum. B9 average costs are at a minimum. Ans%er: C C9 marginal revenue e2uals marginal cost. D9 price e2uals marginal revenue.
Type: A Topic:
1: &*& !/: 224
1. /n long6run e2uilibrium a monopolistically competitive firm$s price %ill: A9 be less than both !C and ATC. B9 exceed ATC- but e2ual !C. Ans%er: C C9 exceed !C- but e2ual ATC. D9 exceed both !C and ATC.
Type: A Topic:
1: &*( !/: 221
2. @hich of the follo%ing is correct for a monopolistically competitive firm in long6run e2uilibrium< A9 !C = ATC Ans%er: C B9 !C exceeds !" C9 P exceeds minimum ATC D9 P = !C
Type: A Topic:
1: &*(6&** !/: 2216222
. /n long6run e2uilibrium a monopolistically competitive firm %ill: A9 earn an economic profit. B9 reali,e all economies of scale. Ans%er: D C9 e2uate price and marginal cost. D9 have excess production capacity.
Type: D Topic:
1: &*(6&** !/: 2216222
&. 1xcess capacity refers to the: A9 amount by %hich actual production falls short of the minimum ATC output. B9 fact that entry barriers artificially reduce the number of firms in an industry. C9 differential bet%een price and marginal costs %hich characteri,es monopolistically competitive firms. D9 fact that most monopolistically competitive firms encounter diseconomies of scale. Ans%er: A
Fse the follo%ing to ans%er 2uestions (6 0:
Type: E Topic:
1: &* 6&*& !/: 2136224
(. "efer to the above diagram for a monopolistically competitive firm in short6run e2uilibrium. This firm$s profit6maximi,ing price %ill be: A9 )14. Ans%er: C B9 )1 . C9 )1*. D9 )13.
Type: E Topic:
1: &* 6&*& !/: 2136224
*. "efer to the above diagram for a monopolistically competitive firm in short6run e2uilibrium. The profit6maximi,ing output for this firm %ill be: A9 214. Ans%er: C B9 104. C9 1*4. D9 144.
Type: E Topic:
1: &* 6&*& !/: 2136224
.. "efer to the above diagram for a monopolistically competitive firm in short6run e2uilibrium. This firm %ill reali,e an economic: A9 loss of ) 24. Ans%er: C B9 loss of )204. C9 profit of )&04. D9 profit of )*44. 19 profit of ) *4.
Type: E Topic:
1: &*& !/: 224
0. "efer to the above diagram for a monopolistically competitive firm in short6run e2uilibrium. Assume the firm is part of an increasing6cost industry. /n the long run firms %ill: A9 leave this industry- causing both demand and the ATC curve to shift up%ard. B9 enter this industry- causing demand to rise and the ATC curve to shift do%n%ard. C9 enter this industry- causing demand to fall and the ATC curve to shift up%ard. D9 enter this industry- causing both demand and the ATC curve to shift up%ard. Ans%er: C
Type: A Topic:
1: &*& !/: 224
3. /n the short run a monopolistically competitive firm$s economic profit: A9 %ill be maximi,ed %here price e2uals average total cost. B9 may be positive- ,ero- or negative. C9 are al%ays positive. D9 %ill al%ays be ,ero. Ans%er: B
Fse the follo%ing to ans%er 2uestions &46&2:
Type: E Topic:
1: &*
!/: 213 7tatus: 5e%
&4. /n short6run e2uilibrium- the monopolistically competitive firm sho%n above %ill set its price: A9 belo% ATC. B9 above ATC. C9 belo% !C. D9 belo% !". Ans%er: A
Type: E Topic:
1: &* 6&*& !/: 2136224
&1. The monopolistically competitive firm sho%n in the above figure: A9 is in long6run e2uilibrium. B9 might reali,e an economic profit or a loss- depending on its choice of output level. C9 cannot operate profitably- at least in the short run. D9 can reali,e an economic profit. Ans%er: C
Type: E Topic:
1: &*& !/: 224 7tatus: 5e%
&2. /f all monopolistically competitive firms in the industry have profit circumstances similar to the firm sho%n above: A9 ne% firms %ill enter the industry. B9 some firms %ill exit the industry. Ans%er: B C9 all firms %ill exit the industry. D9 no firms %ill exit the industry.
Fse the follo%ing to ans%er 2uestions & 6&(:
Type: E Topic:
1: &*
!/: 213 7tatus: 5e%
& . /n short6run e2uilibrium- the monopolistically competitive firm sho%n in the above figure %ill set its price: A9 belo% ATC. B9 above ATC. C9 belo% !C. D9 belo% !". Ans%er: B
Type: E Topic:
1: &* 6&*& !/: 2136224
&&. The monopolistically competitive firm sho%n in the above figure: A9 %ill reali,e allocative efficiency at its profit6maximi,ing output. B9 cannot operate at a loss. C9 is in long6run e2uilibrium. D9 is reali,ing an economic profit. Ans%er: D
Type: E Topic:
1: &*& !/: 224 7tatus: 5e%
&(. /f all monopolistically competitive firms in the industry have profit circumstances similar to the firm sho%n above: A9 ne% firms %ill enter the industry. B9 some firms %ill exit the industry. Ans%er: A C9 all firms %ill exit the industry. D9 no firms %ill enter the industry.
Fse the follo%ing to ans%er 2uestions &*6&0:
Type: E Topic:
1: &*
!/: 213
&*. "efer to the above diagrams- %hich pertain to monopolistically competitive firms. 7hort6run e2uilibrium entailing economic loss is sho%n by: A9 diagram a only. Ans%er: C B9 diagram b only. C9 diagram c only. D9 both diagrams a and c.
Type: E Topic:
1: &*
!/: 213
&.. "efer to the above diagrams- %hich pertain to monopolistically competitive firms. A short6run e2uilibrium entailing economic profits is sho%n by: A9 diagram a only. Ans%er: B B9 diagram b only. C9 diagram c only. D9 both diagrams b and c.
Type: E Topic:
1: &*
!/: 213
&0. "efer to the above diagrams- %hich pertain to monopolistically competitive firms. ?ong6run e2uilibrium is sho%n by: A9 diagram a only. Ans%er: A B9 diagram b only. C9 diagram c only. D9 both diagrams b and c.
Type: A Topic:
1: &*& !/: 224
&3. @hich of the follo%ing is not characteristic of long6run e2uilibrium under monopolistic competition< A9 price e2uals minimum average total cost C9 price is e2ual to average total cost
B9 marginal cost e2uals marginal revenue D9 price exceeds marginal cost Ans%er: A
Fse the follo%ing to ans%er 2uestions (46(2:
Type: E Topic:
1: &*
!/: 213
(4. "efer to the above diagram for a monopolistically competitive firm. ?ong6run e2uilibrium price %ill be: A9 above A. Ans%er: C B9 EF. C9 A. D9 B.
Type: E Topic:
1: &*
!/: 213
(1. "efer to the above diagram for a monopolistically competitive firm. ?ong6run e2uilibrium output %ill be: A9 greater than E. Ans%er: C B9 E. C9 D. D9 C.
Type: E Topic:
1: &*& !/: 224
(2. "efer to the above diagram for a monopolistically competitive firm. /f more firms %ould enter the industry and product differentiation %ould %ea'en: A9 resource misallocation %ould become more severe. B9 the demand curve %ould become more elastic. C9 e2uilibrium output %ould decline and e2uilibrium price %ould rise. D9 e2uilibrium output %ould decline and e2uilibrium price %ould fall. Ans%er: B
Type: A Topic:
1: &*& !/: 224
( . ?ong6run e2uilibrium for a monopolistically competitive firm %here economic profits are ,ero results from: A9 rising marginal costs. C9 relatively easy entry.
B9 a perfectly elastic product demand curve. D9 product differentiation and development. Ans%er: C
Fse the follo%ing to ans%er 2uestions (&6((:
Type: E Topic:
1: &*& !/: 224
(&. /n long6run e2uilibrium- the firm sho%n in the diagram above %ill: A9 earn a normal profit. Ans%er: A B9 go ban'rupt. C9 incur a loss. D9 reali,e an economic profit.
Type: E Topic:
1: &*( !/: 221
((. /n long6run e2uilibrium- production for the firm sho%n in the diagram above is: A9 greater than %ould occur under pure competition. B9 less efficient than in a purely competitive mar'et. C9 more efficient than in a purely competitive mar'et. D9 optimally efficient. Ans%er: B
Type: A Topic:
1: &* 6&*& !/: 2136224
(*. @hen a monopolistically competitive firm is in long6run e2uilibrium: A9 production ta'es place %here ATC is minimi,ed. B9 marginal revenue e2uals marginal cost and price e2uals average total cost. C9 normal profit is ,ero and price e2uals marginal cost. D9 economic profit is ,ero and price e2uals marginal cost. Ans%er: B
Type: A Topic:
1: &*& !/: 224
(.. /n the long run- ne% firms %ill enter a monopolistically competitive industry: A9 provided economies of scale are being reali,ed. achieved. B9 even though losses are incurred in the short run. Ans%er: D C9 D9 until minimum average total cost is until economic profits are ,ero.
Type: A Topic:
1: &*& !/: 224
(0. /f some firms leave a monopolistically competitive industry- the demand curves of the remaining firms %ill: A9 be unaffected. Ans%er: D B9 shift to the left. C9 become more elastic. D9 shift to the right.
Type: A Topic:
1: &* 6&*& !/: 2136224
(3. @hen a monopolistically competitive firm is in long6run e2uilibrium: A9 P = !C = ATC. B9 !" = !C and minimum ATC V P. Ans%er: D C9 !" V !C and P = minimum ATC. D9 !" = !C and P V minimum ATC.
Type: A Topic:
1: &*& !/: 224
*4. +ther things e2ual- if more firms enter a monopolistically competitive industry: A9 the demand curves facing existing firms %ould shift to the right. B9 the demand curves facing existing firms %ould shift to the left. C9 the demand curves facing existing firms %ould become less elastic. D9 losses %ould necessarily occur. Ans%er: B
Type: A Topic:
1: &*& !/: 224
*1. @hich of the follo%ing statements is correct< A9 #urely competitive firms- monopolistically competitive firms- and pure monopolies all earn ,ero economic profits in the long run. B9 #urely competitive firms- monopolistically competitive firms- and pure monopolies all earn positive economic profits in the long run. C9 /n the long run purely competitive firms and monopolistically competitive firms earn ,ero economic profits- %hile pure monopolies may or may not earn economic profits. D9 !onopolistically competitive firms earn ,ero economic profits in both the short run and the long run. Ans%er: C
Type: A Topic:
1: &*
!/: 213
*2. Dor a monopolistically competitive firm in long6run e2uilibrium: A9 price %ill e2ual marginal cost. B9 price %ill e2ual average total cost. Ans%er: B C9 marginal revenue %ill exceed marginal cost. D9 economic profits %ill be some positive amount.
Type: A Topic:
1: &* 6&*& !/: 2136224
