Econ Exam 2

Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity of demand for the dolls over this range is a) 2.5. b) 0.4. c) 0.5. d) 5. e) inelastic.

a) 2.5.

Assume that supply increases greatly and demand increases slightly. Which of the following will happen? a) Equilibrium price will fall and equilibrium quantity will rise. b) Equilibrium price will rise and equilibrium quantity will fall. c) Equilibrium price will rise and equilibrium quantity will rise. d) Equilibrium price will fall and equilibrium quantity will fall. e) Neither equilibrium price nor equilibrium quantity will change.

a) Equilibrium price will fall and equilibrium quantity will rise.

Suppose demand decreases and supply decreases. Which of the following will happen? a) Equilibrium price will rise, fall, or stay the same while equilibrium quantity will decrease. b) Equilibrium price will rise, fall, or stay the same while c) equilibrium quantity will increase. c) Equilibrium quantity will rise, fall, or stay the same and equilibrium price will increase. d) Equilibrium quantity will rise, fall, or stay the same while equilibrium price will decrease. e) The change in equilibrium price and quantity cannot be determined.

a) Equilibrium price will rise, fall, or stay the same while equilibrium quantity will decrease.

In order for the law of diminishing returns to be present, we must have a) at least one factor of production to be fixed. b) output decreasing as more laborers are hired. c) the price of labor increasing as more workers are hired. d) simultaneous changes in labor and capital. e) double the output when labor input is doubled.

a) at least one factor of production to be fixed.

Market prices generally promote social cooperation because they a) clarify the options available to people and encourage individuals to help others in exchange for income. b) encourage government officials to levy taxes to provide people with the necessities of life. c) eliminate scarcity by allowing prices to rise. d) reward only altruistic actions, whereby, people seek to help others without the expectation of personal gain.

a) clarify the options available to people and encourage individuals to help others in exchange for income.

If a Pizza Hut restaurant near campus reduces its pizza prices by 15 percent, and as a result, its total revenue from pizza sales increases, this indicates that the price elasticity of demand was a) elastic. b) of unitary elasticity. c) inelastic. d) equal to 0.15.

a) elastic.

Suppose Microsoft announces it is cutting the prices of some of its software titles (mainly games) by 25 percent. Assuming that Microsoft is seeking to increase revenues, it must believe that the elasticity of demand for these products is a) elastic. b) inelastic. c) of unitary elasticity. d) perfectly inelastic.

a) elastic.

Demand will be more inelastic when a) the time the consumer has to adjust to price changes is short. b) the price of the good is high. c) the number of good substitutes is large. d) the consumption of the good is not very essential.

a) the time the consumer has to adjust to price changes is short.

Other things equal, the demand for a good tends to be more inelastic when a) there are fewer available substitutes. b) a longer time period is considered. c) the good is considered a luxury good. d) the market for the good is more narrowly defined.

a) there are fewer available substitutes.

Use the table below to answer the following question. What is the marginal cost of producing the third unit of output? a) $20 b) $44 c) $70 d) This cannot be determined from the data.

b) $44

Which of the following provides the best explanation for diseconomies of scale? a) The firm is too small to take advantage of specialization. b) Large management structures may be bureaucratic and inefficient. c) If there are too many employees, the work place becomes crowded and people become less productive. d) Average fixed costs are rising.

b) Large management structures may be bureaucratic and inefficient.

If the government levies a $1 excise tax on each unit of a good sold, what will happen to the producer's cost curve? a) The average total cost and marginal cost curves will shift downward by the amount of the tax. b) The average total cost and marginal cost curves will shift upward by the amount of the tax. c) The marginal cost curve will shift upward by the amount of the tax; the average total cost curve will remain unchanged. d) Both the marginal cost and average total costs will remain the same since taxes are not a cost of production.

b) The average total cost and marginal cost curves will shift upward by the amount of the tax.

If the board of regents of a major state university system plans to raise tuition in order to increase revenues, the regents must believe student demand is a) elastic. b) inelastic. c) of unitary elasticity. d) perfectly elastic.

b) inelastic.

The law of diminishing marginal returns explains the general shape of the firm's a) long-run cost curves. b) short-run cost curves. c) both short-run and long-run cost curves. d) The law of diminishing returns has nothing to do with cost curves.

b) short-run cost curves.

A 20 percent increase in the price of flour reduces flour consumption by about 10 percent. Such a price increase causes households to a) spend less on flour. b) spend more on flour. c) spend the same amount on flour as before. d) consume more goods like salt and baking powder, which are flour complements.

b) spend more on flour.

