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Microeconomics 14Th Canadian Edition by Ragan – Test Bank

chapter 6

Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
FIGURE 6-2
1) Refer to Figure 6-2. Suppose the price of Y is $1, the consumer’s income is $10, and the
consumer is
currently buying 3 units of good X and 4 units of good Y. If this consumer is maximizing her
utility,
then the price of X must be
1)
A) $2.
B) $4.
C) $3.
D) $1.
E) Impossible to tell with the given information.
Answer: A
Explanation: A)
B)
C)
D)
E)
1
FIGURE 6-9
2) Refer to Figure 6-9. In part (i), the consumer is able to move from point A to point B because
of 2)
A) a decrease in the price of milk.
B) a decrease in money income.
C) a decrease in the price of bread.
D) a decrease in the price of one good and an increase in money income.
E) an increase in real income.
Answer: E
Explanation: A)
B)
C)
D)
E)
2
FIGURE 6-2
3) Refer to Figure 6-2. Suppose that the price of Y is $1 and the consumer’s income is $10.
Initially, the
price of X is $2 and the consumer is buying 4 units of good Y. If the price of X then falls to $1,
which
of the following pairs of quantities of X correctly completes the demand schedule below?
Price of X: $1 $2
Quantity Demanded of X: ________ ________
3)
A) 4; 3 B) 2; 4 C) 4; 4 D) 6; 3 E) 6; 4
Answer: D
Explanation: A)
B)
C)
D)
E)
3
4) The marginal rate of substitution 4)
A) is the amount of one good the consumer is willing to give up in exchange for another so as to
keep total satisfaction unchanged.
B) is constant as one moves along a particular indifference curve.
C) is the amount of one good the consumer is willing to give up in exchange for another so as to
keep total expenditure unchanged.
D) is equal to the price ratio on the budget line.
E) always has a positive algebraic value.
Answer: A
Explanation: A)
B)
C)
D)
E)
5) The market demand curve is derived from 5)
A) a weighted average of the quantity demanded of all individuals in the economy at each price.
B) the vertical summation of individual demand curves.
C) market data provided by Statistics Canada.
D) the average quantity demanded of all individuals in the economy.
E) the horizontal summation of individual demand curves.
Answer: E
Explanation: A)
B)
C)
D)
E)
6) An indifference curve plotted for two different goods on the axes 6)
A) shows the different combinations of two goods that the same income can purchase.
B) shows all combinations of the two goods that give the same level of utility.
C) changes its slope as the relative prices of the two goods change.
D) shifts when real income changes.
E) shows the combinations of the two goods that will just use up a consumer’s income.
Answer: B
Explanation: A)
B)
C)
D)
E)
4
The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds
of golf.
Rounds of
Golf per
Month
Total
Value
($)
00
1 40
2 70
3 92
4 108
5 120
6 130
7 130
TABLE 6-3
7) Refer to Table 6-3. Andrew values the 4th round of golf at a marginal value of 7)
A) $92. B) $310. C) $16. D) $430. E) $108.
Answer: C
Explanation: A)
B)
C)
D)
E)
5
The diagram below shows a set of budget lines facing a household.
FIGURE 6-8
8) Refer to Figure 6-8. The movement of the budget line from ab to ef could be caused by 8)
A) a decrease in money income.
B) an equal percentage increase in the price of both food and housing.
C) a decrease in the price of either food or housing.
D) an equal percentage decrease in the price of both food and housing.
E) an increase in the price of either food or housing.
Answer: D
Explanation: A)
B)
C)
D)
E)
6
Sophie consumes two goods 􀁎 paperback novels and visits to the movies.
FIGURE 6-12
9) Refer to Figure 6-12. Sophie’s movement from point A to point B is the 9)
A) income effect of an increase in the price of paperback novels.
B) result of a change in her preferences between movies an paperback novels.
C) total effect of a decrease in income.
D) substitution effect of a decrease in the price of paperback novels.
E) total effect of an increase in the price of paperback novels.
Answer: E
Explanation: A)
B)
C)
D)
E)
7
The table below shows the quantities of toffee bars and bags of cashews that a consumer could
consume over a 1-week period.
Toffee (bars) Cashews (bags)
Units
Marginal
Utility
Total
Utility
Marginal
Utility
Total
Utility
1 10 10 12 12
2 8 18 10 22
3 5 23 7 29
4 3 26 5 34
5 1 27 2 36
6 0 27 1 37
7 0 27 0 27
TABLE 6-1
10) Refer to Table 6-1. If the prices of both toffee bars and bags of cashews are $2 and this
consumer
has $14 per week to spend on these two snacks, what is the maximum total utility achievable?
10)
A) 15 B) 10 C) 57 D) 45 E) 33
Answer: C
Explanation: A)
B)
C)
D)
E)
11) Suppose a utility-maximizing person consumes only two goods, hamburgers and milkshakes.
Suppose the price of milkshakes rises and all other variables remain constant. As a result, this
person will certainly
11)
A) not increase his consumption of both milkshakes and hamburgers.
B) increase his/her consumption of milkshakes.
C) purchase more milkshakes and fewer hamburgers.
D) consume more hamburgers and the same amount of milkshakes.
E) reduce his/her consumption of both milkshakes and hamburgers.
Answer: A
Explanation: A)
B)
C)
D)
E)
8
12) The total value that Doug places on his consumption of computer games equals 12)
A) the price multiplied by quantity demanded.
B) the total amount he pays for all the games he purchases.
C) price times marginal value.
D) his marginal utility multiplied by quantity demanded.
E) his total expenditure on computer games plus his consumer surplus.
Answer: E
Explanation: A)
B)
C)
D)
E)
13) Consider the income and substitution effects of price changes. The income effect refers to the
change in quantity demanded that occurs as a result of a change in
13)
A) relative prices, with real income held constant.
B) money income, with relative prices held constant.
C) marginal utility, with real income held constant.
D) preferences, with real income held constant.
E) real income, with relative prices held constant.
Answer: E
Explanation: A)
B)
C)
D)
E)
14) Assume an individual with a downward-sloping demand curve is paying a single price for
each
unit of some commodity. He will experience consumer surplus on
14)
A) all units that were not bought at that particular price.
B) none of the units.
C) all of the units bought.
D) the first unit only.
E) all units bought with the possible exception of the last unit.
Answer: E
Explanation: A)
B)
C)
D)
E)
9
15) Suppose the price of potatoes falls and we observe a decrease in an individual’s purchases of
potatoes. Which of the following can we infer?
15)
A) The substitution effect outweighs the income effect.
B) The income effect just offsets the substitution effect.
C) The income effect is negative and outweighs the substitution effect.
D) The income effect is positive and exceeds the substitution effect.
E) The income effect is negative and reinforces the substitution effect.
Answer: C
Explanation: A)
B)
C)
D)
E)
16) Given a particular market demand curve, consumer surplus is 16)
A) less the lower the price and the larger the output.
B) greater the higher the price and the smaller the output.
C) greater the lower the price and the larger the output.
D) less the lower the price and the smaller the output.
E) greater the lower the price and the smaller the output.
Answer: C
Explanation: A)
B)
C)
D)
E)
17) Bjorn is a student with a monthly budget of $500, which he allocates between transportation
services and “all other goods.” Suppose the price of transportation is $5 per unit, and the price of
“all other goods” is $20 per unit. The marginal utility he currently receives from his consumption
of
transportation services is 60. How many units of “all other goods” is he consuming if he is
maximizing his utility?
17)
A) 60
B) 240
C) 25
D) 200
E) There is not enough information to determine
Answer: E
Explanation: A)
B)
C)
D)
E)
10
FIGURE 6-4
18) Refer to Figure 6-4. For both goods, the price falls from P0 to P1. The substitution effect is
illustrated by the change in quantity demanded from A to B; the income effect is illustrated by
the
change in quantity demanded from B to C. Good Y is certainly a(n) ________ good.
18)
A) inferior B) luxury C) normal D) necessity E) Giffen
Answer: C
Explanation: A)
B)
C)
D)
E)
19) A demand curve for a normal good is downward sloping due to 19)
A) the income effect.
B) neither the substitution effect nor the income effect.
C) the substitution effect.
D) the Giffen effect.
E) the combination of income and substitution effects.
Answer: E
Explanation: A)
B)
C)
D)
E)
11
20) The Smith family is allocating its monthly household expenditure between only two goods,
food
and
clothing. Suppose that the price of food is $12 per unit, and the price of clothing is $16 per unit
and
that the marginal utility that the family is receiving from its consumption of clothing is currently
200. What is the family’s marginal utility from its consumption of food if it is maximizing its
utility?
20)
A) 12 B) 16 C) 75 D) 150 E) 200
Answer: D
Explanation: A)
B)
C)
D)
E)
21) Consider the income and substitution effects of price changes. If the price of a normal good
changes, the income effect of the price change will
21)
A) always be to increase quantity demanded.
B) produce a positively sloped demand curve.
C) reinforce the substitution effect.
D) oppose the substitution effect.
E) always be larger than the substitution effect.
Answer: C
Explanation: A)
B)
C)
D)
E)
12
FIGURE 6-5
22) Refer to Figure 6-5. For both goods, the price increases from P0 to P1. The substitution
effect is
illustrated by the change in quantity demanded from A to B; the income effect is illustrated by
the
change in quantity demanded from B to C. Good X is certainly a(n) ________ good.
22)
A) luxury B) normal C) Giffen D) inferior E) necessity
Answer: D
Explanation: A)
B)
C)
D)
E)
13
FIGURE 6-9
23) Refer to Figure 6-9. In part (ii), the line joining points X, Y, and Z is known as ________,
which
shows how ________.
23)
A) an indifference map; the value of various combinations of two goods changes
B) a price-consumption line; consumption changes as relative prices change, with money
income constant
C) an income-consumption line; consumption changes with changing relative prices and
constant income
D) an income-consumption line; consumption changes as income changes, with relative prices
held constant
E) a price-consumption line; consumption changes as money income and relative prices change
Answer: B
Explanation: A)
B)
C)
D)
E)
14
The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds
of golf.
Rounds of
Golf per
Month
Total
Value
($)
00
1 40
2 70
3 92
4 108
5 120
6 130
7 130
TABLE 6-3
24) Refer to Table 6-3. If the price of a 9-hole round of golf is $22, and Andrew is maximizing
his
utility, then his consumer surplus will be
24)
A) $26. B) $22. C) $92. D) $108. E) $202.
Answer: A
Explanation: A)
B)
C)
D)
E)
25) If total utility from the consumption of some product is increasing as more units are
consumed,
then marginal utility must be
25)
A) increasing at an increasing rate.
B) increasing.
C) decreasing at an increasing rate.
D) negative.
E) positive.
Answer: E
Explanation: A)
B)
C)
D)
E)
15
FIGURE 6-2
26) Refer to Figure 6-2. Suppose that the price of X is $2, the price of Y is $1, the consumer’s
income is
$10, and the consumer is buying 3 units of good X and 4 units of good Y. What is the total utility
the
consumer obtains from this combination of X and Y?
26)
A) 72 B) 18 C) 40 D) 60 E) 30
Answer: A
Explanation: A)
B)
C)
D)
E)
16
FIGURE 6-1
27) Refer to Figure 6-1. If this figure represents the utility obtained from consuming units of a
good,
how many units would this consumer consume if the good were free?
27)
A) 1 B) 2 C) 3 D) 4 E) at least 5
Answer: E
Explanation: A)
B)
C)
D)
E)
28) The substitution effect of a price change 28)
A) is equal to the income effect for normal goods.
B) will result in the consumer buying less of a good at a lower price.
C) will result in the consumer buying less of a good at a higher price.
D) is equal to the income effect for inferior goods.
E) outweighs the income effect for Giffen goods.
Answer: C
Explanation: A)
B)
C)
D)
E)
17
29) Consider the income and substitution effects of price changes. For a product with an income
elasticity greater than one, a price increase will cause the consumer’s real income to
29)
A) rise and the quantity purchased to rise.
B) fall and the quantity purchased to rise.
C) remain constant.
D) fall and the quantity purchased to fall.
E) rise and the quantity purchased to fall.
Answer: D
Explanation: A)
B)
C)
D)
E)
30) An equal proportional increase in money income and all money prices will 30)
A) shift the budget line to the right parallel to the original budget line.
B) rotate the budget line inward from the horizontal axis.
C) rotate the budget line inward from the vertical axis.
D) shift the budget line to the left parallel to the original budget line.
E) leave the position of the budget line unchanged.
Answer: E
Explanation: A)
B)
C)
D)
E)
31) The Smith family is allocating its monthly household expenditure between only two goods,
food
and clothing. Suppose that the price of food is $5 per unit, and the price of clothing is $10 per
unit
and that the marginal utility that the family is receiving from its consumption of food is currently
25. What is the family’s marginal utility from its consumption of clothing if it is maximizing its
utility?
31)
A) 10 B) 50 C) 25 D) 5 E) 12.5
Answer: B
Explanation: A)
B)
C)
D)
E)
32) In which of the following situations will an individual’s purchasing power be unaffected? 32)
A) money income falls and the price of one good falls
B) money income is cut in half and prices of all goods and services remain constant
C) money income doubles and the prices of all goods and services are cut in half
D) money income is cut in half and the prices of all goods and services fall by 50%
E) money income doubles and the prices of all goods and services remain constant
Answer: D
Explanation: A)
B)
C)
D)
E)
18
33) Economists use the term “marginal utility” to describe the 33)
A) inverse of the measure of total utility.
B) average utility of each unit of a good consumed.
C) change in total satisfaction caused by consumption of an additional unit of a good.
D) price paid for every unit consumed.
E) total satisfaction received from consumption of a good.
Answer: C
Explanation: A)
B)
C)
D)
E)
34) Assume a person reveals the following demand conditions. At a price of $10, quantity
demanded is
zero; and at a price of $1, quantity demanded is 10 units.
34)
A) The consumer surplus will be zero at a price of $10.
B) Demand decreases as the price decreases.
