Chapter Three Microeconomics: Competitive Product Markets and Firm Decisions Part A: Theory and Public Policy Applications:

1. The market process is a) made up of people, consumers and entrepreneurs attempting to buy and sell on the best terms possible. b) an ongoing information and exchange system. c) self-correcting in that buyers and sellers routinely revise their plans on the basis of their trading experiences. d) all of the above. 2. Competition a) does not occur between buyers and sellers, but does occur among buyers and among sellers. b) is the process by which market participants, in pursuing their own interests, attempt to outdo, outprice, outproduce, and outmaneuver each other. c) stimulates the exchange of information. d) can be described by all of the above. 3. Which of the following is NOT a characteristic of the type of competitive market captured by supply and demand? a) b) c) d) Many sellers produce an identical product. Firms can increase their prices by restricting their production. Firms have freedom of entry into the market. No single firm can influence the market price.

4. The law of demand states there is a) b) c) d) a direct relationship between the price of a good and the quantity demanded. a direct relationship between the price of a good and the quantity supplied. an inverse relationship between the price and the quantity demanded. an inverse relationship between the price and the quantity supplied.

5. The demand curve a) is downward sloping because of the substitution and income effects associated with a price change.
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2 b) shifts to the right if there is a decrease in demand and shifts to the left if there is an increase in demand. c) illustrates the various quantities supplied at various prices. d) can be described by all of the above. 6. The substitution effect a) explains why the supply curve is upward sloping. b) indicates that people will buy more of a good as its price rises (and the prices of all other goods stay the same) because the purchasing power of consumer incomes rise when the price of a good falls. c) indicates that people will buy more of a good as its price falls (and the prices of all other goods stay the same) because the good becomes relatively cheaper compared to other goods. d) explains why the demand curve shifts to the right as the price falls. 7. According to the law of demand, an increase in the price of a good will a) b) c) d) increase the quantity demanded. decrease the quantity demanded. increase demand. decrease demand.

8. Movement down along a demand curve could be caused by a) b) c) d) a decrease in the price. an increase in consumer's desire or taste for the good. an increase in the price of a substitute good. a decrease in consumer incomes.

9. Which of the following will most likely shift the demand curve to the left? a) b) c) d) An increase in the price of a complementary good An expected increase in the future price of the good An increase in consumers' incomes and the product is a "normal" good An increase in the number of buyers

10. Which of the following will cause an increase in the demand for a product? a) b) c) d) An increase in the number of producers An increase in the number of consumers A decrease in the price of a substitute product Consumer expectations that the product will be more abundant in the near future

11. The supply curve is

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

3 a) downward sloping because of the substitution and income effects associated with a price change. b) downward sloping because a lower price will result in an increase in the quantity demanded. c) upward sloping because of the substitution and income effects on consumers associated with a price change. d) upward sloping because higher marginal (extra) costs result from increased production. 12. Which of the following will cause an increase in the supply of a product? a) b) c) d) An increase in wages that increases costs of production. An increase in consumer incomes. An advancement in technology that reduces costs of production. An increase in the price of the good.

13. If there is an increase in consumer desire or taste for a good, then the demand for the product will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

14. If there is an increase in the number of buyers, then the demand for the product will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

15. If there is an decrease in the price of a good A, which is a substitute for good B, then the demand for good B will a) b) c) d) increase. decrease. remain the same (Unknown; not enough information to specify among these options.)

16. If there is a decrease in the price of good A, which is a complement for good B, then the demand for good B will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

17. If there is an expected decrease in the future price of a good, then the near-term demand for the good will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

18. If there is an increase in profitability of producing goods other than good A, then the supply of good A can be expected to a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

19. If there is an increase in the productivity of producing good A, then the supply of good A can be expected to a) b) c) d) increase decrease remain the same (Unknown; not enough information to specify among these options.)

20. If there is an increase in market wage rates of workers producing good A, then the supply of good A can be expected a) b) c) d) to increase. to decrease. to remain the same. (Unknown; not enough information to specify among these options.)

21. If quantity supplied exceeds quantity demanded, a) a shortage exists and the price will decrease in the near future because buyers will competitively bid down the price. b) a shortage exists and the price will increase in the near future because sellers will competitively bid up the price. c) a surplus exists and the price will decrease in the near future because sellers will competitively bid down the price. d) a surplus exists and the price will increase in the near future because buyers will competitively bid up the price. Use the graph below to answer the next four questions.

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22. In the graph above, if the price is $16, the resulting a) b) c) d) surplus will lead to a fall in price. shortage will lead to a fall in price. surplus will lead to a rise in price. shortage will lead to a rise in price.

23. In the graph above, if the price is $8, the resulting a) b) c) d) surplus will lead to a fall in price. shortage will lead to a fall in price. surplus will lead to a rise in price. shortage will lead to a rise in price.

24. In the graph above, if the price is $11 and no change occurs in market forces, the price will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to say.)

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6 25. In the above graph, the efficient (welfare-maximum) output level is a) b) c) d) 100 150 225 350

26. If demand increases for a product, this will cause a) the price of the product to rise. b) the amount bought and sold to rise. c) a temporary shortage of the product that will be eliminated over time as buyers competitively bid up the price. d) all of the above. 27. Consider the market for some item of clothing. If this type of clothing suddenly becomes more fashionable, what will happen in the market? a) b) c) d) Demand will fall. Supply will fall. Price will increase. The equilibrium quantity will fall.

