Microeconomics Test 2

Assume the price elasticity of demand for U.S. Frisbee Co. Frisbees is 0.5. If the company increases the price of each Frisbee from $12 to $16, the number of Frisbees sold will: a. Decrease by 14.3 percent. b. Decrease by 33.3 percent. c. Increase by 20.0 percent. d. Increase by 7.0 percent.

A

Carla buys one soft drink a day regardless of the price. Which of the following is correct with respect of Carla? A) price elasticity of demand for soft drinks is 0 B) price elasticity of demand for soft drinks is 1 C) cross-price elasticity of demand for soft drinks is 1 D) total expenditure will decrease if the price of soft drinks increases E) there will be an increase in total revenue if the price of soft drinks decreases

A

Economic costs and economic profits are: A) Usually greater and smaller, respectively, than their accounting counterparts. B) Usually smaller and greater, respectively, than their accounting counterparts. C) Usually both smaller than their accounting counterparts. D) Usually both larger than their accounting counterparts.

A

Economic profit equals zero where: A) P = minimum ATC. B) P = AVC. C) P = AFC. D) P = minimum ATC x Q.

A

If a firm can change market prices by altering its output, then: A) It has market power. B) It is a price taker. C) It faces a horizontal demand curve. D) It is a competitive firm.

A

In the long run, A) all of a firms resources are variable B) new technology cannot be introduced C) at least one of the firm=s resources is fixed D) most of the firm=s resources cannot be varied E) none of the firm=s resources is variable

A

Perfect competition and monopolistic competition are best distinguished by: A) The degree of product differentiation. B) The long-run economic profits that are expected. C) The number of firms in the market. D) The ease of entry and exit.

A

Technical efficiency: A) Requires getting maximum output from the resources used in production. B) Requires covering the opportunity costs of the resources used in production. C) Requires production beyond the production function. D) All of the above

A

The best measure of the economic cost of doing your homework is: A) The best opportunity you give up when you do your homework. B) The amount you would have to pay to get someone else to do it. C) The accounting cost plus the explicit cost of doing the homework. D) The tuition paid for your schooling.

A

The law of demand implies that, ceteris paribus: A) The quantity demanded increases at lower prices. B) A consumer will purchase more of a good at higher prices than at lower prices. C) Price and quantity supplied are directly related. D) The responsiveness of consumer demand to a change in the price of a good is measured by the price elasticity of demand.

A

The slope of the production function with respect to an input is: A) The marginal physical product of the input. B) The average product of the input. C) The unit cost of the input. D) The input price.

A

When a monopolistically competitive firm advertises, it is attempting to increase: A) The demand and decrease the price elasticity of demand for its product. B) The demand and increase the price elasticity of demand for its product. C) Long-run profits. D) Market demand.

A

*GRAPH* The marginal physical product of the third unit of labor in Figure 6.1 above is: a. 40.0 units per day. b. 12.0 units per day. c. 13.3 units per day. d. 4.0 units per day

B

A production function: A) Shows the cost of producing any level of output. B) Is a technological relationship between factors of production and output. C) Expresses the least-cost method of producing a given level of output. D) Expresses our ability to produce various combinations of goods, using all of our resources

B

Decisions which treat at least one factor of production as fixed are referred to as: A) Long-run decisions. B) Short-run decisions. C) Efficiency decisions. D) Investment decisions.

B

Explicit costs: A) Include only payments to entrepreneurship. B) Are the sum of actual monetary payments made for resources used to produce a good. C) Include the market value of all resources used to produce a good. D) Are the total opportunity costs of resources used to produce a good.

B

If marginal utility is negative: A) Total utility increases with additional consumption of a good. B) Total utility decreases with additional consumption of a good. C) The good or service being consumed is an inferior good. D) Total utility is at a minimum

B

In making a production decision, an entrepreneur: A) Decides whether to enter or exit the market. B) Decides what level of output will maximize profits. C) Determines plant and equipment. D) Can change both fixed and variable inputs.