C) The lower the price the smaller the consumer surplus.
D) The consumer surplus is zero at a price of $1.
E) The consumer surplus will be the area under the entire demand curve.
Answer: A
Explanation: A)
B)
C)
D)
E)
19
FIGURE 6-7
35) Refer to Figure 6-7. Suppose that price is P0. The market value of the quantity purchased is
given
by the area
35)
A) under the demand curve.
B) under the demand curve to the left of Q0.
C) below P0 and to the left of Q0.
D) under the demand curve and above P0.
E) under the demand curve and to the right of Q0.
Answer: C
Explanation: A)
B)
C)
D)
E)
36) At a garage sale, Dominique purchases a sewing machine for $30 when she was willing to
pay $55.
If the sewing machine costs $200 new, Dominique’s consumer surplus would be
36)
A) $25. B) $0. C) $145. D) $170. E) $120.
Answer: A
Explanation: A)
B)
C)
D)
E)
20
37) At a garage sale, Ken purchases a used bicycle for $8 when he was willing to pay $25. If the
bicycle
costs $75 new, Ken’s consumer surplus is
37)
A) $50. B) $67. C) $17. D) $33. E) $0.
Answer: C
Explanation: A)
B)
C)
D)
E)
FIGURE 6-1
38) Refer to Figure 6-1. The consumer’s total utility is 38)
A) increasing at a decreasing rate.
B) increasing at an increasing rate.
C) decreasing at a decreasing rate.
D) decreasing at an increasing rate
E) constant.
Answer: A
Explanation: A)
B)
C)
D)
E)
21
39) In economics, the term “utility” is defined as the 39)
A) usefulness of a good.
B) usefulness of a theory to explain price determination.
C) total consumer satisfaction received from consumption of a good.
D) a service such as sewer and water or electricity.
E) system of basing the price of a good on its usefulness to society.
Answer: C
Explanation: A)
B)
C)
D)
E)
Sophie consumes two goods 􀁎 paperback novels and visits to the movies.
FIGURE 6-12
40) Refer to Figure 6-12. Sophie’s movement from point A to point C is 40)
A) the income effect of an increase in the price of paperback novels.
B) the total effect of a decrease in the price of paperback novels.
C) the income effect of a decrease in the price of paperback novels.
D) the total effect of a change in money income.
E) the substitution effect of an increase in the price of paperback novels.
Answer: E
Explanation: A)
B)
C)
D)
E)
22
41) The paradox in “the paradox of value” refers to the 41)
A) fact that goods with high total values command high prices.
B) situation where a good with a low total value can command a high price, while a good with a
high total value can command a low price.
C) situation where a good that is necessary to sustain life is “more valuable” than a decorative,
luxury item.
D) fact that goods with low total values command low prices.
E) confusion between supply curves and demand curves.
Answer: B
Explanation: A)
B)
C)
D)
E)
FIGURE 6-1
42) Refer to Figure 6-1. This figure illustrates the law of 42)
A) diminishing total utility.
B) increasing marginal utility.
C) maximizing utility.
D) increasing total utility.
E) diminishing marginal utility.
Answer: E
Explanation: A)
B)
C)
D)
E)
23
43) If all consumers in an economy have maximized their utility, and they face a given set of
market
prices, then each consumer will have identical
43)
A) total utilities for each good.
B) consumption of each good.
C) marginal utilities per unit of each good.
D) marginal utilities for each good.
E) ratios of marginal utility to price for each good.
Answer: E
Explanation: A)
B)
C)
D)
E)
44) A consumer maximizes his or her utility when expenditures are allocated such that 44)
A) the utility received per dollar spent on the last unit of each good is equal.
B) the marginal utility is zero for each good consumed utility.
C) the utility received from the last unit of each good is equal.
D) the total number of dollars spent on each good is equal.
E) the total utility from each good is equal.
Answer: A
Explanation: A)
B)
C)
D)
E)
45) Given a typical downward-sloping demand curve in a market that has reached its
equilibrium, the
consumer surplus
45)
A) is calculated as the product of market price and quantity consumed.
B) is measured by the area above the market price and under the demand curve.
C) is measured by the area below the market price and under the demand curve.
D) is measured by the area immediately above the demand curve.
E) cannot be measured given the information.
Answer: B
Explanation: A)
B)
C)
D)
E)
24
46) When a consumer’s marginal rate of substitution between X and Y is equal to the ratio of
prices for
X and Y, and when the consumer is spending all available income, then
46)
A) the consumer is not maximizing his utility.
B) the budget line is tangent to the indifference curve at all quantities of X and Y.
C) a higher indifference curve can be reached given the existing budget line.
D) all budget lines are tangent to all indifference curves.
E) the budget line is tangent to an indifference curve.
Answer: E
Explanation: A)
B)
C)
D)
E)
The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds
of golf.
Rounds of
Golf per
Month
Total
Value
($)
00
1 40
2 70
3 92
4 108
5 120
6 130
7 130
TABLE 6-3
47) Refer to Table 6-3. If the price of a 9-hole round of golf is $9, then Andrew will play
________
times per month.
47)
A) 5 B) 3 C) 2 D) 6 E) 4
Answer: D
Explanation: A)
B)
C)
D)
E)
25
48) Consider the income and substitution effects of price changes. The substitution effect is the
change
in quantity demanded that occurs
48)
A) when one good is substituted for another.
B) with a change in the relative prices of two or more goods.
C) as a result of a change in relative prices, with real income held constant.
D) as a result of a change in relative prices with money income held constant.
E) as a result of a change in absolute prices, with real income held constant.
Answer: C
Explanation: A)
B)
C)
D)
E)
FIGURE 6-7
49) Refer to Figure 6-7. Suppose that price is P0. The total value placed on all units of the
commodity
consumed is given by the area
49)
A) below P0 and to the left of Q0.
B) under the demand curve and to the right of Q0.
C) under the demand curve and above P0.
D) under the demand curve to the left of Q0.
E) under the demand curve to the left of Q0, but above P0.
Answer: D
Explanation: A)
B)
C)
D)
E)
26
50) If the income effect of a price change is negative and larger in absolute terms than the
substitution
effect, then the demand curve will be
50)
A) of indeterminate slope.
B) downward sloping.
C) horizontal.
D) vertical.
E) upward sloping.
Answer: E
Explanation: A)
B)
C)
D)
E)
51) Given a particular consumer’s indifference map, the further the indifference curve is from
the
origin
51)
A) the higher the marginal rate of substitution.
B) the higher the level of satisfaction.
C) the more goods are included.
D) the lower the marginal rate of substitution.
E) the lower the level of satisfaction.
Answer: B
Explanation: A)
B)
C)
D)
E)
27
FIGURE 6-11
52) Refer to Figure 6-11. Suppose the consumer begins at E1. The income and substitution
effects of the
reduction in the price of X are represented as follows:
52)
A) the distance Q1Q2 shows the substitution effect and the distance Q2Q3 shows the income
effect.
B) the distance Q1Q2 shows the income effect and the distance Q2Q3 shows the substitution
effect.
C) the distance de shows the income effect and the distance cd shows the substitution effect.
D) the distance Q1Q3 shows the substitution effect and the distance Q2Q3 shows the income
effect.
E) the distance Q1d shows the substitution effect and the distance Q2e shows the income effect.
Answer: A
Explanation: A)
B)
C)
D)
E)
28
FIGURE 6-1
53) Refer to Figure 6-1. The marginal utility of the second unit of the good consumed is 53)
A) 10. B) 40. C) 30. D) 50. E) 20.
Answer: E
Explanation: A)
B)
C)
D)
E)
54) Suppose a consumer can purchase only two goods, pasta and cheese. Let the quantity of
pasta be
measured on the vertical axis and the quantity of cheese be measured on the horizontal axis. If
the
price of pasta falls, with no change in the price of cheese or in the consumer’s money income,
then
the budget line for the consumer will rotate
54)
A) outward parallel to the existing budget line.
B) toward the origin and become steeper.
C) away from the origin and become steeper.
D) away from the origin and become flatter.
E) toward the origin and become flatter.
Answer: C
Explanation: A)
B)
C)
D)
E)
29
Diagrams A, B, and C show 3 individual consumers’ demand curves for cement. Consumers A,
B, and C constitute the entire monthly
cement market in this region.
FIGURE 6-3
55) Refer to Figure 6-3. On the regional market demand curve for cement (not shown), at which
price
level(s) is there a “kink” in the demand curve?
55)
A) $80
B) $10
C) $20 and $30
D) $40 and $70
E) $30 and $70
Answer: E
Explanation: A)
B)
C)
D)
E)
56) Suppose a consumer can purchase only two goods, beef and chicken. If the price of beef falls
(with
all other variables held constant), and the consumption of chicken increases, we can conclude
that
the increased consumption of chicken is due to
56)
A) a change in the consumer’s preference toward chicken.
B) neither the income effect nor the substitution effect.
C) the substitution effect only.
D) both the income effect and the substitution effect.
E) the income effect only.
Answer: E
Explanation: A)
B)
C)
D)
E)
30
FIGURE 6-11
57) Refer to Figure 6-11. The line joining points E1 and E3 is known as ________, which shows
how
________.
57)
A) a price consumption line; consumption changes as money income and relative prices change
B) an income consumption line; consumption changes as income changes, with relative prices
held constant
C) an income consumption line; consumption changes with changing relative prices and
constant income
D) a price consumption line; consumption changes as one price changes, with money income
held constant
Answer: D
Explanation: A)
B)
C)
D)
58) Indifference theory is based on the assumption that 58)
A) consumers can always say which of two consumption bundles they prefer without having to
say by how much they prefer it.
B) the consumer is able to quantify the difference in total utility received from two different
consumption bundles.
C) the consumer has equated the marginal utilities of all products, and is therefore indifferent
between consumption bundles.
D) the consumer receives the same utility and is therefore indifferent between any two
consumption bundles.
E) consumers are not able to rank consumption bundles in order of preference.
Answer: A
Explanation: A)
B)
C)
D)
E)
31
FIGURE 6-2
59) Refer to Figure 6-2. If the price of X is $2 and the price of Y is $1 and the consumer is
buying 4 units
of X and 2 units of Y, the consumer’s total utility is
59)
A) 69. B) 56. C) 8. D) 10. E) 52.
Answer: A
Explanation: A)
B)
C)
D)
E)
32
Diagrams A, B, and C show 3 individual consumers’ demand curves for cement. Consumers A,
B, and C constitute the entire monthly
cement market in this region.
FIGURE 6-3
60) Refer to Figure 6-3. What is the market demand (in cubic metres per month) for cement at a
price of
$80 per cubic metre?
60)
A) 4000 B) 2000 C) 3000 D) 0 E) 1000
Answer: E
Explanation: A)
B)
C)
D)
E)
61) If consumption of an extra unit of some good generates a marginal utility of zero, then
consumption of that additional unit would mean that total utility would
61)
A) be negative.
B) also be zero.
C) be increasing.
D) be decreasing.
E) not change.
Answer: E
Explanation: A)
B)
C)
D)
E)
33
The figures below show Chris’s consumption of specialty coffee per week.
FIGURE 6-10
62) Refer to Figure 6-10. In general, the absolute value of the slope of the budget lines is equal to
________, which reflects the ________ of specialty coffees in terms of all other goods.
62)
A) the relative price ratio (Pall other goods/Pspecialty coffee); demand
B) $15/value of all other goods; opportunity cost
C) the quantity of all other goods consumed divided by the quantity of specialty coffees
consumed; quantity
D) the relative price ratio (Pspecialty coffee/Pall other goods); opportunity cost
E) the dollar value of all other goods divided by the number of specialty coffees consumed per
week; demand
Answer: D
Explanation: A)
B)
C)
D)
E)
34
63) Laurie spends all of her money buying bread and cheese. The marginal utility she receives
from the
last loaf of bread is 60 and from the last block of cheese is 30. The price of bread is $3 and the
price
of cheese is $2. Laurie
63)
A) should buy more cheese and less bread in order to maximize her utility.
B) should buy more bread and more cheese in order to maximize her utility.
C) should buy more bread and less cheese in order to maximize her utility.
D) is buying bread and cheese in utility-maximizing amounts.
E) is spending too much money on bread and cheese.
Answer: C
Explanation: A)
B)
C)
D)
E)
64) Suppose Arun consumes only 2 goods — books and CDs — and has a set of downward
sloping
indifference curves. As Arun moves from one point to another on a particular indifference curve,
64)
A) Arun is consuming the same combination of goods, but with varying levels of income.
B) the combination of books and CDs will vary, but the level of utility remains constant.
C) the combination of books and CDs that Arun prefers will remain constant, but the level of
satisfaction will vary.
D) Arun’s level of satisfaction will vary as the combinations of books and CDs varies.
E) the combination of books and CDs and Arun’s income level will remain constant.
Answer: B
Explanation: A)
B)
C)
D)
E)
35
FIGURE 6-9
65) Refer to Figure 6-9. In part (ii), the consumer’s move from point Z to point Y is caused by
65)
A) an increase in the price of bread.
B) an increase in the price of milk.
C) an decrease in the price of bread.
D) a decrease in money income.
E) a change in the consumer’s preferences towards milk.
Answer: A
Explanation: A)
B)
C)
D)
E)
36
The table below shows the quantities of toffee bars and bags of cashews that a consumer could
consume over a 1-week period.
Toffee (bars) Cashews (bags)
Units
Marginal
Utility
Total
Utility
Marginal
Utility
Total
Utility
1 10 10 12 12
2 8 18 10 22
3 5 23 7 29
4 3 26 5 34
5 1 27 2 36
6 0 27 1 37
7 0 27 0 27
TABLE 6-1
66) Refer to Table 6-1. If this consumer purchases 3 toffee bars and 4 bags of cashews per week,
his/her
total utility will be
66)
A) 31. B) 54. C) 23. D) 57. E) 7.