* . /n long6run e2uilibrium both purely competitive and monopolistically competitive firms %ill: A9 produce at minimum average total cost. C9 achieve allocative efficiency. B9 earn economic profits. Ans%er: D D9 e2uate marginal cost and marginal revenue.
Type: A Topic:
1: &*(6&** !/: 2216222
*&. /n long6run e2uilibrium monopolistic competition entails: A9 an efficient allocation of resources. B9 an overallocation of resources. C9 an underallocation of resources. D9 production at the minimum attainable average total cost. Ans%er: C
Type: A Topic:
1: &*& !/: 224
*(. @hich of the follo%ing statements concerning a monopolistically competitive industry is correct< A9 /f there are short6run losses- firms %ill leave the industry and the demand curves of the remaining firms %ill shift to the right. B9 /f there are short6run economic profits- firms %ill enter the industry and the demand curves of existing firms %ill shift to the right. C9 /f there are short6run losses- firms %ill leave the industry and the demand curves of the remaining firms %ill shift to the left. D9 /f there are short6run economic profits- firms %ill leave the industry and the demand curves of the remaining firms %ill shift to the right. Ans%er: A
Fse the follo%ing to ans%er 2uestions **6.1:
Ans%er the next 2uestion8s9 on the basis of the follo%ing demand and cost data for a specific firm:
'! ; r ic e $$$ A .A A A 8 .$ ! . & .$ &
C e m a n d C a ta -! ; r ic e $$! 8 .8 & 8 . .$ ! & ) .$ &
+ o st C a ta 0! A u a n tity . 8 A $! $$ $2 O u tp u t . 8 A $! $$ $2 T o ta l cost $.$ .2 .) . 2 A 8.
Type: T Topic:
1: &*& !/: 224
**. /f columns 819 and 8 9 of the demand data sho%n above are this firm$s demand schedule- the profit6 maximi,ing level of output %ill be: A9 12 units. Ans%er: B B9 0 units. C9 14 units. D9 3 units.
Type: T Topic:
1: &*& !/: 224
*.. /f columns 819 and 8 9 of the demand data sho%n above are this firm$s demand schedule- the profit6 maximi,ing price %ill be: A9 )3. B9 ).. C9 )11. D9 )*.
Ans%er: A
Type: T Topic:
1: &*& !/: 224
*0. /f columns 819 and 8 9 of the demand data sho%n above are this firm$s demand schedule- economic profit %ill be: A9 )14. Ans%er: D B9 )13. C9 )*. D9 )0.
Type: T Topic:
1: &*& !/: 224
*3. 7uppose that entry into the industry changes this firm$s demand schedule from columns 819 and 8 9 sho%n above to columns 829 and 8 9. 1conomic profit %ill: A9 fall by )14. Ans%er: D B9 fall to )*. C9 increase by )14. D9 decline to ,ero.
Type: T Topic:
1: &*& !/: 224
.4. 7uppose that entry into this industry changes this firm$s demand schedule from columns 819 and 8 9 sho%n above to columns 829 and 8 9. @e can conclude that this industry is: A9 a pure monopoly. B9 purely competitive. Ans%er: D C9 a constant cost industry. D9 monopolistically competitive.
Type: T Topic:
1: &*& !/: 224
.1. @ith the demand schedule sho%n above by columns 829 and 8 9- in long6run e2uilibrium: A9 price %ill e2ual average total cost. B9 total cost %ill exceed total revenue. Ans%er: A C9 marginal cost %ill exceed price. D9 price %ill e2ual marginal revenue.
Type: A Topic:
1: &* 6&*& !/: 2136224
.2. An important similarity bet%een a monopolistically competitive firm and a purely competitive firm is that: A9 both face perfectly elastic demand schedules. C9 B9 economic profit tends to%ard ,ero for both. Ans%er: B D9 both reali,e productive efficiency. both reali,e allocative efficiency.
Type: A Topic:
1: &*2 !/: 210
. . An important similarity bet%een a monopolistically competitive firm and a pure monopolist is that both: A9 reali,e an economic profit in the long run. B9 achieve allocative efficiency. C9 face demand curves %hich are less than perfectly elastic. D9 achieve productive efficiency. Ans%er: C
Type: A Topic:
1: &*2- &*& !/: 210- 224
.&. The less elastic a monopolistic competitor$s long6run demand curve- the: A9 less its excess capacity.
B9 higher its price relative to that of a pure competitor having the same cost curves. C9 higher its long6run profits. D9 lo%er its average total cost at its e2uilibrium level of output. Ans%er: B
Fse the follo%ing to ans%er 2uestions .(6..:
Type: E Topic:
1: &* 6&*& !/: 2136224
.(. "efer to the above diagram for a monopolistically competitive producer. The firm is: A9 minimi,ing losses in the long run. B9 minimi,ing losses in the short run. Ans%er: C C9 reali,ing a normal profit in the long run. D9 about to leave the industry.
Type: E Topic:
1: &*(6&** !/: 2216222
.*. "efer to the above diagram for a monopolistically competitive producer. This firm is experiencing: A9 a shortage of production capacity. B9 excess capacity of CD. Ans%er: C C9 excess capacity of DE. D9 diseconomies of scale.
Type: E Topic:
1: &*( !/: 221
... "efer to the above diagram for a monopolistically competitive producer. /f this firm %ere to reali,e productive efficiency- it %ould: A9 also reali,e an economic profit. B9 incur a loss. Ans%er: B C9 also achieve allocative efficiency. D9 have to produce a smaller output.
Type: A Topic:
1: &* 6&*& !/: 2136224
.0. /n the long run a monopolistically competitive firm:
A9 earns an economic profit. B9 produces %here P = ATC. Ans%er: B
C9 produces %here !" exceeds !C. D9 achieves allocative efficiency.
Dfficienc! aspects
Type: D Topic: & 1: &*(6&** !/: 2216222 .3. !onopolistically competitive industries are inefficient because: A9 they reali,e diseconomies of scale. B9 advertising costs retard technological advance and product development. C9 monopolistically competitive industries are overpopulated %ith firms %hose plants are underutili,ed. D9 monopolistically competitive sellers engage in misleading advertising. Ans%er: C
Type: A Topic: & 1: &** !/: 222 04. The economic inefficiencies of monopolistic competition may be offset by the fact that: A9 advertising expenditures shift the average cost curve up%ard. B9 available capacity is fully utili,ed. C9 resources are optimally allocated to the production of the product. D9 consumers have a number of variations of the product from %hich to choose. Ans%er: D
Type: A Topic: & 1: &*(6&** !/: 2216222 01. /nefficiencies occur under monopolistic competition because: A9 each firm$s demand curve becomes more elastic as %e move do%n the curve. B9 each firm$s marginal revenue curve coincides %ith its demand curve. C9 each firm$s do%nsloping demand curve is tangent to the ATC curve in the long run. D9 entry barriers greatly restrict the entry of ne% firms. Ans%er: C
Type: D Topic: & 1: &** !/: 222 02. A significant benefit of monopolistic competition compared %ith pure competition is: A9 less li'elihood of K6inefficiency. B9 improved resource allocation. C9 greater product variety. D9 stronger incentives to achieve economies of scale. Ans%er: C
Type: A Topic: & 1: &** !/: 222 0 . #roduct variety is li'ely to be greater in: A9 monopolistic competition than in pure competition. B9 pure competition than in monopolistic competition. C9 homogenous oligopoly than in monopolistic competition. D9 homogenous oligopoly than in differentiated oligopoly. Ans%er: A
Type: A Topic: & 1: &** !/: 222 0&. @hich of the follo%ing is correct< A9 The excess capacity problem diminishes as the monopolistically competitive firm$s demand curve becomes less elastic. B9 The excess capacity problem means that monopolistically competitive firms typically produce at some point on the rising segment of their average total cost curve. C9 The greater the degree of product variation- the lesser is the excess capacity problem. D9 The greater the degree of product variation- the greater is the excess capacity problem. Ans%er: D
Type: A Topic: & 1: &*( !/: 221 0(. /n monopolistically competitive mar'ets resources are: A9 overallocated because long6run e2uilibrium occurs %here price exceeds marginal cost. B9 underallocated because long6run e2uilibrium occurs %here price exceeds marginal cost. C9 overallocated because long6run e2uilibrium occurs %here marginal cost exceeds price. D9 underallocated because long6run e2uilibrium occurs %here marginal cost exceeds price. Ans%er: B
Type: A Topic: & 1: &*( !/: 221 0*. /n long6run e2uilibrium a monopolistically competitive producer achieves: A9 neither productive efficiency nor allocative efficiency. B9 both productive efficiency and allocative efficiency. C9 productive efficiency- but not allocative efficiency. D9 allocative efficiency- but not productive efficiency. Ans%er: A
Type: A Topic: & 1: &*(6&** !/: 2216222 0.. The less elastic a monopolistic competitor$s long6run demand curve- the: A9 greater its excess capacity. B9 lo%er its price relative to that of a pure competitor having the same cost curves. C9 higher its long6run economic profit. D9 lo%er its average total cost at its e2uilibrium level of output. Ans%er: A
Type: A Topic: & 1: &*( !/: 221 00. The more elastic a monopolistic competitor$s long6run demand curve- the: A9 greater its excess capacity. B9 the higher its price relative to that of a pure competitor having the same cost curves. C9 lo%er its long6run profit. D9 lo%er its average total cost at its e2uilibrium level of output. Ans%er: D
Pligopol!: definition9 characteristics
Type: A Topic: ( 1: &*. !/: 22
7tatus: 5e%
03. /n %hich of these continuums of degrees of competition 8highest to lo%est9 is oligopoly properly placed< A9 pure competition- oligopoly- pure monopoly- monopolistic competition B9 oligopoly- pure competition- monopolistic competition- pure monopoly
C9 monopolistic competition- pure competition- pure monopoly- oligopoly D9 pure competition- monopolistic competition- oligopoly- pure monopoly Ans%er: D
Type: D Topic: ( 1: &*. !/: 22 34. The term oligopoly indicates: A9 a one6firm industry. B9 many producers of a differentiated product. C9 a fe% firms producing either a differentiated or a homogeneous product. D9 an industry %hose four6firm concentration ratio is lo%. Ans%er: C
