4. Microeconomics

Which of the following costs is most likely a variable cost for a manufacturing plant? A. Energy costs B. Interest expense C. Insurance expense

A is correct. Energy costs are variable costs that are sensitive to the level of production. B is incorrect because interest expense is often a fixed cost and does not vary with the level of production. C is incorrect because insurance expense is often a fixed cost and does not vary with the level of production.

If revenues decrease when the price of a good increases, the price elasticity of this good is most likely: A. elastic. B. inelastic. C. unit elastic.

A is correct. For elastic goods, an increase in price will lead to a greater percentage decrease in quantity and a decrease in revenues. B is incorrect because for inelastic goods, a decrease in price will lead to a decrease in revenues. C is incorrect because price changes do not affect total revenue for goods that are unit elastic.

Holding all other factors constant, if the demand for printers increases, the demand for ink cartridges is most likely to: A. increase. B. decrease. C. remain unchanged.

A is correct. Printers and ink cartridges are complementary products. Thus, if the demand for printers increases, the demand for ink cartridges increases as well. B is incorrect because the demand for ink cartridges would decrease if the demand for printers increased if printers and ink cartridges were substitute products, not complementary products. C is incorrect because printers and ink cartridges are complementary products. Thus, an increase in demand for printers will increase the demand for ink cartridges.

Which of the following factors is most likely to affect the pricing of a service? A. Production costs B. Average age of the workforce C. Availability of complementary products

A is correct. Production costs are considered when pricing the service. B is incorrect because the average age of the workforce does not affect pricing. C is incorrect because the availability of substitute products will affect pricing, not the availability of complementary products.

If consumers demand more of a good than sellers find profitable to produce, then sellers' inventories will tend to: A. deplete. B. pile up. C. remain unchanged.

A is correct. When the price of a good is below the equilibrium price, consumers will demand more of the good than producers will find profitable to sell and inventories will be depleted. B is incorrect because inventories pile up when companies are willing to supply more of a good than consumers are willing to buy. C is incorrect because sellers' inventories are affected by consumer demand and will not remain unchanged.

Holding all other factors constant, if the price of a product increases, the demand for a substitute product is most likely to: A. increase. B. decrease. C. remain unchanged.

A is correct. When the price of a product increases, the demand for substitute products also increases. B is incorrect because the demand for a complementary product, not a substitute product, will decrease if the price of the product increases. C is incorrect because the demand for a substitute product will increase if the price of a product increases.

Economics is the study of: A. an economy as a whole. B. choices in the presence of limited or scarce resources. C. how individuals and companies make decisions to allocate limited resources.

B is correct. Economics is the study of choices in the presence of limited or scarce resources (labour, real assets, financial capital, etc.). Macroeconomics is the study of an economy as a whole. Microeconomics is the study of how individuals and companies make decisions to allocate limited resources.

Which of the following statements best describes price inelasticity? A small change in price produces a: A. proportional change in demand. B. less than proportional change in demand. C. disproportionally larger change in demand.

B is correct. If price elasticity is low or inelastic, changes in price are accompanied by less than proportional changes in the quantity demanded. This means demand is not very price sensitive. A is incorrect because a small change in prices would produce a proportional change in demand for a good exhibiting unit elasticity. C is incorrect because a small change in price would produce a disproportionally larger change in demand for a good exhibiting high price elasticity.

An industry dominated by a small number of large companies is most likely a(n): A. monopoly. B. oligopoly. C. perfect competition.

B is correct. Oligopolies are dominated by a small number of large companies because the barriers to entry are high. A is incorrect because a monopoly is a market with a single company that produces a product for which there are no close substitutes and with significant barriers to entry. C is incorrect because in perfect competition there are many buyers and sellers trading in a uniform commodity and there are no major barriers to entry.

If the price of chocolate increases, the quantity of chocolate demanded will most likely: A. increase. B. decrease. C. remain unchanged.

B is correct. The law of demand states that the quantity demanded and the price of a product are inversely related. If the price of chocolate increases, then the quantity of chocolate demanded should decrease. A and C are incorrect because the law of demand suggests that as the price of a product increases, the quantity demanded will decrease, not increase or remain unchanged.

For a particular period, a golf course generated revenues of $10,000,000 and incurred costs of $5,000,000. In addition, the implicit costs were $1,000,000. The accounting profit is most likely: A. lower than the economic profit. B. the same as the economic profit. C. higher than the economic profit.

C is correct. Accounting profit considers only explicit costs and would be derived from the difference between revenues and direct costs ($10,000,000 − $5,000,000 = $5,000,000). A is incorrect because economic profit deducts implicit costs from accounting profit ($10,000,000 − $5,000,000 − $1,000,000 = $4,000,000). B is incorrect because accounting profit and economic profit are not the same when there are implicit costs.

Which of the following statements best describes the effect of lower production on a manufacturing plant's costs per unit? Average: A. total cost will decrease. B. fixed cost will decrease. C. variable cost will remain fairly constant.

C is correct. Average variable cost or variable cost per unit of output is generally constant as production changes. A is incorrect because average total cost should increase as output decreases. B is incorrect because average fixed cost will increase. The fixed costs are being spread over fewer units of production.

Market equilibrium is a state in the market when, at a particular price and with all other factors remaining unchanged, no buyer or seller has any incentive or desire to change the: A. quality of a product that is demanded or supplied. B. market for a product that is demanded or supplied. C. quantity of a product that is demanded or supplied.

C is correct. Market equilibrium is a state in the market when at a particular price, no buyer or seller has any incentive or desire to change the quantity of a product that is demanded or supplied, all other factors remaining unchanged. A is incorrect because market equilibrium is a price at which there is no excess supply or demand and it does not consider the quality of the product. B is incorrect because market equilibrium relates to the quantity of a product that is demanded or supplied at a particular price, not the market for the product.

Which of the following would most likely cause a steel manufacturer to increase the quantity supplied? An increase in: A. input costs. B. corporate taxes. C. the price of steel.

C is correct. The law of supply states that when prices increase, the quantity supplied by companies will increase. Movements along the supply curve occur when only the price changes. A is incorrect because an increase in input costs would cause the supply curve to shift to the left and the manufacturer to offer the same quantities of steel at higher prices or smaller quantities at the same prices. B is incorrect because an increase in corporate taxes would cause the supply curve to shift to the left and the manufacturer to offer the same quantities of steel at higher prices or smaller quantities at the same prices.