B

In which of the following cases would a firm enter a market? A) P > short-run ATC. B) P > long-run ATC. C) P < short-run ATC. D) P < long-run ATC.

B

Marginal cost is equal to: A) Total cost - output. B) Change in total cost - change in total output. C) Change in total cost - change in input. D) Total cost - input cost

B

The additional pleasure or satisfaction from a good declines as more of it is consumed in a given period. This is the definition of: A) The law of demand. B) The law of diminishing marginal utility. C) The law of diminishing total utility. D) The total revenue rule.

B

The exit of firms from a market, ceteris paribus: A) Shifts the market supply curve to the right. B) Reduces the economic losses of remaining firms in a market. C) Increases the equilibrium output in the market. D) All of the above.

B

The market value of all resources used in producing a good or service is expressed by: A) Implicit costs. B) Total costs. C) Fixed costs. D) Variable costs.

B

The only costs which do not change when output changes in the short run are: A) Average variable costs. B) Fixed costs. C) Average fixed costs. D) Variable costs.

B

The total revenue effect of a movement along a demand curve can best be predicted using: A) The law of diminishing marginal utility. B) The price elasticity of demand. C) The utility-maximizing rule. D) The law of demand.

B

To maximize profits, a competitive firm will seek to expand output until: A) Total revenue equals total cost. B) Price equals marginal cost. C) The elasticity of demand equals 1. D) All of the above.

B

Which market structure is characterized by many firms producing close substitutes which are differentiated in the eyes of the consumer? A) Perfect competition. B) Monopolistic competition. C) Oligopoly. D) Monopoly.

B

Which of the following characterizes monopolistic competition? A) Price leadership. B) Product differentiation. C) Price discrimination. D) Economies of scale

B

Which of the following determinants of demand is most directly an indication of a consumer's utility for a good? A) Income. B) Tastes. C) Expectations of future prices. D) Other goods (availability and prices).

B

Which of the following is equivalent to ATC? A) FC + VC. B) (FC + VC) / Q. C) Change in total cost divided by change in output. D) None of the above.

B

Which of the following would cause a firm's production function to shift upward? A) An increase in production by the firm. B) Hiring more workers. C) Increased training for the firm's workers. D) An increase in factor costs

B

With greater consumption, total utility always: A) Falls. B) Increases as long as marginal utility is positive. C) Increases only if marginal utility increases. D) Increases.

B

A movement along a given demand curve between two prices refers to: A) The price elasticity of demand. B) A change in demand. C) A change in quantity demanded. D) The law of diminishing marginal utility.

C

An essential characteristic of a perfectly competitive firm is that: A) It is a price maker. B) It is a price taker. C) The market-demand curve is perfectly elastic. D) Each firm's demand curve is perfectly inelastic.

C

Economists assume the principal motivation of producers is: A) Psychological gratification. B) Social status. C) Profit. D) Their preference for being "their own person."

C

Firms in a monopolistically competitive market will: A) Produce efficiently. B) Make economic profits in the long run. C) Use the profit-maximizing rule MC = MR. D) All of the above.

C

If more firms enter a monopolistically competitive market, we would expect: A) The demand curves facing existing firms to shift to the left and become more price inelastic. B) The demand curves facing existing firms to shift to the left and no change in price elasticity. C) The demand curves facing existing firms to shift to the left and become more price elastic. D) The demand curves facing existing firms to shift to the right and no change in price elasticity.

C

If the equilibrium price in a perfectly competitive market for strawberries is $1.50 per pound, then an individual firm in this market could: A) Not sell additional strawberries unless the firm lowers its price. B) Not sell additional strawberries at any price because the market is at equilibrium. C) Sell an additional pound at $1.50. D) Only sell more by increasing its advertising budget.

C

In a perfectly competitive market economy, business failures can benefit society by causing: A) A reallocation of resources to better uses. B) An increase in market power for the remaining firms. C) A decline in market prices as remaining firms attempt to increase sales and stay in business. D) An increase in the number of jobs for bankruptcy lawyers and accountants.