Type: A Topic: ( 1: &*. !/: 22 31. /n an oligopolistic mar'et: A9 one firm is al%ays dominant. B9 products may be standardi,ed or differentiated. C9 the four largest firms account for 24 percent or less of total sales. D9 the industry is monopolistically competitive. Ans%er: B
Type: D Topic: ( 1: &*.6&*0 !/: 22 622& 32. +ligopolistic industries are characteri,ed by: A9 a fe% dominant firms and substantial entry barriers. B9 a fe% dominant firms and no barriers to entry. C9 a large number of firms and lo% entry barriers. D9 a fe% dominant firms and lo% entry barriers. Ans%er: A
Type: A Topic: ( 1: &*. !/: 22 3 . The automobile- household appliance- and automobile tire industries are all illustrations of: A9 homogeneous oligopoly. B9 monopolistic competition. Ans%er: D C9 pure monopoly. D9 differentiated oligopoly.
Type: C Topic: ( 1: &*. !/: 22 3&. Fse your basic 'no%ledge and your understanding of mar'et structures to ans%er this 2uestion. @hich of the follo%ing companies most closely approximates a differentiated oligopolist in a highly concentrated industry< A9 7ub%ay 7and%iches B9 #ittsburgh #late Elass Aluminum. Ans%er: C C9 Dord !otor Company D9 Gaiser
Type: C Topic: ( 1: &*. !/: 22 3(. Fse your basic 'no%ledge and your understanding of mar'et structures to ans%er this 2uestion. @hich of the follo%ing companies most closely approximates a homogenous oligopolist in a highly concentrated industry< A9 Gellogg Ans%er: B B9 #ittsburgh #late Elass C9 Dord !otor Company D9 7tarbuc's Coffee.
Type: A Topic: ( 1: &*. !/: 22 3*. The mutual interdependence that characteri,es oligopoly arises because: A9 the products of various firms are homogeneous. B9 the products of various firms are differentiated.
C9 a small number of firms produce a large proportion of industry output. D9 the demand curves of firms are 'in'ed at the prevailing price. Ans%er: C
Type: A Topic: ( 1: &*. !/: 22 3.. Barriers to entry in oligopolistic industries may consist of: A9 diseconomies of scale. B9 diminishing returns. Ans%er: C C9 o%nership of essential resources. D9 patent expirations.
Type: A Topic: ( 1: &*. !/: 22 30. The copper- aluminum- cement- and industrial alcohol industries are examples of: A9 interproduct competition. B9 homogeneous oligopoly. Ans%er: B C9 monopolistic competition. D9 differentiated oligopoly.
Type: A Topic: ( 1: &*. !/: 22 33. @hich of the follo%ing is the best example of oligopoly< A9 %omen$s dress manufacturing farming Ans%er: B B9 automobile manufacturing C9 restaurants D9 cotton
Type: A Topic: ( 1: &*. !/: 22 144. /f there are significant economies of scale in an industry- then: A9 a firm that is large may be able to produce at a lo%er unit cost than can a small firm. B9 a firm that is large %ill have to charge a higher price than %ill a small firm. C9 entry to that industry %ill be easy. D9 firms must differentiate their products to earn economic profits. Ans%er: A
Type: A Topic: ( 1: &.2 !/: 220 141. /n %hich of the follo%ing mar'et models do demand and marginal revenue diverge< A9 pure monopoly- oligopoly- and monopolistic competition B9 pure monopoly- oligopoly- and pure competition C9 pure monopoly only D9 oligopoly only Ans%er: A
Type: A Topic: ( 1: &.1 !/: 22. 142. +ligopoly is difficult to analy,e primarily because: A9 the number of firms is too large to ma'e collusion understandable. B9 the price and output decisions of any one firm depend on the reactions of its rivals. C9 output may be either homogenous or differentiated. D9 neither allocative nor productive efficiency is achieved. Ans%er: B
Type: A Topic: ( 1: &.1 !/: 22.
14 . +ligopoly is more difficult to analy,e than other mar'et models because: A9 the number of firms is so large that mar'et behavior cannot be accurately predicted. B9 the marginal cost and marginal revenue curves of an oligopolist play no part in the determination of e2uilibrium price and 2uantity. C9 of mutual interdependence and the fact that oligopoly outcomes are less certain than in other mar'et models. D9 unli'e the firms of other mar'et models- it cannot be assumed that oligopolists are profit maximi,ers. Ans%er: C
Type: A Topic: ( 1: &*. !/: 22 14&. @hich of the follo%ing is an illustration of differentiated oligopoly< A9 the aluminum industry B9 the steel industry Ans%er: C C9 the soft drin' industry D9 retail stores in large cities
Type: A Topic: ( 1: &*. !/: 22 14(. @hich of the follo%ing industries is an illustration of "o o#eneo$% oligopoly< A9 household laundry products B9 personal computers C9 aluminum D9 the auto industry
Ans%er: CType: D Topic: ( 1: &*. !/: 22 14*. Differentiated oligopoly exists %here a small number of firms are: A9 producing goods that differ in terms of 2uality and design. B9 setting price and output collusively. C9 setting price and output independently. D9 producing virtually identical products. Ans%er: A
Type: D Topic: ( 1: &*. !/: 22 14.. ;omogeneous oligopoly exists %here a small number of firms are: A9 producing virtually identical products. C9 setting price and output collusively. B9 setting price and output independently. D9 producing differentiated products. Ans%er: A
Type: D Topic: ( 1: &*. !/: 22 140. +ligopolistic industries: A9 are characteri,ed by a relatively large number of small sellers. B9 may produce either standardi,ed or differentiated products. C9 al%ays produce differentiated products. D9 al%ays produce standardi,ed products. Ans%er: B
Type: A Topic: ( 1: &*. !/: 22 143. @hich of the follo%ing is a uni2ue feature of oligopoly< A9 mutual interdependence B9 advertising expenditures Ans%er: A C9 product differentiation D9 nonprice competition
Type: A Topic: ( 1: &*. !/: 22 114. #rices are li'ely to be least flexible: A9 in oligopoly. C9 %here product demand is inelastic.
B9 in monopolistic competition. Ans%er: A
D9 in pure competition.
Type: D Topic: ( 1: &*. !/: 22 111. !utual interdependence means that each oligopolistic firm: A9 faces a perfectly elastic demand for its product. B9 must consider the reactions of its rivals %hen it determines its price policy. C9 produces a product identical to those of its rivals. D9 produces a product similar but not identical to the products of its rivals. Ans%er: B
Type: A Topic: ( 1: &*. !/: 22 112. Clear6cut mutual interdependence %ith respect to the price6output policies exists in: A9 pure monopoly Ans%er: B B9 oligopoly C9 monopolistic competition D9 pure competition
Concentration ratio9 Berfindahl -ndex
Type: D Topic: * 1: &*0 !/: 22& 11 . Concentration ratios measure the: A9 geographic location of the largest corporations in each industry. B9 degree to %hich product price exceeds marginal cost in various industries. C9 percentage of total sales accounted for by the four largest firms in the industry. D9 number of firms in an industry. Ans%er: C
Type: A Topic: * 1: &*0 !/: 22& 11&. /f the four6firm concentration ratio for industry K is 04: A9 the four largest firms account for 04 percent of total sales. B9 each of the four largest firms accounts for 24 percent of total sales. C9 the four largest firms account for 24 percent of total sales. D9 the industry is monopolistically competitive. Ans%er: A
Type: A Topic: * 1: &*0 !/: 22& 11(. An industry having a four6firm concentration ratio of 0( percent: A9 approximates pure competition. B9 is monopolistically competitive. Ans%er: D C9 is a pure monopoly. D9 is an oligopoly.
Type: A Topic: * 1: &*0 !/: 22& 11*. As a general rule- oligopoly exists %hen the four6firm concentration ratio: A9 exceeds the ;erfindahl index. B9 is less than the ;erfindahl index. Ans%er: C C9 is &4 percent or more. D9 is 1( percent or more.
Type: A Topic: * 1: &*3 !/: 22( 11.. Aluminum competes %ith copper in the mar'et for po%er transmission lines. This illustrates: A9 mutual interdependence. B9 differentiated oligopoly. Ans%er: C C9 interindustry competition. D9 homogeneous oligopoly.
Type: A Topic: * 1: &*3 !/: 22( 110. The ;erfindahl index for a pure monopolist is: A9 144. Ans%er: B B9 14-444. C9 144-444. D9 14.
Type: A Topic: * 1: &*3 !/: 22( 113. /ndustries K and L both have four6firm concentration ratios of *( percent- but the ;erfindahl index for K is 1-(44 %hile that for L is 2-444. These data suggest: A9 greater mar'et po%er in K than in L. B9 greater mar'et po%er in L than in K. C9 that K is more technologically progressive than L . D9 that price competition is stronger in L than in K. Ans%er: B
Type: A Topic: * 1: &*0 !/: 22& 124. 7uppose that total sales in an industry in a particular year are )*44 million and sales by the top four sellers are )244 million- )1(4 million- )144 million- and )(4 million- respectively. @e can conclude that: A9 price leadership exists in this industry. B9 the concentration ratio is more than 04 percent. C9 this industry is a differentiated oligopoly. D9 the firms in this industry face a 'in'ed demand curve. Ans%er: B
Type: A Topic: * 1: &*0 !/: 22& 121. The four6firm sales concentration ratio for an industry measures the: A9 geographic concentration of firms. B9 extent to %hich the four largest firms dominate the production of a good. C9 percentage of the industry$s capital facilities o%ned by the four largest firms. D9 degree of K6inefficiency in the industry. Ans%er: B
Type: A Topic: * 1: &*0 !/: 22& 122. Concentration ratios: A9 may overstate the degree of competition because they ignore imported products. B9 may overstate the degree of competition because interindustry competition is ignored. C9 may understate the degree of competition because they ignore imported products. D9 provide detailed insights as to the price and output behavior of firms %hich comprise the various industries.
Ans%er: C
Type: A Topic: * 1: &*06&*3 !/: 22&622( 12 . /f a product such as cement or bric's is costly to ship and- therefore- mar'ets are very locali,ed- the national concentration ratio for that industry: A9 %ill be greater than (4 percent. B9 may understate the degree of monopoly. C9 may overstate the degree of monopoly. D9 %ill yield an accurate impression of the degree of monopoly. Ans%er: B
