Chapter 5: The Competitive Firm: Multiple Choice Questions

Chapter 5: The Competitive Firm
Multiple Choice Questions
THE PROFIT MOTIVE
1. Which of the following is a reason that individuals own small businesses?

A) Self-reliance. B) Status. C) The potential for profit. D) All of the above.
Answer: D Type: Basic Understanding Page: 150
2. Economists assume the principal motivation of producers is:

A) Psychological gratification. C) Profit.
B) Social status. D) Their preference for being "their own person."
Answer: C Type: Basic Understanding Page: 150
3. Profit:
A) Is the difference between total revenue and total cost.
B) Is the "residual" that the owners of a business receive.
C) Motivates people to own and operate a business.
D) All of the above.
4. Profit is:
A) TR - FC. B) Q × (P - AVC). C) (P × Q) - TC. D) All of the above.
Answer: C Type: Definition Page: 150
5. Profit is defined as:

A) The earnings to all the factors of production that are employed.
B) Economic profit plus accounting profit.
C) The sum of total revenue and total cost.
D) The difference between total revenue and total cost.
Answer: D Type: Definition Page: 150
6. Which of the following is a reason that individuals own small businesses?

A) The potential for profit. B) Recognition. C) Control. D) All of the above.
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7. The profit motive can encourage businesses to:

A) Pollute the environment. C) Restrict competition.
B) Provide unsafe working conditions. D) All of the above.
ECONOMIC VS. ACCOUNTING PROFITS
8. The best measure of the economic cost of doing your homework is:
A) The best opportunity you give up when you do your homework.
B) The amount you would have to pay to get someone else to do it.
C) The accounting cost plus the explicit cost of doing the homework.
D) The tuition paid for your schooling.
Answer: A Type: Complex Understanding Page: 152
9. In defining economic costs, economists recognize:

A) Explicit and implicit costs while accountants recognize only implicit costs.
B) Explicit and implicit costs while accountants recognize only explicit costs.
C) Only explicit costs while accountants recognize only implicit costs.
D) Only explicit costs while accountants recognize explicit and implicit costs.
Answer: B Type: Basic Understanding Page: 152
10. Explicit costs:

A) Include only payments to entrepreneurship.
B) Are the sum of actual monetary payments made for resources used to produce a good.
C) Include the market value of all resources used to produce a good.
D) Are the total opportunity costs of resources used to produce a good.
Answer: B Type: Definition Page: 152
11. Implicit costs:

A) Include only payments to entrepreneurship.
B) Represent actual monetary payments made for resources used to produce a good.
C) Are the costs to produce a good for which not direct payment is made.
D) Are the total opportunity costs of resources used to produce a good.
12. Accounting costs and economic costs differ because:

A) Accounting costs exceed economic costs whenever any factor is not paid an explicit wage.
B) Accounting costs include implicit costs and economic costs do not.
C) Economic costs include the opportunity costs of all resources used while accounting costs include actual
dollar outlays.
D) Accounting costs include explicit costs and economic costs do not.
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13. Economic profit:

A) Is greater than accounting profit by the amount of implicit cost.
B) Is greater than accounting profit by the amount of explicit cost.
C) Is less than accounting profit by the amount of implicit cost.
D) Is less than accounting profit by the amount of explicit cost.
14. A firm that makes zero economic profits:

A) Must eventually go bankrupt.
B) Does not cover its variable costs and should shut down.
C) Incurs an accounting loss.
D) Covers all its costs, including a provision for normal profit.
15. Economic costs and economic profits are:

A) Usually greater and smaller, respectively, than their accounting counterparts.
B) Usually smaller and greater, respectively, than their accounting counterparts.
C) Usually both smaller than their accounting counterparts.
D) Usually both larger than their accounting counterparts.
Answer: A Type: Definition Page: 152
16. Normal profit is:

A) The profit which covers the full opportunity cost of the resources used by the firm.
B) The average rate of return.
C) The accounting profit earned when economic profit is zero.
17. Normal profit implies that:

A) Economic profit is zero.
B) All factors employed are earning an amount equal to their opportunity costs.
C) The factors employed are earning as much as they could in the best alternative employment.
18. Greater-than-normal profit represents:

