3070 Practice Questions

ECON 3070 Intermediate Microeconomic Theory: Practice Multiple-Choice Questions 1

ECON 3070Intermediate Microeconomic TheoryPractice Multiple-Choice Questions

Utility and Choice

1. As long as the principle of diminishing marginal utility is operating, any increased consumption of a gooda. lowers total utility.b. produces negative total utility.c. lowers marginal utility and, therefore, total utility.d. lowers marginal utility, but may raise total utility.

2. Among all the combinations of goods attainable by a consumer, the one that maximizes total utility is the onethata. maximizes the marginal utilities per dollar of each good.b. maximizes the marginal utilities per pound (or other physical unit) of each good.c. equates the marginal utilities per dollar of each good.d. equates the marginal utilities per pound (or other physical unit) of each good.

3. A utility contour (or indifference curve) shows all the alternative combinations of two consumption goodsthata. can be produced with a given set of resources and technology.b. yield the same total of utility.c. can be purchased with a given budget at given prices.d. equate the marginal utilities of these goods and, therefore, make the consumer indifferent between them.

When answering questions 4-6, consider the accompanying graph of a person’s consumption-indifference curves:

4. This graph indicates that the consumera. at A is indifferent between 0a of apples and 0b of butterb. at A is consuming either 0a of apples or 0b of butter.c. is indifferent between 0a of apples plus 0b of butter on the one hand and 0c of apples plus 0d of butter on

the other.d. is correctly described by all of the above.


5. This graph also indicates that the consumer prefers combinationa. A to B.b. C to B.c. B to D.d. E to F.

6. This graph also shows the consumer’s marginal rate of substitution in the AB range to bea. 0a of apples for 0d of butter.b. 0a of apples for 0b of butter.c. 0c of apples for 0d of butter.d. ac of apples for bd of butter.

7. At any given point on an indifference curve, the absolute value of the slope equalsa. unity--otherwise there would be no indifference.b. the marginal rate of substitution.c. the consumer’s marginal utility.d. none of the above.

8. If a consumer’s marginal rate of substitution equals 2 eggs for 1 hamburger,a. the consumer’s indifference curve must be positively sloped.b. the consumer’s indifference curve must be convex with respect to the origin of the graph.c. the ratio of the consumer’s marginal utility of 1 egg to that of 1 hamburger must equal ½.d. all of the above are true.

9. In the presence of declining marginal rates of substitution, consumers who again and again sacrifice a unit ofone good cannot remain on their original consumption-indifference curves (that is, they cannot maintain theiroriginal levels of welfare) unless they receive as compensationa. again and again equal units of another good.b. ever smaller units of another good.c. ever larger units of another good.d. either (a), (b), or (c), depending on the tastes of the consumer involved.

10. Which of the following is a correct representation of the budget constraint in a world with only food and

f sshelter, where M = income, P = price of food, P = shelter price, S = the quantity of shelter, and F = thequantity of food.

f sa. M = P (S) + P (F)

s f sb. F = M/P - P /P (S)

s s fc. S = M/P - P /P (F)

s f sd. F = M(P ) + P /P (S)e. None of the above is correct.

11. All points on or below a budget constrainta. are attainable with the given income.b. are equally desirable.c. represent market basket combinations that exhaust the income available.d. are described, in part, by a, b, and c above.


12. For the graph of the budget line shown below, which statement is true?a. The vertical intercept represents all the money available for purchases.b. The distance AB shows the amount of money spent on OD amount of food.c. The distance AO shows the amount of money left over after purchasing OD amount of food.d. All of the above are true.e. None of the above is true.

13. In a preference ordering exercise in which two baskets of goods are being considered, it is assumed byindifference theory that the consumer is able toa. measure the amount of pleasure expected from the preferred basket.b. say how much more one basket is valued over the other.c. calculate only the absolute value of the less desirable basket.d. make no absolute measure of the value of any of the market baskets.

14. Indifference curves that intersect would be illogical constructs becausea. more is better than less.b. of diminishing marginal utility.c. of the transivity property of indifference theory.d. of both a and c above.e. of none of the above.

15. The marginal rate of substitution between food and shelter for a given point on an indifference curvea. is equal to the absolute value of the slope of the indifference curve at that point.b. is equal to the rate at which the consumer is willing to exchange the two goods in the marketplace.c. reflects the relative values the consumer attaches to the two good.d. is described, in part, by each of the above statements.

16. If a man prefers Budweiser to Schlitz and Schlitz to Pabst, and if he is indifferent between Budweiser andMiller, he musta. prefer Miller to Pabst.b. prefer Schlitz to Miller.c. be indifferent between Schlitz and Miller.d. be indifferent between Budweiser and Pabst.e. be indifferent between Pabst and Miller.


17. If a market basket is changed by adding more to at least one of the goods, then every consumer willa. rank the market basket more highly after the change.b. rank the market basket more highly before the change.c. rank the market basket just as desirable after the change.d. be unable to decide whether he prefers the first market basket to the second or the second to the first.e. recognize this as one of the unsolved problems in economics.

18 An indifference curve is.a. a collection of market baskets that are equally desirable to the consumer.b. a collection of market baskets that the consumer can buy.c. a curve whose elasticity is constant for every price.d. a curve which passes through the origin and includes all of the market baskets that the consumer regards

as being equivalent.

19. If A, B, C, and D are any four market baskets, and if the consumer has ranked them so that D is preferred toC, A is not preferred to B, and B is not preferred to C, thena. A is preferred to C.b. A is preferred to D.c. B is preferred to D.d. D is preferred to A.e. D is not preferred to B.

20. Suppose that a market basket of two goods is changed by adding more to one of the goods and subtractingone unit from the other.a. The consumer will rank the market basket more highly after the change.b. The consumer will rank the market basket less highly after the change.c. The consumer will be indifferent between the market baskets.d. Any of the above statements may be true.

21. Which of the following is not an assumption of ordinal utility analysis?a. Consumers are consistent in their preference.b. Consumers can measure the total utility received from any given basket of good.c. Consumers are non-satiated with respect to the goods they confront.d. All are necessary.e. None of the above.

22. As long as all prices remain constant, an increase in money income results in a. an increase in the slope of the budget line.b. a decrease in the slope of the budget line.c. an increase in the intercept of the budget line.d. a decrease in the intercept of the budget line.e. both (a) and (c).

23. If the prices of both goods increase by the same percent, the budget line willa. shift parallel to the left.b. shift parallel to the right.c. pivot about the x axis.d. pivot about the y axis.e. none of the above.


24. Cardinal utility theory assumes that consumers cana. rank baskets of goods as to their preference.b. determine the number of utils that can be derived from consuming all goods.c. determine the marginal rate of substitution between goods.d. avoid the law of diminishing marginal utility.e. all of the above.

25. The budget allocation rule states thata. the marginal utility of x equals the marginal utility of y at maximum utility.b. the marginal utility of x divided by its price be equal to marginal utility of all other goods divided by

their prices.c. the marginal utility of x equals the marginal rate of substitution of x for y.d. the ratio of prices of x to y be greater than the ratio of marginal utility of x to the marginal utility of y.e. none of the above.

26. In spending all his or her income, the consumer chooses the market basket that maximizes his or her utility.Which of the following statements will be correct?

1. The marginal utility is the same for each commodity.2. The marginal utility per dollar spent is the same for each commodity.3. The marginal utility of each commodity is proportional to its price.

a. 1 only.b. 2 only.c. 1 and 2 only.d. 2 and 3 only.e. 1, 2, and 3.

27. A consumer buys only jellybeans and wrinkle remover and the more of any one he buys, the lower themarginal utility of that good. In spending all his income, his marginal utility of a pound of jellybeans is 12and his marginal utility of a jar of wrinkle remover is 15. The price of jellybeans is $8 per pound and theprice of wrinkle remover is $11 per jar. For maximum satisfaction, this consumer shoulda. buy more wrinkle remover and fewer jellybeans.b. by less wrinkle remover and more jellybeans.c. buy more wrinkle remover and the same quantity of jellybeans.d. buy the same quantity of wrinkle remover and more jellybeans.e. remain where he is, since his present position is the best attainable one.