Type: A Topic: * 1: &*3 !/: 22( 12&. Concentration ratios may be inaccurate indicators of the degree of monopoly po%er in an industry because: A9 they include interindustry competition. B9 foreign competition is not considered. C9 they are only calculated for local and regional mar'ets. D9 they do not distinguish bet%een normal and economic profit. Ans%er: B
Type: A Topic: * 1: &*0 !/: 22& 12(. /f an industry evolves from monopolistic competition to oligopoly- %e %ould expect: A9 the four6firm concentration ratio to decrease. B9 the four6firm concentration ratio to increase. C9 the four6firm concentration ratio to remain the same. D9 barriers to entry to %ea'en. Ans%er: B
Type: D Topic: * 1: &*3 !/: 22( 12*. /nterindustry competition means that: A9 in oligopolistic industries a fe% large firms compete %ith one another in bidding do%n product price. B9 in some mar'ets the producers of a particular product might face competition from products produced by other industries. C9 firms that sell a product at one stage of production are faced %ith firms that buy the product at the next stage of production. D9 in most industries there are usually a number of firms producing identical products. Ans%er: B
Type: A Topic: * 1: &*3 !/: 22( 12.. /f you sum the s2uares of the mar'et shares of each firm in an industry 8as measured by percent of industry sales9- you are calculating: A9 the four6firm concentration ratio. B9 the ;erfindahl index. Ans%er: B C9 the degree of collusion. D9 the ?erner index.
Type: A Topic: * 1: &*3 !/: 22( 120. The ;erfindahl /ndex: A9 measures the prices charged by oligopolistic manufacturers. B9 is another name for the four6firm concentration ratio. C9 tells us %hether oligopolistic firms are engaging in collusion. D9 gives much greater %eight to larger firms than to smaller firms in an industry. Ans%er: D
Type: A Topic: * 1: &*3 !/: 22( 123. /f the four6firm concentration ratio in an oligopolistic industry is 144 percent and each firm has an e2ual percentage of sales- the ;erfindahl /ndex is: A9 14-444. Ans%er: B B9 2-(44. C9 -.(4. D9 1-444.
Type: A Topic: * 1: &*3 !/: 22( 1 4. Assume six firms comprising an industry have mar'et shares of 4- 4- 14- 14- 14- and 14 percent. The ;erfindahl /ndex for this industry is: A9 2-(2(. Ans%er: C B9 1-*44. C9 2-244. D9 04.
Type: A Topic: * 1: &*3 !/: 22( 1 1. 7uppose the ;erfindahl /ndexes for industries A- B- and C are 1-244- (-444- and .-(44 respectively. These data imply that: A9 mar'et po%er is greatest in industry A. B9 mar'et po%er is greatest in industry B. C9 mar'et po%er is greatest in industry C. D9 industry A is more monopolistic than industry C. Ans%er: C
Fse the follo%ing to ans%er 2uestions 1 261 *:
F ir m + 8 ' : 9 0
/ ar1 et sh are K ! 2! 2! 2! 2! $! $!
Type: T Topic: * 1: &*0 !/: 22& 1 2. The industry characteri,ed by the above information is: A9 an oligopoly. C9 a purely competitive industry.
B9 a monopolistically competitive industry.D9 a pure monopoly. Ans%er: A
Type: T Topic: * 1: &*0 !/: 22& 1 . The four6firm concentration ratio for the above industry is: A9 144 percent. B9 indeterminate- since %e don$t 'no% %hich four firms are included.
C9 04 percent. D9 24 percent. Ans%er: C
Type: T Topic: * 1: &*3 !/: 22( 1 &. The ;erfindahl /ndex for the above industry is: A9 1-*44. B9 1-044. C9 10-444. D9 04. Ans%er: B
Type: T Topic: * 1: &*3 !/: 22( 1 (. /f all the firms in the above industry merged into a single firm- the ;erfindahl /ndex %ould become: A9 144. B9 1-444. C9 14-444. D9 144-444. Ans%er: C
Type: T Topic: * 1: &*06&*3 !/: 22&622( 1 *. 7uppose that firms in this industry miraculously split up such that there %ere 144 firms- each %ith a one percent mar'et share. The four6firm concentration ratio and the ;erfindahl /ndex respectively %ould be: A9 144 percent and 14-444. B9 & percent and &. C9 144 percent and 1*. D9 & percent and 1*. Ans%er: D
Fse the follo%ing to ans%er 2uestions 1 .61&4:
F ir m + 8 ' : 9
/ ar1 et sh are K ! )! %! 2! & &
Type: A Topic: * 1: &*0 !/: 22& 7tatus: 5e% 1 .. "efer to the above data. The four6firm concentration ratio for this industry is: A9 34 percent. B9 3( percent. C9 144 percent. D9 indeterminate- because %e don$t 'no% %hich four firms are included. Ans%er: B
Type: A Topic: * 1: &*3 !/: 22( 7tatus: 5e% 1 0. "efer to the above data. The ;erfindahl /ndex for this industry is: A9 3(. B9 1444. C9 232(. D9 23(4. Ans%er: D
Type: A Topic: * 1: &*.6&*0 !/: 22 622& 7tatus: 5e% 1 3. "efer to the above data. This industry illustrates: A9 pure competition. B9 monopolistic competition. C9 oligopoly. D9 pure monopoly. Ans%er: C
Type: A Topic: * 1: &*06&*3 !/: 22&622( 7tatus: 5e% 1&4. "efer to the data above. /f Dirm B merged %ith Dirm C- the industry$s four6firm concentration ratio %ould PPPP and its ;erfindahl /ndex %ould PPPP: A9 rise> rise. B9 fall> rise C9 remain the same> rise. D9 remain the same> fall. Ans%er: C
Eame theor!
Type: A Topic: . 1: &*3 !/: 22( 7tatus: 5e% 1&1. Eame theory: A9 is the analysis of ho% people 8or firms9 behave in strategic situations. B9 is best suited for analy,ing purely competitive mar'ets. C9 reveals that mergers bet%een rival firms are self6defeating. D9 reveals that price6fixing among firms reduces profits.
Ans%er: AType: A Topic: . 1: &*3 !/: 22( 7tatus: 5e% 1&2. The study of ho% people 8or firms9 behave in strategic situations is called: A9 cost6benefit analysis. B9 recursive analysis. C9 normative economics. D9 game theory. Ans%er: D
Type: A Topic: . 1: &*36&.4 !/: 22(622* 1& . The terms strategic behavior and payoff matrix both relate directly to: A9 the perfect competition model. B9 the monopolistic competition model. Ans%er: C C9 game theory. D9 the price leadership model.
Type: A Topic: . 1: &*3 !/: 22( 1&&. Eame theory is best suited to analy,e the pricing behavior of: A9 pure monopolists. B9 pure competitors. C9 monopolistic competitors. D9 oligopolists. Ans%er: D
Type: A Topic: . 1: &.4 !/: 22* 1&(. Eame theory can be used to demonstrate that oligopolists: A9 rarely consider the potential reactions of rivals. B9 experience economies of scale. C9 that oligopolists can increase their profits through collusion. D9 may be either homogeneous or differentiated. Ans%er: C
Fse the follo%ing to ans%er 2uestions 1&*61(1:
Type: T Topic: . 1: &.4 !/: 22* 1&*. The above matrix best illustrates: A9 game theory. B9 the principal6agent problem. C9 product differentiation. D9 price discrimination. Ans%er: A
Type: T Topic: . 1: &.4 !/: 22* 1&.. "efer to the above diagram %here the numerical data sho% profits in millions of dollars. Beta$s profits are sho%n in the northeast corner and Alpha$s profits in the south%est corner of each cell. /f both firms follo% a high6price policy: A9 Alpha %ill reali,e a )14 million profit and Beta a ) 4 million profit. B9 each %ill reali,e a )24 million profit. C9 Beta %ill reali,e a )14 million profit and Alpha a ) 4 million profit. D9 each %ill reali,e a )1( million profit. Ans%er: B
Type: T Topic: . 1: &.4 !/: 22* 1&0. "efer to the above diagram %herein the numerical data sho% profits in millions of dollars. Beta$s profits are sho%n in the northeast corner and Alpha$s profits in the south%est corner of each cell. /f Beta commits to a high6price policy- Alpha %ill gain the largest profit by: A9 also adopting a high6price policy. B9 adopting a lo%6price policy. C9 adopting a lo%6price policy- but only if Beta agrees to do the same. Ans%er: B
Type: T Topic: . 1: &.4 !/: 22* 1&3. "efer to the above diagram %here the numerical data sho% profits in millions of dollars. Beta$s profits are sho%n in the northeast corner and Alpha$s profits in the south%est corner of each cell. @ith independent pricing the outcome of this duopoly game %ill gravitate to cell: A9 A. B9 B. C9 C. D9 D.
Ans%er: D
Type: T Topic: . 1: &.46&.1 !/: 22*622. 1(4. "efer to the above diagram %here the numerical data sho% profits in millions of dollars. Beta$s profits are sho%n in the northeast corner and Alpha$s profits in the south%est corner of each cell. /f Alpha and Beta engage in collusion- the outcome of the game %ill be at cell: A9 A. B9 B. C9 C. D9 D.
Ans%er: A
Type: T Topic: . 1: &.46&.1 !/: 22*622.
1(1. "efer to the above diagram %here the numerical data sho% profits in millions of dollars. Beta$s profits are sho%n in the northeast corner and Alpha$s profits in the south%est corner of each cell. /f Alpha and Beta agree to a high6price policy through collusion- the temptation to cheat on that agreement is demonstrated by the fact that: A9 Beta can increase its profit by lo%ering its price. B9 Beta can increase its profit by increasing its price still further. C9 both Alpha and Beta can earn even more profits if both agree to a lo%6price policy. D9 Alpha can increase its profit by reducing its production costs. Ans%er: A
Fse the follo%ing to ans%er 2uestions 1(261(&:
Type: T Topic: . 1: &.4 !/: 22* 1(2. "efer to the above profits6payoff table for a duopoly. /f the firms are acting independently and firm K sets its price at )*- firm L %ill achieve the largest profit by selecting: A9 a price higher than )*. Ans%er: D B9 a price bet%een )( and )*. C9 )*. D9 )&.
Type: T Topic: . 1: &.4 !/: 22* 1( . "efer to the above profits6payoff table for a duopoly. /f initially firms K and L are charging )( and )& respectively: A9 the t%o firms %ill be maximi,ing :oint profits. B9 L %ill find it advantageous to raise its price if it %as certain K %ould not alter its price. C9 K %ill find it advantageous to raise its price if it %as certain L %ould not alter its price. D9 both firms %ould find it advantageous to collude to raise their prices by )1 each. Ans%er: D