A) Co mpensation for risks incurred. C) Above-average returns to capital.
B) Payment fo r entrepreneurship. D) All of the above.
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19. Hideki is the owner/operator of a flower shop. Last year he earned $250,000 in total revenue. His explicit
costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total
opportunity cost of these resources). During the course of the year he received three offers to work for other
flower shops with the highest offer being $75,000 per year. Which of the following is true about Hideki's
accounting and economic profit?
A) Accounting profit = $75,000; economic profit = $0.
B) Accounting profit = $175,000; economic profit = $75,000.
C) Accounting profit = $75,000; economic profit = negative $100,000.
D) Accounting profit = $0; economic profit = negative $75,000.
Use the following to answer questions 20-26:
Suppose a firm has an annual budget of $150,000 in wages and salaries, $75,000 in materials, $30,000 in new
equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner-manager does not choose
to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $320,000
per year.
Answer the indicated questions on the basis of this information.
20. What are the annual accounting costs for the firm described above?
A) $400,000. B) $275,000. C) $255,000. D) $310,000.
Answer: D Type: Analytical Page: 152
21. What are the annual explicit costs for the firm described above?
A) $310,000. B) $400,000. C) $275,000. D) $255,000.
Answer: A Type: Analytical Page: 152
22. What are the annual implicit costs for the firm described above?
A) $50,000. B) $75,000. C) $90,000. D) $310,000.
Answer: C Type: Analytical Page: 152
23. What are the annual economic costs for the firm described above?
A) $310,000. B) $275,000. C) $255,000. D) $400,000.
24. What is the accounting profit for the firm described above?
A) Loss of $10,000. B) $10,000. C) Loss of $80,000. D) $80,000.
Answer: B Type: Analytical Page: 152
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25. What is the economic profit for the firm described above?
A) Loss of $10,000. B) $10,000. C) Loss of $80,000. D) $80,000.
26. To receive a normal profit the firm described above would have to:
A) Experience $10,000 less in cost. C) Receive $90,000 more in revenue.
B) Receive $80,000 more in revenue. D) Receive $10,000 more in revenue.
27. Entrepreneurship:
A) Entails risks as well as potential rewards.
B) Can earn economic profits.
C) Takes on the added responsibility of owning and operating a business.
MARKET STRUCTURE
28. A monopoly occurs when:

A) There is only one producer of a good or service.
B) There is only one buyer of a good or service.
C) Owners take on additional risk and earn huge profits.
D) Companies become greedy and raise the price of a good or service.
Answer: A Type: Basic Understanding Page: 155
29. Market structure is determined by the:

A) Annual income for an industry.
B) Number and relative size of the firms in an industry.
C) Amount of power CEOs have.
30. Perfect competition is a situation in which:

A) Owners take on additional risk and earn huge profits.
B) Companies constantly raise the price of goods and services in order to compete with each other.
C) There are many buyers but only a few sellers.
D) There are many firms and no buyer or seller has market power.
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THE NATURE OF PERFECT COMPETITION
31. When a producer can control the market price for the good it sells:
A) The producer is an entrepreneur. C) The producer has market power.
B) The producer is certain to make a profit. D) The producer is a perfectly competitive firm.
32. If a firm can change market prices by altering its output, then it:
A) Has market power. C) Faces a horizontal demand curve.
B) Is a price taker. D) Is a competitive firm.
33. In which of the following types of markets does a single firm have the most market power?
A) Perfect competition. B) Monopolistic competition. C) Oligopoly. D) Monopoly.
34. A perfectly competitive firm is a price taker because:

A) It has no control over the selling price of its product.
B) It has market power.
C) Market demand is downward sloping.
D) Its product are differentiated.
35. A competitive firm:

A) Has the market power to compete effectively.
B) Is large enough relative to the market to be taken into account by competitors.
C) Confronts a downward-sloping firm demand curve.
D) Is a price taker.
36. A firm that can sell all of its output at the prevailing market price:
A) Is a competit ive firm. C) Faces a downward-sloping demand curve.
B) Receives less than its marginal cost. D) Has substantial market power.
37. An essential characteristic of a perfectly competitive firm is that:

A) It is a price maker. C) The market-demand curve is perfectly elastic.
B) It is a price taker. D) Each firm's demand curve is perfectly inelastic.
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38. Which of the following characterizes a competitive market?

