Microeconomics Unit 2 Test Questions

Economic profit can be derived from calculating total revenues minus all of the firm's costs, A: Excluding its opportunity costs B: Including its opportunity costs C: Including its marginal revenue D: Excluding its marginal revenue

B: Including its opportunity costs

The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in _______________ A: Quantity supplied B: The slope of the demand curve C: Price D: The slope in the supply curve

C: Price

The term _____________________________ refers to a firm operating in a perfectly competitive market that must take the prevailing market price for its product. A: Price setter B: Business entity C: Price taker D: Trend setter

C: Price taker

__________________ include all spending on labor, machinery, tools, and supplies purchased from other firms. A: Total profits B: Total revenues C: Total costs D: Total profit margins

C: Total costs

If the price of good increases by 10% and the quantity demanded falls by 5% what is the elasticity of demand? Answer in absolute terms. A: 0.5 B: 2 C: 5 D: 10

A: 0.5

A firm that holds a monopoly position in the market place is A: A price maker B: A price taker C: Monopolistically competitive D:Subject to infinite market forces

A: A price maker

If the price that a firm charges is lower than its ___________________ of production, the firm will suffer losses. A: Average cost B: Marginal cost C: Fixed cost D: Variable cost

A: Average cost

If a firm is experiencing _____________________, then as the quantity of output rises, the average cost of production rises. A: Decreasing returns to scale B: Consent returns to scale C: Economies of scale D: Increasing returns to scale

A: Decreasing returns to scale

According to the definition of profit, if a profit-maximizing firm will always attempt to produce its desired level of output at the lowest possible cost, then it will A: Do so regardless of what type of competition exists in a market. B: Take a long-run perspective on costs, when such costs cannot be adjusted. C: Take short-run perspective on labor costs which cannot be immediately changed. D: Breakdown its cost structure according to short-run adjustments.

A: Do so regardless of what type of competition exists in a market.

When a business wants to increase it's revenue should it raise it's price? A: It depends on the elasticity of demand B: Yes C: No

A: It depends on the elasticity of demand

Following the assumption that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency? A: Output will be too small and its price too high B: Output will be too large and its price too high C: Output will be too small and its price too low D: Output will be too large and its price too low

A: Output will be too small and its price too high

Is elasticity of demand calculated by absolute changes or percentage changes? A: Percentage changes B: Absolute changes C: Either one works

A: Percentage Changes

In a perfectly competitive firm is a price taker, then A: Pressure from competing firms will force acceptance of the prevailing market price. B: It must be a relatively small player compared to its competitors in the overall market C: It can increase of decrease its output without affecting overall quantity supplied in the market D: Quality differences will be very perceptible and will play a major role in purchasers' decisions.

A: Pressure from competing firms will force acceptance of the prevailing market price

The quality differences of similar products are mostly imperceptible to the average consumer's eyes, which of the following will most likely play a major role in influencing the decisions of purchasers? A: Price of competing products B: Size of competing products C: Purchaser's opportunity costs D: Geographic origin of products

A: Price of competing products

Revenue is equal to: A: Price times quantity (P*Q) B: Price divided by quantity (P/Q) C: Quantity divided by quantity (Q/P D: Price minus quantity (P-Q)

A: Price times quantity (P*Q)

Revenue is equal to: A: Price times quantity (P*Q) B: Price divided by quantity (P/Q) C: Quantity divided by quantity (Q/P) D: Price minus quantity (P-Q)

A: Price times quantity (P*Q)

Temperatures have persisted below freezing levels in Florida throughout the months of December and January. As a result, demand for electricity sharply increased and the price of electricity and coal rose sharply. This can be interpreted using supply and demand by saying it was a shift in the demand for electricity and coal, but what can be said about the supply curve? A: There is a movement along the marginal costs curves B: At all levels out output shifts marginal costs to the right C: Can also be interpreted as shifts of their respective marginal cost curve D: Shifts marginal costs to the right enabling both to produce more at any given price

A: There is a movement along the marginal cost curves

____________________ is calculated by taking the quantity of everything that is sold and multiplying it by the sale price. A: Total revenue B: Total profits C: Average profit margin D: Total cost