28. If there is an increase in productivity of producing good A at the same time that there is an increase in consumers' taste for the good, then the quantity of the good bought and sold in the market will a) increase. b) decrease. c) remain the same. d) don't know (not enough information to specify one of the other options) 29.If there is an increase in productivity of producing good A at the same time there is an increase in consumers' taste for the good, then the price of the good in the market will a) b) c) d) increase. decrease. remains the same. (Unknown; not enough information to specify among these options.)

30. An effective price floor will lead to a a) b) c) d) market shortage. market surplus. market equilibrium. market efficiency.

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

31. An effective price ceiling will lead to a a) b) c) d) market shortage. market surplus. market equilibrium. market efficiency.

32. Suppose new genetic engineering results in oranges becoming less susceptible to damage from freezing temperatures. This innovation is expected to save orange growers $1 billion a year in crop losses. If this technology becomes widely used, what will happen to the equilibrium price and quantity of oranges? a) b) c) d) The equilibrium price will decrease and the equilibrium quantity will decrease. The equilibrium price will increase and the equilibrium quantity will decrease. The equilibrium price will decrease and the equilibrium quantity will increase. The equilibrium price will increase and the equilibrium quantity will increase.

33. Yesterday's newspaper reports results of a study indicating that people who eat lots of apples can expect a significant increase in life expectancy. What do you expect to happen to the market price and quantity of apples? a) b) c) d) The equilibrium price will decrease and the equilibrium quantity will decrease. The equilibrium price will increase and the equilibrium quantity will decrease. The equilibrium price will decrease and the equilibrium quantity will increase. The equilibrium price will increase and the equilibrium quantity will increase.

34. If economies of scale are experienced as the market for a good grows, we would most likely expect a) b) c) d) the long-run equilibrium price to be lower than the short-run equilibrium price. the long-run equilibrium price to be equal to the short-run equilibrium price. the long-run equilibrium price to be greater than the short-run equilibrium price. a larger number of smaller firms operating within the industry.

35. Which of the following are shortcomings of free competitive markets? a) Competition sometimes leads to product proliferation. b) The outcome of competition will not be efficient to the extent that production costs are imposed on people who do not consume a product. c) Competition can promote socially undesirable goods or services. d) All of the above. e) None of the above 36. That which must be given up in order to get something else is called

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8 a) b) c) d) an opportunity cost. a fixed cost. a variable cost. a sunk cost.

37. If the long-run increase in market demand is greater than the long-run increase in market supply, then in the long run, the competitive price will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

38. If the long-run increase in market demand is greater than the long-run increase in market supply, then in the long run, the quantity produced in competitive markets will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

39. If the long-run increase in market supply is greater than the long-run increase in market demand, then in the long run, the competitive price will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

40. If the long-run increase in market supply is greater than the long-run increase in market demand, then in the long run, the quantity produced in competitive markets will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

41. Which of the following arguments can explain queues in competitive markets? a) Queues are observed in markets because firms make mistakes in stocking goods. b) Queues enable firms to lower their costs and prices by more than queues raise the opportunity costs incurred by customers standing in line. c) Both a and b. d) Neither a nor b. 42. Which of the following statements about queues is correct?
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

a) Queues indicate inefficiency in markets and are not expected even in perfectly competitive markets. b) Queues are expected in competitive markets and have an optimum length. c) People's opportunity costs will have nothing to do with the length of queues since queues are the result of a firms stocking and pricing mistakes. d) An increase in people's opportunity costs in a given market will leave the length of queues unaffected. Given the following changes (and only those changes) in market conditions, predict the directional change in equilibrium price and quantity in the next ten problems. Assume competitive markets and normal slopes for supply and demand. What happens to price and quantity: 43. When demand decreases, price a) b) c) d) increases. decreases. remains the same. (Unknown; not enough information to specify among these options.)

44. When demand decreases, quantity a) b) c) d) increases. decreases. remains the same. (Unknown; not enough information to specify among these options.)

45. When cost of production decreases, price a) b) c) d) increases. decreases. remains the same. (Unknown; not enough information to specify among these options.)

46. When cost of production decreases, quantity a) b) c) d) increases. decreases. remains the same. (Unknown; not enough information to specify among these options.)

47. When price of a substitute good B increases the price of substitute good A will a) increase.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

10 b) decrease. c) remain the same. d) (Unknown; not enough information to specify among these options.) 48. When the price of a substitute good B increases, the quantity of substitute good A will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

49. When the price of a complement good B increases, the price of complement good A will a) b) c) d) increase. decrease. remains the same. (Unknown; not enough information to specify among these options.)

50. When the price of a complement good B increases, the quantity of complement good A will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

51. When Hurricane Katrina knocks out several oil refineries along the Gulf Coast, the price of gasoline can be expected to a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

52. When Hurricane Katrina knocks out several oil refineries along the Gulf Coast, the quantity of gasoline can be expected to a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

53. When given the conditions in question 52, the price of gasoline-powered motor scooters will

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

11 a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

54. When given the conditions in question 52 above, the quantity of gasoline-powered motor scooters will a) b) c) d) increase. decrease. remains the same. (Unknown; not enough information to specify among these options.)

