Micro Final Practice Questions

Concentration ratios measure the a.) percentage of total industry sales accounted for by the largest firms in the industry. b.) geographic location of the largest corporations in each industry. c.) number of firms in an industry. d.) degree to which product price exceeds marginal cost in various industries.

a

Economic cost can best be defined as a.) a payment that must be made to obtain and retain the services of a resource. b.) all costs exclusive of payments to fixed factors of production. c.) any contractual obligation to labor or material suppliers. d.) any contractual obligation that results in a flow of money expenditures from an enterprise to resource suppliers.

a

If a regulatory commission wants to provide a natural monopoly with a fair return, it should establish a price that is equal to a.) average total cost. b.) marginal cost. c.) minimum average fixed cost. d.) marginal revenue.

a

If an increase in the supply of a product in the market results in a decrease in price, but no change in the quantity traded, then: a.) The price elasticity of demand is zero b.) The price elasticity of demand is unitary c.) The price elasticity of supply is zero d.) The price elasticity of supply is infinite

a

In the short-run equilibrium, a monopolist's profits a.) may be positive, negative, or zero. b.) are positive because of the monopolist's market power. c.) are positive if the product's elasticity of demand is less than 1. d.) are positive if the product's elasticity of demand is greater than 1.

a

Most economists contend that a.) noncash gifts are less efficient than cash gifts. b.) noncash and cash gifts are equally efficient. c.) government can assess consumer preferences better than can consumers themselves. d.) noncash gifts are more efficient than cash gifts.

a

Mutual interdependence means that each oligopolistic firm a.) must consider the reactions of its rivals when it determines its price policy. b.) produces a product identical to those of its rivals. c.) produces a product similar but not identical to the products of its rivals. d.) faces a perfectly elastic demand for its product.

a

Natural monopolies result from a.) extensive economies of scale in production. b.) control over an essential natural resource. c.) pricing strategies. d.) patents and copyrights.

a

Oligopolistic firms engage in collusion to a.) earn greater profits. b.) minimize unit costs of production. c.) realize allocative efficiency, that is, the P = MC level of output. d.) increase production.

a

Prospect theory in behavioral economics predicts that as the price of flour increases, bakeries will try to avoid turning off their buyers by a.) reducing the unit sizes of their products. b.) producing more units of their products. c.) passively accepting lower profits. d.) increasing the unit prices of their products.

a

The demand curve in a purely competitive industry is ________, while the demand curve to a single firm in that industry is ________. a.) downsloping; perfectly elastic b.) perfectly elastic; downsloping c.) downsloping; perfectly inelastic d.) perfectly inelastic; perfectly elastic

a

The marginal utility of the last unit of apples consumed is 12, and the marginal utility of the last unit of bananas consumed is 8. What set of prices for apples and bananas, respectively, would be consistent with consumer equilibrium? a.) $6 and $4 b.) $4 and $6 c.) $16 and $9 d.) $8 and $12

a

The theory of consumer behavior assumes that a.) consumers behave rationally, attempting to maximize their satisfaction. b.) consumers have unlimited money incomes. c.) marginal utility is constant. d.) consumers do not know how much marginal utility they obtain from successive units of various products.

a

When ordinarily neat people tend to litter in areas that are covered with graffiti, they illustrate the a.) framing effect. b.) availability heuristic. c.) confirmation bias. d.) planning fallacy.

a

When the price of movie tickets in a certain town was reduced, the movie-theaters' revenues did not change. This suggests that the demand for movie tickets in that town has a price-elasticity coefficient of: a.) 1.0 b.) zero c.) greater than 1 d.) .5

a

Which of the following does not necessarily apply to a pure monopoly? a.) The firm will charge the highest price possible. b.) Entry must be blocked. c.) The product the firm produces must have no close substitutes. d.) The firm must be the sole producer of a product.

a

Which of the following is a feature of a purely competitive market? a.) Products are standardized or homogeneous. b.) There are significant barriers to entry into the industry. c.) The industry's demand curve is perfectly elastic. d.) Price differences exist between firms producing the same product.

a

Which of the following is correct? a.) A purely competitive firm is a "price taker," while a monopolist is a "price maker." b.) Both purely competitive and monopolistic firms are "price takers." c.) Both purely competitive and monopolistic firms are "price makers." d.) A purely competitive firm is a "price maker," while a monopolist is a "price taker."