Type: T Topic: . 1: &.4 !/: 22* 1(&. "efer to the above profits6payoff table for a duopoly. /f initially firm K$s price %as )* and L$s price %as )(: A9 K %ould find it profitable to cut price- provided L also cut price. B9 L %ould find it profitable to cut price- provided K also cut price. C9 L %ould find it profitable to raise price by )1- provided K %ould also raise price by )1.
D9 both firms %ould profit by simultaneously lo%ering their prices by )1. Ans%er: C
Fse the follo%ing to ans%er 2uestions 1((61(*:
A Oa x Ts a d v e r tis in g str a te g y L arge % m a ll "udget " ud get A 6 ,7(( ,7(( ,'-(( C ,'-(( ,E((
A c m e Ts a d v e r t is in g str a te g y
L arge "udget
+ % m a ll "udget ,E((
,'(((
,'(((
Type: A Topic: . 1: &.4 !/: 22* 7tatus: 5e% 1((. "efer to the above game theory matrix %here the numerical data sho% the profits resulting from alternative combinations of advertising strategies for A:ax and Acme. A:ax$s profits are sho%n in the upper right part of each cell> Acme$s profits are sho%n in the lo%er left. @ithout collusion- the outcome of the game is cell: A9 A. B9 B. C9 C. D9 D. Ans%er: A
Type: A Topic: . 1: &.46&.1 !/: 22*622. 7tatus: 5e% 1(*. "efer to the above game theory matrix %here the numerical data sho% the profits resulting from alternative combinations of advertising strategies for A:ax and Acme. A:ax$s profits are sho%n in the upper right part of each cell> Acme$s profits are sho%n in the lo%er left. @ith collusion and no cheating- the outcome of the game is cell: A9 A. B9 B. C9 C. D9 D. Ans%er: D
6in.ed-demand curve model
Type: A Topic: 0 1: &.2 !/: 220 1(.. 7uppose an oligopolistic producer assumes its rivals %ill ignore a price increase but match a price cut. /n this case the firm perceives its:
A9 demand curve as being of unit elasticity throughout. B9 supply curve as 'in'ed- being steeper belo% the going price than above. C9 demand curve as 'in'ed- being steeper belo% the going price than above. D9 demand curve as 'in'ed- being steeper above the going price than belo%. Ans%er: C
Type: A Topic: 0 1: &.2 !/: 220 1(0. The 'in'ed6demand curve of an oligopolist is based on the assumption that: A9 competitors %ill follo% a price cut but ignore a price increase. B9 competitors %ill match both price cuts and price increases. C9 competitors %ill ignore a price cut but follo% a price increase. D9 there is no product differentiation. Ans%er: A
Type: A Topic: 0 1: &.2 !/: 220 1(3. The 'in'ed6demand curve describes a situation in %hich an oligopolist %ill be: A9 interested in maintaining the going price unless there is a rather large change in costs. B9 anxious to either increase or lo%er price. C9 anxious to increase price but not to lo%er price. D9 anxious to lo%er price but not to increase price. Ans%er: A
Type: A Topic: 0 1: &.2 !/: 220 1*4. /f an oligopoly is faced %ith a 'in'ed6demand curve that is relatively elastic above- and relatively inelastic belo%- the going price- then it %ill: A9 increase total revenue by increasing price- but lo%er total revenue by decreasing price. B9 decrease total revenue by either increasing or decreasing price. C9 increase total revenue by either increasing or decreasing price. D9 increase total revenue by decreasing price- but lo%er total revenue by increasing price. Ans%er: B
Type: A Topic: 0 1: &.2 !/: 220 1*1. The 'in'ed6demand curve model of oligopoly is useful in explaining: A9 the %ay that collusion %or's. B9 %hy oligopolistic prices and outputs are extremely sensitive to changes in marginal cost. C9 %hy oligopolistic prices might change only infre2uently. D9 the process by %hich oligopolists merge %ith one another. Ans%er: C
Type: A Topic: 0 1: &.2 !/: 220 1*2. The 'in'ed6demand curve model helps to explain price rigidity because: A9 there is a gap in the marginal revenue curve %ithin %hich changes in marginal cost %ill not affect output or price. B9 demand is inelastic above and elastic belo% the going price. C9 the model assumes firms are engaging in some form of collusion. D9 the associated marginal revenue curve is perfectly elastic at the going price. Ans%er: A
Type: A Topic: 0 1: &.2 !/: 220 1* . /f competing oligopolists completely ignore oligopolist K$s price changes- then K$s: A9 demand curve %ill be less elastic than if the other oligopolists matched K$s price changes. B9 demand curve %ill be more elastic than if the other oligopolists matched K$s price changes. C9 marginal revenue curve %ill have a vertical gap. D9 demand and marginal revenue curves %ill coincide. Ans%er: B
Type: A Topic: 0 1: &.2 !/: 220 1*&. /f an oligopolist is faced %ith a marginal revenue curve that has a gap in it- %e may assume that: A9 it is colluding %ith its rivals to maximi,e :oint profits. B9 its demand curve is 'in'ed. C9 it is selling a standardi,ed product. D9 it is selling a differentiated product. Ans%er: B
Type: A Topic: 0 1: &.2 !/: 220 1*(. The 'in'ed6demand curve model of oligopoly: A9 assumes a firm$s rivals %ill ignore a price cut but match a price increase. B9 embodies the possibility that changes in unit costs %ill have no effect on e2uilibrium price and output. C9 assumes a firm$s rivals %ill match any price change it may initiate. D9 assumes a firm$s rivals %ill ignore any price change it may initiate. Ans%er: B
Fse the follo%ing to ans%er 2uestions 1**61*3:
Type: E Topic: 0 1: &.26&.
!/: 2206223
1**. "efer to the above diagram for a noncollusive oligopolist. 7uppose that the firm is initially in e2uilibrium at point E %here the e2uilibrium price and 2uantity are P and Q. @hich of the follo%ing statements is correct< A9 Demand curve D assumes that rivals %ill match any price change initiated by this oligopolist.
1
B9 Demand curves D and D both assume that rivals %ill ignore any price change initiated by this
1 2
oligopolist.
C9 Demand curves D and D both assume that rivals %ill match any price change initiated by this
1 2
oligopolist. D9 Demand curve D assumes that rivals %ill match any price change initiated by this oligopolist.
2
Ans%er: A
Type: E Topic: 0 1: &.26&.
!/: 2206223
1*.. "efer to the above diagram for a noncollusive oligopolist. 7uppose that the firm is initially in e2uilibrium at point E %here the e2uilibrium price and 2uantity are P and Q. /f the firm$s rivals %ill ignore any price increase but match any price reduction- then the firm$s demand curve %ill be: A9 D ED .
1 2
B9 D ED .
2 1
C9 D ED .
1 1
D9 D ED .
2 2
Ans%er: B
Type: E Topic: 0 1: &.26&.
!/: 2206223
1*0. "efer to the above diagram for a noncollusive oligopolist. @e assume that the firm is initially in e2uilibrium at point E %here the e2uilibrium price and 2uantity are P and Q. /f the firm$s rivals %ill ignore any price increase but match any price reduction- the firm$s marginal revenue curve %ill be: A9 D ED .
1 2
B9 !" ab!" .
2 1
C9 !" a!" .
2 2
D9 !" b!" .
1 1
Ans%er: B
Type: E Topic: 0 1: &.26&.
!/: 2206223
1*3. "efer to the above diagram for a noncollusive oligopolist. @e assume that the firm is initially in e2uilibrium at point E %here the e2uilibrium price and 2uantity are P and Q. /f the firm$s rivals %ill ignore any price increase but match any price reduction- over %hat range might marginal cost rise %ithout disturbing e2uilibrium price and output< A9 bE B9 ab C9 Qa D9 Qb Ans%er: B
Fse the follo%ing to ans%er 2uestions 1.461.&:
Type: E Topic: 0 1: &.
!/: 223
1.4. The above diagram portrays: A9 pure competition. monopoly. Ans%er: C B9 monopolistic competition. C9 noncollusive oligopoly. D9 pure
!/: 223
1.1. "efer to the above diagram. 12uilibrium output is:
A9 &.
B9 ".
C9 #.
D9 f .
Ans%er: C
!/: 223
1.2. "efer to the above diagram. 12uilibrium price is: A9 e. B9 d. C9 c. D9 b.
Ans%er: B
Type: E Topic: 0 1: &.26&.
!/: 2206223
1. . "efer to the above diagram. This firm$s demand and marginal revenue curves are based on the assumption that: A9 the firm has no immediate rivals. B9 rivals %ill match both a price increase and a price decrease. C9 rivals %ill match a price increase- but ignore a price decrease. D9 rivals %ill ignore a price increase- but match a price decrease. Ans%er: D
Type: E Topic: 0 1: &.26&.
!/: 2206223
1.&. "efer to the above diagram. /n e2uilibrium the firm: A9 is reali,ing an economic profit of ad per unit. B9 should close do%n in the short run. Ans%er: A C9 is incurring a loss.
D9 is reali,ing an economic profit of bd per unit.
Type: A Topic: 0 1: &.26&.
!/: 2206223
1.(. According to the 'in'ed6demand curve model- an oligopolistic firm %ill produce %here: A9 average total cost is minimi,ed. B9 price e2uals marginal cost. C9 marginal revenue e2uals marginal cost. D9 the demand curve intersects the average total cost curve. Ans%er: C
Type: A Topic: 0 1: &.26&.
!/: 220
1.*. A 'in' may exist in an oligopolist$s demand curve because: A9 products are differentiated. B9 an abrupt change in price elasticity occurs. C9 the firm %ill ignore price cuts by rivals- but %ill match their price increases. D9 there is a gap in marginal costs. Ans%er: B
Collusion9 cartels9 price leadership
Type: A Topic: 3 1: &.( !/: 2 1 1... +#1C provides an example of: A9 a tacit understanding. B9 noncollusive oligopoly. Ans%er: C C9 an international cartel. D9 a monopolistically competitive industry.
Type: A Topic: 3 1: &.& !/: 2 4 1.0. +ligopolistic firms engage in collusion to: A9 minimi,e unit costs of production. B9 reali,e allocative efficiency- that is- the P = !C level of output. C9 earn greater profits. D9 increase production. Ans%er: C
Type: A Topic: 3 1: &.* !/: 2 2 1.3. The li'elihood of a cartel being successful is greater %hen: A9 firms are producing a differentiated- rather than a homogeneous- product. B9 cost and demand curves of various participants are very similar. C9 the number of firms involved is relatively large. D9 the economy is in the recession phase of the business cycle. Ans%er: B
Type: A Topic: 3 1: &.* !/: 2 2 104. Cartels are difficult to maintain in the long run because: A9 they are illegal in all industriali,ed countries. B9 individual members may find it profitable to cheat on agreements. C9 it is more profitable for the industry to charge a lo%er price and produce more output. D9 entry barriers are insignificant in oligopolistic industries. Ans%er: B