55. When an excise tax is imposed on the producers of good B, the price of good B will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

56. When an excise tax is imposed on the producers of good B, the quantity of good B will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

57. When an excise tax is imposed on the producers of good B, then the price of good A, which is a substitute for good B, will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

58. When an excise tax is imposed on the producers of good B, then the quantity of good A, which is a substitute for good B, will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

59. When a subsidy is granted to the buyers of good A, the price of good A will a) increase.
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12 b) decrease. c) remain the same. d) (Unknown; not enough information to specify among these options.) 60. When a subsidy is granted to the buyers of good A, the quantity of Good A will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

61. When a subsidy is granted to the producers of substitute good A, the price good B will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

62. When a subsidy is granted to the producers of substitute good A, the quantity of good B will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

Given the following changes (and only these changes) in market conditions, predict the directional change in equilibrium price and quantity in the next ten questions. Assume competitive markets and normal slopes for supply and demand. 63.When demand increases, price will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

64.When demand increases, quantity will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

65. When cost of production increases in highly competitive markets,, price will

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

13 a) b) c) d) increase. decrease. Remain the same. (Unknown; not enough information to specify among these options.)

66. When cost of production increases in highly competitive markets,, quantity will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

67. When the price of a substitute good B decreases, the price of good A will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

68. When the price of a substitute good B decreases, the quantity of good A will a) b) c) d) increase. decrease. Remains the same. (Unknown; not enough information to specify among these options.)

69. When the price of a good B, which is a complement to good A,decreases in highly competitive markets, the price of good A will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

70. When the price of a good B, which is a complement to good A, decreases, the quantity of good A will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

71. When the factories of several major suppliers of a good are blown up, price of the good will a) increase.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

14 b) decrease. c) remain the same. d) (Unknown; not enough information to specify among these options.) 72. When the factories of several major suppliers of a good are blown up, quantity of the good will a) increase. b) decrease. c) remain the same. (Unknown; not enough information to specify among these options.) 73. When a tariff is imposed on an import collected from the importer, the price of the imported good will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

74. When a tariff is imposed on an import collected from the importer, the quantity of the imported good will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

75. When a tariff is imposed on the import, as above, the price of the domestic good that competes with the import in the domestic market will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

76. When a tariff is imposed on the import, as above, the quantity of the domestic good that competes with the import in the domestic market will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

77. When a subsidy is granted to domestic producers of a good that competes with an imported good, then the price of the domestic good will

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15 a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

78. When a subsidy is granted to domestic producers of a good that competes with an imported good, then the quantity of the domestic good will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

79. When a subsidy is granted to domestic producers of a good that competes with an imported good, then the price of the good in foreign markets will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

80. When a subsidy is granted to domestic producers of a good that competes with an imported good, the quantity of the good in foreign markets will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

81. When supply increases while the demand decreases (the amount of change in each curve is unknown), then price will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

82. When supply increases while the demand decreases (the amount of change in each curve is unknown), then quantity will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

83. Perfect competition is a market structure in which

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

16

a) b) c) d)

the product is perfect. individual producers and consumers have no control over the market price. the price is set by government. the output level is inefficient.

84. Markets are said to be efficient when a) b) c) d) e) the market price equals the marginal cost of producing the last unit sold. the marginal benefit of the last unit sold equals the marginal cost of production. all gains from trade have been exploited. output has been maximized given supply and demand constraints. all of the above.

85. If the price of a good goes up, then the demand a) b) c) d) increases. decreases. remains the same. (Unknown; not enough information to specify among these options.)

86. If the price of a good goes down, then the demand a) b) c) d) increases. decreases. remains the same. (Unknown; not enough information to specify among these options.)

87. If the price of a good goes down, the supply of the good will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

88. If the price of a good goes down, the supply of the good will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

89. A product improvement will be made a) whenever the additional value of the improvement is greater than the additional cost of the improvement.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

17 b) whenever the total value of the improved product is greater than the total cost of the improved product. c) whenever the improvement has value. d) only when the improvement comes at no cost. 90. If a product improvement adds more to consumer value than it adds to production costs, the price of the good in a competitive market will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

91. If a product improvement adds more to consumer value than it adds to production costs, the quantity of the good produced and sold in a competitive market will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

92. If a product improvement adds more to consumer value than it adds to production costs, in a competitive market. consumers will be a) worse off because of the price increase consumers will pay. b) better off because the increase in the added value consumers receive will be greater than the increase in the price they pay. c) worse off because the increase in the price consumers pay is greater than the added cost of production. d) better off because the decrease in the price consumers pay will exceed the increase in the added cost of production. 93. If a product improvement adds more to consumer value than it adds to production costs, in a competitive market, producers will be a) worse off because of the cost increase producers will incur. b) better off because the increase in the price producers receive will be greater than the increase in their added costs. c) worse off because the increase in producers cost will be greater than the higher price they receive. d) better off because the decrease in the price producers receive will exceed the increase in their added cost of production. 94. If the price of the product workers produce goes up, the demand for labor will a) increase.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

18 b) decrease. c) remain the same. d) (Unknown; not enough information to specify among these options.) 95. If worker productivity goes up, the demand for labor will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