Utility and Choice – Answers

1. d 2. c 3. b 4. c 5. d 6. d 7. b 8. c 9. c 10. e

11. a 12. d 13. d 14. d 15. d 16. a 17. a 18. a 19. d 20. d

21. b 22. c 23. a 24. b 25. b 26. d 27. b


Individual Demand

1. Patty buys only two brands of golf balls: “Jack Nickless” and “Olin 1.” The more of any one she buys, thelower the marginal utility of that ball. In spending all her income, her marginal utility of a “Nickless” is 5and her marginal utility of an “Olin 1” is 10. The price of a “Nickless” ball is $2 and the price of an “Olin 1”is $3. Given this information, which of the statements is true?

1. In equilibrium, patty must give up three “Olin 1” balls for two “Nickless” balls.2. Patty would be willing to give up two “Olin 1”: balls for one “Nickless” ball.3. Patty could increase her satisfaction by trading “Nickless” for “Olin 1.”

a. 1 only.b. 2 only.c. 3 only.d. 1 and 2 only.e. 1 and 3 only.

2 Bo Dacious buys 10 classical albums and 15 tubes of suntan lotion along with quantities of other goods.Suppose that the price of records rises by 90 cents per album and the price of suntan lotion falls by 60 centsper tube. Other prices and Bo’s income remain unchanged. What will Bo do?a. Buy more albums and less suntan lotion.b. Buy fewer albums and more suntan lotion.c. Buy the same number of albums and more suntan lotion.d. Remain where she is since her present position is the best attainable one after prices change.

3. Suppose an individual spends all his income on only two goods, good X and good Y. Moreover, supposethat you were asked to derive his price consumption curve for good Y. Which of the following would beallowed to vary?a. Money income.b. The tastes of the consumer.c. The price of good X.d. The price good Y.

4. The “compensated” demand curve is the demand curve thata. shows only the income effect.b. shows only the substitution effect.c. shows both the income and substitution effects.d. shows the Giffen good demand curve.e. none of the above.

5. The substitution effect refers toa. the change in quantity demanded when the price of a substitute changes.b. the change in quantity demanded resulting from a change in total satisfaction, holding relative prices

constant.c. the change in quantity demanded resulting from a change in relative prices, holding the level of

satisfaction constant.d. the percentage change in quantity demanded resulting from a one percent change in all prices.e. a movement from one indifference curve to another.


6. The income effect of a price changea. is always positive.b. is always negative.c. may be positive or negative.d. is associated with a change in nominal income.e. is caused by changes in consumer tastes.

7. If a good is normal, then the demand curve for that good must bea. downward sloping.b. upward sloping.c. perfectly elastic.d. completely inelastic.e. either (a) or (b); whether it is one or the other depends on the relative magnitudes of the income and

substitution effects.

8. If the demand curve for a good is downward sloping, then the good must bea. normal.b. inferior.c. Giffen.d. either (a) or (b).e. either (b) or (c).

9. If the demand curve for a good is upward sloping, then which of the following statements must be true?1. The good is inferior.2. The substitution effect is in the opposite direction to the income effect.3. The substitution effect overwhelms the income effect.


10. When a good is an inferior good, the “non-compensated” demand curve will bea. relatively more elastic than the compensated demand curve.b. relatively more inelastic than the compensated demand curve.c. equally elastic but with a different intercept than the compensated demand curve.d. parallel to the compensated demand curve and to the right.e. either more elastic or more inelastic depending upon the size of the income effect.

11. A normal good can be defined as one which consumers purchase more of asa. prices fall.b. prices rise.c. incomes fall.d. incomes increase.e. the prices of other products increase.


12. An inferior gooda. can be a Giffen good, but a Giffen good is not always inferior.b. must be a Giffen good.c. can be a Giffen good but a Giffen good must always be an inferior good.d. has a positively sloped demand curve.e. all of the above.

13. Which is true of a price-consumption curve for good X?a. Nominal income falls as the price of X falls.b. The absolute price of X falls, but the relative price between X and the composite good Y stays the same.c. It is always downward sloping for a normal good.d. It represents only those market baskets that are optimal for the given price ratio and preference pattern,

and therefore a demand curve can be plotted from it.

14. The substitution effect of a price decrease for a good with a normal indifference curve patterna. is always inversely related to the price change.b. measures the change in consumption of the good that is due to the consumer’s feeling of being richer.c. is measured by the horizontal distance between the original and the new indifference curves.d. Is sufficient information to plot an ordinary demand curve for the commodity being considered.

15. The income effecta. always makes a consumer buy more of a good with a lowered price, all else being equal (because

lowered price implies higher real income).b. always makes a consumer buy less of a good with an increased price, all else being equal (because

increased price implies lower real income).c. is correctly describe by (a) and (b).d. is correctly described by neither (a) nor (b).

16. When the substitution effect of a lowered price is counteracted by the income effect, the good in question isa. an inferior good.b. a substitute good.c. an independent good.d. a normal good.


Questions 17 and 18 refer to the figure below:

17. The curve EF is called a(n)a. price-consumption curve.b. income-consumption curve.c. demand curve.d. elasticity curve.

18. From the curve EF, we know that the demand curve for coffee isa. elastic at high prices and inelastic at low prices.b. inelastic at high prices and elastic at low prices.c. elastic everywhere.d. unit elastic everywhere.

19. A price decrease and an increase in income are similar in thata. both force the consumer to achieve a lower level of well-being.b. both force the consumer to reach a lower indifference curve.c. both move the budget line outward.d. They are not similar at all.

20. The difference between a price decrease and an increase in income is thata. a price decrease does not affect the consumption of other goods while an increase in income does.b. an increase in income does not affect the slope of the budget line while a decrease in price does change

the slope.c. a price decrease decreases real income while an increase in income increases real income.d. a price decrease leaves real income unchanged while an increase in income increases real income.


21. A market demand curve can be derived by adding all the individual demand curves a. vertically.b. horizontally.c. in parallel.d. Any of the above as long as it is consistent.

22. Some goods are not closely related to each other and are neither substitutes nor complements. For suchgoods, the cross-price elasticity of demand would bea. positive.b. negative.c. zero.d. Cannot tell without more information.

23. The phenomenon of the backward-bending market supply curve for labora. reflects the policy of labor unions.b. reflects the scarcity of high-priced, highly skilled labor.c. results from workers’ preference for leisure over work.d. results from the effect of the decrease in the cost of leisure as wage rates rise.e. indicates an increasing desire for leisure as income rises.

24. If leisure is an inferior good, the individual’s supply curve for labor isa. backward bending.b. completely inelastic.c. upward sloping.d. perfectly elastic.e. not necessarily any of the above.

25. If the income effect resulting from a change in the price of leisure is zero, the individual’s supply curve oflabor isa. backward bending.b. completely inelastic.c. upward sloping.d. perfectly elastic.e. not necessarily any of the above.

The following labor-leisure choice diagram applies to questions 26 and 27 below.


26. If the individual receives $5 per hour and is in equilibrium at point E, his or her income at this equilibriumpoint must bea. $40.b. $55.c. $65.d. $80.a. indeterminate.

27. In moving from point E to point G, one would conclude thata. leisure is normal and the supply curve is upward sloping.b. leisure is inferior and the supply curve is backward bending.c. leisure is neither normal nor inferior and the supply curve is backward bending.d. leisure is inferior and the supply curve is completely inelastic.e. leisure is neither normal nor inferior and the supply curve is completely inelastic.

Individual Demand – Answers

1. c 2. b 3. d 4. b 5. c 6. c 7. a 8. d 9. c 10. b

11. d 12. c 13. d 14. a 15. d 16. a 17. a 18. a 19. c 20. b

21. b 22. c 23. e 24. c 25. c 26. a 27. e

Individual Demand – Short Answers

Relationship between explanation and predictionTotal utilityMarginal utilityLaw of diminishing marginal utilityProblems with classical utility theoryFour postulates of choice (that define a preference function)Indifference curveMarginal rate of substitutionBudget lineCondition for consumer equilibrium in classical and in modern demand analysisPrice effectSubstitution effectIncome effectGiffen goodFactors held constant in defining individual demandPareto optimumExchange efficiency locusTwo “fundamental laws of demand”


Elasticity Concepts

1. In 1991, the price of gasoline fell significantly. At the new lower price, gasoline isa. relatively more price elastic.b. relatively more price inelastic.c. unaffected in terms of elasticity.d. unitarily elastic.e. none of the above.