A) A downward-sloping demand curve facing the firm.
B) A horizontal demand curve for the market.
C) All the firms sell at the equilibrium price for the market.
D) A competitive price is set by each individual firm.
39. If a perfectly competitive firm can sell 200 computers at $700 each, in order to sell one more computer, the
firm:
A) Must lower its price.
B) Can raise its price.
C) Can sell the 201st computer at $700.
D) Cannot sell an additional computer at any price because the market is at equilibrium.
40. Competitive firms cannot individually affect market price because:

A) There is an infinite demand for their goods.
B) Demand is perfectly inelastic for their goods.
C) Their individual production is insignificant relative to the production of the industry.
D) The government exercises control over the market power of competitive firms.
41. A competitive firm is one:

A) That has a large advertising budget.
B) Whose output is so small relative to the market supply that it has no effect on market price.
C) That can alter the market price of the good(s) it produces.
D) That can raise price to increase profit.
42. If the equilibrium price in a perfectly competitive market for apples is $1.09 per pound, then an individual
firm in this market could:
A) Not sell additional apples unless the firm lowers its price.
B) Not sell additional apples at any price because the market is at equilibrium.
C) Sell an additional pound at $1.09.
D) Only sell more by increasing its advertising budget.
Answer: C Type: Complex Understanding Page: 156
43. Which of the following characterizes a competitive market?

A) A downward-sloping demand curve for the market.
B) A horizontal demand curve facing each firm in the market.
C) All the firms sell at the equilibrium price for the market.
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44. The market demand curve for perfectly competitive firms is:
A) Downward sloping. C) The sum of individual demand curves.
B) Used to determine equilibriu m price. D) All of the above.
45. The market equilibrium price occurs where:

A) Price equals the minimum of short-run average variable cost.
B) Market supply crosses market demand.
C) A firm's marginal revenue equals short-run marginal cost.
D) A firm's short-run marginal cost equals average total cost.
46. Which of the following is true about the demand curve confronting a competitive firm?
A) Horizontal, as is market demand.
B) Horizontal, while market demand is downward-sloping.
C) Downward-sloping, while market demand is flat.
D) Downward-sloping as in market demand.
47. The demand curve confronting a competitive firm:

A) Equals the marginal revenue curve.
B) Is horizontal, as is the market demand curve.
C) Slopes downward, while the market demand curve is horizontal.
D) Slopes downward and the marginal revenue curve is below it.
THE PRODUCTION DECISION
48. A production decision is a:

A) Short-run choice about both fixed and variable factor levels.
B) Short-run choice about only variable factor levels.
C) Long-run choice about both fixed and variable factor levels.
D) Long-run choice about only variable factor levels.
49. Which of the following is a production decision?

A) What output the firm should produce in the long run.
B) What output the firm should produce in the short run.
C) Whether the firm should exit or enter the market.
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50. Which of the following is a short-run decision?

A) The production decision.
B) The investment decision.
C) Whether to use implicit or explicit costs to calculate economic profit.
D) Where the marginal cost curve intersects the average total cost curve.
51. In making a production decision, an entrepreneur:

A) Decides whether to enter or exit the market.
B) Decides what level of output will maximize profits.
C) Determines plant and equipment.
D) Can change both fixed and variable inputs.
52. Total revenue for the competitive firm is equal to:

A) P × Q. B) Economic costs + economic profit. C) MR × Q. D) All of the above.
53. The fact that a perfect ly co mpetitive firm's total revenue curve is an upward -sloping straight line imp lies that:
A) The total profit curve is also an upward-sloping straight line.
B) Product price is constant at all levels of output.
C) Product price decreases as output increases and demand is elastic.
D) Product price increases at all output levels.
Answer: B Type: Complex Understanding Page: 158
54. If a perfectly competitive firm wanted to maximize its total revenues, it would produce:
A) The output where MC equals price.
B) As much as it is capable of producing.
C) The output where the ATC curve is at a minimum.
D) The output where the marginal cost curve is at a minimum.
55. The short run is the time period:

A) Over which an investment decision can be made.
B) Necessary so that profits can be earned from production.
C) In which some costs are fixed.
56. Fixed costs:
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A) Occur in the short run but not in the long run. C) Do not change when the rate of output changes.
B) Occur even at zero output in the short run. D) All of the above.
57. Which of the following is generally a fixed cost?

