Econ Chapter 2
73. 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) The degree of product differentiation.
35. 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) It has market power.
74. Perfect 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.
A) Many interdependent firms sell a homogeneous product.
32. A firm should shut down production when: A) P < minimum AVC. B) P > minimum AVC. C) P = minimum ATC. D) P = MC.
A) P < minimum AVC.
20. Economic profit equals zero where: A) P = minimum ATC. B) P = AVC. C) P = AFC. D) P = minimum ATC x Q.
A) P = minimum ATC.
108. Which market structure is characterized by many firms producing close substitutes which are not differentiated in the eyes of the consumer? A) Perfect competition. B) Monopolistic competition. C) Oligopoly. D) Monopoly.
A) Perfect competition.
101. When a purely 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) The demand and decrease the price elasticity of demand for its product.
89. 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) The marginal physical product of the input.
57. 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 quantity demanded increases at lower prices.
14. A demand curve is described as perfectly inelastic if: A) The same quantity is purchased regardless of price. B) The same price is charged regardless of quantity sold. C) Only quantity demanded can change. D) It is horizontal.
A) The same quantity is purchased regardless of price.
18. 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) Usually greater and smaller, respectively, than their accounting counterparts.
112. Which of the following is equivalent to ATC? A) FC + VC. B) AFC + AVC. C) Change in output divided by change in total cost. D) Total cost times the quantity produced. b) AFC + AVC
B) AFC + AVC.
13. 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) Short-run decisions.
109. 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) Tastes.
1. 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 law of diminishing marginal utility.
96. 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) The price elasticity of demand.
66. 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) Total costs.
4. 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 best opportunity you give up when you do your homework.
62. 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) The change in total utility divided by the change in quantity.
64. The marginal utility of additional units consumed of any good A) remains the same B) is always negative C) is always positive D) decreases E) Not enough information to determine
D) decreases
79. 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) negative
3. Assume MUx=30 utils, MUy15, Px=$2, and Py=$0.50. This consumer A) should buy less of X and less of Y B) is in equilibrium C) should buy more of X and less of Y D) should buy less of X and more of Y E) should buy more of X and more of Y
D) should buy less of X and more of Y
49. In the graph above, consumer surplus is shown by area: A). ABD. B). ACD. C) DEF. D). BCD.
D). BCD.
88. Since a perfectly competitive firm has no market power, its marginal cost curve is flat (i.e. horizontal). t/f
FALSE
90. A sunk cost is a cost that has occurred but can be recovered.
FALSE
95. Total output may continue to rise even though marginal physical product is negative. t/f
FALSE
59. The law of diminishing returns indicates that the marginal physical product of a variable input declines as more of it is employed, ceteris paribus. t/f
TRUE
75. A perfectly competitive firm has no market power. t/f
TRUE
87. Short-run choices imply that at least one factor of production is fixed. t/f
TRUE
93. To maximize profits, a firm should expand production as long as it is making profits. t/f
TRUE
98. Vanessa has $100 to spend on jewelry. She can buy earrings for $16 a pair and bracelets for $20 each. The combination of three pairs of earrings and three bracelets lies outside Vanessa's budget line. t/f
TRUE
39. 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) Total utility decreases with additional consumption of a good.
23. 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) Profit.
41. 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) Sell an additional pound at $1.50.
42. 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) Sell an additional pound at $1.50.
72. 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) Shifts to the right.
110. Which of the following influences the price elasticity of demand? A) Availability of substitutes. B) Price relative to budget. C) Length of time. D) All of the above.
D) All of the above.
111. 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) All of the above.
24. 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) All of the above.
25. 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) All of the above.
37. 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) All of the above.
81. 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) All of the above.
34. 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) Higher output per worker.
51. 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) Long-run average total cost.
10. The change in total revenue that results from a 1-unit increase in the quantity sold is: A) Marginal cost. B) Total revenue. C) Marginal profit. D) Marginal revenue.
D) Marginal revenue.