Answer: D
Explanation: A)
B)
C)
D)
E)
67) Since there is a relatively plentiful supply of water in Canada (this is not true in many parts
of the
world), the consumption of water in Canada
67)
A) takes place at a relatively low marginal value.
B) should be unlimited at a price of $0.
C) takes place at a relatively high marginal value.
D) takes priority over all other goods.
E) should be regulated by the government.
Answer: A
Explanation: A)
B)
C)
D)
E)
37
68) The condition required for a consumer to be maximizing utility, for any pair of products, X
and Y,
is
68)
A) PX = PY.
B) PX(MUX) = PY(MUY).
C) MUX/PX = MUY/PY.
D) MUX/PY = MUY/PX.
E) MUX = MUY.
Answer: C
Explanation: A)
B)
C)
D)
E)
Dave’s Consumer Surplus on Movie Rentals per Week
Number of movies
rented per week
Amount Dave is willing to
pay to rent this movie ($)
Dave’s consumer surplus
on each movie rental if
price is $5 each
1st 10.00
2nd 8.00
3rd 6.50
4th 5.50
5th 5.00
6th 4.50
7th 4.25
TABLE 6-2
69) Refer to Table 6-2. Assuming Dave maximizes his utility when the price is $5, his consumer
surplus (in dollars) on each movie rental in order from 1 through 7 is as follows:
69)
A) 5.00 on all units.
B) 10.00, 8.00, 6.50, 5.50, 5.00, 4.50, 4.25.
C) 5.00, 3.00, 1.50, 0.50, 0, 0, 0.
D) 0 on all units.
E) 10.00, 18.00, 24.50, 30.00, 35.00, 39.50, 43.75.
Answer: C
Explanation: A)
B)
C)
D)
E)
38
70) Bjorn is a student with a monthly budget of $500, which he allocates between transportation
services and “all other goods.” Suppose the price of transportation is $5 per unit, and the price of
“all other goods” is $20 per unit. The marginal utility he currently receives from his consumption
of
transportation services is 60. What is his marginal utility from the consumption of “all other
goods”
if he is maximizing his utility?
70)
A) 200 B) 240 C) 5 D) 20 E) 25
Answer: B
Explanation: A)
B)
C)
D)
E)
71) A parallel shift in the consumer’s budget line must indicate a change in 71)
A) at least one money price.
B) both prices.
C) tastes.
D) real income.
E) money income.
Answer: D
Explanation: A)
B)
C)
D)
E)
39
FIGURE 6-1
72) Refer to Figure 6-1. Marginal utility is zero when total utility is 72)
A) equal to marginal utility.
B) is decreasing.
C) equal to zero.
D) at its maximum.
E) is increasing.
Answer: D
Explanation: A)
B)
C)
D)
E)
73) An individual’s consumer surplus from some product can be eliminated entirely by:
1. raising the price until very few units are bought.
2. charging a price for each unit that is equal to the individual’s marginal value for each unit.
3. raising the price until zero units are purchased.
73)
A) 1 only
B) 2 only
C) 3 only
D) 2 or 3
E) 1 or 2, but not 3.
Answer: D
Explanation: A)
B)
C)
D)
E)
40
The diagram below shows a set of budget lines facing a household.
FIGURE 6-8
74) Refer to Figure 6-8. The movement of the budget line from ab to db could be caused by 74)
A) a decrease in the price of food.
B) a decrease in money income.
C) a decrease in the price of housing.
D) an increase in the price of housing.
E) an increase in the price of food.
Answer: D
Explanation: A)
B)
C)
D)
E)
41
Diagrams A, B, and C show 3 individual consumers’ demand curves for cement. Consumers A,
B, and C constitute the entire monthly
cement market in this region.
FIGURE 6-3
75) Refer to Figure 6-3. On the regional market demand curve for cement (not shown), at what
level(s)
of quantity demanded is there a “kink” in the demand curve?
75)
A) 3000 cubic metres
B) 1500 and 3500 cubic metres
C) 12 000 cubic metres
D) 1500 and 7500 cubic metres
E) 0 cubic metres
Answer: D
Explanation: A)
B)
C)
D)
E)
76) The substitution effect is 76)
A) the change in quantity demanded that occurs when one good is substituted for another.
B) the change in quantity demanded that occurs as a result of a change in absolute prices, with
real income held constant.
C) the change in quantity demanded that occurs as a result of a change in relative prices with
money income held constant.
D) the change in quantity demanded that occurs as a result of a change in relative prices with
real income held constant.
E) the change in the relative prices of two or more goods.
Answer: D
Explanation: A)
B)
C)
D)
E)
42
77) The marginal rate of substitution measures the tradeoff between the 77)
A) different values that two consumers place on a good.
B) prices of two goods along a budget line.
C) amount of one good the consumer is willing to purchase and its own price.
D) different indifference curves.
E) amount of one good the consumer is willing to give up in exchange for another good along an
indifference curve.
Answer: E
Explanation: A)
B)
C)
D)
E)
78) In indifference curve analysis, the consumer’s utility-maximizing point is where 78)
A) the indifference curve farthest from the origin intersects with the budget line that is farthest
from the origin.
B) the consumer’s marginal utility curve is tangent to the relevant budget line.
C) the price-consumption line is tangent to the budget line.
D) one indifference curve is tangent to the relevant budget line.
E) each indifference curve has the same slope as the relevant budget line.
Answer: D
Explanation: A)
B)
C)
D)
E)
79) Assume you are consuming two goods, X and Y. Suppose that the money prices for X and Y
remain
unchanged, but your income increases by 20%. What happens to your consumption of good X?
79)
A) it stays the same
B) it increases
C) it increases or decreases, depending on whether it is normal or inferior
D) it increases by 20%
E) it decreases
Answer: C
Explanation: A)
B)
C)
D)
E)
43
FIGURE 6-7
80) Refer to Figure 6-7. Suppose that price is P0. Total consumer surplus is then given by the
area 80)
A) under the demand curve to the left of Q0, but above P0.
B) under the demand curve to the left of Q0.
C) under the entire demand curve.
D) above the market price.
E) below P0 and to the left of Q0.
Answer: A
Explanation: A)
B)
C)
D)
E)
81) For your typical consumption levels of water and diamonds, the good with the higher
marginal
utility is ________; the good with the higher total utility is ________; and the good with the
greatest
consumer surplus is ________.
81)
A) water; diamonds; water
B) diamonds; water; water
C) water; water; diamonds
D) water; water; water
E) diamonds; water; diamonds
Answer: B
Explanation: A)
B)
C)
D)
E)
44
82) Suppose a consumer can purchase only two goods, soap and apples. If the price of soap falls
and
the consumption of apples increases, we can conclude that the increased consumption of apples
is
due to
82)
A) the income effect only.
B) the substitution effect only.
C) the deflation effect.
D) both the income effect and the substitution effect.
E) neither the income effect nor the substitution effect.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diagrams A, B, and C show 3 individual consumers’ demand curves for cement. Consumers A,
B, and C constitute the entire monthly
cement market in this region.
FIGURE 6-3
83) Refer to Figure 6-3. What is the market demand (in cubic metres per month) for cement at a
price of
$60 per cubic metre?
83)
A) 4000 B) 2000 C) 0 D) 1000 E) 3000
Answer: E
Explanation: A)
B)
C)
D)
E)
45
FIGURE 6-6
84) Refer to Figure 6-6. Suppose the market price is p*. In this case, consumer surplus is
outlined by
the area
84)
A) ACF B) ADE C) BCD D) ABDF E) ACDE
Answer: C
Explanation: A)
B)
C)
D)
E)
85) The “law” of diminishing marginal utility implies that the 85)
A) first unit of a good consumed will contribute most to the consumer’s satisfaction.
B) last unit of a good consumed will contribute most to the consumer’s satisfaction.
C) marginal utility of a good diminishes over time.
D) total utility is constant as more units are consumed.
E) total utility is negative.
Answer: A
Explanation: A)
B)
C)
D)
E)
46
86) Consider the pizza market, with a downward-sloping demand curve and an upward-sloping
supply curve. Suppose 100 pizzas are purchased at the free-market equilibrium price. The
consumer surplus on the 100th pizza is
86)
A) positive.
B) zero.
C) negative.
D) unknown.
E) non-negative.
Answer: B
Explanation: A)
B)
C)
D)
E)
47
The figures below show Chris’s consumption of specialty coffee per week.
FIGURE 6-10
87) Refer to Figure 6-10. The two diagrams in Figure 6-10 are showing 87)
A) that Chris is indifferent between bundles A, B and C.
B) the derivation of Chris’s demand curve for specialty coffee.
C) the derivation of Chris’s indifference curve for specialty coffee.
D) that Chris is indifferent between points D, E and F.
E) the change in Chris’s preferences toward specialty coffee.
Answer: B
Explanation: A)
B)
C)
D)
E)
48
88) Marginal utility analysis predicts a downward-sloping demand curve for good X because 88)
A) as PX rises, the consumer increases purchases of X such that MUX/PX is equal to MU/P for
all
other products.
B) all demand curves are downward sloping, regardless of the behaviour of consumers.
C) utility-maximizing consumers equate marginal utility received for each product consumed.
D) as PX falls, the consumer increases purchases of X until MUX/PX is equal to MU/P for all
other products.
E) as PX falls, the ratio MUX/PX becomes smaller, causing the consumer to purchase more of
good X.
Answer: D
Explanation: A)
B)
C)
D)
E)
The table below shows the quantities of toffee bars and bags of cashews that a consumer could
consume over a 1-week period.
Toffee (bars) Cashews (bags)
Units
Marginal
Utility
Total
Utility
Marginal
Utility
Total
Utility
1 10 10 12 12
2 8 18 10 22
3 5 23 7 29
4 3 26 5 34
5 1 27 2 36
6 0 27 1 37
7 0 27 0 27
TABLE 6-1
89) Refer to Table 6-1. If the price of toffee bars is $1 each, bags of cashews are $2 each, and
this
consumer has $7 per week to spend on these two snacks, how many of each will he/she purchase
to
maximize utility?
89)
A) 3 toffee bars and 2 bags of cashews
B) 0 toffee bars and 3 bags of cashews
C) 7 toffee bars and 0 bags of cashews
D) 1 toffee bars and 3 bags of cashews
E) 2 toffee bars and 2 bags of cashews
Answer: A
Explanation: A)
B)
C)
D)
E)
49
90) If total utility from the consumption of some product is decreasing as more units are
consumed,
then marginal utility must be
90)
A) decreasing.
B) increasing at a decreasing rate.
C) decreasing at an increasing rate.
D) positive.
E) negative.
Answer: E
Explanation: A)
B)
C)
D)
E)
91) Christine is allocating her household expenditure between cleaning services and gardening
services
in order to maximize the household’s total utility. For the quantities of cleaning and gardening
services she has chosen, an increase in the price of cleaning service will, ceteris paribus,
91)
A) increase the marginal utility of a unit of cleaning service.
B) have no effect on the marginal utility per dollar spent on cleaning service.
C) reduce the marginal utility of a unit of cleaning service.
D) reduce the marginal utility per dollar spent on cleaning service.
E) increase the marginal utility per dollar spent on cleaning service.
Answer: D
Explanation: A)
B)
C)
D)
E)
92) Suppose there are only two goods, A and B, and that consumer income is constant. If the
price of
good A falls and the consumption of good B rises, we can conclude that
92)
A) both A and B are normal goods.
B) A is a normal good.
C) B is an inferior good.
D) B is a normal good.
E) A is an inferior good.
Answer: D
Explanation: A)
B)
C)
D)
E)
50
The figures below show Chris’s consumption of specialty coffee per week.
FIGURE 6-10
93) Refer to Figure 6-10. Suppose Chris’s income is such that he is able to buy no more than 10
specialty coffees per week. If Chris is maximizing his utility at this level of income, how many
specialty coffees is he consuming per week?
93)
A) 10 B) 5 C) 2 D) 6 E) 4
Answer: E
Explanation: A)
B)
C)
D)
E)
51
FIGURE 6-2
94) Refer to Figure 6-2. Suppose that the price of X is $2, the price of Y is $1, and the
consumer’s
income is $10. The consumer is currently buying 3 units of good X and 4 units of good Y. In
order to
maximize his/her utility, the consumer should
94)
A) buy the same amount of X but less Y.
B) buy more of X and less Y.
C) not change his/her behaviour.
D) buy more of X but the same amount Y.
E) buy less of X and more Y.
Answer: C
Explanation: A)
B)
C)
D)
E)
52
95) If a consumer is faced with a choice of products A, B, C, …, and has a given money income,
the
consumer’s utility will be maximized when
95)
A) TUA = TUB = TUC = …
B) MUA = PA; MUB = PB; MUC = PC; …
C) MUA/PA = MUB/PB = MUC/PC = …
D) MUA = MUB = MUC = …
E) PA = PB = PC = …
Answer: C
Explanation: A)
B)
C)
D)
E)
96) Marginal utility theory is about 96)
A) how producers allocate their scarce resources.
B) proving that demand curves are always downward sloping.
C) calculating consumer surplus.
D) the total satisfaction resulting from the consumption of some good by the consumer.
E) the consumer behaviour that underlies the theory of demand.
Answer: E
Explanation: A)
B)
C)
D)
E)
53
The table below shows the quantities of toffee bars and bags of cashews that a consumer could
consume over a 1-week period.
Toffee (bars) Cashews (bags)
Units
Marginal
Utility
Total
Utility
Marginal
Utility
Total
Utility
1 10 10 12 12
2 8 18 10 22
3 5 23 7 29
4 3 26 5 34
5 1 27 2 36
6 0 27 1 37
7 0 27 0 27
TABLE 6-1
97) Refer to Table 6-1. The maximum utility that a consumer can obtain from toffee bars and
bags of
cashews per week is
97)
A) 56. B) 74. C) 54. D) 64. E) 22.