96. If workers opportunity costs rise, the demand for labor will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

97. If workers opportunity costs rise, the supply of labor will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

Assume competitive labor markets and normal shapes for the demand for and supply of labor. Given the specified change in market conditions in each question (and no other change for each question), predict the directional change to the equilibrium wage rate and quantity of labor hired. Use the following four alternatives: a) b) c) d) Increases Decreases Remains the same (Not enough information to determine.) Wage rate 98. The supply of labor decreases. 99. The demand for labor increases. 100. The productivity of labor increases. _________ _________ Quantity of labor

_________ _________ _________

_________

101. The opportunity cost of labor decreases. _________ 102. The price of the product produced

_________

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19 increases. 103. The working environment improves at a cost to employers that is less than the value of the improved environment to workers _________ _________

_________

_________

104. If the wage rate is held above the equilibrium wage rate, a) b) c) d) the quantity of labor demanded will exceed the quantity of labor supplied. the quantity of labor supplied will exceed the quantity of labor demanded. the quantity of labor supplied will equal the quantity of labor demanded.. the quantity of labor supplied and demanded will be unaffected.

105. If the wage rate is held below the equilibrium wage rate, a) b) c) d) the quantity of labor demanded will exceed the quantity of labor supplied. the quantity of labor supplied will exceed the quantity of labor demanded. the quantity of labor supplied will equal the quantity of labor demanded. the quantity of labor supplied and demanded will be unaffected.

106. If there is a shortage in a competitive labor market, the wage rate will a) b) c) d) increase. decrease. remain the same. (Not enough information to determine).

107. If there is a surplus in a competitive labor market, the wage rate will a) b) c) d) increase. decrease. remain the same. (Not enough information to determine)

108. If a competitive market process exists, this means a) There are both buyers and sellers of an item. b) The amount buyers wish to purchase will eventually match the amount sellers wish to produce and make available in the market. c) No one individual buyer has the ability to control the price. d) No one individual seller has the ability to control the price. e) All of the above. 109. A competitive market will a) Achieve equilibrium. b) Result in a production level exactly desired by consumers. c) Eliminate any shortage.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

20 d) Eliminate any surplus. e) Be characterized by all of the above. 110. The law of demand illustrates that a) As price decreases, demand increases. b) Price changes are always in the same direction as demand changes. c) As price increases, quantity demanded increases. d) As price decreases, quantity supplied increases. e) As price decreases, quantity demanded increases. 111. The law of supply illustrates that a) As price increases, quantity supplied decreases. b) Demand must decrease to cause an increase in quantity supplied. c) A change in price causes a change in supply. d) Whatever happens to price happens to quantity supplied. e) Price changes are always in the same direction as supply changes. 112. A market is in equilibrium when a) Changes in demand are equal to changes in supply. b) The amount people wish to purchase is equal to the amount producers wish to produce. c) The determinants of supply are equal to the determinants of demand. d) Equilibrium price equals quantity supplied. e) Consumer preferences are equal to production costs. 113. When an economist says the demand for a product has increased, he or she means that a) Consumers are willing and able to purchase more at any given price. b) The demand curve has shifted to the left. c) The product has become more scarce and consumers therefore want it more. d) Consumers would be willing and able to pay less to receive the same quantity. e) The price has decreased and consumers will therefore purchase more of the product. 114. The market demand curve is determined by a) Adding individual demand curves. b) Adding the quantity supplied by all producers at various prices. c) Subtracting the demand for the product from the supply of the product. d) Adding the demand for the product and the supply of the product. e) Subtracting supply from demand at each price. If price is below equilibrium a) Demand is too low for equilibrium. b) The income and substitution effects will cause the price to rise. c) Quantity demanded exceeds quantity supplied, and a shortage will occur. d) Demand will increase. e) Quantity supplied exceeds quantity demanded, and a shortage will occur.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

21

115. The income effect measures the effect a price change has on a) The purchasing power of consumer incomes. b) The change in demand. c) The relative price of other substitutable products. d) The inflation rate. e) National income. 116. Which of the following is not a determinant of supply? a) A change in the price of resources utilized in production. b) A change in production costs. c) A change in the profitability of producing other goods. d) A change in productivity due to a change in technology e) A change in consumer incomes. 117. When an economist says the supply of a product has decreased, he or she means that a) A smaller quantity will be produced at any price. b) The price is too high for equilibrium. c) A greater quantity will be produced at any price. d) The price is too low for equilibrium. e) Demand was too high for producers to make a profit. 118. Which of the following may cause a change in demand for a product? a) A change in the profitability of producing another product. b) A decrease in the cost of producing the product. c) A change in consumer incomes. d) A change in the price of the product. e) All of the above. 119. The law of supply states that a) Price and quantity supplied are positively (directly) related. b) The higher the price the smaller the quantity that will be sold. c) Price and quantity supplied are inversely related. d) Price and quantity demanded are inversely related. e) None of the above. 120. The law of demand states that a) There is a direct (positive) relationship between price and quantity supplied. b) As price increases, quantity demanded increases. c) There is an inverse relationship between price and quantity demanded. d) There is an inverse relationship between price and quantity supplied. e) As price decreases, demand increases. 121. Which of the following will not cause the demand for ice cream to change? a) A change in population size b) A change in the price of ice cream
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