Type: A Topic: 3 1: &.&6&.* !/: 2 462 2 101. Three ma:or means of collusion by oligopolists are: A9 cartels- tacit understandings- and price leadership. B9 mar'et sharing- mutual interdependence- and product differentiation. C9 cartels- 'in'ed6demand pricing- and product differentiation. D9 tacit understandings- P = !C pricing- and mutual interdependence. Ans%er: A
Type: A Topic: 3 1: &.& !/: 2 4 102. /f the firms in an oligopolistic industry can establish an effective cartel- the resulting output and price %ill approximate those of: A9 a purely competitive producer. B9 a pure monopoly. C9 a monopolistically competitive producer. D9 an industry %ith a lo% four6firm concentration ratio. Ans%er: B
Type: D Topic: 3 1: &.* !/: 2 2 10 . /n the Fnited 7tates cartels are: A9 2uite common in industries that produce nondurable goods. B9 in violation of the antitrust la%s. C9 concentrated in monopolistically competitive industries. D9 encouraged by government policy so firms can achieve economies of scale. Ans%er: B
Type: A Topic: 3 1: &.( !/: 2 1 10&. Assume the several manufacturers of ceramic tile in a city reach a verbal agreement to establish the price of their product at (( cents per tile. This best describes: A9 multiproduct pricing. Ans%er: C B9 a cartel. C9 a tacit understanding. D9 price leadership.
Type: A Topic: 3 1: &.* !/: 2 2 10(. +ne %ould expect that collusion among oligopolistic producers %ould be easiest to achieve in %hich of the follo%ing cases< A9 a rather large number of firms producing a differentiated product B9 a very fe% firms producing a differentiated product C9 a rather large number of firms producing a homogeneous product D9 a very fe% firms producing a homogeneous product Ans%er: D
Type: D Topic: 3 1: &.& !/: 2 4 10*. 7uppose the only three existing manufacturers of video game players signed a %ritten contract by %hich each agreed to charge the same price for products and to distribute their products only in the geographical area assigned them in the contract. This best describes: A9 cost6plus pricing. Ans%er: C B9 multiproduct pricing. C9 a cartel. D9 price leadership.
Type: D Topic: 3 1: &.( !/: 2 1 10.. @hich of the follo%ing statements is correct< A9 A cartel is usually a formal agreement among oligopolists that sets product price and determines each firm$s mar'et share. B9 The practice of price leadership is almost al%ays based on a formal %ritten agreement. C9 All oligopolists heavily advertise their products. D9 Active and fre2uent price competition bet%een firms is a basic characteristic of oligopoly. Ans%er: A
Type: D Topic: 3 1: &.. !/: 2 100. 7uppose firms in a collusive oligopoly decide to establish their prices at a level that discourages ne% rivals from entering the industry. This is called: A9 mutual interdependence. leadership. Ans%er: C B9 pricing the demand curve. C9 limit pricing. D9 price
Type: A Topic: 3 1: &.& !/: 2 4
103. /f the several oligopolistic firms that comprise an industry behave collusively- the resulting price and output %ill most li'ely resemble those of: A9 bilateral monopoly. Ans%er: B B9 pure monopoly. C9 monopolistic competition. D9 pure competition.
Type: A Topic: 3 1: &.* !/: 2 2 134. +ther things e2ual- cartels and similar collusive arrangements are easier to establish and maintain: A9 %hen there are ample opportunities for the firms to ma'e secret price concessions to selected buyers. B9 during periods of cyclical stability and full employment. C9 %hen the demand and cost conditions of the participating firms differ substantially. D9 %hen the number of firms is relatively large. Ans%er: B
Type: D Topic: 3 1: &.. !/: 2 131. A brea'6do%n in price leadership leading to successive rounds of price cuts is 'no%n as: A9 limit pricing. B9 a price %ar. C9 tacit pricing D9 price discrimination
Ans%er: BType: D Topic: 3 1: &.( !/: 2 1 132. @hich of the follo%ing nations is not a member of the +#1C oil cartel< A9 7audi Arabia. B9 /ran. C9 Aene,uela. D9 5or%ay. Ans%er: D
Type: D Topic: 3 1: &.( !/: 2 1 13 . @hich of the follo%ing companies %as convicted in the 1334s as part of a conspiracy to fix prices< A9 Archer Daniels !idland B9 Boeing C9 @endy$s D9 /B! Ans%er: A
Type: D Topic: 3 1: &.( !/: 2 1 13&. 7ecret conspiracies to fix prices are examples of: A9 cartels. B9 price leadership. C9 overt collusion. D9 covert collusion. Ans%er: D
)dvertising
Type: D Topic: 14 1: &.. !/: 2 13(. /n recent years advertising expenditures in the Fnited 7tates have been: A9 14 to 12 percent of ED# per year. B9 )1 to )2 billion per year. Ans%er: C C9 more than )21( billion per year. D9 about )24 billion per year.
Type: A Topic: 14 1: &.0 !/: 2 & 13*. Advertising can enhance economic efficiency %hen it: A9 increases brand loyalty. B9 raises entry barriers. C9 increases consumer a%areness of substitute products. D9 boosts average total cost. Ans%er: C
Type: A Topic: 14 1: &.0 !/: 2 & 13.. Advertising can enhance economic efficiency %hen it: A9 increases brand loyalty. B9 expands sales such that firms achieve substantial economies of scale. C9 'eeps ne% firms from entering profitable industries. D9 is underta'en by pure competitors. Ans%er: B
Type: A Topic: 14 1: &.06&.3 !/: 2 &62 ( 130. Advertising can impede economic efficiency %hen it: A9 increases entry barriers. B9 reduces brand loyalty. C9 enables firms to achieve substantial economies of scale. D9 increases consumer a%areness of substitute products. Ans%er: A
Type: A Topic: 14 1: &.06&.3 !/: 2 &62 ( 133. Advertising can impede economic efficiency %hen it: A9 reduces entry barriers. B9 reduces brand loyalty. C9 leads to greater monopoly po%er. D9 provides consumers %ith useful information about product 2uality. Ans%er: C
Type: A Topic: 14 1: &.3 !/: 2 ( 244. The presence of advertising in a particular mar'et: A9 tells us that the industry is an oligopoly. B9 tells us that the industry is monopolistically competitive. C9 means that barriers to entering the industry are high. D9 may or may not mean substantial monopoly po%er in the industry. Ans%er: D
Dfficienc! aspects
Type: A Topic: 11 1: &.3 !/: 2 ( 241. @e %ould expect a cartel to achieve: A9 both allocative efficiency and productive efficiency. B9 allocative efficiency- but not productive efficiency. C9 productive efficiency- but not allocative efficiency. D9 neither allocative efficiency nor productive efficiency. Ans%er: D
Type: C Topic: 11 1: &.3 !/: 2 ( 242. 7uppose that a particular industry has a a four6firm concentration ratio of 0( and a ;erfindahl /ndex of 444. !ost li'ely- this industry %ould achieve: A9 both productive efficiency and allocative efficiency. B9 allocative efficiency but not productive efficiency.
C9 neither productive efficiency nor productive efficiency. D9 productive efficiency but not allocative efficiency. Ans%er: C
Type: A Topic: 11 1: &.3 !/: 2 ( 24 . 7uppose that an industry is characteri,ed by a fe% firms and price leadership. @e %ould expect that: A9 price %ould e2ual marginal cost. B9 price %ould e2ual average total cost. C9 price %ould exceed both marginal cost and average total cost. D9 marginal revenue %ould exceed marginal cost. Ans%er: C
Type: A Topic: 11 1: &.3 !/: 2 ( 24&. The conclusion that oligopoly is inefficient relative to the competitive ideal must be 2ualified because: A9 industry price leaders often select a price e2ual to marginal cost. B9 over time oligopolistic industries may promote more rapid product development and greater improvement of production techni2ues than if they %ere purely competitive. C9 increased output due to persuasive advertising may perfectly offset the restriction of output caused by monopoly po%er. D9 many oligopolists sell their products in monopolistically competitive or even purely competitive industries. Ans%er: B
"eview of four structures
Type: A Topic: 12 1: &*1- &*. !/: 21.- 22 24(. !onopolistic competition and oligopoly are ali'e in that: A9 the number of firms is approximately the same in both cases. B9 the 'in'ed6demand analysis is applicable in both instances. C9 strong mutual interdependence exists among firms in both mar'et models. D9 nonprice competition is common to both. Ans%er: D
Type: A Topic: 12 1: &*1- &*. !/: 21.- 22 24*. #roduct differentiation is present in: A9 purely competitive mar'ets only. B9 monopolistically competitive mar'ets only. C9 oligopolistic mar'ets only. D9 both monopolistically competitive and oligopolistic mar'ets. Ans%er: D
Type: A Topic: 12 1: &.3 !/: 2 ( 24.. Fnder %hich of the follo%ing mar'et structures %ill the long6run e2uilibrium price be e2ual to marginal cost<
A9 oligopoly Ans%er: D
B9 monopolistic competition
C9 pure monopoly
D9 pure competition
Type: A Topic: 12 1: & 3- &*. !/: 13(- 22 240. /n %hich of the follo%ing industry structures is the entry of ne% firms the most difficult< A9 pure monopoly Ans%er: A B9 oligopoly C9 monopolistic competition D9 pure competition
Type: A Topic: 12 1: &*4 !/: 21* 243. An industry comprised of &4 firms- none of %hich has more than differentiated product is an example of: A9 monopolistic competition Ans%er: A B9 oligopoly C9 pure monopoly percent of the total mar'et for a D9 pure competition
Type: A Topic: 12 1: &1 - & 0 !/: 1*3- 13& 214. A one6firm industry is 'no%n as: A9 monopolistic competition Ans%er: C B9 oligopoly C9 pure monopoly D9 pure competition
Type: A Topic: 12 1: &*. !/: 22 211. An industry comprised of four firms- each %ith approximately 2( percent of the total mar'et for a product- is an example of: A9 monopolistic competition Ans%er: B B9 oligopoly C9 pure monopoly D9 pure competition
Type: A Topic: 12 1: &1
!/: 1*3
212. An industry comprised of a very large number of sellers that are producing a homogeneous or standardi,ed product is called: A9 monopolistic competition Ans%er: D B9 oligopoly C9 pure monopoly D9 pure competition