Answer: D
Explanation: A)
B)
C)
D)
E)
54
Dave’s Consumer Surplus on Movie Rentals per Week
Number of movies
rented per week
Amount Dave is willing to
pay to rent this movie ($)
Dave’s consumer surplus
on each movie rental if
price is $5 each
1st 10.00
2nd 8.00
3rd 6.50
4th 5.50
5th 5.00
6th 4.50
7th 4.25
TABLE 6-2
98) Refer to Table 6-2. If Dave rents 3 movies in one week, his total consumer surplus is
________ and
the total amount he pays is ________.
98)
A) $5.50; $5.00
B) $6.50; $5.00
C) $19.50; $15.00
D) $9.50; $15.00
E) $24.50; $24.50
Answer: D
Explanation: A)
B)
C)
D)
E)
99) In indifference curve analysis, a point to the left of the consumer’s budget line 99)
A) shows a combination of goods that are beyond the income of the household.
B) indicates consumption spending beyond current income.
C) implies that the household is not spending all of its income on the goods in question.
D) implies the household is paying above-market prices for the goods in question.
E) implies the household is paying below-market prices for the goods in question.
Answer: C
Explanation: A)
B)
C)
D)
E)
55
FIGURE 6-1
100) Refer to Figure 6-1. Total utility is at its maximum when marginal utility is 100)
A) equal to total utility.
B) equal to zero.
C) at the maximum.
D) negative.
E) positive.
Answer: B
Explanation: A)
B)
C)
D)
E)
56
FIGURE 6-5
101) Refer to Figure 6-5. For both goods, the price increases from P0 to P1. The substitution
effect is
illustrated by the change in quantity demanded from A to B; the income effect is illustrated by
the
change in quantity demanded from B to C. Good Y is certainly a(n) ________ good.
101)
A) normal B) necessity C) inferior D) Giffen E) luxury
Answer: A
Explanation: A)
B)
C)
D)
E)
102) Consumer surplus is 102)
A) the sum of the extra value placed on each unit of a commodity above the market price paid
for each.
B) the total value that consumers place on their purchases.
C) the same as total utility.
D) the same as Karl Marx’s notion of surplus value.
E) the marginal value that consumers place on their purchases.
Answer: A
Explanation: A)
B)
C)
D)
E)
57
103) A basic hypothesis of marginal utility theory is that the utility a consumer derives from
successive
units of a good diminishes as total consumption of the good increases. This hypothesis is known
as
103)
A) the utility theory of demand.
B) the law of diminishing marginal utility.
C) utility maximization.
D) the law of diminishing total utility.
E) the paradox of value.
Answer: B
Explanation: A)
B)
C)
D)
E)
58
The figures below show Chris’s consumption of specialty coffee per week.
FIGURE 6-10
104) Refer to Figure 6-10. The line connecting points A, B and C is ________. The line
connecting points
D, E and F is ________.
104)
A) the demand curve; the budget line
B) the income-consumption line; the budget line
C) the price-consumption line; the demand curve
D) the budget line; the price-consumption line
E) the income-consumption line; the demand curve
Answer: C
Explanation: A)
B)
C)
D)
E)
59
The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds
of golf.
Rounds of
Golf per
Month
Total
Value
($)
00
1 40
2 70
3 92
4 108
5 120
6 130
7 130
TABLE 6-3
105) Refer to Table 6-3. If the price of a 9-hole round of golf is $16, and Andrew is maximizing
his
utility, then his consumer surplus will be
105)
A) $310. B) $92. C) $108. D) $16. E) $44.
Answer: E
Explanation: A)
B)
C)
D)
E)
106) Consumer surplus is 106)
A) the total value that a consumer receives from the purchase of a particular good.
B) the consumption of a commodity above and beyond the amount required by the consumer.
C) a measure of the gains that a consumer forgoes by buying this product rather than another.
D) the difference between what the consumer is willing to pay for all the units consumed and
what he or she actually paid.
E) the sum of the marginal values to the consumer.
Answer: D
Explanation: A)
B)
C)
D)
E)
60
107) Since there is a limited supply of diamonds in the world, the consumption of diamonds 107)
A) is no less important than consumption of water.
B) takes priority over some other good.
C) takes place at relatively low marginal value.
D) should be regulated by the government.
E) takes place at relatively high marginal value.
Answer: E
Explanation: A)
B)
C)
D)
E)
The table below shows the quantities of toffee bars and bags of cashews that a consumer could
consume over a 1-week period.
Toffee (bars) Cashews (bags)
Units
Marginal
Utility
Total
Utility
Marginal
Utility
Total
Utility
1 10 10 12 12
2 8 18 10 22
3 5 23 7 29
4 3 26 5 34
5 1 27 2 36
6 0 27 1 37
7 0 27 0 27
TABLE 6-1
108) Refer to Table 6-1. If the prices of toffee bars and bags of cashews are both $1 and this
consumer
has $7 per week to spend on these two snacks, how many of each will he/she purchase to
maximize
utility?
108)
A) 2 toffee bars and 5 bags of cashews
B) 3 toffee bars and 4 bags of cashews
C) 6 toffee bars and 1 bag of cashews
D) 5 toffee bars and 2 bags of cashews
E) 4 toffee bars and 3 bags of cashews
Answer: B
Explanation: A)
B)
C)
D)
E)
61
FIGURE 6-2
109) Refer to Figure 6-2. Suppose the price of X is $2, the price of Y is $1, and the consumer’s
income is
$10. The consumer is currently buying 4 units of good X and 2 units of good Y. In order to
maximize his utility, he should
109)
A) buy the same amount of X but less Y.
B) make no changes—he is already maximizing his total utility.
C) buy less of X and more Y.
D) buy more of X but the same amount Y.
E) buy more of X and less Y.
Answer: C
Explanation: A)
B)
C)
D)
E)
62
110) As a consumer moves along an indifference curve 110)
A) the combination of goods and the consumer’s income level will remain constant.
B) the combination of goods will vary, but the level of money income remains constant.
C) the combination of goods will vary but the level of utility remains constant.
D) his level of utility will vary as the combinations of goods varies.
E) the combination of goods he prefers will remain constant, but the level of satisfaction will
vary.
Answer: C
Explanation: A)
B)
C)
D)
E)
111) The idea that the utility a consumer derives from successive units of a good diminishes as
total
consumption of the good increases is known as
111)
A) the utility theory of demand.
B) utility maximization.
C) diminishing marginal utility.
D) the paradox of value.
E) diminishing total utility.
Answer: C
Explanation: A)
B)
C)
D)
E)
63
FIGURE 6-9
112) Refer to Figure 6-9. In part (i), the line joining points A, B, and C is known as ________,
which
shows how ________.
112)
A) an income-consumption line; consumption changes with changing relative prices and
constant income
B) a price-consumption line; consumption changes as relative prices change, with money
income constant
C) a price-consumption line; consumption changes as money income and relative prices change
D) an income-consumption line; consumption changes as income changes, with relative prices
held constant
E) an indifference map; the value of various combinations of two goods changes
Answer: D
Explanation: A)
B)
C)
D)
E)
64
The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds
of golf.
Rounds of
Golf per
Month
Total
Value
($)
00
1 40
2 70
3 92
4 108
5 120
6 130
7 130
TABLE 6-3
113) Refer to Table 6-3. If the price of a 9-hole round of golf is $19, then Andrew will play
________
rounds per month.
113)
A) 6 or more B) 5 C) 2 D) 3 E) 4
Answer: D
Explanation: A)
B)
C)
D)
E)
114) If money income is reduced by half, and the prices of all goods consumed by the household
are
reduced by half, the household’s budget line will
114)
A) shift inward.
B) not change.
C) become steeper.
D) shift outward.
E) become flatter.
Answer: B
Explanation: A)
B)
C)
D)
E)
65
115) The demand curve for a good with an income elasticity of less than one 115)
A) must be upward sloping.
B) must be downward sloping.
C) indicates a normal good.
D) will be upward sloping only if the substitution effect outweighs the income effect.
E) will be upward sloping only if the income effect outweighs the substitution effect.
Answer: E
Explanation: A)
B)
C)
D)
E)
FIGURE 6-4
116) Refer to Figure 6-4. For both goods, the price falls from P0 to P1. The substitution effect is
illustrated by the change in quantity demanded from A to B; the income effect is illustrated by
the
change in quantity demanded from B to C. Good X is certainly a(n) ________ good.
116)
A) Giffen B) luxury C) normal D) necessity E) inferior
Answer: E
Explanation: A)
B)
C)
D)
E)
66
The diagram below shows a set of budget lines facing a household.
FIGURE 6-8
117) Refer to Figure 6-8. The movement of the budget line from ab to ac could be caused by
117)
A) a decrease in the price of housing.
B) an increase in the price of food.
C) a decrease in the price of food.
D) an increase in the price of housing.
E) an increase in money income.
Answer: C
Explanation: A)
B)
C)
D)
E)
118) Any consumption point that is on the budget line 118)
A) implies the household is paying above-market prices for the goods in question.
B) implies the household is paying below-market prices for the goods in question.
C) implies that the household is not spending all of its income on the goods in question.
D) indicates consumption spending beyond current income.
E) implies that the household is spending all of its income on the goods in question.
Answer: E
Explanation: A)
B)
C)
D)
E)
67
Diagrams A, B, and C show 3 individual consumers’ demand curves for cement. Consumers A,
B, and C constitute the entire monthly
cement market in this region.
FIGURE 6-3
119) Refer to Figure 6-3. What is the market demand (in cubic metres per month) for cement at a
price of
$20 per cubic metre?
119)
A) 0 B) 4000 C) 5000 D) 14 000 E) 10 000
Answer: D
Explanation: A)
B)
C)
D)
E)
68
FIGURE 6-1
120) Refer to Figure 6-1. The total utility from consuming two units of the good is 120)
A) 100. B) 60. C) 20. D) 40. E) 80.
Answer: E
Explanation: A)
B)
C)
D)
E)
121) Assume you are consuming two goods, X and Y. X and Y are both normal goods but they
are not
close complements. The price of good X increases but the price of Y remains unchanged.
However,
you are given enough additional income to ensure that your utility remains unchanged. What
happens to your consumption of good X?
121)
A) it increases or decreases
B) it increases over the long run
C) it stays the same
D) it decreases
E) it increases
Answer: D
Explanation: A)
B)
C)
D)
E)
69
122) Economists usually assume that consumers 122)
A) are poor judges of what is best for them.
B) are motivated to maximize their utility.
C) spend all of their current income.
D) usually save as much as possible of their income.
E) are motivated to maximize their profit.
Answer: B
Explanation: A)
B)
C)
D)
E)
123) Assume the quantity of good X is measured on the horizontal axis and the quantity of good
Y on
the vertical axis. Initial prices are PX = $5 and PY = $10. The consumer’s income is $100. If PY
increases to $20, then
123)
A) the entire budget line shifts parallel to the left.
B) the budget line will rotate to the left with the slope changing from 1/2 to 1/4 (in absolute
values).
C) the budget line will rotate to the left, slope remaining constant.
D) the budget line will rotate to the right with the slope changing from 1/4 to 1/2 (in absolute
values).
E) the entire budget line shifts parallel to the right.
Answer: B
Explanation: A)
B)
C)
D)
E)
124) The substitution effect of a price change leads consumers to ________ their demand for
goods
whose prices have risen. The income effect leads consumers to buy less of all ________ goods
whose prices have risen.
124)
A) reduce; normal
B) reduce; Giffen
C) increase; normal
D) increase; inferior
E) reduce; complement
Answer: A
Explanation: A)
B)
C)
D)
E)
70
Dave’s Consumer Surplus on Movie Rentals per Week
Number of movies
rented per week
Amount Dave is willing to
pay to rent this movie ($)
Dave’s consumer surplus
on each movie rental if
price is $5 each
1st 10.00
2nd 8.00
3rd 6.50
4th 5.50
5th 5.00
6th 4.50
7th 4.25
TABLE 6-2
125) Refer to Table 6-2. How many movies will Dave rent per week such that the consumer
surplus on
the last unit is zero?
125)
A) 7 B) 5 C) 1 D) 6 E) 3
Answer: B
Explanation: A)
B)
C)
D)
E)
126) Consider a consumer who divides his income between spending on good X and good Y.
The
opportunity cost of good X in terms of good Y is reflected by the
126)
A) absolute price of good Y.
B) price of good X relative to the prices of all other goods.
C) ratio of the price of X to the price of Y.
D) absolute price of good X.
E) ratio of the price of Y to the price of X.
Answer: C
Explanation: A)
B)
C)
D)
E)
71
The table below shows the quantities of toffee bars and bags of cashews that a consumer could
consume over a 1-week period.
Toffee (bars) Cashews (bags)
Units
Marginal
Utility
Total
Utility
Marginal
Utility
Total
Utility
1 10 10 12 12
2 8 18 10 22
3 5 23 7 29
4 3 26 5 34
5 1 27 2 36
6 0 27 1 37
7 0 27 0 27
TABLE 6-1
127) Refer to Table 6-1. If the prices of toffee bars and bags of cashews are both $1 and this
consumer
has $11 per week to spend on snacks, how many of each will he/she purchase?
127)
A) 4 toffee bars and 7 bags of cashews
B) 5 toffee bars and 6 bags of cashews
C) 6 toffee bars and 5 bags of cashews.
D) 3 toffee bars and 8 bags of cashews
E) 5 toffee bars and 5 bags of cashews
Answer: B
Explanation: A)
B)
C)
D)
E)
128) If consumption of an extra unit of a product delivers a positive marginal utility, then
consumption
of that additional unit would mean
128)
A) that total utility would be decreasing.
B) that the consumer would no longer receive any satisfaction from any consumption of this
good.
C) that total utility would be increasing.
D) that total utility would not change.
E) that total utility is also zero.
Answer: C
Explanation: A)
B)
C)
D)
E)
72
129) If John consumes only two goods, A and B, and he is maximizing his utility subject to his
budget
constraint,
129)
A) MUA/MUB equals 1.
B) MUA/MUB equals the ratio of the price of A to the price of B.
C) MUA/MUB is at a maximum.