a

Which of the following is not a basic characteristic of pure competition? a.) considerable nonprice competition b.) a standardized or homogeneous product c.) a large number of buyers and sellers d.) no barriers to the entry or exit of firms

a

Which of the following is not a precondition for price discrimination? a.) The commodity involved must be a durable good. b.) The seller must possess some degree of monopoly power. c.) The seller must be able to segment the market, that is, to distinguish buyers with different elasticities of demand. d.) The good or service cannot be profitably resold by original buyers.

a

Which of the following nations is not a member of the OPEC oil cartel? a.) Norway b.) Venezuela c.) Iraq d.) Iran

a

Which would definitely not be an example of price discrimination? a.) An electric power company charges less for electricity used during off-peak hours, when production costs are lower. b.) A movie theater charges children less than adults for a movie ticket. c.) A doctor charges for services according to the income of individual patients. d.) Universities charge higher tuition for out-of-state residents than for in-state students.

a

Why, according to behavioral economics, would supermarkets place gum, candy, and other small convenience items near the cash registers? a.) Many of these are small items that people will buy on an impulse. b.) Smaller items tend to fall through shopping cart holes, so stores reduce that problem for consumers by having smaller items at the checkout stands. c.) Those are the shelving locations that minimize costs. d.) Stores try to make frequently purchased items quicker and easier for consumers to access.

a

A perfectly elastic demand curve implies that the firm a.) is selling a differentiated (heterogeneous) product. b.) can sell as much output as it chooses at the existing price. c.) must lower price to sell more output. d.) realizes an increase in total revenue that is less than product price when it sells an extra unit.

b

Elasticity of supply will increase when: a.) Producers are given less time to respond to price changes b.) It becomes easier to substitute one factor of production for another in a manufacturing process c.) The number of consumers wanting to purchase a product increases d.) The number of producers selling a product decreases

b

If a firm is a price taker, then the demand curve for the firm's product is a.) unit elastic. b.) perfectly elastic. c.) perfectly inelastic. d.) equal to the total revenue curve.

b

In the short run, a profit-maximizing monopolistically competitive firm sets it price a.) equal to marginal cost. b.) above marginal cost. c.) equal to marginal revenue. d.) below marginal cost

b

In the short run, the individual competitive firm's supply curve is that segment of the a.) marginal cost curve lying between the average total cost and average variable cost curves. b.) marginal cost curve lying above the average variable cost curve. c.) average variable cost curve lying below the marginal cost curve. d.) marginal revenue curve lying below the demand curve.

b

Increases in product prices shift the consumer's a.) indifference curves to the left. b.) budget line to the left. c.) budget line to the right. d.) indifference curves to the right.

b

One inherent factor that tends to destroy collusion among oligopolists is the a.) mutual interdependence. b.) incentive to cheat. c.) product differentiation. d.) leadership of the dominant firm.

b

Other things equal, if the fixed costs of a firm were to increase by $100,000 per year, which of the following would happen? a.) Average fixed costs and average variable costs would rise. b.) Average fixed costs and average total costs would rise. c.) Average fixed costs would rise, but marginal costs would fall. d.) Marginal costs and average variable costs would both rise.

b

Suppose the only three existing manufacturers of video game players signed a written contract by which each agreed to charge the same price for products and to distribute their products only in the geographical area assigned them in the contract. This best describes a.) price leadership. b.) a cartel. c.) cost-plus pricing. d.) multiproduct pricing.

b

The demand curve faced by a purely competitive firm a.) has unitary elasticity. b.) is the same as its marginal revenue curve. c.) yields constant total revenues even when price changes. d.) is identical to the market demand curve.

b

The oft heard "I knew it all along" comment that many people make illustrates the a.) self-serving bias. b.) hindsight bias. c.) confirmation bias. d.) framing effect.

b

The price of elasticity of demand for a textbook is estimated to be 1 no matter what the price or quantity demanded. In this case: a.) a 10 percent increase in price will result in a 10 percent increase in quantity demanded b.) a 10 percent increase in price will result in a 10 percent decrease in the quantity demanded c.) a 10 percent increase in price will result in a 10 percent decrease in total revenues d.) a 10 percent increase in price will result in a 10 percent increase in total revenues

b

The product in an oligopolistic market a.) is assumed to be homogeneous. b.) may be homogeneous or differentiated. c.) has very many close substitutes. d.) is always differentiated from one firm to another.

b

The term oligopoly indicates a.) many producers of a differentiated product. b.) a few firms producing either a differentiated or a homogeneous product. c.) a one-firm industry. d.) an industry whose four-firm concentration ratio is low.