2. Price elasticity of demand is defined to bea. the change in quantity demanded resulting from a 1 cent change in price.b. the percentage change in price resulting from a 1 unit change in quantity demanded.c. the percentage change in quantity demanded resulting from a 1 percent change in price.d. the maximum amount consumers will pay for 1 percent more of a good.e. the change in the price of a good divided by the resulting change in its quantity demanded.

3. Suppose that the price elasticity of demand for maple syrup has been estimated at -2. If quantity demandedincreased by 10 percent, price must have changed bya. 5 percent lower.b. 5 percent higher.c. 10 percent lower.d. 10 percent higher.e. cannot be determined from the given information.

4. Along any straight-line, negatively sloped demand curve,a. the price elasticity and slope vary.b. the price elasticity varies, but the slope remains the same.c. the slope varies, but the price elasticity remains the same.d. the price elasticity and slope remain the same.e. none of the above are necessarily true.

5. Price elasticity at a given price is not affected bya. the price of complements.b. the price of substitutes.c. the consumer’s income.d. a change in tastes.e. a change in supply.

6. The arc elasticity formula is used to estimate elasticity whena. the product is thought to be inelastic.b. the product is thought to be elastic.c. the demand function is known.d. there are two observations of price and quantity.e. none of the above.


7. At your favorite watering spot, happy hour prices are less than normal prices for all drinks except wine. Nodiscount prices are offered for wine. You can conclude thata. wine drinkers may be price elastic.b. wine is a substitute and thus sales will rise without a price reduction.c. wine drinkers may be price inelastic.d. none of the above could be correct.

8. The price elasticity of demand is the same thing as the negative of the a. slope.b. reciprocal of slope.c. the first derivative of the demand function.d. reciprocal of slope times the ratio of price to quantity.e. all of the above.

9. An elasticity coefficient of -1 means thata. the demand curve is perfectly inelastic.b. the demand curve is perfectly elastic.c. the relative changes in price and quantity are equal.d. expenditures on the good would increase if prices were reduced.e. expenditures on the good would decrease if prices were reduced.

10. If the demand curve for a good is downward sloping, then the good must bea. normal.b. inferior.c. Giffen.d. either (a) or (b).e. either (b) or (c).

11. Three points on a demand curve can be derived from the price consumption curve drawn perpendicular tothe X-axis, as shown in the adjoining graph. From this graph, we can see thata. the demand for X is unit elastic.b. the demand for Y is unit elastic.c. the demand for X is infinitely elastic.d. the demand for Y is infinitely elastic.e. the demand for X is completely inelastic.

12. Three points on a demand curve can be derived from the price consumption curve drawn parallel to the X-axis, as shown in the adjoining graph. From this graph, we can see thata. the demand for Y is unit elastic.b. the demand for X is unit elastic.c. the demand for Y is infinitely elastic.d. the demand for X is infinitely elastic.e. the demand for Y is completely inelastic.


13. If the demand for gasoline is relatively but not completely price inelastic, then it follows thata. people would be willing to pay any price to drive.b. a decrease in the price of gasoline would increase the supply of gasoline.c. a decrease in the price of gasoline would reduce the total amount spent on gasoline.d. gasoline consumption could not be cut without rationing.e. an increase in the price of gasoline would not cause the quantity demanded of gasoline to fall.

14. The most important determinant of price elasticity isa. the slope of the demand curve.b. the availability of substitutes.c. the price of other goods.d. the income of the consumer.e. the price of complements.

15. If consumers spend $15 million a month on CDs, regardless of whether the price they pay goes up or down,that implies that their price elasticity of demand for CDs isa. 0.b. 1.c. infinite.d. 15.e. cannot be determined.

16. Which of the following will not be a determinant of the price elasticity of demand for a commodity?a. The absence of substitute for the good.b. The presence of substitutes for the good.c. The importance of the commodity in consumers’’ budgets.d. The length of time period to which the demand curve pertains.e. The cost of producing the commodity.

17. In 1976, a frost in Brazil killed over 500 million coffee trees and damaged many more. A civil war inAngola, a major supplier of coffee, cut back its crop. And, an earthquake in Guatemala disrupted the flowof coffee. In spite of these calamities, these three producers reported an increase in export earnings. On thebasis of this information, which of the following must be true?a. The demand for coffee is price elastic.b. The supply of coffee is price elastic.c. The demand for coffee is price inelastic.d. The supply of coffee is price inelastic.e. The demand for coffee is unit elastic.

18. If the demand for emeralds is elastic, thena. emeralds will have a high price.b. a reduction in price will lead to an increase in the expenditure on emeralds.c. the slope of the demand curve for emeralds must be greater than one.d. a price reduction will not appreciably affect sales.e. the slope of the price consumption curve for emeralds must be greater than one.


19. The market demand for a product is found bya. horizontally summing the individual demand curves.b. vertically summing the individual demand curves.c. both horizontally and vertically summing the individual demand curves.d. none of the above.

20. The price elasticity of demand will increase with the length of the period to which the demand curvepertains becausea. consumers’ incomes will increase.b. the demand curve will shift outward.c. all prices will increase over time.d. consumers will be better able to find substitutes.e. firms will be better able to produce the good for less.

21. If the income elasticity of demand is +4a. the good is an inferior good.b. the good is an inelastic normal good.c. the good is an elastic normal good.d. the good is an elastic inferior good.e. none of the above.

22. Luxuries are distinguished from necessities bya. the number of substitutes available for each.b. the fact that luxuries have high prices and necessities have low ones.c. the high price elasticity of demand for luxuries and the low price elasticity of demand for necessities.d. the high income elasticity of demand for luxuries and the low income elasticity of demand for

necessities.e. the absolute slope of the Engel curve.

23. Which of the following is likely to have a negative cross price elasticity of demand?a. Aluminum foil and cellophane.b. Jelly beans and licorice sticks.c. Bethlehem steel and imported Japanese steel.d. Big Macs and French fries.e. Buggy whips and bug spray.

24. In a 1956 Supreme Court case, economists for E.I. DuPont discovered that the cross price elasticity betweenits cellophane and the prices of similar wrapping materials was large and positive. This evidence suggested:

1. DuPont’s control of cellophane could not be construed as being monopolistic because the other goodsin question were strong substitutes and therefore in competition with each other.

2. The demand of cellophane was price elastic.3. Cellophane was an inferior good.



25. In the early 1940s, Columbia Records, after considerable study, decided to reduce the price of classicalrecords with the result that total expenditure on classical records rose greatly. This would imply that at thetime.a. the demand for classical records was greater than that for popular records.b. the demand for classical records was highly inelastic.c. the demand for classical records was highly elastic.d. the demand curve for classical records was upward sloping.e. the supply of classical records was very inelastic.

26. The income elasticity of an inferior good isa. negative because as people get richer they increase their purchases of the good by smaller and smaller

amounts.b. 1 because the increased income offsets the desire to consume less of the good because it is inferior.c. greater than 1 because the richer you get, the less you consume of the good.d. negative because higher income leads to a reduction in the amount consumed of the product.

27. The income elasticity of demanda. is negative for normal goods.b. is positive for inferior goods.c. equals the relative change in demand for a good divided by the relative change in the income of

consumers, all else being equal.d. is correctly described by all of the above.

28. If a good’s income-elasticity-of-demand estimate equaleda. 2.46, an economist would call the good a necessity.b. 0.37, an economist would call the good a luxury.c. -0.50, an economist would call the good an inferior one.d. -0.50, an economist would call the good a complementary one.

29. With Y on the vertical axis and X on the horizontal axis, if the price-consumption curve for X is upwardsloping to the right,a. the price elasticity of demand for X is relatively elastic.b. the price elasticity of demand for X is relatively inelastic.c. X is an inferior good.d. the price elasticity of demand for X is equal to -1.

30. With Y on the vertical axis and X on the horizontal axis, if the price-consumption curve for X is downwardsloping to the right,a. the price elasticity of demand for X is relatively elastic.b. the price elasticity of demand for X is relatively inelastic.c. X is an inferior good.d. the price elasticity of demand for X is equal to -1.