D) MUA/MUB equals the ratio of the total utility of A to the total utility of B.
E) MUA/MUB equals zero.
Answer: B
Explanation: A)
B)
C)
D)
E)
73
FIGURE 6-2
130) Refer to Figure 6-2. Suppose the price of Y is $1 and the consumer’s income is $10.
Initially, the
price of X is $2 and the consumer is buying 3 units of good X and 4 units of good Y. If the price
of X
then falls to $1, what quantities of X and Y will he/she now purchase in order to maximize total
utility?
130)
A) 6 X and 4 Y.
B) 5 X and 5 Y.
C) 2 X and 8 Y.
D) 3 X and 7 Y.
E) 4 X and 6 Y.
Answer: A
Explanation: A)
B)
C)
D)
E)
74
Answer Key
Testname: C6
1) A
2) E
3) D
4) A
5) E
6) B
7) C
8) D
9) E
10) C
11) A
12) E
13) E
14) E
15) C
16) C
17) E
18) C
19) E
20) D
21) C
22) D
23) B
24) A
25) E
26) A
27) E
28) C
29) D
30) E
31) B
32) D
33) C
34) A
35) C
36) A
37) C
38) A
39) C
40) E
41) B
42) E
43) E
44) A
45) B
46) E
47) D
48) C
49) D
50) E
75
Answer Key
Testname: C6
51) B
52) A
53) E
54) C
55) E
56) E
57) D
58) A
59) A
60) E
61) E
62) D
63) C
64) B
65) A
66) D
67) A
68) C
69) C
70) B
71) D
72) D
73) D
74) D
75) D
76) D
77) E
78) D
79) C
80) A
81) B
82) A
83) E
84) C
85) A
86) B
87) B
88) D
89) A
90) E
91) D
92) D
93) E
94) C
95) C
96) E
97) D
98) D
99) C
100) B
76
Answer Key
Testname: C6
101) A
102) A
103) B
104) C
105) E
106) D
107) E
108) B
109) C
110) C
111) C
112) D
113) D
114) B
115) E
116) E
117) C
118) E
119) D
120) E
121) D
122) B
123) B
124) A
125) B
126) C
127) B
128) C
129) B
130) A
77

chapter 7

Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
1) Refer to Table 7-4. The total fixed cost of producing 305 units of output is 1)
A) $100. B) $125. C) $225 D) $112.50. E) $305.
Answer: A
Explanation: A)
B)
C)
D)
E)
2) Suppose a firm with the usual U-shaped cost curves is producing a level of output such that its
short-run costs are as follows:
ATC = $0.37 per unit
AVC = $0.32 per unit
AFC = $0.05 per unit
MC = $0.43 per unit
Given these short-run costs, as the firm increases its output, which of the following statements is
true?
2)
A) Average product of the variable factor must be increasing.
B) Marginal product of the variable factor is at its minimum point.
C) Marginal product of the variable factor must be increasing.
D) Marginal product of the variable factor must be decreasing.
E) The point of diminishing average product of the variable factor has not yet been reached.
Answer: D
Explanation: A)
B)
C)
D)
E)
1
3) Consider a firm in the short run. If AP = MP and both are positive, then total product 3)
A) is decreasing as extra units of the variable factor are employed.
B) is increasing as extra units of the variable factor are employed.
C) is at a maximum.
D) is at its minimum.
E) may be either increasing or decreasing as extra units of the variable factor are employed.
Answer: B
Explanation: A)
B)
C)
D)
E)
4) The relationship between factors of production used in the production process and the
resulting
output is called a(n)
4)
A) production boundary.
B) production function.
C) economic function.
D) cost function.
E) consumption possibilities boundary.
Answer: B
Explanation: A)
B)
C)
D)
E)
The table below provides the annual revenues and costs for a family-owned firm producing
catered meals.
Total Revenues ($) 500 000
Total Costs ($)
– wages and salaries 200 000
– risk-free return of 6% on owners’ capital of 250 000 15 000
– rent 105 000
– depreciation of capital equipment 25 000
– risk premium of 8% on owners’ capital of 250 000 20 000
– intermediate inputs 150 000
– forgone wages of owners in alternative employment 80 000
– interest on bank loan 10 000
TABLE 7-1
5) Refer to Table 7-1. The implicit costs for this family-owned firm are 5)
A) $115 000. B) $35 000. C) $100 000. D) $80 000. E) $490 000.
Answer: A
Explanation: A)
B)
C)
D)
E)
2
6) In the short run, the firm’s product curves show 6)
A) TP is at its maximum when MP = O.
B) AP is at its minimum when MP = AP.
C) when MP > AP, AP is decreasing.
D) TP begins to decrease when AP begins to decrease.
E) when the MP curve cuts the AP curve from below, the AP curve begins to fall.
Answer: A
Explanation: A)
B)
C)
D)
E)
7) Which of the following is the best example of an input to production that is an intermediate
product?
7)
A) a sewing machine
B) the skills and training of a web designer
C) 40 acres of farmland
D) a textile factory
E) computer circuit boards
Answer: E
Explanation: A)
B)
C)
D)
E)
3
FIGURE 7-1
8) Refer to Figure 7-1. Total product is increasing at an increasing rate 8)
A) from 0 to 32 units of output.
B) from 0 to 140 units of output.
C) between 140 to 200 units of output.
D) between 200 to 250 units of output.
E) over the whole production range.
Answer: B
Explanation: A)
B)
C)
D)
E)
4
9) Which of the following is most likely a long-run decision for a firm? 9)
A) The number of workers to hire.
B) The hours a store should stay open.
C) How many warehouses to build.
D) The price at which to sell the product.
E) The amount of inventory to stock.
Answer: C
Explanation: A)
B)
C)
D)
E)
10) Churches, the YMCA, the Salvation Army, and the Nature Conservancy are examples of 10)
A) corporations.
B) non-profit organizations.
C) partnership.
D) single proprietorship.
E) limited partnership.
Answer: B
Explanation: A)
B)
C)
D)
E)
11) A firm’s short-run marginal cost curve is decreasing when 11)
A) average fixed cost is increasing.
B) total fixed cost is decreasing.
C) marginal product is decreasing.
D) capacity is reached.
E) marginal product is increasing.
Answer: E
Explanation: A)
B)
C)
D)
E)
12) In economics, the term “fixed costs” means 12)
A) implicit costs.
B) costs incurred in the past that involve no implicit costs.
C) costs that are never accounted for.
D) costs that do not vary with the level of output produced.
E) opportunity costs.
Answer: D
Explanation: A)
B)
C)
D)
E)
5
The table below provides information on output per month and short-run costs for a firm
producing outdoor wooden lounge chairs.
Q TFC TVC TC
5 200 200 400
10 200 220 420
15 200 240 440
20 200 260 460
25 200 350 550
30 200 810 1010
TABLE 7-5
13) Refer to Table 7-5. Given the information in the table about short-run costs, this firm would
minimize the average variable cost of production when producing
13)
A) 10 chairs. B) 15 chairs. C) 20 chairs. D) 25 chairs. E) 30 chairs.
Answer: C
Explanation: A)
B)
C)
D)
E)
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
14) Refer to Table 7-4. Average fixed costs for 305 units of output is approximately 14)
A) 45 cents. B) 74 cents. C) 82 cents. D) 33 cents. E) 41 cents.
Answer: D
Explanation: A)
B)
C)
D)
E)
6
The following data show the total output for a firm when different amounts of labour are
combined with a fixed amount of capital.
Assume that the wage per unit of labour is $10 and the cost of the capital is $50.
Labour per period Total output per period
00
1 10
2 30
3 90
4 132
5 150
TABLE 7-3
15) Refer to Table 7-3. The marginal product of labour is at its maximum when the firm changes
the
amount of labour hired from
15)
A) 0 to 1 unit.
B) 1 to 2 units.
C) 2 to 3 units.
D) 3 to 4 units.
E) 4 to 5 units.
Answer: C
Explanation: A)
B)
C)
D)
E)
16) Diminishing marginal product of labour is said to exist when there is 16)
A) an increase in the division and specialization of labour.
B) a reduction in the level of labour input that causes output to increase.
C) a successively smaller increase in output with each successive unit increase in labour input.
D) an increase in the amount of capital available for each unit of labour.
E) technological advancement.
Answer: C
Explanation: A)
B)
C)
D)
E)
7
17) If a firm uses factor inputs that are personally owned by the firm’s owner, then economists
refer to
the opportunity cost of these inputs as
17)
A) implicit costs.
B) inverted costs.
C) accounting costs.
D) direct production costs.
E) sunk costs.
Answer: A
Explanation: A)
B)
C)
D)
E)
The table below provides the total revenues and costs for a small landscaping company in a
recent year.
Total Revenues ($) 250 000
Total Costs ($)
– wages and salaries 150 000
– risk-free return of 2% on owner’s capital of $20 000 400
– interest on bank loan 1500
– cost of supplies 27 000
– depreciation of capital equipment 8000
– additional wages the owner could have earned in next
best alternative 30 000
– risk premium of 4% on owner’s capital of $20 000 800
TABLE 7-2
18) Refer to Table 7-2. The implicit costs for this firm are 18)
A) $400. B) $31 200. C) $30 400. D) $30 800. E) $800.
Answer: B
Explanation: A)
B)
C)
D)
E)
8
The diagram below shows some short-run cost curves for a firm.
FIGURE 7-2
9
19) Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in
part (ii) of
the figure?
19)
A) Curve 4 is the marginal cost curve.
Curve 5 is the average fixed cost curve.
Curve 6 is the average variable cost curve.
Curve 7 is the average total cost curve.
B) Curve 4 is the average fixed cost curve.
Curve 5 is the average total cost curve.
Curve 6 is the marginal cost curve.
Curve 7 is the average variable cost curve.
C) Curve 4 is the marginal cost curve.
Curve 5 is the average variable cost curve.
Curve 6 is the average fixed cost curve.
Curve 7 is the average total cost curve.
D) Curve 4 is the marginal cost curve.
Curve 5 is the average total cost curve.
Curve 6 is the average variable cost curve.
Curve 7 is the average fixed cost curve.
E) Curve 4 is the average total cost curve.
Curve 5 is the marginal cost curve.
Curve 6 is the average variable cost curve.
Curve 7 is the average fixed cost curve.
Answer: D
Explanation: A)
B)
C)
D)
E)
20) The opportunity cost of money that a firm’s owner has invested in the firm is an example of
20)
A) direct production costs.
B) explicit costs.
C) accounting costs.
D) sunk costs.
E) implicit costs.
Answer: E
Explanation: A)
B)
C)
D)
E)
10
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
21) Refer to Table 7-4. Marginal product of labour begins decreasing with the ________ unit of
labour
hired. Average product of labour begins decreasing with the ________ unit of labour hired.
21)
A) 3rd; 2nd B) 2nd; 3rd C) 4th; 5th D) 3rd; 4th E) 4th; 3rd
Answer: C
Explanation: A)
B)
C)
D)
E)
22) When a plant is operating at the level of output where its short-run average total cost is at its
minimum,
22)
A) marginal cost is at a minimum.
B) average fixed cost is at a minimum.
C) the plant is operating at its capacity.
D) more of the variable factor of production should be employed.
E) average variable cost is at a minimum.
Answer: C
Explanation: A)
B)
C)
D)
E)
11
The table below provides the annual revenues and costs for a family-owned firm producing
catered meals.
Total Revenues ($) 500 000
Total Costs ($)
– wages and salaries 200 000
– risk-free return of 6% on owners’ capital of 250 000 15 000
– rent 105 000
– depreciation of capital equipment 25 000
– risk premium of 8% on owners’ capital of 250 000 20 000
– intermediate inputs 150 000
– forgone wages of owners in alternative employment 80 000
– interest on bank loan 10 000
TABLE 7-1
23) Refer to Table 7-1. To an accountant, this family-owned catering company is earning
________.To
an economist, the same firm is earning ________.
23)
A) zero profit; normal profits
B) positive profits; economic losses
C) economic profits; economic profits
D) economic profits; economic losses
E) zero profit; economic losses
Answer: B
Explanation: A)
B)
C)
D)
E)
24) A firm’s short-run cost curves, as conventionally drawn, show that 24)
A) AFC increases as output increases.
B) ATC decreases and then increases as output increases.
C) AVC decreases as long as MC > AVC.
D) the MC curve intersects the AVC and ATC curves at their maximum points.
E) ATC = TFC + TVC.
Answer: B
Explanation: A)
B)
C)
D)
E)
12
25) Short-run cost curves for a firm are eventually upward-sloping because of the effects of 25)
A) diminishing marginal product.
B) increasing fixed costs.
C) decreasing total product.
D) increasing marginal productivity of the variable inputs.
E) the increasing price of variable inputs.
Answer: A
Explanation: A)
B)
C)
D)
E)
26) A firm that is maximizing its profits by producing a certain level of output must also be 26)
A) minimizing its cost of producing that output.
B) maximizing its revenue.
C) minimizing its variable costs.
D) maximizing its sales.
E) maximizing its output.
Answer: A
Explanation: A)
B)
C)
D)
E)
27) The vertical distance between the total cost curve and the total variable cost curve is 27)
A) average variable cost.
B) total fixed cost.
C) average total cost.
D) average fixed cost.
E) marginal cost.
Answer: B
Explanation: A)
B)
C)
D)
E)
13
28) Consider a basket-producing firm with fixed capital. If the firm can produce 36 baskets per
day
with 3 workers and then increases productivity to 44 baskets per day with 4 workers, then which
of
the following statements is true?
28)
A) The marginal product of the fourth worker is 11.
B) The firm has passed the point of diminishing average productivity.
C) With 4 workers, the firm’s average product of labour is 13.
D) The firm has not yet reached the point of diminishing marginal productivity.
E) The marginal product is above the average product.
Answer: B
Explanation: A)
B)
C)
D)
E)
29) A firm can raise financial capital without incurring debt by 29)
A) issuing bonds.
B) investing in new capital equipment.
C) making extra dividend payments.