b

What is the most likely effect of the development of DVDs, rental movies, and online movie streaming on the movie theater industry? a.) Decreased costs of producing movies b.) Increased price elasticity of demand for movie theater tickets c.) Movie theater tickets become an inferior good d.) Increased demand for movie theater tickets

b

Which of the following best explains the difference between neoclassical economics and behavioral economics? a.) There is no real difference; behavioral economics just studies more intently how the rational decision-making process works. b.) Neoclassical economics assumes that people are rational in their decision making, while behavioral economics believes people make systematic errors. c.) Neoclassical economics no longer offers valid explanations for economic outcomes, while behavioral economics does. d.) Neoclassical economics believes that government should play a minimal role in the economy, while behavioral economics calls for a more active role for government.

b

Which of the following characteristics provide a monopolistically competitive firm some monopoly power? a.) significant barriers to entry into the industry b.) product differentiation c.) price discrimination d.) a low concentration ratio in the industry

b

Which of the following is most likely to be a variable cost? a.) interest on business loans b.) fuel and power payments c.) real estate taxes d.) rental payments on IBM equipment

b

Which of the following represents a long-run adjustment? a.) A farmer uses an extra dose of fertilizer on his corn crop. b.) Unable to meet foreign competition, a U.S. watch manufacturer sells one of its branch plants. c.) A supermarket hires four additional clerks. d.) A steel manufacturer cuts back on its purchases of coke and iron ore.

b

Which of the following statements is correct? a.) Monopolistically competitive firms earn zero economic profits in both the short run and the long run. b.) In the long run, purely competitive firms and monopolistically competitive firms earn zero economic profits, while pure monopolies may or may not earn economic profits. c.) Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn zero economic profits in the long run. d.) Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn positive economic profits in the long run.

b

Why do cereals marketers most prefer to have their brand occupy the shelf-space a foot or two below a typical adult's eye-level? a.) Because it's a lot easier to restock those shelf-spaces. b.) Because they are targeting the children who go shopping with adults. c.) Because they know that adults typically look down when they go by the store shelves. d.) Because that shelf-space is the lowest priced space they could occupy.

b

A 3 percent increase in the price of tea causes a 6 percent increase in the demand for coffee. The cross elasticity of demand for coffee with respect to the price of tea is: a.) -0.5 b.) +0.5 c.) +2.0 d.) -2.0

c

A budget line shows the a.) alternative combinations of two goods that will yield the same level of total utility to a consumer. b.) ratio of money income to product price. c.) alternative combinations of two goods that a consumer can purchase with a given money income. d.) quantities of a particular good that a consumer will buy at various prices.

c

A monopolistically competitive firm has a a.) perfectly elastic demand curve. b.) perfectly inelastic demand curve. c.) highly elastic demand curve. d.) highly inelastic demand curve.

c

Accounting profits are typically a.) greater than economic profits because the former do not take explicit costs into account. b.) equal to economic profits because accounting costs include all opportunity costs. c.) greater than economic profits because the former do not take implicit costs into account. d.) smaller than economic profits because the former do not take implicit costs into account.

c

At long-run equilibrium in monopolistic competition, there is a.) productive efficiency but not allocative efficiency. b.) both allocative and productive efficiency. c.) neither allocative nor productive efficiency. d.) allocative efficiency but not productive efficiency.

c

Barriers to entry a.) exist in economic theory but not in the real world. b.) usually result in pure competition. c.) can result from government regulation. d.) are typically the result of wrongdoing on the part of a firm.

c

Compared to a purely competitive firm in long-run equilibrium, the monopolistic competitor has a a.) higher price and higher output. b.) lower price and lower output. c.) higher price and lower output. d.) price and output that may be higher or lower.

c

Dequam likes product variety, while Natasha is most concerned about paying the lowest price possible for a good. This suggests that a.) Dequam cares more about allocative efficiency, while Natasha cares more about productive efficiency. b.) Dequam prefers purely competitive industries, while Natasha prefers monopolistically competitive industries. c.) Dequam prefers monopolistically competitive industries, while Natasha prefers purely competitive industries. d.) Dequam cares more about productive efficiency, while Natasha cares more about allocative efficiency.

c

Diminishing marginal utility explains why a.) supply curves are upsloping. b.) the income effect exceeds the substitution effect. c.) demand curves are downsloping. d.) the substitution effect exceeds the income effect.

c

Firms in an industry will not earn long-run economic profits if a.) the number of firms in the industry is fixed. b.) production costs for a given level of output are minimized. c.) there is free entry and exit of firms in the industry. d.) fixed costs are zero.