Elasticity Concepts – Answers

1. b 2. c 3. a 4. b 5. e 6. d 7. c 8. d 9. c 10. d

11. b 12. e 13. c 14. b 15. b 16. e 17. c 18. b 19. a 20. d

21. c 22. d 23. d 24. a 25. c 26. d 27. c 28. c 29. b 30. a

Elasticity Concepts – Short Answers

Price elasticity of demandRelatively elasticRelatively inelasticUnitary elasticPerfectly elasticPerfectly inelastic

Income elasticity of demandLuxuryNecessityInferior good

Engel curveCross elasticity of demand

SubstituteComplement

Relationship between price consumption curve and price elasticity of demandArc elasticity of demandRelationship between price elasticity of demand and expenditures on a commodity (as price changes)Change in quantity demandedChange in demand


Theory of Production

1. If 1 orchard, 7 workers, and 3 tons of fertilizer yield 1,000 bushels of peaches, while 1 orchard, 7 workers,and 4 tons of fertilizer yield 1,300 bushels,a. the average product of labor equals 1,150 bushels.b. the marginal product of labor cannot be calculated.c. the average product of fertilizer equals 1,150 bushels.d. the marginal product of fertilizer cannot be calculated.

When answering the next five questions (2-6), refer to the following graph.

2. The marginal product of labor is rising with increased use of labor untila. 10 workers are employed.b. 20 workers are employed.c. 30 workers are employed.d. 40 workers are employed.

3. The average product of labor is falling with increased use of labor oncea. 10 workers are employed..b. 20 workers are employed.c. 30 workers are employedd. 40 workers are employed.

4. As long as fewer than 30 workers are employed,a. the average product of labor exceeds the marginal product of labor.b. the marginal product of labor exceeds the average product of labor.c. the marginal product of labor is rising.d. both (a) and (c) are true.

5. Between points d and e, increased use of labor meansa. negative marginal product of labor.b. falling average product and falling marginal product of labor.c. marginal product of labor below average product of labor.d. all of the above.


6. Maximum average product of labor corresponds toa. point a.b. point b.c. point c.d. point d.

7. An isoquant curve showsa. all the alternative combinations of two inputs that yield the same maximum total product.b. all the alternative combinations of two products that can be produced by using a given set of inputs fully

and in the best possible way.c. all the alternative combinations of two products among which a producer is indifferent because they yield

the same profit.d. both (b) and (c).

8. A negatively sloped isoquant impliesa. products with negative marginal utilities.b. products with positive marginal utilities.c. inputs with negative marginal products.d. inputs with positive marginal products.

9. The marginal rate of technical substitution isa. the rate at which a producer is able to exchange, without affecting the quantity of output produced, a

little bit of one input for a little bit of another input.b. the rate at which a producer is able to exchange, without affecting the total cost of inputs, a little bit of

one input for a little bit of another input.c. the rate at which a producer is able to exchange, without affecting the total inputs used, a little bit of one

output for a little bit of another output.d. a measure of the ease or difficulty with which a producer can substitute one technique of production for

another.

10. In the presence of a diminishing marginal rate of technical substitution between labor and capital, output canbe kept unchanged only ifa. equal successive sacrifices of capital go hand in hand with ever smaller increases of labor.b. equal successive sacrifices of capital go hand in hand with ever smaller sacrifices of labor.c. equal successive increases in labor go hand in hand with ever smaller increases in capital.d. qual successive increases in labor go hand in hand with ever smaller sacrifices of capital.

11. If the capital-labor ratio changes from 100 to 150, while the marginal rate of technical substitution betweencapital and labor changes from 50 to 100, the elasticity of input substitutiona. cannot be calculated.b. remains unchanged.c. equals 2.d. equals 0.5.

12. If a simultaneous and equal percentage decrease in the use of all physical inputs leads to a larger percentagedecrease in physical output, a firm’s production function is said to exhibita. decreasing returns to scale.b. constant returns to scale.c. increasing returns to scale.d. diseconomies of scale.


13. If a firm triples all inputs, and output triples as well, the firm is subject toa. constant returns to scale.b. increasing returns to scale.c. economies of scale.d. both (b) and (c).

14. For a given short-run production function,a. technology is assumed to change as capital stock changes.b. technology is assumed to change as the labor input changes.c. technology is considered to be constant for a given production function relationship.d. technology is assumed to change positively until diminishing returns set in and then it changes in the

other direction.

15. Which is a true statement?a. Decreasing returns to scale and diminishing returns to production are two ways of stating the same thing.b. Increasing returns to scale is a short-run concept, and diminishing returns to production is a long-run

concept.c. Constant returns to scale is a short-run concept, and decreasing returns to scale is a long-run concept.d. All the above are true.e. None of the above is true.

16. An isocost line identifiesa. the least costly combination of inputs needed to produce a given level of output.b. the relative prices of inputs.c. the technological relationships among inputs.d. the rate at which one input can be substituted for another in the production process.

17. The expansion path identifiesa. the least costly combination of inputs required to produce various levels of output.b. the firm’s demand curves for the inputs.c. the various combinations of inputs that can be used to produce a given level of output.d. the least-cost combination of outputs.

18. A tangency point between an isoquant and an isocost line identifiesa. the least costly combination of inputs required to produce various levels of outputs.b. the various levels of output that can be produced using a given level of inputs.c. the various combinations of inputs that can be used to produce a given level of output.d. the least costly combination of inputs required to produce a given level of output.

19. A firm is employing 100 units of labor and 50 units of capital to produce 200 widgets. Labor costs $10 per unit

L Kand capital $5 per unit. For the quantities of inputs employed, MP = 2 and MP = 5. In this situation, the firma. is producing the maximum output possible given the prices and relative productivities of the inputs.b. could lower its production costs by using more labor and less capital.c. could increase its output at no extra cost by using more capital and less labor.d. should use more of both inputs in equal proportions.

20. Suppose a firm is using two inputs, labor and capital. What will happen if the price of labor falls?a. The firm’s average cost curve will shift downward.b. The firm’s marginal cost curve will shift downward.c. To produce an unchanged output, the firm would use more labor.d. All of the above.


Theory of Production – Answers

1. b 2. b 3. c 4. b 5. d 6. c 7. a 8. d 9. a 10. d

11. d 12. c 13. a 14. c 15. e 16. b 17. a 18. d 19. c 20. d

Theory of Production – Terms to Know

Production functionMarginal (physical) productAverage (physical) productConstant returns to scaleIncreasing returns to scaleDecreasing returns to scaleIsoquant Isocost lineLeast cost combination of inputsStages of productionExpansion path(Marginal) technical rate of substitutionElasticity of substitution


Theory of Cost

1. In the short run, a firm’s fixed costa. is zero.b. cannot be escaped.c. can be escaped only by cutting production to zero.d. is not correctly described by any of the above.

2. When average total cost rises from $10 to $30 as total production rises from 100 to 300 units, averagevariable costa. cannot be calculated.b. equals $10.c. equals $20.d. equals $30.

When answering the next four questions (3-6), refer to the following graph.

3. When total product equals 0A,a. variable cost equals BC.b. average variable cost equals BC divided by 0A.c. fixed cost equals CD.d. all of the above are true.

4. When total product equals 0A, the associated marginal costa. cannot be determined from this graph.b. exceeds average total cost.c. equals DA divided by 0A.d. equals the slope of the variable-cost curve at C.

5. According to this graph,a. marginal cost is positive at all levels or output.b. marginal cost is falling whenever total product rises.c. marginal cost exceeds average total cost at all levels of output.d. all of the above are true.


6. According to this graph,a. average total cost exceeds marginal cost at all levels of output.b. average total cost exceeds average variable cost at all levels of output.c. average fixed cost is the same at all levels of output.d. average fixed cost exceeds average variable cost when total product equals 0A.

When answering the next 3 questions (7-9), refer to the graph below:

7. Line B representsa. marginal cost.b. average variable cost.c. average fixed cost.d. average total cost.

8. The vertical difference, at any level of output, between lines B and C representsa. marginal cost.b. average variable cost.c. average total cost.d. average fixed cost.

9. When output equals 0f,a. total cost equals 0f times fe.b. fixed cost equals 0f times fe.c. total variable cost equals 0f times fe.d. marginal cost equals ed.