D) issuing new shares.
E) increasing its bank loans.
Answer: D
Explanation: A)
B)
C)
D)
E)
30) Jodi recently went into business producing widgets. Which of the following would be a fixed
cost
for her firm?
1. labour costs of $1000 per month
2. raw material costs of $5000 per month
3. a one-year lease on a building of $12 000
30)
A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3
Answer: C
Explanation: A)
B)
C)
D)
E)
14
31) When a corporation issues a bond 31)
A) it is called equity capital.
B) the purchaser of the bond assumes ownership rights in the corporation.
C) it is making a promise to pay interest each year but not repay the principal.
D) it is called financing through the stock market.
E) it is making a promise to pay interest each year and to repay the principal at a stated time in
the future.
Answer: E
Explanation: A)
B)
C)
D)
E)
32) The opportunity cost to a firm of using an asset is zero if 32)
A) the asset has zero sunk costs associated with it.
B) the asset is already owned by the firm.
C) the asset has no alternative uses.
D) the asset was given to the firm for free.
E) no money was spent to acquire the asset.
Answer: C
Explanation: A)
B)
C)
D)
E)
33) Suppose a firm is producing 250 units of output. At this level of output, average fixed costs
are $20
per unit and average variable costs are $80 per unit. It can be concluded that total cost is
33)
A) $40 per unit.
B) $0.40 per unit.
C) $2500.
D) $100.
E) $ 25 000.
Answer: E
Explanation: A)
B)
C)
D)
E)
15
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
34) Refer to Table 7-4. The average total cost of producing 75 units of output is 34)
A) $0.80. B) $1. C) $2. D) $1.33. E) $0.67.
Answer: C
Explanation: A)
B)
C)
D)
E)
35) Economists use the notation Q = f(L,K) to describe 35)
A) the arithmetic relationship between the outputs that a firm uses and the inputs that it
produces.
B) the flow of labour (L) and capital (K) services that are available when output is (Q).
C) the level of output (Q) required to fully employ labour (L) and capital (K).
D) the technological relationship between the inputs that a firm uses and the outputs that it
produces.
E) the financial relationship between the inputs that a firm uses and the outputs that it produces.
Answer: D
Explanation: A)
B)
C)
D)
E)
36) Real capital includes 36)
A) owner’s equity.
B) a firm’s balance in its bank account.
C) a firm’s physical assets.
D) corporate bonds.
E) corporate stock.
Answer: C
Explanation: A)
B)
C)
D)
E)
16
37) Consider a firm’s short-run cost curves. Which one of the following types of cost declines
over the
whole range of output?
37)
A) total fixed cost
B) average variable cost
C) total variable cost
D) marginal cost
E) average fixed cost
Answer: E
Explanation: A)
B)
C)
D)
E)
38) Suppose a firm is producing 500 units of output, incurring a total cost of $700 000 and total
fixed
cost of $100 000. It can be concluded that average variable cost is
38)
A) $1200. B) $1600. C) $1400. D) $600. E) $200.
Answer: A
Explanation: A)
B)
C)
D)
E)
39) The equation Q = 0.5KL – (0.4)L + 2L2 is an example of 39)
A) a factor of production equation.
B) a technological change equation.
C) an economic input function.
D) an arithmetic expression of output quantities.
E) a production function.
Answer: E
Explanation: A)
B)
C)
D)
E)
40) A limited partnership differs from an ordinary partnership by 40)
A) including some partners whose liability is restricted to the amount that they invested in the
firm.
B) having a limited number of partners, each with limited liability.
C) having limited liability of all partners.
D) having a limited number of partners.
E) having unlimited liability for all partners.
Answer: A
Explanation: A)
B)
C)
D)
E)
17
41) A firm’s capacity is defined as the level of output where 41)
A) average total cost is at its maximum.
B) short-run average total cost is at its minimum.
C) the upper limit on what can be produced is reached.
D) average fixed costs are at a minimum.
E) marginal cost equals average variable cost.
Answer: B
Explanation: A)
B)
C)
D)
E)
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
42) Refer to Table 7-4. Diminishing marginal productivity of labour is first observed when the
firm
changes the amount of labour hired from
42)
A) 0 to 1 unit.
B) 1 to 2 units.
C) 2 to 3 units.
D) 3 to 4 units.
E) 4 to 5 units.
Answer: D
Explanation: A)
B)
C)
D)
E)
18
43) Which of the following statements about the organization of firms is true? 43)
A) Owners of a corporation have unlimited liability.
B) Corporations have limited access to money markets.
C) Crown corporations are never interested in increasing profits because they have other goals.
D) Partnerships are the most common form of business organization in Canada.
E) Owners of a corporation are not personally liable for the firm’s actions, though its directors
may be.
Answer: E
Explanation: A)
B)
C)
D)
E)
44) The point of diminishing marginal productivity is the point where 44)
A) the marginal product begins to fall at an increasing rate.
B) average product has reached its maximum.
C) marginal product has reached its maximum.
D) the marginal product curve lies below the average product curve.
E) the total product begins to fall.
Answer: C
Explanation: A)
B)
C)
D)
E)
19
The following data show the total output for a firm when different amounts of labour are
combined with a fixed amount of capital.
Assume that the wage per unit of labour is $10 and the cost of the capital is $50.
Labour per period Total output per period
00
1 10
2 30
3 90
4 132
5 150
TABLE 7-3
45) Refer to Table 7-3. The average product of labour is highest when the firm hires 45)
A) 1 unit of labour.
B) 2 units of labour.
C) 3 units of labour.
D) 4 units of labour.
E) 5 units of labour.
Answer: D
Explanation: A)
B)
C)
D)
E)
46) Which of the following statements is NOT true of a corporation? 46)
A) It can incur debt that is an obligation of the corporation but not of its individual owners.
B) It is an entity separate from the individuals who own it.
C) It is legally obliged to distribute all profits to shareholders.
D) It can enter into contracts.
E) It has the right to sue and be sued.
Answer: C
Explanation: A)
B)
C)
D)
E)
47) When a firm’s marginal cost is rising, we know that 47)
A) marginal product must be zero.
B) average variable cost must be rising.
C) average fixed cost must be rising.
D) average total cost must be rising.
E) marginal product must be falling.
Answer: E
Explanation: A)
B)
C)
D)
E)
20
FIGURE 7-1
48) Refer to Figure 7-1. The marginal product of labour curve intersects the average product of
labour
curve when
48)
A) average product is at its maximum.
B) the firm achieves increasing returns.
C) total product is at its maximum.
D) diminishing returns sets in.
E) the firm is at its capacity.
Answer: A
Explanation: A)
B)
C)
D)
E)
21
The table below shows output, marginal cost, and average variable cost for the production of
pairs of shoes. All costs are in dollars.
Output
Marginal
Cost
Average
Variable Cost
50 60 140
70 45 115
90 35 95
110 30 80
130 35 65
150 60 60
170 105 65
190 180 75
210 230 90
230 290 110
TABLE 7-6
49) Refer to Table 7-6. Suppose this firm is producing 210 pairs of shoes per time period and
that the
variable factor of production is labour. Which of the following statements best describes this
firm’s
production?
49)
A) Each additional unit of labour employed reduces the average variable cost of the pairs of
shoes.
B) Additional units of labour employed will increase the average variable cost of producing
shoes.
C) Marginal cost is higher than average variable cost, so marginal product must be rising.
D) Marginal cost is higher than average variable cost, so average product must be rising.
E) The firm is producing below its capacity.
Answer: B
Explanation: A)
B)
C)
D)
E)
50) What information is provided by average, marginal, and total product curves? 50)
A) They demonstrate that each of these measures of output increase as more inputs are applied.
B) They relate the price of output to the quantity supplied.
C) They demonstrate that, in the short run, all inputs are variable.
D) They express relationships between physical inputs and physical outputs.
E) They relate the prices of inputs (factors of production) to the prices of products.
Answer: D
Explanation: A)
B)
C)
D)
E)
22
The following data show the total output for a firm when different amounts of labour are
combined with a fixed amount of capital.
Assume that the wage per unit of labour is $10 and the cost of the capital is $50.
Labour per period Total output per period
00
1 10
2 30
3 90
4 132
5 150
TABLE 7-3
51) Refer to Table 7-3. The average total cost when producing 150 units of output is
approximately 51)
A) 33 cents. B) 40 cents. C) $1.50. D) 80 cents. E) 67 cents.
Answer: E
Explanation: A)
B)
C)
D)
E)
52) Refer to Table 7-3. The average variable cost when producing 132 units of output is
approximately 52)
A) 30 cents. B) 24 cents. C) 45 cents. D) 89 cents. E) 68 cents.
Answer: A
Explanation: A)
B)
C)
D)
E)
53) An example of debt financing for any form of business organization is 53)
A) borrowing from a bank.
B) issuing new stock.
C) using undistributed profits.
D) buying back bonds.
E) buying back previously issued stock.
Answer: A
Explanation: A)
B)
C)
D)
E)
23
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
54) Refer to Table 7-4. The average total cost for 250 units of output is approximately 54)
A) 33 cents. B) $1.00. C) 80 cents. D) 40 cents. E) 63 cents.
Answer: C
Explanation: A)
B)
C)
D)
E)
55) Consider a house-construction firm with fixed capital. The firm can build 8 houses per year
with
16 workers and 8.8 houses per year with 17 workers. If it is currently building 8.8 houses per
year,
which of the following is true?
55)
A) The firm has not yet reached the point of diminishing average productivity.
B) The firm has already passed the point of diminishing marginal productivity.
C) The marginal product is below the average product.
D) Average product is at a maximum with 17 workers.
E) Average product is at a maximum with 16 workers.
Answer: A
Explanation: A)
B)
C)
D)
E)
56) Suppose a firm is producing 100 units of output, incurring a total cost of $10 000 and total
variable
cost of $6000. It can be concluded that average fixed cost is
56)
A) $100. B) $4000. C) $40. D) $60. E) $160.
Answer: C
Explanation: A)
B)
C)
D)
E)
24
57) Suppose that when a firm hires one additional unit of labour, total product increases from
100 to
110 units of output per month. Marginal product must therefore be
57)
A) decreasing.
B) increasing.
C) zero.
D) constant.
E) positive.
Answer: E
Explanation: A)
B)
C)
D)
E)
58) The period of time over which all factors of production and technology are variable is known
as the 58)
A) very-long run. B) short run. C) very-short run. D) long run.
Answer: A
Explanation: A)
B)
C)
D)
59) The period of time over which the firm can vary its technology of production is the 59)
A) short run.
B) long run.
C) very-long run.
D) very-short run.
E) none of the above; technology cannot be varied.
Answer: C
Explanation: A)
B)
C)
D)
E)
60) Consider a firm in the short run. If total product is at its maximum, then 60)
A) average product must equal marginal product.
B) average product must be falling and be equal to zero.
C) average product must be rising and must lie above marginal product.
D) marginal product must be greater than zero and must be falling.
E) marginal product must be falling and be equal to zero.
Answer: E
Explanation: A)
B)
C)
D)
E)
25
61) In the short run time horizon for a firm, total fixed costs 61)
A) decrease as output increases.
B) are equal to total variable costs.
C) decrease and then increase as output increases.
D) do not vary with output.
E) increase and then decrease as output increases.
Answer: D
Explanation: A)
B)
C)
D)
E)
62) A single proprietorship is a form of business organization which 62)
A) has limited liability.
B) has unlimited access to money capital.
C) allows easy transferability of ownership by the trading of shares.
D) has a single owner but has directors who are responsible for the firm’s debts.
E) has one owner-manager who is personally responsible for the firm’s actions and debts.
Answer: E
Explanation: A)
B)
C)
D)
E)
The table below provides information on output per month and short-run costs for a firm
producing outdoor wooden lounge chairs.
Q TFC TVC TC
5 200 200 400
10 200 220 420
15 200 240 440
20 200 260 460
25 200 350 550
30 200 810 1010
TABLE 7-5
63) Refer to Table 7-5. Given the information in the table about short-run costs, this firm would
minimize the average total cost of production when producing
63)
A) 10 chairs. B) 15 chairs. C) 20 chairs. D) 25 chairs. E) 30 chairs.
Answer: D
Explanation: A)
B)
C)
D)
E)
26
64) Suppose NHL hockey player Jarome Iginla is averaging three points per game going into the
last
game of the season in which he collects four points, thereby changing his average for the season.
To
use an analogy in economics, it could be said that average product increases
64)
A) when marginal product increases.
B) when total product increases.
C) when marginal product exceeds average product.
D) when average product exceeds marginal product.
E) whenever marginal product is positive.
Answer: C
Explanation: A)
B)
C)
D)
E)
65) With regard to economic decision making for firms, the long run is a period in which 65)
A) only capital is variable.
B) only some of the factors of production are variable.
C) all factors of production are variable but technology is fixed.
D) technology is variable.
E) technology may be variable, but some factors of production are fixed.
Answer: C
Explanation: A)
B)
C)
D)
E)
66) It is assumed in standard economic theory that a firm makes decisions in an effort to 66)
A) be favoured politically.
B) maximize its revenue.
C) maximize its profits.
D) have a highly diversified product.
E) become as large as possible.
Answer: C
Explanation: A)
B)
C)
D)
E)
27
67) In the short run, the firm’s product curves show 67)
A) AP is at its minimum when MP = AP.
B) when MP < AP, AP is increasing.
C) TP is at its maximum when MP is at its maximum.
D) TP begins to decrease when AP begins to decrease.
E) when the MP curve cuts the AP curve from above, the AP curve begins to fall.
Answer: E
Explanation: A)
B)
C)
D)
E)
68) Suppose a firm producing digital cameras is operating such that marginal costs are higher
than
average costs. If the firm produces one more camera, average costs will
68)
A) reach a point of diminishing returns.
B) remain constant.
C) rise.
D) fall.
E) reach their maximum.