c

Fixed cost is a.) the cost of producing one more unit of capital, for example, machinery. b.) average cost multiplied by the firm's output. c.) any cost that does not change when the firm changes its output. d.) usually zero in the short run.

c

If a college admits only a fixed number of applicants every year, then the school's supply curve for admissions is: a.) Quite flat b.) Downward-sloping c.) Perfectly inelastic d.) Perfectly elastic

c

If a technological advance reduces the amount of variable resources needed to produce any level of output, then the a.) AVC curve will shift upward. b.) ATC curve will shift upward. c.) MC curve will shift downward. d.) AFC curve will shift downward.

c

If demand for farm crops is inelastic, a good harvest will cause farm revenues to: a.) Remain unchanged, because the increase in quantity that can be sold will be matched by an equal decrease in price b.) Increase because of a downward movement along the supply curve, encouraging an increase in demand c.) Decrease because of a percentage fall in price greater than the percentage increase in quantity sold d.) Increase because of the increase in the quantity that farmers can sell

c

OPEC provides an example of a.) a monopolistically competitive industry. b.) noncollusive oligopoly. c.) an international cartel. d.) an unwritten, informal understanding.

c

Oligopolistic industries are characterized by a.) a large number of firms and low entry barriers. b.) a few dominant firms and no barriers to entry. c.) a few dominant firms and substantial entry barriers. d.) a few dominant firms and low entry barriers.

c

The automobile, household appliance, and automobile tire industries are all illustrations of a.) monopolistic competition. b.) homogeneous oligopoly. c.) differentiated oligopoly. d.) pure monopoly.

c

The cross elasticity of demand between Quaker State motor oil and Texaco motor oil is likely to be: a.) A large negative number b.) A small negative number c.) A positive number d.) Zero

c

The profit-maximizing output of a pure monopoly is not socially optimal, because in equilibrium a.) marginal revenue equals marginal cost. b.) price equals minimum average total cost. c.) price exceeds marginal cost. d.) marginal cost exceeds price.

c

The short run is characterized by a.) increasing but not diminishing returns. b.) zero fixed costs. c.) fixed plant capacity. d.) plenty of time for firms to either enter or leave the industry.

c

The study of how people (or firms) behave in strategic situations is called a.) normative economics. b.) cost-benefit analysis. c.) game theory. d.) recursive analysis.

c

Which of the following constitutes an implicit cost to the Johnston Manufacturing Company? a.) rent paid for the use of equipment owned by the Schultz Machinery Company b.) payments of wages to its office workers c.) use of savings to pay operating expenses instead of generating interest income d.) economic profits resulting from current production

c

Which of the following factors will make the demand for a product relatively elastic? a.) There are few substitutes b.) Purchases of the good require a small portion of consumers' budgets c.) The time interval considered is long d.) The good is considered a necessity

c

A consumer who has a limited budget will maximize utility or satisfaction when the a.) marginal utility of each product purchased is the same. b.) total utility derived from each product purchased is the same. c.) price of each product purchased is the same. d.) ratios of the marginal utility of each product purchased divided by its price are equal.

d

A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from a.) mutual interdependence in decision making. b.) the likelihood of collusion. c.) high entry barriers. d.) product differentiation.

d

According to behavioral economics, placement of goods in retail stores is often designed to accomplish which of the following? a.) minimize shelving costs b.) maximize the amount of product the store can display c.) maximize convenience for customers d.) maximize impulse buying by consumers

d

According to prospect theory, firms are more likely to shrink packages than raise prices because a.) consumers associate smaller packages with higher quality luxury goods. b.) consumers are generally trying to downsize their purchases and lead simpler lives. c.) they don't understand that consumers recognize price increases easily, regardless of what form they take. d.) consumers feel the loss of a price increase more than they feel the loss of buying a smaller package for their money.

d

According to prospect theory, what strategy will firms typically employ with regard to pricing and packaging of their goods, when faced with rising production costs? a.) Firms will keep package sizes the same but lower prices and attempt to cover the higher costs with greater revenue. b.) Firms will increase both package sizes and prices but will increase prices more to communicate to consumers that the product has greater value. c.) According to prospect theory, the choice of strategy doesn't matter, as consumers are generally able to recognize price increases regardless of what form they take. d.) Firms will reduce package sizes but keep prices the same, thus increasing the per unit price of the good.

d

Assume a pure monopolist is currently operating at a price-quantity combination on the inelastic segment of its demand curve. If the monopolist is seeking maximum profits, it should a.) charge a lower price. b.) retain its current price-quantity combination. c.) increase both price and quantity sold. d.) charge a higher price.