A: Total Revenue

A 25% decrease in the price of breakfast cereal leads to a 20% increase in the quantity of cereal demanded. As a result A: Total revenue will decrease B: Total revenue will increase C: Total revenue will remain constant D: The elasticity of demand will increase

A: Total revenue will decrease

Economists usually refer to elasticity of demand in absolute terms. A: True B: False

A: True

Elasticity of Demand is percentage change in quantity divided by percentage change in price. A: True B: False

A: True

If elasticity of demand is greater than one, economists say that the demand is elastic A: True B: False

A: True

If a paper mill shuts down its operations for three months so that it produces nothing, its ___________________ will be reduced to zero. A: Variable B: Fixed Costs C: Opportunity Costs D: Total Cost

A: Variable

In a free market economy, firms operating in a perfect competitive industry are said to have only one major choice to make. Which of the following correctly sets out that choice? A: What quantity to produce B: What price to charge C: What quantity of labor is needed D: What quality to produce

A: What quantity to produce

Billy Bob's Barber shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop? A: 0.15 B: 3 C: 0.1 D 0.05

B: 3

The marginal revenue curve for a monopolist ____________________ the market demand curve. A: Always rises above B: Always lies beneath C: Always runs parallel D: Always is the same

B: Always lies beneath

When demand is inelastic: A: Price elasticity of demand is greater than 1. B: Consumers are not very responsive to changes in price C: The percentage change in quantity demanded resulting from a price change is greater than the percentage change in price. D: Demand curves appear to be fairly flat

B: Consumers are not very responsive to changes in price

If the demand curve is perfectly elastic, then an increase in supply will: A: Decrease the price but result in no change in the quantity exchanged B: Increase the quantity exchanged but result in no change in the price C: Increase the price but result in no change in the quantity exchanged D: Increase both the price and the quantity exchanged

B: Increase the quantity exchanged, but result in no change in the price.

In Microeconomics, the term ______________________ is synonymous with economies of scale. A: Diminishing marginal returns B: Increasing returns to scale C: Decreasing returns to scale D: Constant returns to scale

B: Increasing returns to scale

Demand is said to be ____________________ when the quantity demanded is not very responsive to changes in price. A: Independent B: Inelastic C: Unit elastic D: Elastic

B: Inelastic

Which of the following is most likely to be a monopoly? A: Local fast-food restaurant B: Local electric distributor C: Local bathroom fixtures shop D: Local television broadcaster

B: Local electric distributor

Under perfect competition, any profit-maximizing producer faces a market price equal to its A: Average costs B: Marginal costs C: Total costs D: Variable costs

B: Marginal costs

Deregulation occurs when a government eliminates or scales back rules relating to all but one of the following. Which one is it? A: prices that can be charged B: Natural monopoly C: Conditions of entry in a certain industry D: Quantities that can be produced

B: Natural monopoly

Firms operating in a market situation that creates _________________________, sell their product in a market with other firms who produce identical or extremely similar products. A: A perfect monopoly B: Perfect competition C: An oligopoly D: A free-market

B: Perfect competition

When a business adopts a strategy of reducing and/or discontinuing production in response to a sustained pattern of losses, it is A: Considering opportunity costs B: Preparing to exit operations C: Preparing to reach its shutdown point D: Considering capital investments

B: Preparing to exit operations

Idaho farmers can sell as large a quantity of their potato crop as they wish. A: If they set their own price in the short run, but in the long run, the market sets the price B: Provided each is willing to accept the prevailing market price C: If they set their own price in the long run, but in the short run, the market sets the price D: Provided quality is perceptible and determines the market price

B: Provided each is willing to accept the prevailing market price

Which of the following should typically be ignored because spending has already been made and cannot be changed? A: Variable costs B: Sunk costs C: Marginal costs D: Average marginal costs

B: Sunk Costs

For a perfectly competitive firm, the marginal cost curve is identical to the firms _______________________. A: Demand curve B: Supply curve C: Average total cost curve D: Average variable cost curve

B: Supply curve

If it was possible for one company to gain ownership control all of the uranium processing plants in the US, then A: They will strive to reach efficiencies only they know how to make B: That firm could set up barriers to entry to discourage competition C: Government will deregulate to ensure the company's monopoly D: The factors of market demand and supply will set the price