10. At the point where a straight line from the origin is tangent to the variable-cost curvea. marginal cost equals average total cost.b. marginal cost equals average fixed cost.c. marginal cost equals average variable cost.d. average total cost is minimized.

11. If a profit-maximizing firm’s marginal product of labor equals 1 ton of output, while the marginal product ofcapital equals 7 tons of output and the use of capital is priced at $14 per unit, thena. the price of labor must be $2.b. the price of labor must be $7.c. the price of labor must be $14 as well.d. none of the above is true.


12. A firm’s long-run average-total-cost line isa. identical to its long-run marginal-cost line.b. also its long-run supply curve.c. in fact the average-total-cost curve of the optimal plant.d. tangent to all the curves of short-run average total cost.

13. Average fixed costa. is U-shaped.b. declines over the entire output range.c. is a long-run concept only.d. is influenced by diminishing returns to production.e. is described by none of the above.

14. If average total cost is 100 for a given output and marginal cost is 70, we then know that average fixed cost isa. 30.b. 170.c. 70.d. not possible to determine with the information given.

15. If average fixed cost is 40 and average variable cost is 80 for a given output, we then know that average totalcost isa. 40.b. 120.c. 80.d. not possible to determine with the information given.

16. The output where diminishing returns to production begin is also the output wherea. marginal cost is at a minimum.b. average total cost is at a minimum.c. average variable cots is at a minimum.d. marginal and average cost intersect.

17. Which of the following statements about marginal cost is incorrect?a. A U-shaped marginal cost curve implies the existence of diminishing returns over all ranges of output.b. When marginal cost equals average cost, average cost is at its minimum.c. In the short run, the shape of the marginal cost curve is due to the law of diminishing marginal returns.d. When marginal cost is falling, total cost is rising.

18. Which of the following statements about the relationship between marginal cost and average cost is correct?a. When MC is falling, AC is falling.b. AC equals MC and MC’s lowest point.c. When MC exceeds AC, AC must be rising.d. When AC exceeds MC, MC must be rising.

19. The slope of the total variable cost curve equalsa. average variable cost.b. marginal cost.c. average cost.d. marginal physical product.


20. In the short run, diminishing marginal returns are implied bya. rising marginal cost.b. rising average cost.c. rising average variable cost.d. all of the above.

Theory of Cost – Answers

1. b 2. a 3. c 4. d 5. a 6. b 7. b 8. d 9. c 10. c

11. a 12. d 13. b 14. d 15. b 16. a 17. a 18. c 19. b 20. a

Theory of Cost – Terms to Know

Market periodShort runLong runOpportunity costNormal profitFixed costVariable costMarginal costAverage costOptimum scale of plantOptimum rate of output


Perfect Competition

1. A firm operating in a perfect market maximizes its profit by adjustinga. its output price until it exceeds average total cost as much as possible.b. its output price until it exceeds marginal cost as much as possible.c. its output until its marginal cost equals output price.d. its output until its average total cost is minimized.


2. Assuming this firm maximizes profit, it will

4a. produce 0A at a price of P .

1b. produce 0D at a price of P .c. incur a total cost of GC times 0C at point I.d. do all the above.

3. Assuming this firm maximizes profit, it willa. procure 0A regardless of price.

4b. produce 0A only at price of P .

2c. make a zero profit at price P (output 0C).

1d. make a profit of KL times 0D at price P .

4. Assuming this firm maximizes profit, it will

1a. incur total fixed cost of KL at a price of P .

2b. incur total variable cost of HC at a price of P .c. supply varying quantities in the short run, depending on the price–quantities that one can read off on line EI.

3d. make a loss of FM times 0B at price P .

5. In the short run, no firm operates with a loss, unlessa. variable cost equals fixed cost.b. variable cost falls short of fixed cost.c. total revenue covers variable costs.d. total revenue covers fixed cost.

6. For a firm operating in a perfect market, its short-run supply is identical with the rising arm ofa. its marginal-cost curve.b. its average-fixed-cost curve.c. its average-total-cost curve.d. none of the above.


7. A good’s short-run supply curve is shifted to the right bya. a fall in the good’s price.b. a rise in the prices of inputs used to make the good.c. an improvement in the technology of making the good.d. none of the above.

8. Being a price taker in a market means that the sellera. charges each consumer the maximum that she will be3 able to pay for the product.b. has no choice but to charge the equilibrium price that results from the market supply and demand curves.c. takes her price from her average total cost curve.d. sells her products at different prices to different customers.

9. The statement that marginal cost = marginal revenue leads to profit maximization of loss minimization is truea. all the time.b. only in the long run.c. only if marginal cost is rising at the point of equality.d. only if average total cost is falling at the point of equality.

10. In perfect competition, when economic profits exist in the short run, they are very tenuous becausea. costs will inevitably increase and eliminate profit.b. price will fall because market supply will increase.c. firms are driven to increase output in the short run to the point where average total cost will equal price.d. firms are driven in the short run to reduce output until average total cost equals price.

11. When a profit-maximizing firm is at its short-run optimum point,a. the average cost of the product is at its lowest possible point whether a profit is being made or not.b. the firm will be shut down if its price is less than the average fixed cost.c. the profit per unit of output will be at its maximum possible level.d. all the above will be true.e. none of the above will be true.

12. If a firm is producing where its SMC = price and the LMC is less that LAC, then it would do better in thelong run bya. increasing output with its existing plant until LMC equals price.b. increasing plant size until LMC and SMC are identical and equal to price.c. decreasing plant size until LAC, SAC, and price are equal.d. doing nothing because it is already at the long-run profit maximizing point.

13. The competitive firm maximizes its profit by operating wherea. average costs are at a minimum.b. total revenue is at a maximum.c. profit per unit is at a maximum.d. marginal cost equals price.



14. Assume that price is $10. The profit maximizing level of output for the firm isa. 0A.b. 0E.c. 0F.d. 0G.

15. At the profit maximizing level of output at a price of $10 the firma. is making economic profit.b. is losing money.c. is making zero economic profit.d. none of the above.

16. When producing the profit-maximizing level of output at a price of $10,a. total fixed costs are 0A.b. total profits equal DC.c. average cost equals CG/0G.d. all of the above.

17. If price fell to $8,a. the firm would decrease production to 0F and would be operating at a loss.b. the firm would decrease production to 0F and would be earning a normal return.c. the firm would decrease production to 0E where it would break even.d. the firm would shut down.



18. Assume price is $10. The profit maximizing level of output for the firm isa. 0A where marginal cost just covers AVC.b. 0B where average profit per unit is the greatest.c. 0C where marginal cost equals the $10 price.d. 0K where average cost equals avenge revenue and the firm earns a normal rate of return.

19. At the profit maximizing level of output, when price is $10,a. the firm X is earning economic profit.b. profits per unit are the greatest.c. average variable cost equals ZC.d. all of the above.

20. At output level 0C, profit per unit is equal toa. GZ.b. ZV.c. ED.d. GC.

21. At output level 0C, total profits equala. FHSR.b. OSZC.c. GZSR.d. ORGC.

22. At output level 0C, average fixed cost is equal toa. ZV.b. GZ.c. ED.d. VC.


23. For a competitive firm the demand curvea. is horizontalb. coincides with the marginal revenue curve.c. coincides with the average revenue curve.d. all of the above.

24. In the short run, if price falls, the firm will respond bya. shutting down.b. equating average variable cost to marginal revenue.c. reducing output along its marginal cost curve as long as marginal revenue exceeds average variable cost.d. none of the above.

25. In the short run, a competitive firm’s supply curve isa. its average variable cost curve to the right of the marginal cost curve.b. its marginal cost curve above the average variable cost curve.c. its marginal cost curves above its average cost curve.d. the horizontal summation of the marginal cost curves.

26. In a constant cost competitive industry if price rises above its long-run equilibrium level, which of thefollowing will not occur as the industry adjusts to a new LR equilibrium?a. New firms will enter the industry.b. Economic profit will be eliminated.c. Input prices will rise.d. Existing firms will increase production.

27. The term increasing cost industry is used to describea. a firm with a rising average cost curve.b. an industry subject to decreasing returns to scale.c. an industry with a rising marginal cost curve.d. an industry in which the prices of one or more inputs are bid up as output expands.