A) Lease payments for plant and equipment. B) Payroll taxes. C) Profit taxes. D) All of the above.
58. Which of the following represents the change in total cost that results from a 1-unit increase in production?
A) Marginal profit. B) Total revenue. C) Marginal cost. D) Marginal revenue.
59. When the short-run marginal cost curve is upward-sloping:

A) The average total cost curve is upward-sloping.
B) The average total cost curve is above the marginal cost curve.
C) Diminishing returns occur with greater output.
D) There are diseconomies of scale.
60. The difference between the total revenue and total cost curves at a given output is equal to:
A) Total profit. B) Profit per unit. C) Average revenue. D) Average total cost.
PROFIT-MAXIMIZING RULE
61. Which of the following represents the change in total revenue that results from a 1-unit increase in the
quantity sold?
A) Marginal cost. B) Total revenue. C) Marginal profit. D) Marginal revenue.
62. For the perfectly competitive firm, the marginal revenue is always:
A) Below the firm's demand curve. C) Equal to marginal cost.
B) Equal to the market price. D) Declining.
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63. For perfectly competitive firms, price:

A) Is greater than marg inal revenue. C) Is equal to marginal revenue.
B) Is less than marg inal revenue. D) And marginal revenue are not related.
64. When a perfectly competitive firm maximizes profits, it is:

A) Making a production decision.
B) Maximizing the difference between total revenue and total cost.
C) Finding the production level at which its marginal revenue equals its marginal cost above average
variable costs.
65. Short-run profits are maximized, for a perfectly competitive firm, at the rate of output where:
A) Average total costs are min imized. C) Marginal revenue is zero.
B) Total revenue is maximized. D) Marginal revenue is equal to marginal cost.
66. Short-run profits are maximized, for a perfectly competitive firm, at the rate of outpu t where:
A) Price is equal to marginal cost. C) Marginal revenue is zero.
B) Total revenue is maximized. D) Average total costs are maximized.
67. At the profit-maximizing output for a perfectly competitive firm:

A) Average revenue = average total cost. C) Marginal cost = price.
B) Total revenue = price. D) Total cost = total revenue.
68. For a perfectly competitive firm in the short run, the profit maximization rule requires:
A) Producing where the marginal profit is maximized.
B) That price equal marginal cost.
C) Production at the minimum of short-run average variable cost.
D) That price equal average total cost.
69. Since the demand curve is horizontal for a perfectly competitive firm, at the profit -maximizing output:
A) TR = P. B) P = minimum AVC. C) P = MC. D) All of the above.
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70. A perfectly competitive firm should expand output when:

A) P < ATC. B) P > ATC. C) P < MC. D) P > MC.
Answer: D Type: Complex Understanding Page: 161
71. If a perfectly competitive firm is producing a rate of output for which MC exceeds price, then the firm:
A) Must have an economic loss. C) Can increase its profit by decreasing output.
B) Can increase its profit by increasing output. D) Is maximizing profit.
72. If price is greater than marginal cost, a perfectly competitive firm should increase output because:
A) Marginal costs are increasing.
B) Additional units of output will add to the firm's profits (or reduce losses).
C) The price they receive for their product is increasing.
D) Total revenues would increase.
73. If price is less than marginal cost, a perfectly competitive firm should decrease output because:
A) Marginal costs are increasing.
B) Total revenues are decreasing.
C) The firm is producing units that cost more to produce than the firm receives in revenue thus reducing
profits (or increasing losses).
D) All of the above are reasons to decrease output.
74. If a perfectly co mpetitive firm is producing a rate of output for which price exceeds MC and average variable
cost, then it is definitely true that the firm:
A) Has an economic profit. C) Can increase profit by increasing output.
B) Has an economic loss. D) Can increase profit by decreasing output.
75. If the vertical d istance between the total revenue curve and total cost curve is divided by output, the result is:
A) Total profit. B) Profit per unit. C) Average revenue. D) Average total cost.
76. Profit per unit equals:

A) (TR - TC) ÷ Q. B) (P - ATC) × Q. C) Profit × Q. D) All of the above.
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Consider the following informat ion for a perfectly co mpetitive firm during a one-month time period. Assume that Q =
the level of output and all costs are economic costs.
Market price = $10.

Total cost = 50 + 2Q + 0.5Q2
Marginal cost = 2 + Q
77. At the profit-maximizing or loss-minimizing output level, economic profit would equal:
A) +$98. B) +$80. C) -$18. D) -$50.
78. Under these conditions, the firm should produce an output of:
A) zero (i.e. shutdown). B) 8. C) 16. D) 50.
79. At an output of 10 units, total variable costs equal:

A) $120. B) $50. C) $70. D) $10.
Consider the following information for a perfectly competit ive firm during a one month time period. Assume that Q =
the level of output and all costs are economic costs.
Market price = $12.