B: That firm could set up barriers to entry to discourage competition

In order to determine the average variable cost, the firm's variable costs are divided by _________________________. A: Its' fixed costs B: The quantity of output C: Its' average costs D: Diminishing marginal costs

B: The quantity of output

________________________ include all of the costs of production that increase with the quantity produced. A: Fixed costs B: Variable costs C: Average costs D: Average variable costs

B: Variable costs

Suppose that Bobo purchases 1 pizza per month when the price is $19 and 3 pizzas per month when the price is $15. What is the price elasticity of Bobo's demand curve? A: .235 B: 2 C: 4.25 D: 6.33

C: 4.25

The demand for a product is unit elastic. At a price of $20, 10 units of a product are sold. If the price is increased to $40, then one would expect sales to equal: A: 20 Units B: 10 Units C: 5 Units D: 0 Units

C: 5 Units

Which one of the following is the most accurate description of a monopolist? A: A sole producer of a narrowly defined product class, such as brown Grade A eggs produced in Eagle County, Colorado B: A firm that is very large relative to all its competitors within a narrow product class C: A sole producer of a product for which good substitutes are lacking in a market with high barriers to entry D: A large, multinational firm that produces a single product in a narrow product class

C: A sole producer of a product for which good substitutes are lacking in a market with high barriers to entry

A manufacturer would likely make an entry in a market following the long-run process of beginning and expanding production in response to _______________________. A: A strategy to grow profits B: An incentive for profit C: A sustained pattern of profits D: An incentive to add to profits

C: A sustained pattern of profits

In economics, the term "shutdown point" refers to the point where the A: Marginal cost curve crosses the total revenue curve. B: Average variable cost curve crosses the total revenue curve C: Average variable cost curve crosses the marginal cost curve D: Marginal cost curve crosses the fixed cost curve

C: Average variable cost curve crosses the marginal cost curve

A situation known as ___________________________ occurs when all production inputs are allowed to expand, but that expansion does not result in much of a change in the average cost of production. A: Returns to scale B: Economies of scale C: Constant returns to scale D: Diminishing marginal returns

C: Constant returns to scale

It is said that in a perfectly competitive market, raising the price of a firms product from the prevailing market price of $179 to $199 ____________________ A: Will likely cause the firm to reach its shutdown point immediately B: Will cause the firm to recover some of its opportunity costs C: Could likely result in a notable loss of sales to competitors D: Is a sure sign the firm is raising the given price in the market

C: Could likely result in a notable loss of sales to competitors

_______________________ arises where many firms are competing in a market to sell similar but differentiated products. A: Oligopolistic Competition B: Perfect Competition C: Monopolistic Competition D: Monogopolised Competition

C: Monopolistic Competition

The use of sharp, temporary price cuts as a form of _________________ would enable traditional US automakers to discourage new competition from smaller electric car manufacturers. A: Natural monopoly B: Monopolistic competition C: Predatory pricing D: Oligopolistic competition

C: Predatory pricing

In order to determine _______________________, the firm's total costs must be divided by the quantity of its output. A: Diminishing marginal returns B: Fixed costs C: Variable costs D: Average costs

D: Average Cost

Which of the following is most unlikely to present a barrier to entry into a market? A: Market forces B: Patent laws C: Technological advantages D: Deregulation

D: Deregulation

The slope of the demand curve for a monopoly is A: Horizontal, parallel to the x-axis B: Vertical, parallel to the y-axis C: Upward sloping D: Downward sloping

D: Downward sloping

If monopolists are able to produce fewer goods and sell them at a higher price than they could under perfect competition, the result will be A: Elimination of barriers to entry B: Irregularly high unsustainable profits C: Government deregulation D: High sustained profits

D: High sustained profits

When a natural monopoly exists in a given industry, the per-unit costs of production will be A: Lowest when there are a large number of producers in the industry B: Lower for the smaller firms than for larger firms C: Minimized at the output that maximizes the industry's profitability D: Lowest when a single firm generates the entire output of the industry

D: Lowest when a single firm generates the entire output of the industry.

Why would labor be treated as a variable cost? A: They are costs incurred in the act of producing that will decrease with quantity produced B: They are made before production starts and vary according to the specific line of business C: Labor costs are an input cost that firms are unable to change in the short run D: Producing larger quantities of a good or service generally requires more workers

D: Producing larger quantities of a good or service generally requires more workers