28. Along the long-run supply curve, all of the following can vary excepta. the level of profits.b. the number of firms in the industry.c. input prices.d. the level of input usage.

29. The short-run supply curve for a competitive industry is derived bya. horizontally summing the marginal cost curves for each firm in the industry.b. horizontally summing the average variable cost curves for each firm in the industry.c. vertically summing the marginal cost curves for each firm in the industry.d. none of the above.

30. Generally, supply isa. more elastic in the long run than in the short run.b. more elastic in the short run than in the long run.c. more elastic the more firms in the industry.d. more elastic the lower the input prices.


Perfect Competition – Answers

1. c 2. b 3. c 4. d 5. c 6. d 7. c 8. b 9. c 10. b

11. e 12. b 13. d 14. d 15. a 16. d 17. b 18. c 19. a 20. a

21. c 22. a 23. d 24. c 25. b 26. c 27. d 28. a 29. a 30. a

Perfect Competition – Terms to Know

Total revenueMarginal revenueMarginal net revenuePerfect competitionIncreasing cost industryDecreasing cost industryConstant cost industry


Supply, Demand, and Market Price

Questions 1-4 are based on the figure below.

1 11. If the initial demand and supply curves are D and S , equilibrium price and quantity are

2 3a. OP and OQ .

1 2b. OP and OQ .

2 1c. OP and OQ .

3 2d. OP and OQ .

1 22. If the demand curve shifts from D to D , one could say that

1 2a. the quantity demanded has decreased to Q and price has fallen to P .b. there had been an increase in demand for X.c. the price of a good which is a substitute for X must have fallen.

3 3 2d. the higher price of X (P ) has caused the quantity demanded of X to fall from OQ to OQ .

1 1 23. If the initial demand and supply curves are D and S , and demand shifts to D ,a. a permanent shortage of X will result.

1 3b. a surplus of Q Q will occur.

3c. a shortage will occur at any price above P .

2 1 3d. a ceiling price of P would produce a shortage of Q Q .

2 14. A shift in supply from S to S might be caused bya. the costs of producing good X rising.b. a decrease in the price of X.c. a decrease in demand for X.d. an improvement in the technology of producing good X.


5. A supply curve for a good shows thea. maximum quantities sellers are willing to offer for sale at alternative prices.b. maximum quantities that can be produced at alternative prices.c. quantities sellers will offer as their production costs change.d. quantities sellers can legally supply.

6. If both supply and demand for a good increase at the same time, which of the following must also increase?a. the equilibrium priceb. the use of substitutesc. the equilibrium quantityd. all of the above

7. “If at the initial price there is excess demand, the price will rise. The increase in price has two consequences: It shifts the demand curve down since people buy less at a higher price; and it shifts the supply curve upbecause producers find it profitable to produce more output at a higher price. Price will continue to adjustuntil there is no excess demand.”Which of the following is true about this statement?a. The quotation is correct.b. The quotation confuses excess supply with excess demand.c. The quotation confuses movements along curves with shifts in curves.d. The quotation confuses short-run adjustments with long-run adjustments.

8. Suppose a vaccine for the common cold is discovered. Although the government begins producing thevaccine in as large a volume as possible, there is not enough vaccine available to meet demand. Consequently, the government must also set up an allocation scheme to control the vaccine’s distribution. Which of the following is true about the price of the vaccine?a. It was above equilibrium.b. It was below equilibrium.c. It was at equilibrium.d. Nothing can be determined from the information given.


The graph below pertains to questions 9 and 10.

9. The equilibrium price is not $2.50 per bushel becausea. at that price there would be an excess supply of 10 million bushels and this would tend to drive the price up.b. at that price there would be an excess supply of 30 million bushels and this would tend to drive the price down.c. at that price there would be an excess supply of 30 million bushels and this would tend to drive the price up.d. at that price there would be an excess demand of 30 million bushels and this would tend to drive the price down.e. at that price there would be an excess demand of 30 million bushels and this would tend to drive the price up.

10. At the price of $3.50 per bushel of corn, there would bea. excess supply of 20 million bushels.b. excess supply of 30 million bushels.c. excess supply of 80 million bushels.d. excess demand of 20 million bushels.e. excess demand of 30 million bushels.

Supply, Demand, and Market Price – Answers

1. c 2. b 3. d 4. a 5. a 6. c 7. c 8. b 9. e 10. b

Supply, Demand, and Market Price – Terms to Know

EquilibriumStable equilibriumUnstable equilibriumMarshallian adjustment mechanismWalrasian adjustment mechanism


Monopoly

1. In the long run, a profit-maximizing monopoly produces an output volume thata. equates long-run marginal cost with marginal revenue.b. equates long-run average total cost with average revenue.c. assures permanent positive profit.d. is correctly described by both (a) and (c).

When answering questions 2-6, refer to the following graph about a monopoly firm:

2. Which of the following is true?a. Curve A indicates average total cost.b. Curve B indicates average total cost.c. Curve C indicates average fixes cost.d. Curve D indicates marginal cost.

3. To maximize profit, the firm shoulda. shut down at once.b. produce an output volume of 0d.c. produce an output volume of 0m.d. charge a price of su.

4. When it produces its profit-maximizing output volume, the firm’sa. price will be km.b. marginal revenue will be fi.c. total fixed cost will be gh multiplied by 0i.d. marginal cost will be xz.

5. When it produces its profit-maximizing output volume the firm’sa. average profit will be equal kl.b. average profit will equal bc.c. average revenue will equal ei.d. average revenue will equal np.

6. When it produces its profit-maximizing output volume, the firm’sa. output will equal 0r.b. total cost will equal lm multiplied by 0m.c. total cost will equal tu multiplied by 0u.d. total cost will equal vw multiplied by 0w.


7. With respect to price elasticity, it is true thata. monopoly market demand need not be less elastic than market demand in a competitive industry.b. monopoly firms face less elastic demand than do competitive firms.c. a monopolist should not produce where demand is inelastic.d. all the above are correct statements.

8. A monopolist will maximize profita. where total revenue is maximized.b. where the slope of the total revenue function equals the slope of the total cost function.c. where average cost is at a minimum.d. where all the above are true.e. somewhere other than the solutions listed because none of them is true.

9. In the figure below, for the demand curve shown, marginal revenue for the price reduction from a to b can bemeasured bya. adding x + y.b. subtracting x from y.c. measuring only x.d. subtracting y from x.e. none of the above.

10. If the LMC curve is below the MR curve at the point of output for a monopolist that is making profit, then thefirm hasa. too large a plant size.b. too small a plant size.c. insufficient knowledge about plant size until he knows his short-run marginal cost.d. insufficient knowledge about plant size until he knows his demand curve.

11. If a monopolist’s demand curve is downward sloping and linear, then its total revenue curve must bea. identical to the demand curve.b. a ray from the origin with a slope equal to price.c. negatively sloped with twice the slope of the demand curve.d. a rising function of output that increases at an increasing rate.e. a rising function of output that increases at a decreasing rate, reaches a maximum, then falls.


12. All of the following are true about a monopolist excepta. average and marginal revenue are not the same.b. marginal revenue is greater than price.c. marginal revenue is zero if price elasticity of demand equals 1.d. marginal revenue decreases with increases in output.e. marginal revenue can be negative.

13. Suppose that an excise tax is imposed on the monopolist’s product. If the monopolist’s marginal cost ishorizontal in the relevant range, which of the following statements must be true?a. The price will increase by an amount less than the tax.b. The price will increase by an amount equal to the tax.c. The price will increase by an amount greater than the tax.d. The price may either increase or decrease.e. An excise tax will have no effect on the price-output decision of a monopolist.

14. Which of the following is not true?a. A monopolist typically seeks to maximize profits.b. A monopolist sets price as high as possible.c. A monopolist may engage in advertising.d. Monopolists price on the elastic portion of their demand curves.e. Profits are not guaranteed even if the firm is a monopolist.

15. Since entry is barred in a monopoly, in the long run the monopolist willa. do nothing since entry will not force an adjustment.b. adjust output but leave the price at the short run profit maximizing level.c. adjust price but leave the output at the short run profit maximizing level.d. adjust both price and output levels to reflect long run scale of plant adjustments.e. set price equal to long run average costs.