C

In which of the following types of markets does a single firm have the most market power: A) Perfect competition. B) Monopolistic competition. C) Oligopoly. D) Monopoly.

C

Monopolistic competition is a market structure in which: A) Many interdependent firms sell a homogeneous product. B) A few firms produce a particular type of product. C) Many firms produce a particular type of product, but each maintains some independent control over its own price. D) A few firms produce all of the market supply of a good.

C

Other things being equal, as more firms enter a market, the market supply curve: A) Becomes more inelastic. B) Shifts to the left. C) Shifts to the right. D) Intersects the demand curve at a higher price.

C

Profit is: A) TR - FC. B) Q x (P - AVC). C) (P x Q) - TC. D) All of the above.

C

Rising marginal costs result from: A) Rising prices of fixed inputs. B) Rising prices of variable inputs. C) Falling marginal physical product. D) All of the above.

C

The change in total cost that results from a 1-unit increase in production is: A) Marginal profit. B) Total revenue. C) Marginal cost. D) Marginal revenue

C

The change in total output associated with one additional unit of input is: A) The opportunity cost of the output. B) The average productivity. C) The marginal physical product. D) The marginal cost

C

The law of diminishing returns states that beyond some point, ceteris paribus: A) The returns on stocks and bonds diminish with higher security prices. B) The addition to total utility diminishes as more units of a good are consumed. C) The marginal physical product of a factor of production diminishes as more of that factor is used. D) The output of any good increases as more of a variable input is used.

C

The market demand curve in a perfectly competitive market is downward sloping: A) Because of the law of diminishing returns. B) Because the firms have market power. C) Because of the law of demand. D) All of the above.

C

The price elasticity of demand is calculated using percentage changes in order to: A) Avoid mistaking elasticity with slope. B) Make elasticity a percentage figure. C) Avoid problems associated with units of measurement. D) Find a constant elasticity along each demand curve

C

Total utility will be maximized: A) When price is less than marginal utility. B) When price is equal to marginal utility. C) When marginal utility is zero. D) When marginal utility is maximized.

C

When the demand for a good increases: A) Consumers are willing and able to pay only lower prices for any given quantity of the good. B) Consumers desire to have more of the good. C) Consumers are willing and able to purchase greater quantities of the good at any given price. D) There is movement along the demand curve.

C

When total utility is at a maximum, marginal utility is A) increasing B) at a minimum C) equals to zero D) decreasing E) at a maximum

C

"Price of new autos (dollars per auto) Number of new autos (millions per year)" Which of the following elasticities can be computed using the data in Table 5.4 above? a. The price elasticity of demand. b. The income elasticity of demand. c. The cross-price elasticity of demand. d. The quantity elasticity of demand.

C or A

A consumer maximized his or her satisfaction from a given amount of income when A) Mua=MUb=...+MUn B) Pa=Pb C) Pa-MUa=Pa-MUb D) Mua/Pa=MUb/Pb=...MUn/Pn E) Pa+MUa=Pb+MUb=...Pn+MUn

D

A perfectly competitive firm should expand output when: A) P > ATC. B) P < ATC. C) P < MC. D) P > MC.

D

Greater labor productivity means: A) Lower output per labor hour. B) Higher labor cost per unit of output. C) Lower output per worker. D) Higher output per worker

D

If economic profits are earned in a competitive market, then in the long run: A) Additional firms will enter the market. B) The market supply curve will shift to the right. C) Equilibrium price will fall as more firms enter. D) All of the above.

D

In which of the following cases would a firm exit from a market? A) P > short-run ATC. B) P > long-run ATC. C) P < short-run ATC. D) P < long-run ATC

D

Investment decisions are made on the basis of the relationship of price to: A) Short-run average total cost. B) Long-run fixed cost. C) Short-run marginal cost. D) Long-run average total cost.

D

Marginal utility for a good is computed as: A) Total utility divided by quantity. B) Quantity divided by total utility. C) The change in quantity divided by total utility. D) The change in total utility divided by the change in quantity.