Answer: C
Explanation: A)
B)
C)
D)
E)
69) Consider a firm’s short-run cost curves. If average total cost is increasing as output rises,
then 69)
A) average total cost is no longer equal to the sum of average variable cost and average fixed
cost.
B) average variable cost must be increasing.
C) average fixed costs must be increasing.
D) total fixed costs must be increasing.
E) marginal cost must be below average total cost.
Answer: B
Explanation: A)
B)
C)
D)
E)
28
70) The choices listed below involve costs to the firm. For which is the implicit cost potentially
different
than its explicit cost?
70)
A) The interest paid on borrowed money.
B) The purchase of raw materials used in production.
C) The use of firm-owned assets.
D) The services of hired workers.
E) The use of rented land.
Answer: C
Explanation: A)
B)
C)
D)
E)
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
71) Refer to Table 7-4. The total variable cost of producing 305 units of output is 71)
A) $325. B) $305. C) $225. D) $100. E) $125.
Answer: E
Explanation: A)
B)
C)
D)
E)
29
The following data show the total output for a firm when different amounts of labour are
combined with a fixed amount of capital.
Assume that the wage per unit of labour is $10 and the cost of the capital is $50.
Labour per period Total output per period
00
1 10
2 30
3 90
4 132
5 150
TABLE 7-3
72) Refer to Table 7-3. The average total cost when producing 90 units of output is
approximately 72)
A) $26.67. B) 33 cents. C) 89 cents. D) 30 cents. E) 27 cents.
Answer: C
Explanation: A)
B)
C)
D)
E)
73) Which of the following statements about the relationship between marginal product and
average
product is correct?
73)
A) Average product equals marginal product when marginal product is at its maximum.
B) When marginal product exceeds average product, average product must be rising.
C) Average product equals marginal product at marginal product’s lowest point.
D) When marginal product is falling, average product is falling.
E) When average product exceeds marginal product, marginal product must be rising.
Answer: B
Explanation: A)
B)
C)
D)
E)
30
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
74) Refer to Table 7-4. The total cost of producing 175 units of output is 74)
A) $100. B) $75. C) $175. D) $350. E) $150.
Answer: C
Explanation: A)
B)
C)
D)
E)
75) Suppose Jodi’s widget business is using two inputs, labour and capital. If the price of labour
increases, which of the following will happen?
75)
A) The firm’s marginal cost curve will remain unchanged.
B) The firm’s average total cost curve will shift upward.
C) Jodi will shut down her business.
D) Jodi will hire more labour.
E) The firm’s average fixed cost curve will shift upward.
Answer: B
Explanation: A)
B)
C)
D)
E)
76) The theory of the firm is based on the following two key assumptions: 76)
A) Firms seek to maximize revenues, and to maximize undistributed profits.
B) Firms seek to maximize profits, and the firm is a single, consistent decision-making unit.
C) Firms seek to become as large as possible, and they seek to maximize total revenue.
D) Firms seek to maximize profit, and to distribute the maximum value in dividends.
E) Each firm has a highly diversified product, and this leads to profit maximization.
Answer: B
Explanation: A)
B)
C)
D)
E)
31
77) The opportunity cost of any factor of production is 77)
A) its explicit cost.
B) the money actually paid to the factors of production.
C) the benefit forgone by not using it in its worst alternative.
D) its accounting cost.
E) the benefit forgone by not using it in its best alternative.
Answer: E
Explanation: A)
B)
C)
D)
E)
The table below provides information on output per month and short-run costs for a firm
producing outdoor wooden lounge chairs.
Q TFC TVC TC
5 200 200 400
10 200 220 420
15 200 240 440
20 200 260 460
25 200 350 550
30 200 810 1010
TABLE 7-5
78) Refer to Table 7-5. At what level of output is this firm at its capacity? 78)
A) 10 chairs B) 15 chairs C) 20 chairs D) 25 chairs E) 30 chairs
Answer: D
Explanation: A)
B)
C)
D)
E)
79) The law of diminishing returns states that if increasing quantities of a variable factor are
applied to
a given quantity of fixed factors, then
79)
A) the MP and the AP of the variable factor will eventually decrease.
B) the AP will eventually decrease with constant MP.
C) the MP will eventually decrease with constant AP.
D) the AP will eventually decrease, but only if TP is held constant.
E) TP will eventually begin to fall.
Answer: A
Explanation: A)
B)
C)
D)
E)
32
The table below provides the total revenues and costs for a small landscaping company in a
recent year.
Total Revenues ($) 250 000
Total Costs ($)
– wages and salaries 150 000
– risk-free return of 2% on owner’s capital of $20 000 400
– interest on bank loan 1500
– cost of supplies 27 000
– depreciation of capital equipment 8000
– additional wages the owner could have earned in next
best alternative 30 000
– risk premium of 4% on owner’s capital of $20 000 800
TABLE 7-2
80) Refer to Table 7-2. The explicit costs for this firm are 80)
A) $186 900. B) $217 300. C) $186 500. D) $178 500. E) $217 700.
Answer: C
Explanation: A)
B)
C)
D)
E)
81) Consider a firm in the short run. When the total-product curve is increasing at an increasing
rate 81)
A) the marginal-product curve lies below the average-product curve.
B) marginal product is positive and increasing.
C) average product is falling.
D) marginal product is positive but declining.
E) average product is zero.
Answer: B
Explanation: A)
B)
C)
D)
E)
82) Which of the following statements describes an advantage to the owner of a single
proprietorship? 82)
A) The firm has a legal existence separate from its owner.
B) Shares of the firm can be traded on any stock exchange.
C) He or she has limited liability.
D) The owner’s liability is limited to the amount he or she actually invests in the firm.
E) The owner can readily maintain full and complete control over every aspect of the firm’s
operation.
Answer: E
Explanation: A)
B)
C)
D)
E)
33
The diagram below shows some short-run cost curves for a firm.
FIGURE 7-2
34
83) Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in
part (i) of
the figure?
83)
A) Curve 1 is the total variable cost curve.
Curve 2 is the total cost curve.
Curve 3 is the total fixed cost curve.
B) Curve 1 is the total fixed cost curve.
Curve 2 is the total variable cost curve.
Curve 3 is the total cost curve.
C) Curve 1 is the total cost curve.
Curve 2 is the total variable cost curve.
Curve 3 is the average fixed cost curve.
D) Curve 1 is the total cost curve.
Curve 2 is the total variable cost curve.
Curve 3 is the total fixed cost curve.
E) Curve 1 is the total marginal cost curve.
Curve 2 is the total average cost curve.
Curve 3 is the total average fixed cost curve.
Answer: D
Explanation: A)
B)
C)
D)
E)
84) Consider a firm’s short-run cost curves. When capital is a fixed factor, a rise in the cost of
labour 84)
A) shifts the marginal cost curve upwards.
B) shifts the AVC curve down.
C) leaves the MC curve unchanged.
D) shifts the total product curve downwards.
E) leaves the ATC curve unchanged.
Answer: A
Explanation: A)
B)
C)
D)
E)
35
85) Suppose that a firm’s capital is fixed and one more unit of labour is hired, thereby increasing
the
firm’s total output. Which of the following statements can be correct?
1. Marginal cost would remain constant.
2. Marginal cost would increase.
3. Marginal cost would decrease.
85)
A) 1 only
B) 2 only
C) 3 only
D) Any of 1, 2, and 3 is possible.
E) None are possible.
Answer: D
Explanation: A)
B)
C)
D)
E)
86) Sport-fishermen on the Campbell River in British Columbia are catching fewer fish and are
having
to fish many more hours to catch them. However, the total number of fish caught on the river
continues to increase. The river is experiencing
86)
A) diminishing total returns.
B) diminishing marginal returns.
C) increasing marginal returns.
D) constant marginal returns.
E) increasing average returns.
Answer: B
Explanation: A)
B)
C)
D)
E)
36
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
87) Refer to Table 7-4. The marginal product of labour curve intersects the average product of
labour
curve from above when the firm changes the amount of labour per unit of time from
87)
A) 0 to 1 units.
B) 1 to 2 units.
C) 2 to 3 units.
D) 3 to 4 units.
E) 4 to 5 units.
Answer: E
Explanation: A)
B)
C)
D)
E)
88) An example of “real” capital is 88)
A) shares in a corporation.
B) a firm’s balance in a bank account.
C) a firm’s computer systems.
D) corporate bonds.
E) a firm’s retained earnings.
Answer: C
Explanation: A)
B)
C)
D)
E)
37
89) Consider the production costs for a firm, one of which is the cost of depreciation.
Depreciation costs
are
89)
A) an estimate of the loss of value of the firm’s physical capital.
B) irrelevant to an accounting of the firm’s total costs.
C) a measure of the depreciation of financial assets of the firm.
D) payments to outside suppliers.
E) the cost of money borrowed to buy a durable asset.
Answer: A
Explanation: A)
B)
C)
D)
E)
90) If increasing quantities of a variable factor are applied to a given quantity of fixed factors,
then the
law of diminishing returns tells us that
90)
A) the marginal product will eventually decrease with constant average product.
B) the marginal product and the average product of the variable factor will eventually decrease.
C) the average product will eventually decrease with constant marginal product.
D) the average product will eventually decrease, but only if total product is held constant.
E) total product will eventually begin to fall.
Answer: B
Explanation: A)
B)
C)
D)
E)
38
The table below provides the total revenues and costs for a small landscaping company in a
recent year.
Total Revenues ($) 250 000
Total Costs ($)
– wages and salaries 150 000
– risk-free return of 2% on owner’s capital of $20 000 400
– interest on bank loan 1500
– cost of supplies 27 000
– depreciation of capital equipment 8000
– additional wages the owner could have earned in next
best alternative 30 000
– risk premium of 4% on owner’s capital of $20 000 800
TABLE 7-2
91) Refer to Table 7-2. The economic profits for this firm are 91)
A) $32 300. B) $33 500. C) $31 200. D) $63 500. E) $32 700.
Answer: A
Explanation: A)
B)
C)
D)
E)
92) “An objective of firms is to maximize profits.” This statement 92)
A) is a normative statement and thus cannot be tested.
B) applies only to corporations.
C) is an assumption used by economists to predict the behaviour of firms.
D) is an unrealistic assumption, and therefore of little use to economists.
E) has been proven by empirical testing to be always true.
Answer: C
Explanation: A)
B)
C)
D)
E)
93) With regard to economic decision making for firms, the short run is 93)
A) less than one year.
B) a period over which the quantities of all factors of production are variable but technology is
fixed.
C) a definite number of months.
D) a period over which the quantities of all factors of production and technology are variable.
E) a period over which the quantity of at least one significant factor of production is fixed.
Answer: E
Explanation: A)
B)
C)
D)
E)
39
94) Suppose a production function for a firm takes the following algebraic form: Q = (0.25)K ×
(1.5)L2,
where Q is the output of garage doors produced per month. Now suppose the firm is operating
with 10 units of capital (K = 10) and 8 units of labour (L = 8). What is the output of garage doors
per
month?
94)
A) 24 B) 300 C) 2400 D) 240 E) 3000
Answer: D
Explanation: A)
B)
C)
D)
E)
95) The period of time over which the firm can vary any of its inputs for a given production
technology
is called the
95)
A) short run.
B) very-long run.
C) long run.
D) very-short run.
E) immediate run.
Answer: C
Explanation: A)
B)
C)
D)
E)
40
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
96) Refer to Table 7-4. The marginal product of labour is at its maximum when the firm changes
the
amount of labour hired from
96)
A) 0 to 1 unit.
B) 1 to 2 units.
C) 2 to 3 units.
D) 3 to 4 units.
E) 4 to 5 units.
Answer: C
Explanation: A)
B)
C)
D)
E)
97) Suppose a firm is producing 10 000 units of output. At this level of output, average total cost
is $200
and average fixed cost is $20. It can be concluded that total variable cost is
97)
A) $1800.
B) $18 000.
C) $1 800 000.
D) $ 180 000.
E) $180.
Answer: C
Explanation: A)
B)
C)
D)
E)
41
98) When a firm’s total-product curve is increasing at a decreasing rate 98)
A) average product is falling.
B) the marginal-product curve lies below the average-product curve.
C) average product is zero.
D) marginal product is positive but declining.
E) marginal product is negative and decreasing.
Answer: D
Explanation: A)
B)
C)
D)
E)
99) Consider a firm in the short run. If the AP curve is rising, then the MP curve 99)
A) must lie below the average-product curve over this range.
B) can be either above or below the average-product curve, although it must be rising over the
entire range.
C) must lie above the average-product curve over this range.
D) must lie above the average-product curve over this range and must also be rising.
E) must be falling.
Answer: C
Explanation: A)
B)
C)
D)
E)
42
FIGURE 7-1
100) Refer to Figure 7-1. Suppose each unit of labour represents one worker for one month.
What is the
maximum number of workers the firm could hire so that the final worker hired still raises the
average product of the other workers?
100)
A) 15 B) 9 C) 10 D) 7 E) 8
Answer: B
Explanation: A)
B)
C)
D)
E)
43
The table below shows output, marginal cost, and average variable cost for the production of
pairs of shoes. All costs are in dollars.
Output
Marginal
Cost
Average
Variable Cost
50 60 140
70 45 115
90 35 95
110 30 80
130 35 65
150 60 60
170 105 65
190 180 75
210 230 90
230 290 110
TABLE 7-6
101) Refer to Table 7-6. The firm’s marginal product of its variable factor is maximized when it
produces ________ units of output.
101)
A) 90 B) 110 C) 50 D) 170 E) 100
Answer: B
Explanation: A)
B)
C)
D)
E)
102) Consider the short-run costs of a firm. Suppose the firm’s total fixed costs are $100 and
average
variable costs are constant regardless of output. Which of the following is then true?
102)
A) Average total cost will decrease when output is increased.
B) Marginal cost will be rising as output rises.
C) Average total costs will be constant.
D) Marginal cost will equal average total cost.
E) Marginal cost will be less than average variable cost.
Answer: A
Explanation: A)
B)
C)
D)
E)
44
103) Which of the following factors of production is most likely to be variable in the short run?