16. The cost curves associated with monopolists area. always different from those faced by perfectly competitive firms.b. always lower than those faced by competitive firms.c. always higher than those faced by competitive firms.d. always L-shaped rather than U-shaped.e. typically have no relationship to the selling side of the market.

17. If a monopolist had no costs, the best possible price would be where demand isa. infinitely elastic.b. relatively (but not perfectly) elastic.c. unit elastic.d. relatively (but not completely) inelastic.e. completely inelastic.

18. If a monopolist has only fixed costs and chooses that output at which marginal cost equals price, it willa. earn positive economic profits.b. earn zero economic profits.c. incur a loss equal to its variable costs.d. incur a loss equal to its fixed costs.e. cannot tell from the information given.


19. If the monopolist maximizes profits when marginal revenue equals marginal cost equals average cost,economic profits must bea. negative.b. positive.c. zero.d. either (a) or (c).e. cannot tell from the information given.

20. A monopolist will discontinue production ifa. marginal revenue is less than marginal cost.b. marginal revenue is less than average total cost.c. marginal revenue is less than average fixed cost.d. price is less than average total cost.e. price is less than average variable cost.

21. The supply curve for a monopolista. is equal to the marginal cost curve above the average variable cost curve.b. is equal to the marginal cost curve above the average cost curve.c. cannot be uniquely determined.d. is equal to the average variable cost curve above the marginal cost curve.e. is typically perfectly inelastic.

22. If a monopoly is unable to cover its short-run variable costs, it shoulda. shut down.b. raise price.c. lower price.d. increase output.e. reduce output.

23. If the product demand curve and the industry’s cost curves were the same whether the industry operatedunder conditions of perfect competition or monopoly, what could be said about the price and output undermonopoly vis-a-vis the competitive price and output?a. price would be the same; output would be lower under monopoly.b. Output would be the same; price would be higher under monopoly.c. Price would be the same; output would be lower under perfect competition.d. Price would be higher and output would be lower under monopoly.e. Both price and output would be lower under perfect competition.

24. The conditions necessary for a firm to be able to price discriminate includea. segmentable markets.b. differences in price elasticity of demand among the segments.c. the inability of customers to transfer products.d. all of the above.e. none of the above.

25. Price discrimination isa. illegal.b. a technique that can improve the firm’s revenue and profit performance.c. immoral in most cases.d. impossible if consumers have perfect information.e. difficult to administer.


26. If GM sells cars, as shown in the diagram below,a. it will earn positive economic profits.b. it will break even.c. it will suffer a loss equal to its fixed costs.d. it will suffer a loss equal to its variable costs.e. it should discontinue production.

Monopoly – Answers

1. a 2. b 3. c 4. a 5. a 6. b 7. d 8. b 9. d 10. b

11. e 12. b 13. a 14. b 15. d 16. e 17. c 18. d 19. b 20. e

21. c 22. a 23. d 24. d 25. b 26. c

Monopoly – Terms to Know

Monopoly (characteristics of)Consumer surplusPrice discrimination (forms of)A way to measure entry barriersDead-weight lossClassic case against monopolyBarriers to entry (types of)Lump-sum taxSpecific (per unit) taxExcess burden of a taxLerner IndexMonopsony


Imperfect Competition

1. A monopolistically competitive market is characterized by all of the following excepta. easy entry.b. differentiated products.c. excess capacity.d. economic profit in the long run.

2. An oligopolistic industry can be characterized by all of the following excepta. many sellers.b. mutual interdependence.c. economies of scale.d. a homogenous product.

3. The kinked demand curve faced by an oligopolist is based on the assumption thata. rivals will follow a price increase but not a price cut.b. rivals will follow a price decrease but not a price increase.c. rivals will follow both a price decrease and a price increase.d. rivals will ignore both a price increase and a price decrease.

4. A common criticism of the kinked demand curve model is thata. it does not explain the interdependence of the demand curve.b. it does not explain why costs remain rigid in the face of changing demand.c. it does not explain how price was determined.d. none of the above.

5. Which of the following does not characterize monopolistic competition?a. Product differentiation.b. Many producers.c. Absence of advertising.d. Some control over price.e. All of the above characterize monopolistic competition.

6. Product differentiation gives each seller a small amount of monopoly power becausea. little or nothing can be said concerning the social desirability or undesirability of product differentiation.b. there can be little substitution between product groups.c. the products of other firms are not perfect substitutes.d. the presence of excess capacity greatly reduces monopoly power.e. the monopolistic competitor faces a downward sloping demand curve.

7. A monopolistically competitive firm differs from a perfectly competitive firm in that, unlike the perfectlycompetitive firm, ita. faces a downward sloping demand curve.b. can change the characteristics of its product.c. can vary the price of its product.d. tends to operate with excess capacity.e. all of the above.


8. One of the differences between a perfectly competitive firm’s long-run equilibrium and the long-runequilibrium of a monopolistically competitive firm is thata. LMS = MR under perfect competition, but not under monopolistic competition.b. SAC = LAC under perfect competition, but not under monopolistic competition.c. SMC = LMC under perfect competition, but not under monopolistic competition.d. LAC = LMC under perfect competition, but not under monopolistic competition.e. economic profits are zero under perfect competition, but not under monopolistic competition.

9. In the neighborhood of the long-run equilibrium of a monopolistically competitive firm, average cost will bea. decreasing.b. constant.c. increasing.d. at a minimum.e. either (a) or (c).

10. A conclusion that monopolistic competition will be characterized by excess capacitya. means that the firm produces less than the profit-maximizing level of output.b. means that the firm produces more than the profit-maximizing level of output.c. means that the firm does not operate its plant at the minimum point of the long-run average cost curve.d. means that the firm does not operate its plant at the minimum point of the long-run marginal cost curve.e. means that there are too many firms in the industry.

11. The long-run equilibrium price charged by the monopolistic competitor isa. likely to be lower than the perfect competitor’s price.b. likely to equal long-run marginal cost.c. likely to exceed long-run average cost so that all firms are earning positive economic profits.d. likely to exceed the monopolist’s price.e. likely to lie somewhere between the perfect competitor’s price and the monopolist’s price.

12. The firm under monopolistic competition is likely to produce less and set a higher price than under perfectcompetition becausea. the firm faces decreasing returns to scale.b. the firm faces increasing costs.c. the firm must incur selling expenses, including advertising.d. the firm operates where marginal revenue equals marginal cost.e. the firm faces a downward sloping demand curve.

13. In order to constitute an oligopolistic market structurea. there must be a few firms in a given relevant market.b. there must be a few firms selling in a national market.c. there must be more than 20 firms selling in the international market.d. there must be fewer than 15 firms in any given market.

14. The key feature of oligopoly isa. excess capacity.b. high profitability.c. product differentiation.d. interdependence of firms.e. the impersonal nature of the market.


15. The basic behavioral assumption of the kinked demand model isa. each duopolist assumes that his or her rival’s price is invariant with respect to his or her own price.b. each duopolist assumes that his or her rival’s output is invariant with respect to his or her own output.c. duopolists recognize their mutual interdependence and agree to act in unison.d. each duopolist assumes that if he or she lowers the price, his or her rivals will do the same but that if he

or she raises the price, his or her rivals may not follow suit.e. none of the above.

16. The kinked demand curve is used toa. illustrate the difference between pure and differentiated oligopoly.b. explain the stability of oligopolistic prices.c. illustrate the nature of zero-sum games.d. explain the prevalence of oligopoly in American industry.e. illustrate the linear programming problem faced by the firm.

17. The basic behavioral assumption of the Cournot model isa. each duopolist assumes that his or her rival’s price is invariant with respect to his or her own price.b. each duopolist assumes that his or her rivals’ output is invariant with respect to his or her own output.c. duopolists recognize their mutual interdependence and agree to act in unison.d. each duopolist assumes that if he or she lowers the price, his or her rivals will do the same but that if he

or she raises the price, his or her rivals may not follow suit.e. none of the above.

18. A typical Cournot solution is defined asa. one in which the solution is identical to the purely competitive market.b. one in which the solution is identical to the monopoly solution.c. one in which the output is above the monopoly and below the purely competitive result.d. none of the above

19. If the firms in a monopolistically competitive “industry” made economic profit,a. they might earn this profit permanently.b. new firms would enter their “industry” until the profit was eliminated.c. the price elasticity of demand would have to be less than one in absolute value.d. both (b) and (c) would be true.