22 c) A change in the seasons d) A change in consumer preferences e) A change in consumer incomes 122. A price at which quantity demanded equals quantity supplied a) Could not possibly exist in the short run. b) Will cause a shift in demand. c) Is below the equilibrium price. d) Is an equilibrium price. e) Is above the equilibrium price. 123. Consider the market for an inferior product. If consumer incomes rise then a) The equilibrium price and quantity falls. b) The equilibrium price and quantity rises. c) Demand rises and supply falls. d) The equilibrium price rises and the equilibrium quantity falls. e) None of the above. 124. If the price of product X falls and this causes the demand for product Y to shift to the right then we can conclude a) X and Y are complements. b) X and Y are inferior goods. c) X and Y are substitutes. d) X is an inferior good and Y is a normal good. e) X and Y are normal goods. 125. A successful advertising campaign will most likely cause a) The equilibrium price and quantity to rise. b) Demand to rise. c) Profits to firm to rise. d) The demand for resources (inputs) to rise. e) All of the above. 126. If the demand for a product varies inversely with changes in consumer incomes, then the product is a) An inferior good. b) A substitute good. c) A normal good. d) A complementary good. e) None of the above. 127. If the price of a product decreases, this causes a) Demand to increase. b) The demand curve to shift to the left. c) Movement down along the demand curve. d) Movement up along the demand curve.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

23 e) None of the above. 128. If consumer incomes increase and the demand for potatoes decreases, it is most likely because a) The supply of potatoes decreases. b) Of the income effect. c) Potatoes are an inferior good. d) Potatoes are a normal good. e) Of the substitution effect. 129. Price ceilings and price floors cause a) An efficient allocation of resources. b) Changes in demand and supply. c) The amount consumers want to buy to be different from the amount producers want to produce. d) Market equilibrium. e) None of the above. 130. One reason why the quantity demanded of a good increases as its price decreases is that a) The number of consumers in the market increases. b) The lower price shifts demand to the right. c) The lower price increases the purchasing power of consumers, enabling them to buy more. d) The supply of substitute products increases. e) The lower price shifts demand to the left. 131. At the equilibrium price a) There is a tendency for the price to rise. b) There is no pressure upon price to rise or fall. c) Quantity demanded exceeds quantity supplied. d) Quantity supplied exceeds quantity demanded. e) There is a tendency for the price to fall. 132. Assume the supply of sirloin steak is upward sloping. If the price increases from $4.25 to $8.60 per pound a) The supply of sirloin steak will rise. b) A greater quantity of sirloin steak will be supplied. c) A smaller quantity of sirloin steak will be supplied. d) The demand for sirloin steak will decrease. e) The supply of sirloin steak will decrease. 133. If a product is in surplus supply, we can conclude that a) Quantity demanded exceeds quantity supplied. b) Its price is too low for equilibrium.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

24 c) Its price is above equilibrium. d) Its price will rise. e) Consumers want to buy more than is being made available by producers. 134. A market is in equilibrium a) When equilibrium price equals equilibrium quantity. b) When the price is high. c) When the price is low. d) When government imposes price controls. e) Where demand and supply curves intersect. 135. A price floor a) Causes a shortage. b) Is a minimum legal price for which a product can be sold. c) Occurs when the market is in equilibrium. d) Is a legal price set by the government that is below the equilibrium level. e) Causes quantity demanded to exceed quantity supplied. 136. Assume the demand for watermelons is downward sloping. An increase in price from $2 per pound to $3 per pound a) Could have been caused by a decrease in quantity supplied. b) Will cause a larger quantity of watermelons to be demanded. c) Will cause demand to decrease. d) Could have been caused by an increase in supply. e) Will cause a smaller quantity of watermelons to be demanded. 137. If an increase in the price of product X causes a decrease in the demand for product Y, we can conclude that a) They are substitutes. b) They are normal products. c) The price of product Y will increase. d) They are complements. e) The quantity supplied for product Y will increase. 138. If demand moves to the right as supply moves to the right, then a) Equilibrium price must increase, but equilibrium quantity may either rise, fall, or remain unchanged. b) Equilibrium price and quantity must both go down. c) Equilibrium quantity must rise, but equilibrium price my either rise, fall, or remain unchanged. d) Equilibrium price and quantity must both go up. e) None of the above. 139. Bacon and eggs are most likely a) Complements b) Substitutes.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

25 c) Inferior goods. d) Overproduced in a competitive market. e) None of the above. 140. If demand decreases but supply increases, we can say that a) Equilibrium price will rise, but equilibrium quantity is indeterminate. b) Equilibrium quantity will decrease, but equilibrium price is indeterminate. c) Equilibrium quantity will rise, but equilibrium price is indeterminate. d) We would require more information to determine the movement in price and quantity. e) Equilibrium price will decrease, but equilibrium quantity is indeterminate. 141. If producers require higher prices to produce various quantities, then a) Demand will decrease. b) Consumer incomes will decrease. c) Quantity supplied has increased. d) Supply has shifted to the left. e) Supply has increased. 142. Consider the market for film processing. If there is a technological advance that enables every worker to process twice as much film, then a) Price would decrease b) Supply would increase. c) Quantity demanded would increase. d) Quantity supplied would increase. e) All of the above. 143. Consider the market for corn. If the price of fertilizer decreases, then we can expect a) The supply of corn to decrease. b) The demand for corn to decrease. c) The supply of corn to increase. d) The price of corn to increase. e) The demand for corn to increase. 144. The discovery of vast new oil reserves in Texas will a) Decrease the price of oil. b) Increase the quantity supplied of oil. c) Increase the quantity demanded of oil. d) Increase the supply of oil e) All of the above. 145. If everyone expects the price of almonds to rise in the near future, what will happen to the market for almonds? a) People will buy the same amount now. b) People will buy less now, causing a decrease in demand. c) The amount bought and sold will increase.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