Type: A Topic: 12 1: &1&- &*. !/: 1.4- 22 21 . An industry comprised of a small number of firms- each of %hich considers the potential reactions of its rivals in ma'ing price6output decisions is called: A9 monopolistic competition Ans%er: B B9 oligopoly C9 pure monopoly D9 pure competition
Type: A Topic: 12 1: &*0 !/: 22& 21&. An industry producing a differentiated product %hose four6firm concentration ratio is 10 percent is an example of: A9 monopolistic competition Ans%er: A B9 oligopoly C9 pure monopoly D9 pure competition
Type: A Topic: 12 1: &*0 !/: 22& 21(. An industry producing a homogeneous product %hose four6firm concentration ratio is .* percent is an example of:
A9 monopolistic competition Ans%er: B
B9 oligopoly
C9 pure monopoly
D9 pure competition
Type: A Topic: 12 1: &1& !/: 1.4 21*. /n %hich of the follo%ing mar'et models do individual firms exert no control over product price< A9 oligopoly Ans%er: D B9 pure monopoly C9 monopolistic competition D9 pure competition
Type: A Topic: 12 1: &1& !/: 1.4 21.. @hich of the follo%ing correctly arrays the various mar'et structures in terms of their similarities to one another< A9 pure competition- oligopoly- monopolistic competition- pure monopoly B9 pure monopoly- oligopoly- monopolistic competition- pure competition C9 pure competition- pure monopoly- monopolistic competition- oligopoly D9 pure competition- oligopoly- pure monopoly- monopolistic competition Ans%er: B
Fse the follo%ing to ans%er 2uestions 210622*:
Type: E Topic: 12 1: &2* !/: 102 210. The purely competitive mar'et model is portrayed in the above figures by: A9 Digure A. Ans%er: B B9 Digure B. C9 both Digures B and D. D9 Digure C.
Type: E Topic: 12 1: &1&- &*1 !/: 1.4- 21. 213. "efer to the above figures. @e %ould expect industry entry and exit to be relatively easy in: A9 Digure A only. Ans%er: D B9 Digure C only. C9 both Digures A and C. D9 both Digures B and D.
Type: E Topic: 12 1: & 2 !/: 100 224. "efer to the above figures. Both allocative and productive efficiency are being reali,ed in: A9 all four figures. Ans%er: D B9 Digures B and D. C9 Digure D only. D9 Digure B only.
Type: E Topic: 12 1: &.&6&.( !/: 2 462 1 221. "efer to the above figures. Collusion is most li'ely to occur in the industry8ies9 represented by: A9 Digure A. Ans%er: C B9 Digure B. C9 Digure C. D9 both Digures B and D.
Type: E Topic: 12 1: &*1- &*. !/: 21.- 22 222. "efer to the above figures. #roduct differentiation may be present in: A9 Digure A only. Ans%er: D B9 Digure B only. C9 Digure C only. D9 both Digures C and D.
Type: E Topic: 12 1: &( 6&(& !/: 2436214 22 . "efer to the above figures. Eovernment regulation of price and service is most li'ely to occur in: A9 Digure A only. Ans%er: A B9 Digure D only. C9 both Digures A and C. D9 both Digures A and D.
Type: E Topic: 12 1: &.& !/: 2 4 22&. "efer to the above figures. ?ong6run economic profits are most li'ely to occur in: A9 Digures A and B. Ans%er: D B9 Digure B only. C9 Digure D. D9 Digures A and C.
Type: E Topic: 12 1: &1& !/: 1.4 22(. "efer to the above figures. /ndustry entry is li'ely to be most difficult in: A9 Digure A. Ans%er: A B9 Digure B. C9 Digure C. D9 Digure D.
Type: E Topic: 12 1: &1& !/: 1.4 22*. "efer to the above figures. A homogeneous or standardi,ed product is most li'ely to be produced in: A9 Digure A. Ans%er: B B9 Digure B. C9 Digure C. D9 Digure D.
Consider This Questions
Type: A 1: &.4 !/: 22* 7tatus: 5e%
22.. 8Consider This9 The story about three sellers of 5ative American arts and crafts best illustrates the idea of> A9 strategic behavior. B9 excess capacity. C9 the role of advertising. D9 product differentiation. Ans%er: A
Type: A 1: &.4 !/: 22* 7tatus: 5e% 220. 8Consider This9 The 5ative American arts and crafts story illustrates the t%in ideas of: A9 product differentiation and monopolistic competition. B9 excess capacity and monopolistic competition. C9 local oligopoly and strategic behavior. D9 pure monopoly and price discrimination. Ans%er: C
Last Word Questions
Type: D 1: &04 !/: 2 * 223. 8?ast @ord9 The F.7. beer industry: A9 has become monopolistically competitive as the result of ne% production technologies. B9 has evolved from monopolistic competition to oligopoly in the past (4 years. C9 is populated by hundreds of relatively large- independent bre%ers. D9 approximates the purely competitive mar'et model. Ans%er: B
Type: D 1: &046&01 !/: 2 *62 . 2 4. 8?ast @ord9 /ncreased concentration in the beer industry has been caused by: A9 changes in consumer tastes from the strong beers of small bre%eries to the light beers of the large bre%ers. B9 a shift of beer consumption from bars to homes. C9 technological progress %hich has speeded up canning and bottling lines and lo%ered costs. D9 all of the above factors. Ans%er: D
Type: D 1: &04 !/: 2 * 2 1. 8?ast @ord9 The t%o largest F.7. bre%ers share about: A9 14 percent of the beer mar'et. B9 24 percent of the beer mar'et. Ans%er: D C9 (4 percent of the beer mar'et. D9 .4 percent of the beer mar'et.
Type: D 1: &04 !/: 2 * 2 2. 8?ast @ord9 The leading seller of beer in the Fnited 7tates is: A9 Coors. B9 Anheuser6Busch. C9 !iller Bre%ing Company. D9 Corona. Ans%er: B
Type: D 1: &*3- &04 !/: 22(- 2 * 2 . 8?ast @ord9 The t%o leading producers of beer in the Fnited 7tates have mar'et shares of &. percent and 22 percent- respectively. +n the basis of that information- %e can conclude that: A9 the four6firm concentration ratio in the beer industry is nearly 144 percent. B9 the ;erfindahl index in the beer industry exceeds 2(44. C9 firms practice overt collusion to set prices in the industry. D9 the industry is monopolistically competitive. Ans%er: B
True/ alse Questions
Type: A 1: &*& !/: 224 2 &. /n the long run monopolistically competitive firms ma'e normal profits because they are forced to operate at the minimum point on their average total cost curve. Ans%er: Dalse
Type: A 1: &*&6&*( !/: 2246221 2 (. The monopolistically competitive seller maximi,es profits by e2uating price and marginal cost. Ans%er: Dalse
Type: A 1: &*&6&*( !/: 2246221 2 *. !onopolistically competitive firms are inefficient because they produce at a point on the rising segment of their average cost curves. Ans%er: Dalse
Type: A 1: &*2 !/: 210 2 .. The demand curve of a monopolistically competitive producer is less elastic than that of a purely competitive producer. Ans%er: True
Type: D 1: &*& !/: 224 2 0. The larger the number of firms and the less the degree of product differentiation- the greater %ill be the elasticity of a monopolistically competitive seller$s demand curve. Ans%er: True
Type: A 1: &*& !/: 224 2 3. The economic profits earned by monopolistically competitive sellers are ,ero in the long run. Ans%er: True
Type: A 1: &*(6&** !/: 2216222 2&4. The excess capacity problem associated %ith monopolistic competition implies that fe%er firms could produce the same industry output at a lo%er total cost. Ans%er: True
Type: A 1: &*2 !/: 210 2&1. The demand curve of a monopolistically competitive firm is more elastic than that of a pure monopolist.
Ans%er: True
Type: A 1: &*& !/: 224 2&2. The monopolistically competitive seller e2uates price and marginal cost in maximi,ing profits. Ans%er: Dalse
Type: A 1: &*& !/: 224 2& . !onopolistically competitive sellers reali,e economic profits in the long run because entry barriers are significant. Ans%er: Dalse
Type: A 1: &*&6&*( !/: 2246221 2&&. !onopolistically competitive sellers produce efficiently because they obtain only normal profits in the long run.
Ans%er: DalseType: A 1: &.2 !/: 220 2&(. The oligopolist$s 'in'ed6demand curve is highly elastic belo% and highly inelastic above the going product price. Ans%er: Dalse
Type: A 1: &*. !/: 22 2&*. !utual interdependence means that oligopolistic producers rely on price competition in determining their shares of the total mar'et for their product. Ans%er: Dalse
Type: D 1: &.2 !/: 220 2&.. /f an oligopolist$s several rivals exactly match any price changes it initiates- the demand curve %ill be less elastic than if its price changes are ignored by its rivals. Ans%er: True
Type: A 1: &.& !/: 2 4 2&0. /f three or four homogeneous oligopolists collude- the resulting price and production outcomes %ill be similar to those of pure monopoly. Ans%er: True
Type: A 1: &.* !/: 2 2 2&3. Eenerally spea'ing- the larger the number of firms in an oligopolistic industry- the more difficult it is for those firms to collude. Ans%er: True
Type: A 1: &*. !/: 22 2(4. Eenerally spea'ing- oligopolistic industries producing ra% materials and semifinished goods usually offer differentiated products- %hile oligopolists producing consumer goods usually offer standardi,ed products. Ans%er: Dalse
Type: C 1: &*06&*3 !/: 22&622(
2(1. T%o industries that have the same &6firm concentration ratio can have significantly different ;erfindahl indexes. Ans%er: True
Type: D 1: &*3 !/: 22( 2(2. As it relates to oligopoly- game theory focuses on the strategic behavior of rival firms. Ans%er: True
Type: D 1: &*3 !/: 22( 2( . The highest possible value of the ;erfindahl index is 1-444. Ans%er: Dalse
Type: D 1: &*. !/: 22
7tatus: 5e%
2(&. The mar'et structure called ColigopolyC includes industries %ith one or a small number of firms. Ans%er: Dalse
Type: D 1: &*. !/: 22
7tatus: 5e%
2((. The F.7. brea'fast cereal industry is an example of differentiated oligopoly. Ans%er: True
Type: D 1: &*. !/: 22
7tatus: 5e%
2(*. The F.7. steel industry is an example of homogeneous oligopoly. Ans%er: True
Type: D 1: &.2 !/: 220 7tatus: 5e% 2(.. /n the 'in'ed demand curve model- the firm$s marginal revenue curve and demand curve are identical. Ans%er: Dalse
Type: D 1: &*. !/: 22
7tatus: 5e%
2(0. ;omogenous oligopolists tend to advertise more than do differentiated oligopolists. Ans%er: Dalse