When answering questions 20-22 refer to the following graph about a monopolistically competitive firm:

20. The firm’s profit-maximizing output level equalsa. 0Ib. 0Hc. 0Gd. none of the above.


21. The firm’s profit in the long runa. equals BCDE.b. equals ABEF.c. equals zero.d. cannot be determined from this graph.

22. When it produces output 0G, the firm’sa. fixed cost equals OAFG.b. variable cost cannot be determined.c. profit equals BCDE.d. total revenue equals BCDE.

23. In long-run equilibrium, a monopolistically competitive firm will finda. marginal cost below average total cost.b. marginal cost equal to minimum average total cost.c. both (a) and (b).d. neither (a) nor (b).

Imperfect Competition – Answers

1. d 2. a 3. b 4. c 5. c 6. c 7. e 8. d 9. a 10. c

11. e 12. e 13. a 14. d 15. d 16. b 17. b 18. c 19. b 20. c

21. c 22. c 23. a

Imperfect Competition– Terms to Know

Monopolistic competition (definition of)Conjectural variationCournot assumptionOligopolyKinked oligopoly demand curveNash equilibriumMinimax strategyZero-sum game


Employment and Pricing of Inputs

1. Suppose a competitive firm produces 100 units of X for a price of $10 a unit. The firm is employing laborand capital such that the marginal physical product of labor and capital is 20 and 5 and the prices paid tolabor and capital are $60 and $40 respectively. How would you characterize the firm?a. The firm is in long-run equilibrium.b. The firm is earning excess profits.c. The firm should expand production.d. The firm should contract production.

2. The competitive firm’s marginal value product curve of labor is the firm’s input demand curve for labor ifa. the price of labor is held constant.b. the prices of other inputs are held constant.c. the labor is used in fixed proportions with other inputs.d. the quantities of other inputs are held constant.

3. A competitive firm will hire inputs up to the point wherea. the price of the input equals its marginal physical product of the input.b. the marginal product of the input reaches a maximum.c. the price of the input equals the value of the marginal product of the input.d. the price of the input equals the price of the output.

4. The competitive firm’s VMP curve for an input slopes downward becausea. the productivity of complementary inputs declines as more are used.b. the law of diminishing marginal returns applies.c. the price of the output falls as output increases.d. none of the above.

5. The demand curve for labor for a monopolist when other inputs are fixed is equal to itsa. marginal value product curve.b. marginal revenue product curve.c. horizontal summation of the firm’s demand curve at different output prices.d. marginal physical product curve.

6. Because a monopoly hires workers up to the point where their marginal revenue product equals the wagerate, the monopoly willa. pay less than the going wage rate.b. pay a wage equal to the value of the marginal product of labor.c. pay less than the value of the marginal product of labor.d. pay workers what they are worth to society.

7. A monopsony isa. the sole supplier of an input.b. the sole supplier of an output.c. the sole buyer of some type of input.d. a unionized industry.


Questions 8-12 are based on the figure below:

8. Given the cost and demand functions assumed in the diagram, the firm would hire

1a. 0Q .

2b. 0Q .

3c. 0Q .

4d. 0Q .

9. The firm would pay a wage of

1a. w .

2b. w .

3c. w .

4d. w .

210. If a union organized labor in the industry and got the firm to pay a wage of w , the firm wuld employ

1a. 0Q .

2b. 0Q .

3c. 0Q .

4d. 0Q .

111. If the firm and union agreed to a wage of w , the firm would employ

1a. 0Q .

2b. 0Q .

3c. 0Q .

4d. 0Q .

12. The firm in the diagram sells its output ina. a competitive market.b. a monopolistic market.c. a monopsonistic marketd. it is impossible to determine.


13. That the perfectly competitive firm will pick a combination of inputs where the ratio of each input’s marginalproduct to its price is equal follows froma. the need to use inputs in fixed proportions.b. the backward bending supply curve of labor.c. cost minimization.d. the attempt to achieve a target rate of return.e. the interaction of demand and supply.

14. The profit-maximizing, perfectly competitive firm will employ each input in an amount such thata. the marginal product of each input is equal.b. the marginal product of each input is zero.c. the input price equals the input’s marginal product divided by the product price.d. the marginal product of the input equals the input price multiplied by the firm’s marginal revenue.e. the input price equals the input’s marginal product multiplied by the product price.

15. Sam’s Furniture Manufacturing Company is producing rocking chairs and wishes to expand. It is currentlyselling these chairs at $45 wholesale. The marginal product of adding another worker is 2 per week. What isthe value of marginal product of adding another worker?a. $22.50b. $45c. $90d. $2e. Cannot be determined from the information provided.

16. If an additional worker costs you $15 per hour, and that person can add 25 units of output to the firm, youshould hire that person as long asa. 25 remains above $15.b. 25/$15 is greater than zero.c. $15/25 is great than zero.d. the value of the marginal product is above $15.e. None of the above.

17. Which of the following would cause the demand curve for an input to shift?a. A change in technology.b. A change in demand for the product being produced.c. An increase in the number of firms in the industry.d. All of the above.

18. When a firm has several variable inputs, the demand for any one of them isa. the value of marginal product curve.b. composed of two points along a shifting VMP curve.c. undefined for a single input.d. the vertical summation of the demand for all inputs.e. None of the above.


Questions 19 and 20 are based on the following data, which are for a pumpkin farmer who can hire pumpkinpickers at $9 per day.

Number of Pickers Value of Pumpkin Output

1 $30

2 48

3 62

4 72

5 80

6 84

7 87

8 89

9 90

10 90

19. The profit-maximizing farmer should hirea. one pumpkin picker because his or her contribution to output is greatest.b. three pumpkin pickers because the fourth costs more than he or she earns.c. four pumpkin pickers because the fifth costs more than he or she earns.d. nine pumpkin pickers because the value of the marginal product of the tenth picker is zero.e. ten pumpkin pickers because costs will equal revenue.

20. The Great Pumpkin, in an attempt to make the pumpkin pickers better off, legislates that pumpkin pickersmust be paid a wage no less than $15 per day. If our profit-maximizing farmer complies, which of thefollowing will be correct?

1. Each of the pumpkin pickers our farmer had previously hired will become better off.2. The value of the average product of labor will rise.3. The quantity of pumpkin output will fall.

a. 1 only.b. 1 and 2 only.c. 2 and 3 only.d. 1 and 3 only.e. 1,2, and 3.

When answering questions 21-24, refer to the graph below about a labor monopsony facing competitive sellers oflabor:


21. In the absence of a labor union, the monopsony woulda. set a wage of 0C.b. set a wage of 0A.c. employ 0E workers.d. do both (a) and (c).

22. If the monopsony and a labor union now negotiated a wage of 0B,a. employment would rise.b. unemployment would appear.c. the entire portion of the marginal-outlay-on-labor curve drawn in the graph would become invalid.d. all of the above would occur.

23. Furthermore, if the monopsony and a labor union negotiated a wage of 0B,a. monopsonistic exploitation would continue but would decrease.b. labor’s marginal value product would be reduced along the line shown.c. unemployment would actually fall.d. all of the above would occur.

24. If the monopsony and a labor union negotiated a wage of 0C,a. employment would rise.b. unemployment would be avoided.c. only the portion to the left of D of the marginal-outlay-on-labor curve would become invalid.d. none of the above would occur.

25. The imposition by government of a minimum wage (above the existing wage level) willa. reduce employment in a competitive labor market.b. reduce, raise, or leave unchanged employment in a monopsonistic labor market.c. result in (a) and (b).d. reduce employment in any labor market.

Employment and Pricing of Inputs – Answers

1. c 2. d 3. c 4. b 5. b 6. c 7. c 8. b 9. c 10. c

11. b 12. d 13. c 14. e 15. c 16. d 17. d 18. b 19. c 20. c

21. c 22. d 23. b 24. d 25. c 21. c

Employment and Pricing of Inputs – Terms to Know

MonopsonyValue of marginal productMarginal revenue productMarginal resource costBilateral monopolyDead-weight loss of monopsony

General Equilibrium – Terms to Know

Consumption efficiencyProduction efficiencyProduct-mix efficiencyProduction-possibilities curve

3070 Practice Questions

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