26 d) The supply will increase. e) The amount bought and sold will decrease. 146. Suppose all blue-collar workers unite and form a national union. Now suppose they have threatened the economy with a national strike and have consequently received a substantial pay increase. What would happen in most markets in this economy? a) Demand would decrease. b) Output would rise. c) Price would fall. d) Supply would increase. e) Supply would decrease. 147. If a natural disaster destroys Californias fruit crop, then a) The supply of fruit will remain unchanged but the demand will decrease. b) The demand for fruit will increase. c) The price of fruit will drop because people will consume less. d) The supply of fruit will decrease, causing the equilibrium price to decrease and the equilibrium quantity to increase. e) The supply of fruit will decrease, causing the equilibrium price to increase and the equilibrium quantity to decrease. 148. If producers must obtain higher prices to produce various quantites, we can conclude that a) Supply decreased. b) Demand decreased. c) Demand increased. d) Supply increased. e) Both demand and supply increased. 149. Consider the market for commercial movies seen on television. If there is a decrease in the number of popular television programs, we can expect a) Demand for commercial movies to increase. b) Fewer commercial movies to be shown on television. c) Demand for commercial movies to decrease. d) The profits of commercial movie makers to decrease. e) None of the above. Use the graph below to answer the following 4 questions.

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

27

150. If D1 and S1 are the original demand and supply curves, our original equilibrium price and equilibrium quantity would be a) OE and OA. b) OG and OB. c) OF and OC. d) OD and OA. e) OD and OB. 151. Given D1, if supply moves from S1 to S2 a) Quantity supplied has increased. b) Demand will decrease from OB to OA. c) A surplus will exist equal to AB. d) Supply has decreased, and equilibrium price and equilibrium quantity will move to OG and OB. e) Supply has decreased, and equilibrium price and equilibrium quantity will move to OE and OA. 152. Given S1, if demand shifts from D1 to D2 a) Demand has increased. b) Equilibrium quantity will rise. c) Equilibrium price will rise to OF. d) Quantity supplied will increase to OC. e) All of the above.

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

28 153. If demand shifts from D1 to D2 and supply shifts from S1 to S2 a) Equilibrium price will rise to OF but equilibrium quantity will remain at OB. b) Equilibrium price will move to OC and equilibrium quantity to OG. c) Demand has decreased and supply has increased. d) Equilibrium price will rise to OG but equilibrium quantity will remain at OB. e) Both equilibrium price and equilibrium quantity will decrease. 154. A successful boycott of lettuce is expected to cause a) An increase in the equilibrium quantity of lettuce bought and sold. b) An increase in the price of lettuce. c) A decrease in the demand for lettuce. d) A decrease in the supply of lettuce. e) None of the above. 155. If it is now more profitable for farmers to produce wheat than corn, we can expect a) The price of wheat to rise. b) The supply of corn to increase. c) The quantity demanded of wheat to decrease. d) The demand for wheat to increase. e) The supply of corn to decrease. 156. If the population doubles in size, what can be expected to happen to the market for automobiles? a) Automobile manufacturers will decrease supply. b) The price of automobiles will decrease. c) People will buy more automobiles at any given price. d) People will use fewer automobiles. e) None of the above will happen. 157. A price ceiling imposed on a product will a) Cause sellers to competitively bid down the price over time. b) Cause the quantity supplied to exceed the quantity demanded. c) Be a price above equilibrium. d) Cause fewer resources to be devoted to the product. e) Cause demand to exceed supply at that price. 158. Economists use the term supply to refer to a) The downward sloping line which relates consumer expenditures to different output levels. b) The upward sloping line which relates consumer expenditures to different output levels. c) A whole set of price and quantity supplied combinations. d) A particular quantity supplied at a specific price. e) None of the above.

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

29 159. In which of the following statements are the terms demand, supply, quantity demanded, quantity supplied used correctly? a) Changes in demand and supply causes changes in the equilibrium price. b) If the price rises, supply rises. c) The price of oranges is cheaper in Florida and therefore the demand is greater in Florida. d) When demand exceeds supply the equilibrium price will rise. e) All of the above. 160. If consumers are willing and able to pay a higher price in order to obtain any particular quantity, then a) Demand has increased. b) Supply has increased. c) Demand has decreased. d) Supply has decreased. e) None of the above. 161. If a smaller quantity is supplied at each of the various price levels, then a) Supply has decreased. b) Supply has increased. c) Demand has decreased. d) Demand has increased. e) None of the above. 162. If the quantity demanded equals the quantity supplied, then a) Buyers will competitively bid up the price. b) Sellers will competitively bid up the price. c) Sellers will competitively bid down the price. d) Buyers will competitively bid down the price. e) None of the above. 163. An increase in a product supply curve might be caused by a) Some firms entering an industry. b) An increase in the price of an input (resources). c) An increase in the price of the product. d) A decrease in consumer incomes. e) Some firms leaving an industry. 164. An efficient output level in any market a) Exists where the supply curve intersects the Y axis. b) Exists where the demand curve intersects the X axis. c) Exists at an output level in which buyers will pay more than suppliers require. d) Exists at an output level in which buyers will not pay as much as suppliers require. e) Means consumers or producers welfare will be reduced by an expansion or contraction of output.