As output is expanded, if marginal cost (MC) is less than average total cost (ATC), a) ATC must be at its minimum. b) ATC must be at its maximum. c) ATC must be decreasing. d) the firm must be earning economic profit.

c) ATC must be decreasing.

Which of the following is an implication of the law of diminishing returns? a) Total output will decline as more workers are hired. b) In the long run, average total cost will eventually decline as output is expanded. c) In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost. d) A doubling of all inputs will lead to more than a doubling of output.

c) In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost.

Which of the following must be true if average variable costs are decreasing? a) Average fixed cost exceeds average total cost. b) Marginal cost exceeds average variable cost. c) Marginal cost is less than average variable cost. d) Marginal cost is less than average total cost.

c) Marginal cost is less than average variable cost.

If there is an increase in both the supply and demand for a good, which of the following will definitely occur? a) The price of the good will increase. b) The price of the good will decrease. c) The equilibrium quantity will increase. d) The equilibrium quantity will decrease.

c) The equilibrium quantity will increase.

When an economist says a firm is earning zero economic profit, this implies that the firm a) will be forced out of business in the near future unless market conditions change. b) is earning a zero rate of return on its assets. c) is earning as high a rate of return now as could be earned in other industries. d) has an accounting profit of zero.

c) is earning as high a rate of return now as could be earned in other industries.

Assume that supply decreases slightly and demand decreases greatly. Which of the following will happen? a) Equilibrium price will fall and equilibrium quantity will rise. b) Equilibrium price will rise and equilibrium quantity will fall. c) Equilibrium price will rise and equilibrium quantity will rise. d) Equilibrium price will fall and equilibrium quantity will fall. e) Neither equilibrium price nor equilibrium quantity will change.

d) Equilibrium price will fall and equilibrium quantity will fall.

Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations? a) There is no such thing as a free lunch. b) People buy more when prices are low than when prices are high. c) No matter how much people earn, they tend to spend more than they earn. d) Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.

d) Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.

If a firm produces nothing, which of the following costs will be zero? a) Total cost. b) Fixed cost. c) Opportunity cost. d) Variable cost.

d) Variable cost.

Which one of the following decisions most clearly reflects a lack of understanding of the concept of sunk costs? a) You pay to have your car towed back to the repair shop because it was not fixed properly the first time. b) You decide to get a master's degree because you cannot find a job in the field in which you majored. c) You decide to purchase a piece of machinery for your business that will eliminate three employees' positions. d) You study eight hours for a final exam even though there is no way now that you can pass the course.

d) You study eight hours for a final exam even though there is no way now that you can pass the course.

The difference between normal and inferior goods is that a) an increase in price will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward. b) if the price of a normal good increases, individuals who buy it are poorer; for inferior goods, the opposite is true. c) an inferior good is something that will not be demanded until quantities of the normal good have been exhausted. d) an increase in income will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward.

d) an increase in income will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward.

The price of an airline ticket rises as the amount of time between purchase and flight departure gets smaller. The airlines base the policy on the assumption that a) consumers are not aware of airline prices. b) consumer demand is unrelated to prices. c) consumer demand becomes more elastic as departure time approaches. d) consumer demand becomes more inelastic as departure time approaches.

d) consumer demand becomes more inelastic as departure time approaches.

If a firm doubles all of its inputs and its output triples, it is said to be experiencing a) diminishing marginal returns. b) increasing marginal returns. c) diseconomies of scale. d) economies of scale. e) constant average costs.

d) economies of scale.

If a 10 percent increase in income induced a group of consumers to reduce their yearly purchases of eggs by 5 percent, for these consumers, a) the income elasticity of eggs equals approximately 1.05. b) the income elasticity of eggs is 0.5. c) eggs are a luxury good. d) eggs are an inferior good.

d) eggs are an inferior good.

Price is important in a market economy because it a) eliminates imbalances between supply and demand. b) serves as the rationing mechanism for the limited supplies of goods and services. c) coordinates the choices of consumers and producers and brings them into harmony. d) is all of the above.

d) is all of the above.

Which of the following describes a situation in which demand must be elastic? a) The price of dish soap rises by $0.10, and quantity of dish soap demanded falls by 50 units. b) The price of dish soap rises by $0.10, and total revenue rises. c) A 20 percent increase in the price of dish soap leads to a 20 percent decrease in the quantity of dish soap demanded. d) Total revenue does not change when the price of dish soap rises. e) Total revenue decreases when the price of dish soap rises.

e) Total revenue decreases when the price of dish soap rises.