2. 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) Marginal utility.
12. 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) Mua/Pa=MUb/Pb=...MUn/Pn
53. 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) P < long-run ATC.
77. A perfectly competitive firm should expand output when: A) P > ATC. B) P < ATC. C) P < MC. D) P > MC.
D) P > MC.
58. The law of diminishing marginal utility helps explain the law of demand. t/f
TRUE
45. 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.
A) A reallocation of resources to better uses.
31. (Figure in figure above: Determining Short-Run Supply Curves) Which segment represents the short-run supply curve? A) DE B) CE C) BE D) AE
A) DE
50. In the long run, A) all of a firm's 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) all of a firm's resources are variable
7. 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) price elasticity of demand for soft drinks is 0
55. Labor, land, and capital used in production are A) resources B) outputs C) productivity D) technological progress E) innovations
A) resources
54. Knowing a product's price elasticity allows economists to: A). predict the amount by which quantity demanded will drop in response to a price increase B). predict how changes in consumers' income will affect sales. C). predict the amount by which quantity supplied will drop in response to a price increase. D). respond quickly to tariff changes
A). predict the amount by which quantity demanded will drop in response to a price increase
113. 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) (FC + VC) / Q.
28. 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) Are the sum of actual monetary payments made for resources used to produce a good.
61. Marginal cost is equal to: A) Total cost x output. B) Change in total cost x change in total output. C) Change in total cost x change in input. D) Total cost x input cost.
B) Change in total cost x change in total output.
48. 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) Decides what level of output will maximize profits.
71. 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) Fixed costs.
115. 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) Increases as long as marginal utility is positive.
82. 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) Is a technological relationship between factors of production and output.
26. 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.
B) It is a price taker.
52. 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) P > long-run ATC.
94. To maximize profits, a purely 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) Price equals marginal cost.
27. 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) Reduces the economic losses of remaining firms in a market.
43. If the price of "X" increases and you buy less "Y," then A. "X" and "Y" are complements, and the price of "Y" will increase. B. "X" and "Y" are complements, and the price of "Y" will decrease. C. "X" and "Y" are substitutes, and the price of "Y" will increase. D. "X" and "Y" are substitutes, and the price of "Y" will decrease.
B. "X" and "Y" are complements, and the price of "Y" will decrease.
84. Profit is: A) TR - FC. B) Q x (P - AVC). C) (P x Q) - TC. D) All of the above.
C) (P x Q) - TC.
68. 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) A change in quantity demanded.
80. 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) Avoid problems associated with units of measurement.
65. 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) Because of the law of demand.
86. 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) Falling marginal physical product.
78. Perfectly competitive industries are characterized by: A) Modest concentration ratios. B) Low entry barriers. C) Independent production decisions. D) None of the above.
C) Independent production decisions.
8. 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) Marginal cost.
9. 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 marginal physical product
60. 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 marginal physical product of a factor of production diminishes as more of that factor is used.
33. Firms in a perfectly 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) Use the profit-maximizing rule MC = MR.
97. 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 marginal utility is zero.
107. 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) equals to zero
99. Walmart is thinking about offering a 25% discount on a brand of shoes. If the elasticity of demand is two, then the discount would increase sales by: A). 2%. B). 200%. C). 50%. D). 25%.
C). 50%.
38. If marginal cost (MC) is less than average total cost (ATC), then: A). ATC is at its minimum. B). ATC is increasing. C). ATC is decreasing. D). AFC is increasing.
C). ATC is decreasing.
36. If a perfectly competitive firm can sell 400 computers at $800 each, in order to sell one more computer, the firm: A). Must lower its price. B). Must raise its price. C). Can sell the 41st computer at $800. D). Cannot sell an additional computer at any price because the market is at equilibrium.
C). Can sell the 41st computer at $800.