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

30 165. A market operates efficiently if it a) Produces a surplus. b) Produces an output in which the price consumers are willing to pay exactly equals the price producers are willing to accept. c) Produces an output in which the demand curve lies above the supply curve. d) Results in a product which can be purchased at many different prices. e) Produces an output in which the supply curve lies above the demand curve. 166. Which of the following statements is true about competitive markets? a) Non-price competition usually results in a wider variety of products from which consumers can choose. b) Competitive markets do not usually offer as wide of a variety of products as do non-competitive markets. c) Most markets compete solely on the basis of price. d) Price competition is always the most profitable way producers compete. e) Non-price competition almost always reduces consumer welfare. 167. Which of the following would not be a result of perfect price competition? a) The market would be in equilibrium. b) Quantity demanded would equal quantity supplied. c) Neither a surplus nor a shortage would exist. d) The market would maximize output given what consumers were willing to pay and what producers had to receive. e) Government price controls would be required. 168. The short-run is a) Any period of time for which producers can change demand for their products. b) Is any period of time less than one month. c) Any period of time for which producers cannot alter their production facilities. d) Any period of time in which producers have the ability to alter their production facilities. e) Is any period of time less than one year. 169. Assume an increase in the profitability of firms in a product market. Over time we can expect a) Market supply to decrease. b) The demand for resources (inputs) to rise. c) The equilibrium price of the product to rise. d) Firms to leave this market. e) The equilibrium price of the product to fail. 170. Assume a market is currently earning large profits. Over the long run a) Demand will fall.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

31 b) c) d) e) Supply will fall. Supply will rise. Demand will rise. None of the above.

171. The essential characteristics of the long run is that a) Firms are either losing money or earning large profits. b) Firms are unable to change their production facilities (plan sizes). c) Firms do not have any fixed resources. d) Firms will always produce an output in which the price consumers are willing to pay exceeds the lowest price firms are willing to accept. e) It is always greater than one year. 172. An increase in the demand for a resource might be caused by a) An industry which is losing money. b) A decrease in its price. c) An increase in the demand for the product the resource produces. d) An increase in the price of a complementary resource. e) Any of the above. 173. What can be expected to happen over the long run in a market which is losing money? a) The equilibrium price of the product will rise while the equilibrium quantity will fall. b) The firms in the market will demand more resources (inputs). c) New firms will enter the market increasing market supply. d) Losses will rise. e) None of the above. 174. More television sets are being sold today than one year ago, and the selling price has increased. This could have been caused by a) A decrease in supply. b) An increase in demand. c) A decrease in demand. d) An increase in supply. e) An exception to the law of demand.

Part B: Organizational Economics and Management: 175.. Which of the following statements is true concerning the standard model of a competitive market as it applies to labor? a) As the wage rate rises, more workers will seek employment. b) As the wage rate rises, employers will hire fewer workers. c) Allowing market forces to operate will result in a market equilibrium wage rate
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

32 where the quantity demanded of labor equals the quantity supplied of labor. d) All of the above. 176. According to the textbook authors, one of the problems with the standard demand and supply model as it applies to a real-world labor market is that a) demand and supply analysis simply does not apply to a labor market. b) not only does worker productivity affect the demand for labor and therefore the wage rate, but workers' wages also affect their productivity. c) the demand for labor is upward sloping and the supply of labor is downward sloping in real-world labor markets. d) it is possible to determine an equilibrium quantity of labor, but impossible to determine an equilibrium wage rate. 177. The demand for labor a) is upward sloping, reflecting the fact that businesses hire fewer workers as the wage rate rises. b) will increase, or shift to the right, if the price of the output produced by workers rises. c) will increase, or shift to the right, if the productivity of workers falls. d) will decrease if the wage rate rises. 178. An increase in the demand for labor can be caused by a) b) c) d) a decrease in the wage rate. a decrease in the price of the output produced by workers. an increase in the productivity of workers. a decrease in the supply of labor.

179. According to the standard model of demand and supply, if a) the wage rate is above equilibrium, a shortage of labor will result. b) the wage rate is below equilibrium, the quantity demanded of labor will exceed the quantity supplied of labor. c) there is a surplus of labor then wage rates rise. d) the demand for labor increases, the wage rate will rise and the equilibrium quantity of labor seeking and finding a job will fall. 180. According to the standard model of demand and supply, if the supply of labor increases, then a) the equilibrium wage rate will decrease and the equilibrium quantity of labor will increase. b) the equilibrium wage rate will decrease and the equilibrium quantity of labor will decrease.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

33 c) the equilibrium wage rate will increase and the equilibrium quantity of labor will increase. d) the equilibrium wage rate will increase and the equilibrium quantity of labor will decrease. 181. Offering higher than equilibrium wages may a) b) c) d) enable employers to be more demanding of workers to extract more productivity. enable employers to be more selective in the people they hire. increase the cost to workers of quitting their jobs. all of the above.