103)
A) technology
B) capital equipment
C) labour
D) entrepreneurship
E) land
Answer: C
Explanation: A)
B)
C)
D)
E)
104) Consider a basket-producing firm with fixed capital. If the firm can produce 36 baskets per
day
with 3 workers and then increases production to 44 baskets per day with 4 workers, then which
of
the following statements is true?
104)
A) With 4 workers, the firm’s average product of labour is 8.
B) The marginal product of the fourth worker is 11.
C) With 4 workers, the marginal product is above the average product.
D) The firm has passed the point of diminishing marginal productivity.
E) The firm has not yet reached the point of diminishing marginal productivity.
Answer: D
Explanation: A)
B)
C)
D)
E)
45
The table below provides the annual revenues and costs for a family-owned firm producing
catered meals.
Total Revenues ($) 500 000
Total Costs ($)
– wages and salaries 200 000
– risk-free return of 6% on owners’ capital of 250 000 15 000
– rent 105 000
– depreciation of capital equipment 25 000
– risk premium of 8% on owners’ capital of 250 000 20 000
– intermediate inputs 150 000
– forgone wages of owners in alternative employment 80 000
– interest on bank loan 10 000
TABLE 7-1
105) Refer to Table 7-1. The explicit costs for this family-owned firm are 105)
A) $605 000. B) $115 000. C) $490 000. D) $500 000. E) $505 000.
Answer: C
Explanation: A)
B)
C)
D)
E)
106) Suppose a firm with the usual U-shaped cost curves is producing a level of output such that
its
short run costs are as follows:
ATC = $0.37 per unit
AVC = $0.32 per unit
AFC = $0.05 per unit
MC = $0.43 per unit
Given these short run costs, which of the following statements is true?
106)
A) The firm is producing a level of output where capacity is increasing.
B) The firm is operating with excess capacity.
C) The firm is operating at capacity.
D) The firm is operating above capacity.
E) The firm has no capacity constraints.
Answer: D
Explanation: A)
B)
C)
D)
E)
46
The table below shows output, marginal cost, and average variable cost for the production of
pairs of shoes. All costs are in dollars.
Output
Marginal
Cost
Average
Variable Cost
50 60 140
70 45 115
90 35 95
110 30 80
130 35 65
150 60 60
170 105 65
190 180 75
210 230 90
230 290 110
TABLE 7-6
107) Refer to Table 7-6. If the firm produces 130 pairs of shoes, and the fixed cost is $550, then
the firm’s
total cost is
107)
A) $12 000. B) $7000. C) $8000. D) $10 000. E) $9000.
Answer: E
Explanation: A)
B)
C)
D)
E)
108) Consider a basket-producing firm with fixed capital. If the firm can produce 24 baskets per
day
with 3 workers and then increases production to 36 baskets per day with 4 workers, then which
of
the following statements is definitely true?
108)
A) Average product for this firm is rising.
B) The firm has passed the point of diminishing marginal productivity.
C) The marginal product of the fourth worker is 9.
D) With 4 workers, the average product is greater than the marginal product.
E) Marginal product for this firm is rising.
Answer: A
Explanation: A)
B)
C)
D)
E)
47
109) Suppose a production function for a firm takes the following algebraic form: Q = (0.5)KL –
40L,
where Q is the output of paintbrushes per week. Now suppose the firm is operating with 100
units
of capital (K = 100) and 30 000 units of labour (L = 30 000). What is the output of paintbrushes
per
week?
109)
A) 30 000 B) 3 000 000 C) 300 000 D) 1 500 000 E) 1 200 000
Answer: C
Explanation: A)
B)
C)
D)
E)
The table below provides the annual revenues and costs for a family-owned firm producing
catered meals.
Total Revenues ($) 500 000
Total Costs ($)
– wages and salaries 200 000
– risk-free return of 6% on owners’ capital of 250 000 15 000
– rent 105 000
– depreciation of capital equipment 25 000
– risk premium of 8% on owners’ capital of 250 000 20 000
– intermediate inputs 150 000
– forgone wages of owners in alternative employment 80 000
– interest on bank loan 10 000
TABLE 7-1
110) Refer to Table 7-1. The economic profits for this family-owned firm are 110)
A) $0. B) $10 000. C) $115 000. D) -$105 000. E) -$10 000.
Answer: D
Explanation: A)
B)
C)
D)
E)
111) We can predict that resources will move into an industry whenever 111)
A) economic profits for firms in that industry are greater than zero.
B) economic losses for firms in that industry are minimized.
C) economic profits for firms in that industry are zero.
D) accounting profits for firms in that industry are zero.
E) accounting profits for firms in that industry are greater than zero.
Answer: A
Explanation: A)
B)
C)
D)
E)
48
112) Which of the following items is part of a firm’s financial capital as distinct from its real
capital? 112)
A) inventory of goods valued at $1 000 000
B) a $500 000 balance in a bank account
C) a new bulldozer
D) a fleet of delivery trucks
E) a network of personal computers
Answer: B
Explanation: A)
B)
C)
D)
E)
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
113) Refer to Table 7-4. The average product of labour is highest when the firm hires ________
units of
labour.
113)
A) 1 B) 2 C) 3 D) 4 E) 5
Answer: D
Explanation: A)
B)
C)
D)
E)
114) Consider a firm in the short run. Average product is at its maximum when 114)
A) marginal product is maximized.
B) average product equals marginal product and marginal product is falling.
C) diminishing returns cease to operate.
D) total product is maximized.
E) the maximum quantity of the variable input is employed.
Answer: B
Explanation: A)
B)
C)
D)
E)
49
115) A firm that has two or more owners who share decision-making power as well as the firm’s
profits
is called
115)
A) a partnership.
B) a non-profit organization.
C) a joint-stock company.
D) a single proprietorship.
E) a corporation.
Answer: A
Explanation: A)
B)
C)
D)
E)
116) Marginal cost is defined as the 116)
A) change in total cost resulting from an additional unit of output.
B) change in fixed cost resulting from an additional unit of output.
C) cost of an additional unit of a variable factor of production.
D) difference between average total cost and average variable cost.
E) cost per unit when the firm is operating at capacity.
Answer: A
Explanation: A)
B)
C)
D)
E)
117) Suppose a production function for a firm takes the following algebraic form: Q = 2KL –
(0.2)L2,
where Q is the output of sweaters per day. Now suppose the firm is operating with 8 units of
capital (K=8) and 10 units of labour (L=10). What is the output of sweaters?
117)
A) 155 sweaters per day
B) 140 sweaters per day
C) 60 sweaters per day
D) 30 sweaters per day
E) 80 sweaters per day
Answer: B
Explanation: A)
B)
C)
D)
E)
50
FIGURE 7-1
118) Refer to Figure 7-1. Total product is increasing at a decreasing rate 118)
A) from 0 to 20 units of output.
B) from 0 to 32 units of output.
C) between 140 to 200 units of output.
D) between 140 to 250 units of output.
E) over the whole production range.
Answer: D
Explanation: A)
B)
C)
D)
E)
51
The table below shows output, marginal cost, and average variable cost for the production of
pairs of shoes. All costs are in dollars.
Output
Marginal
Cost
Average
Variable Cost
50 60 140
70 45 115
90 35 95
110 30 80
130 35 65
150 60 60
170 105 65
190 180 75
210 230 90
230 290 110
TABLE 7-6
119) Refer to Table 7-6. Suppose there are no fixed costs. The firm reaches it’s capacity level of
output
when its output is equal to ________ units.
119)
A) 150 B) 50 C) 210 D) 110 E) 190
Answer: A
Explanation: A)
B)
C)
D)
E)
The table below provides the total revenues and costs for a small landscaping company in a
recent year.
Total Revenues ($) 250 000
Total Costs ($)
– wages and salaries 150 000
– risk-free return of 2% on owner’s capital of $20 000 400
– interest on bank loan 1500
– cost of supplies 27 000
– depreciation of capital equipment 8000
– additional wages the owner could have earned in next
best alternative 30 000
– risk premium of 4% on owner’s capital of $20 000 800
TABLE 7-2
120) Refer to Table 7-2. The accounting profits for this firm are 120)
A) $63 500. B) $32 700. C) $63 100. D) $32 300. E) $71 500.
Answer: A
Explanation: A)
B)
C)
D)
E)
52
The following data show the total output for a firm when different amounts of labour are
combined with a fixed amount of capital.
Assume that the wage per unit of labour is $10 and the cost of the capital is $50.
Labour per period Total output per period
00
1 10
2 30
3 90
4 132
5 150
TABLE 7-3
121) Refer to Table 7-3. If this firm is producing 20 units of output per period its marginal cost is
121)
A) 16.7 cents. B) $10.00. C) 50 cents. D) $1.67. E) $1.00.
Answer: C
Explanation: A)
B)
C)
D)
E)
122) Consider a basket-producing firm with fixed capital. If the firm can produce 24 baskets per
day
with 3 workers and then increases production to 36 baskets per day with 4 workers, then which
of
the following statements is definitely true?
122)
A) The firm has passed the point of diminishing average productivity.
B) With 4 workers, the average product is greater than the marginal product.
C) The firm has passed the point of diminishing marginal productivity.
D) With 4 workers, the marginal product is greater than the average product.
E) The marginal productivity of the fourth worker is 9.
Answer: D
Explanation: A)
B)
C)
D)
E)
123) If Michelle used $1000 from her savings account, which was paying 6% interest annually,
to invest
in her brother’s new sporting-goods store, the opportunity cost of her investment on an annual
basis would be
123)
A) $1060.
B) $60.
C) $1000.
D) her share of the store’s profits.
E) the dividend paid to her by her brother.
Answer: B
Explanation: A)
B)
C)
D)
E)
53
The table below provides the annual revenues and costs for a family-owned firm producing
catered meals.
Total Revenues ($) 500 000
Total Costs ($)
– wages and salaries 200 000
– risk-free return of 6% on owners’ capital of 250 000 15 000
– rent 105 000
– depreciation of capital equipment 25 000
– risk premium of 8% on owners’ capital of 250 000 20 000
– intermediate inputs 150 000
– forgone wages of owners in alternative employment 80 000
– interest on bank loan 10 000
TABLE 7-1
124) Refer to Table 7-1. The accounting profits for this family-owned firm are 124)
A) -$15 000. B) $10 000. C) $30 000. D) $0. E) $500 000.
Answer: B
Explanation: A)
B)
C)
D)
E)
The following data show the total output for a firm when different amounts of labour are
combined with a fixed amount of capital.
Assume that the wage per unit of labour is $10 and the cost of the capital is $50.
Labour per period Total output per period
00
1 10
2 30
3 90
4 132
5 150
TABLE 7-3
125) Refer to Table 7-3. If this firm is producing 111 units of output per period, its marginal cost
is 125)
A) 76 cents. B) 38 cents. C) 24 cents. D) $1.00. E) 16.7 cents.
Answer: C
Explanation: A)
B)
C)
D)
E)
54
126) The period of time over which at least one factor of production is fixed is called the 126)
A) very-short run.
B) long run.
C) short run.
D) very-long run.
E) immediate run.
Answer: C
Explanation: A)
B)
C)
D)
E)
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of
the capital is $100.
Labour per unit of time Total output
00
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
127) Refer to Table 7-4. Average variable costs for 175 units of output is approximately 127)
A) 25 cents. B) $1.00. C) 32 cents. D) 43 cents. E) 57 cents.
Answer: D
Explanation: A)
B)
C)
D)
E)
55
FIGURE 7-1
128) Refer to Figure 7-1. If the firm hires the 15th unit of labour, 128)
A) the firm will reach its capacity.
B) average product will rise.
C) the extra output will be zero.
D) output will increase by 2 units of output.
E) marginal product will be unchanged.
Answer: C
Explanation: A)
B)
C)
D)
E)
56
129) Economic profits are less than accounting profits because the calculation of economic profit
129)
A) includes an amount for depreciation.
B) is stipulated in regulations set forth by the Canada Revenue Agency.
C) includes an explicit charge for risk taking.
D) includes the implicit charges for the use of capital owned by the firm and for income taxes.
E) includes the implicit charges for the use of capital owned by the firm and for risk taking.
Answer: E
Explanation: A)
B)
C)
D)
E)
130) Undistributed profits of a firm are 130)
A) profits that are paid out to owners of the firm.
B) earnings that are used to pay dividends to shareholders.
C) earnings that are used to cover interest expenses of the firm.
D) earnings that are used to cover the costs of production.
E) profits that are available to be reinvested in the firm’s operations.
Answer: E
Explanation: A)
B)
C)
D)
E)
57
Answer Key
Testname: C7
1) A
2) D
3) B
4) B
5) A
6) A
7) E
8) B
9) C
10) B
11) E
12) D
13) C
14) D
15) C
16) C
17) A
18) B
19) D
20) E
21) C
22) C
23) B
24) B
25) A
26) A
27) B
28) B
29) D
30) C
31) E
32) C
33) E
34) C
35) D
36) C
37) E
38) A
39) E
40) A
41) B
42) D
43) E
44) C
45) D
46) C
47) E
48) A
49) B
50) D
58
Answer Key
Testname: C7
51) E
52) A
53) A
54) C
55) A
56) C
57) E
58) A
59) C
60) E
61) D
62) E
63) D
64) C
65) C
66) C
67) E
68) C
69) B
70) C
71) E
72) C
73) B
74) C
75) B
76) B
77) E
78) D
79) A
80) C
81) B
82) E
83) D
84) A
85) D
86) B
87) E
88) C
89) A
90) B
91) A
92) C
93) E
94) D
95) C
96) C
97) C
98) D
99) C
100) B
59
Answer Key
Testname: C7
101) B
102) A
103) C
104) D
105) C
106) D
107) E
108) A
109) C
110) D
111) A
112) B
113) D
114) B
115) A
116) A
117) B
118) D
119) A
120) A
121) C
122) D
123) B
124) B
125) C
126) C
127) D
128) C
129) E
130) E
60