91. Suppose a hurricane hits Florida, causing widespread damage to houses and businesses. The governor of Florida places price ceilings on all building materials to keep the prices reasonable. Which of the following is the most likely result? A). A faster recovery from the storm. B). More people will be able to purchase building materials. C). Shortages of building materials and a slower recovery from the storm. D). The supply of building materials to Florida will increase.
C). Shortages of building materials and a slower recovery from the storm.
92. Table 5.4 Demand schedule for automobiles. 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). The cross-price elasticity of demand.
114. 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 decline in the ATC and MC curves.
56. Larry owns his own auto repair shop, and employs three mechanics. His total parts and sales volume this year was $322,400. Because he is well known for his repair expertise, he is also paid $5,200 per year by a local radio station to answer auto repair questions on "Ask the Mechanic." His explicit costs for payroll, parts and taxes, mortgage and utilities are $290,160. Larry left a job as an accountant making $40,000 a year to own his own business. Larry's economic profit is: A). $32,240. B). $37,440. C). $327,600. D). Larry is actually experiencing an economic loss of $2,560.
D). Larry is actually experiencing an economic loss of $2,560.
5. Bill can consume 10 Chinese buffets or go bowling five times this month (or specific other combinations). This above graph represents Bill's: A). utility curve. B). demand curve. C). production possibility frontier. D). budget line.
D). budget line.
102. When businesses earn zero economic profit, they have no incentive to stay in business. t/f
FALSE
104. When firms enter a purely competitive industry, the market supply curve shifts to the left t/f
FALSE
105. When resources are earning zero economic profits for a firm the resources could earn more in their next best alternative use t/f
FALSE
106. When the price of a good is expected to fall next month, there should be a downward movement along the current demand curve. t/f
FALSE
15. A demand curve is perfectly inelastic if consumers reduce their quantity demanded to zero when price rises by even the slightest amount. t/f
FALSE
16. Diseconomies of scale imply that the average total cost curve is downward-sloping in the long run. t/f
FALSE
46. In a perfectly competitive market, firms will earn economic profits in the long run t/f
FALSE
47. An increase in consumer income increases the quantity demanded of an inferior good. t/f
FALSE
6. Brand loyalty makes the demand curve facing the perfectly competitive firm less price-inelastic. t/f
FALSE
63. Marginal utility is always positive. t/f
FALSE
67. Minimizing average total cost always leads to the maximization of total profit. t/f
FALSE
69. 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 t/f
FALSE
70. Normal profit is zero when a firm's revenues just cover its economic cost. t/f
FALSE
76. Perfectly competitive firms are very sensitive to any increase in marginal costs. t/f
FALSE
83. The production function shows the minimum output that would equal the opportunity cost of the resources used to produce the output. t/f
FALSE
44. If there is no budget constraint, utility maximization is achieved when marginal utility is zero. t/f
TRUE
21. Economic profit is the difference between a firm's total revenue and its direct costs.
TRUE
22. Economic profit is zero when a firm's revenues just cover its economic cost. t/f
TRUE
40. If MPP declines with greater output, then MC must increase. t/f
TRUE
100. When a firm produced nothing, total fixed cost is equal to total cost.
TRUE
103. When entrepreneurs decide to build a plant, they are making an investment decision. t/f
TRUE
11. Constant returns to scale occur when an increase in all resources results in an exactly proportionate increase in output. t/f
TRUE
17. A distinguishing characteristic of perfect competition is that there are many firms in an industry. t/f
TRUE
19. Economic losses would lead to firms exiting a market in the short run. t/f
TRUE
30. Figure 6.1 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. 12.0 units per day.
85. Refer to Figure 8.8 above for a perfectly competitive firm. If this firm produces the level of output corresponding to point C in the short run, it will earn: a. Zero profit. b. The maximum profit possible. c. A profit, although not the maximum profit possible. d. A loss.
b. The maximum profit possible.
29. Figure 5.3 Refer to Figure 5.3 above. With no budget constraint, a rational consumer will consume _________ apples. a. Zero. b. One. c. Six. d. An infinite number of.
c. Six.