Microeconomics Study Guide

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Microeconomics Study Guide

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Oligopoly firms may produce either standardized or differentiated products.

Which of the following is correct as it relates to cost curves?

The law of diminishing marginal utility states that

The long run is characterized "y

The law of diminishing marginal utility explains why

The theory of consumer "ehavior assumes that#

The total output of a firm will "e at a maximum where#

The "asic characteristic of the short run is that

Firms see1 to maximize#

Which of the following is not a characteristic of pure competition?

$efer to the a"ove data. The value for 4 is

Accounting profits equal total revenue minus

When diseconomies of scale occur#

$efer to the a"ove data. The value for W is#

Answer the next question s! on the "asis of the following information#

$efer to the a"ove information. Average total cost is#

$efer to the a"ove data. The value for : is#

The short run is characterized "y#

2f total utility is increasing& marginal utility#

2n the a"ove diagram curves '& -& and 0 represent the#

>conomies of scale are indicated "y#

To maximize utility a consumer should allocate money income so that the#

The theory of consumer "ehavior assumes that consumers attempt to maximize#

A purely competitive seller is#

information to answer the following question s!.

Average fixed cost#

Where total utility is at a maximum& marginal utility is#

$efer to the a"ove diagram. At output level A total cost is#

>conomies and diseconomies of scale explain#

/arginal cost is the#

/arginal product is#

Fixed cost is#

$efer to the a"ove data. The value for B is#

2n the long run#

>conomic profits are calculated "y su"tracting#

/arginal product is#

The theory of consumer "ehavior assumes that#

2n the long run#

Which of the following is correct as it relates to cost curves?

The law of diminishing marginal utility states that

The long run is characterized "y

The law of diminishing marginal utility explains why

The theory of consumer "ehavior assumes that#

The total output of a firm will "e at a maximum where#

The "asic characteristic of the short run is that

Firms see1 to maximize#

Which of the following is not a characteristic of pure competition?

$efer to the a"ove data. The value for 4 is

Accounting profits equal total revenue minus

When diseconomies of scale occur#

$efer to the a"ove data. The value for W is#

Answer the next question s! on the "asis of the following information#

$efer to the a"ove information. Average total cost is#

$efer to the a"ove data. The value for : is#

The short run is characterized "y#

2f total utility is increasing& marginal utility#

2n the a"ove diagram curves '& -& and 0 represent the#

>conomies of scale are indicated "y#

To maximize utility a consumer should allocate money income so that the#

The theory of consumer "ehavior assumes that consumers attempt to maximize#

A purely competitive seller is#

Average fixed cost#

Where total utility is at a maximum& marginal utility is#

$efer to the a"ove diagram. At output level A total cost is#