182. Offering higher than equilibrium wages can be expected to a) increase the cost of losing a job. b) prompt some workers to put up with some strict rules and to be obedient to management. c) inspire effort from those who can't be monitored directly on a daily basis. d) all of the above. 183. According to the standard market model, unemployment is caused by a) b) c) d) a wage rate below equilibrium. a wage rate above equilibrium. a shortage of workers. the presence of lazy workers.

184. Overpayment to employees is likely to a) reduce the number of workers who slack. b) reduce the misuse of funds and other company resources by managers who are difficult to monitor. c) reduce training costs and increase efficiency over time. d) all of the above 185. If potential employees are offered premium wages or salaries, they should a) immediately take the job because of the high pay b) rarely take the job because the company will likely not survive and their jobs will be insecure. c) consider carefully what will be expected of them, both immediately and in the future. d) take the job because the employer obviously cares for the well-being of employees. 186. Which of the following statements is true concerning overpayment of workers?

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

34 a) A person who quickly fails at a high salary can end up doing far worse than the person who begins his or her career by succeeding at a more modest salary. b) Firms may "overpay their workers because they have "underpaid" their workers early in their careers. c) Initial "underpayment" of employees may be acceptable to workers if "overpayment" is likely in the future. d) All of the above. 187. Which of the following statements is true? a) Manipulation of a worker's career wage structure, or earning path over time, will typically reduce worker productivity and lifetime income. b) Management must pay workers an amount equal to what they are worth over the course of their careers or else workers will leave the company. c) Deferred compensation is almost never acceptable to employees because it is viewed as another form of exploitation by companies. d) All of the above. 188. Deferred compensation plans a) imply being paid more than you are worth now at the expense of being paid less than you are worth in the future. b) typically reduce productivity and payments to workers over time. c) are rare in the real world. d) require credible commitments by firms to keep their promises of more pay over time. 189. A twisted pay structure, as discussed in chapter 2, a) is generally more difficult for a start-up company because of its lack of history in keeping its promises of more pay later. b) may not be able to fulfill the promise of overpayment to employees if the company faces stiff competition in the future. c) may be abandoned if the company is purchased by another firm who has no compulsion to hold to the original owner's prior commitments. d) all of the above. 190. Which of the following statements is true? a) Mandatory retirement systems can be explained by the expected physical impairment of workers as they age. b) Mandatory retirement systems can be explained by the need to cutoff overpayment to older workers. c) The abolishment of mandatory retirement systems by Congress can create unexpected gain in wealth by some older workers. d) All of the above.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

35

191. Companies and employees can both benefit from buyout offers to workers if a) workers have a lower discount rate than owners. b) retirement systems are underfunded. c) companies are expected to meet with financial difficulty from competition down the road. d) all of the above. 192. The abolition of mandatory retirement systems by Congress a) will tend to help those who are about to retire. b) can be expected to reduce productivity overall. c) can increase the starting wages of younger workers because wage overpayments later in life are reduced. d) all of the above. 193. The abolition of mandatory retirement systems a) can hurt some older workers who are years from retirement, who work for large companies, and who can hang on to their overpayments. b) can help some older workers who are fired, demoted, not given raises or have their pay cut. c) will cause most young workers to be no better off because the reduction in their underpayment while young will be offset by their reduction in overpayment when older. d) all of the above. 194. When Henry Ford doubled his workers' wage rate in 1914, he a) was trying to be socially responsible. b) expected worker absenteeism to go up because workers did not then have to put in as many hours to earn the same weekly wages. c) expected Ford's productivity demands placed on workers to go up. d) expected Ford's profits to go down. 195. Being able to make "credible commitments" can be important to firms because such an ability a) can lower the starting wages of workers. b) can raise worker productivity over their careers. c) can both lower workers' starting wages and raise their productivity and career incomes. d) neither a nor b. 196. Employers can impose higher work demands on workers in competitive labor markets
Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010

36 so long as the wage rate a) goes up by more than the negative value workers place on the greater work demands. b) goes up by more than the added costs to employers. c) goes down by more than the added costs of the greater work demands to employers. d) none of the above. 197. In perfectly competitive product markets, producers who face a surplus of labor at the current wage rate will be pressed to a) decrease the wage rate paid their workers. b) increase the wage rate paid their workers. c) do nothing because the surplus in the labor market will not affect the final product market. d) none of the above. 198. If workers in competitive labor markets place more value on relaxed work than on the loss of worker productivity that may result, then employers in perfectly competitive final product markets can be expected to a) leave work demands and the wage rate as they are and raise their products price. b) decrease work demands and lower the wage rate and lower their products price. c) decrease work demands and raise the wage rate and hold the final product price constant. d) increase work demand and keep the wage rate and the final product price the same the same. 199. Startup firms use stock options as a means of paying their workers because they a) are trying to get labor for nothing. b) dont have the track record to make credible commitments to pay underpay workers initially and to pay above market wages in the future. c) seek to use the work of their initial workers as sweat equity when they dont have the track record to raise financial capital. d) both b and c. e) all of the above. 200. How could Henry Ford justify paying his workers double the going wage rate? a) He demanded an increase in worker productivity that was greater than the added wage rate b) He expected the added wage rate to lead to a shortage of workers. c) He relaxed work demands so that the supply of labor would increase. d) None of the above.

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University Press 2010