D

Monopolistically competitive industries are characterized by: A) Modest concentration ratios. B) Low entry barriers. C) Independent production decisions. D) All of the above.

D

President Bush once claimed, " I wouldn't eat broccoli if you paid me". We can assume that for him the marginal utility of broccoli is A) positive B) positive, but decreasing C) zero D) negative E) constant, but positive

D

The amount of satisfaction obtained from consumption of an additional unit of a good or service is: A) Never negative. B) Total utility. C) A function of supply. D) Marginal utility.

D

The entry of firms into a market: A) Reduces the equilibrium price. B) Reduces the profits of existing firms in the market. C) Shifts the market supply curve to the right. D) All of the above.

D

The equilibrium price in a competitive market: A) Ensures that anyone who can afford the good can get it. B) Equates the demand for goods with the supply of goods. C) Remains unchanged as long as supply and demand do not change. D) All of the above.

D

The production function: A) Represents maximum technical efficiency. B) Represents the most output attainable from any combinations of factor inputs. C) Describes the capacity of a single firm. D) All of the above.

D

Which of the following is a characteristic of a perfectly competitive market? A) Zero economic profit in the long run. B) Homogeneous products. C) Perfect information. D) All of the above.

D

Which of the following is least likely to occur during the long run in a perfectly competitive market experiencing economic profits? A) A rightward shift in the market supply curve. B) An increase in the market quantity demanded. C) An increase in the marginal revenue. D) A decline in the ATC and MC curves.

D

A demand curve is perfectly inelastic if consumers reduce their quantity demanded to zero when price rises by even the slightest amount.

False

A negative cross-price elasticity indicates goods are substitutes because a positive percentage increase in one good results in a negative percentage increase in the other.

False

A sunk cost is a cost that has occurred but can be recovered.

False

An increase in consumer income increases the quantity demanded of an inferior good

False

Brand loyalty makes the demand curve facing the monopolistically competitive firm less price-inelastic

False

Diseconomies of scale imply that the average total cost curve is downward-sloping in the long run.

False

Economic losses would lead to firms exiting a market in the short run.

False

Economic profit is the difference between a firms total revenue and its direct costs

False

If MPP declines with greater output, then MC must increase.

False

If there is no budget constraint, utility maximization is achieved when marginal utility is zero.

False

In a perfectly competitive market, firms will earn economic profits in the long run

False

Marginal utility is always positive

False

Since a perfectly competitive firm has no market power, its marginal cost curve is flat (i.e. horizontal).

False

The production function shows the minimum output that would equal the opportunity cost of the resources used to produce the output.

False

Total output may continue to rise even though marginal physical product is negative

False

When businesses earn zero economic profit, they have no incentive to stay in business.

False

When entrepreneurs decide to build a plant, they are making an investment decision.

False

When firms enter a monopolistically competitive industry, the market supply curve shifts to the left.

False

When resources are earning zero economic profits for a firm the resources could earn more in their next best alternative use.

False

A distinguishing characteristic of monopolistic competition is that there are many firms in an industry.

True

A perfectly competitive firm has no market power.

True

Constant returns to scale occur when an increase in all resources results in an exactly proportionate increase in output.

True

Economic profit is zero when a firm's revenues just cover its economic cost

True

Minimizing average total cost always leads to the maximization of total profit.

True

Monopolistically competitive firms are very sensitive to any increase in marginal costs.

True

Normal profit is zero when a firm's revenues just cover its economic cost.

True

Short-run choices imply that at least one factor of production is fixed.

True

The law of diminishing marginal utility helps explain the law of demand

True

The law of diminishing returns indicates that the marginal physical product of a variable input declines as more of it is employed, ceteris paribus.

True

To maximize profits, a firm should expand production as long as it is making profits

True

When a firm produced nothing, total fixed cost is equal to total cost.

True

When the price of a good is expected to fall next month, there should be a downward movement along the current demand curve.

True