d

Dorothy likes to invest in gold as part of her overall financial investment portfolio, as her gut tells her it will increase dramatically in value. Her favorite and generally only source of investment advice is Wizard's Gold Hour on the OZ cable channel. As a result of this advice, Dorothy's portfolio mix is suboptimal, as it is too heavily weighted in gold. Behavioral economists would say that Dorothy suffers from a.) framing effects. b.) self-serving bias. c.) planning fallacy. d.) confirmation bias.

d

If the demand curve faced by an individual firm is downward-sloping, the firm cannot be a.) an oligopolistic firm. b.) a monopoly firm. c.) a monopolistically competitive firm. d.) a purely competitive firm.

d

If the price elasticity of demand for a product is equal to 0.5, then a 10 percent decrease in price will increase quantity demanded by: a.) 0.5 percent b.) 0.05 percent c.) 20 percent d.) 5 percent

d

If the price elasticity of demand for orange juice is 0.8, then a reduction in the price of orange juice will cause buyers to buy: a.) Fewer bottles of orange juice, but their total spending on orange juice will increase b.) More bottles of orange juice, and their total spending on orange juice will increase c.) Fewer bottles of orange juice, and their total spending on orange juice will decrease d.) More bottles of orange juice, but their total spending on orange juice will decrease

d

Implicit and explicit costs are different in that a.) the latter refer to nonexpenditure costs and the former to monetary payments. b.) implicit costs are opportunity costs; explicit costs are not. c.) explicit costs are opportunity costs; implicit costs are not. d.) the former refer to nonexpenditure costs and the latter to monetary payments.

d

Marginal cost is the a.) change in average total cost that results from producing one more unit of output. b.) rate of change in total fixed cost that results from producing one more unit of output. c.) change in average variable cost that results from producing one more unit of output. d.) change in total cost that results from producing one more unit of output.

d

Mutual interdependence means that each firm in an oligopoly a.) depends on the other firms for its inputs. b.) faces a perfectly inelastic demand for its product. c.) depends on the other firms for its markets. d.) considers the reactions of its rivals when it determines its pricing policy.

d

Salary smoothing, automatic payroll deductions, and early withdrawal penalties are all examples of a.) policies that do not fundamentally alter decisions because they do not change the benefits or costs of an action. b.) hardwired heuristics. c.) mechanisms imposed by companies to extract more from their workers and customers. d.) precommitments.

d

The MR = MC rule a.) does not apply to pure monopoly, because price exceeds marginal revenue. b.) applies only to pure monopoly. c.) applies only to pure competition. d.) applies both to pure monopoly and pure competition.

d

The dictator game a.) demonstrates nothing definitive about fairness, as concerns about the other player's perceptions will influence the dictator's choices. b.) regularly results in the dictator taking all of the money for him/herself, as economic theory would predict. c.) reveals nothing important about economic behavior because the money used is hypothetical. d.) demonstrates that people care about fairness and will sacrifice financially for others.

d

The price-elasticity of demand is always negative because of: a.) Scarcity b.) Percent-changes being used in the formula c.) The midpoint formula d.) The law of demand

d

The utility of a good or service a.) rarely varies from person to person. b.) is easy to quantify. c.) is synonymous with usefulness. d.) is the satisfaction or pleasure one gets from consuming it.

d

When total product is increasing at a decreasing rate, marginal product is a.) constant. b.) negative. c.) positive and increasing. d.) positive and decreasing.

d

Which of the following assumptions about human behavior is most likely to be accepted by behavioral economists? a.) People eagerly and accurately calculate the benefits and costs of their decisions. b.) People are almost entirely self-interested in their behavior. c.) People plan out decisions well and possess lots of willpower. d.) People have preferences that are unstable and vary by context.

d

Which of the following is most likely to be a fixed cost? a.) wages for unskilled labor b.) shipping charges c.) expenditures for raw materials d.) property insurance premiums

d

Which of the following supermarket strategies to increase sales would be most consistent with a behavioral economics (versus neoclassical economics) approach? a.) providing discounts for buying in bulk b.) offering price matching with other stores c.) distributing online coupons d.) positioning frequently purchased items at the back of the store

d

Which of the following would represent a systematic error? a.) Ellen paid good money for a used car that is in constant need of repair. b.) Eddie regularly overspends. Friends and family bail him out, however, so he always ends up with what he wants. c.) Clark makes regular math errors at work, sometimes coming out with figures too high, other times too low. d.) Sparky determines that he has to reduce donut consumption to lose weight but always ends up eating the ones provided in the break room at work.

d