Total cost = 60 + 2Q + 0.5Q2
Marginal cost = 3 + Q
80. At the profit-maximizing or loss-minimizing output level, economic profit would equal:
A) +$118.50. B) +$108. C) -$10.50. D) -$75.
81. Under these conditions, the firm should produce an output of:
A) zero (i.e. shutdown). B) 9. C) 12. D) 60.
82. At an output of 10 units, total variable costs equal:

A) $120. B) $60. C) $70. D) $12.
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THE SHUTDOWN DECISION
83. A firm experiencing economic losses will still continue to produce output in the short run as long as:
A) Revenues are greater than total fixed cost. C) MR = MC.
B) Price is above average variable cost. D) All of the above.
84. A competitive firm should always continue to operate in the short run as long as:
A) P < ATC. B) P < AVC. C) MR > AVC. D) MR > MC.
85. When a firm minimizes its losses in the short run:

A) It continues to produce only if price exceeds average variable cost.
B) The firm will make an investment decision.
C) The firm will enter or exit from the market.
86. Suppose Mark's Machine Co., unlike other U.S. firms, decides to make a lifetime employment commitment
to their workers. Ceteris paribus, we would expect Mark's Machine Co. to:
A) Have higher marginal costs than other firms.
B) Have lower fixed costs than other firms.
C) Shutdown at higher product prices than other firms because of higher fixed costs.
D) Shutdown at lower product prices because of lower variable costs.
87. Under what conditions would a perfectly competitive firm sell a product at a price less than its average total
cost (ATC)?
A) A firm would never sell at a price less than its ATC because it would be experiencing losses on those
units sold.
B) A firm would sell at a price less than its ATC only if it was still experiencing economic profits after the
sale.
C) A firm would sell at a price less than its ATC only if that price was greater than AVC and MR was greater
than or equal to MC.
D) A firm would sell at a price less than its ATC only if total profits per unit were still positive.
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88. When price exceeds average variable cost but not average total cost, the firm should, in the short run:
A) Shut down.
B) Produce at the rate of output where MR = MC.
C) Minimize per-unit losses by producing at the rate of output where ATC is minimized in the short run.
D) Minimize total losses by producing at the rate of output where ATC is minimized.
89. The shutdown point occurs where:

A) P = min imu m of MR. C) P = minimum of AVC.
B) P = min imu m of AFC . D) P = minimum of ATC.
THE INVESTM ENT DECISION
90. The decision to start or expand a business is known as the:

A) Output decision. C) Investment decision.
B) Production decision. D) Profit-maximization decision.
91. In making an investment decision, an entrepreneur:

A) Treats all costs as variable.
B) Makes a shutdown decision if price is below average variable cost.
C) Must take account of diminishing returns to fixed factors.
92. The long run is:

A) A time period longer than 1 year.
B) The time period required to produce a unit of the firm's output.
C) A period of time long enough for all inputs to be variable.
D) Approximately one year.
93. Which of the following is true about a firm in the long run?
A) It is committed to a particular scale of operations.
B) It has both fixed and variable costs.
C) It can choose whatever scale of operations it wishes.
D) It has no variable costs; all costs are fixed.
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94. A firm that makes an investment decision views all factors of production as:
A) Variable over the long run. C) Fixed over the long run.
B) Variable over the short run. D) Fixed over the short run.
DETERMINANTS OF SUPPLY
95. Short-run supply determinants include:

A) Technology. B) Number of buyers. C) Income. D) All of the above.
96. Short-run supply determinants include:

A) Expectations. B) Price of factor inputs. C) Taxes and subsidies. D) All of the above.
97. The supply curve is upward-sloping, i.e. it takes a higher price to induce greater production, because of:
A) Increasing total costs.
B) Increasing fixed costs.
C) Increasing marginal costs.
D) The decreasing skill level of additional workers.
98. The marginal cost curve and the supply curve are not the same when price:
A) Is above the average total cost curve. C) Falls below the average variable cost curve.
B) Is above the demand curve. D) Falls below the demand curve.
99. The marginal cost curve:

A) Will be affected by changes in the price of variable inputs.
B) Slopes upward to the right as output increases.
C) Is the short run supply curve for a competitive firm at prices above the AVC.
100. A shift of the supply curve would be caused by:

A) A change in fixed cost. C) A change in supply determinants.
B) A change in demand determinants. D) A change in price.
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101. Suppose the cost of fertilizer (a variable input) decreases for peach farmers. In order to maximize profits,
ceteris paribus, peach farmers should:
A) Decrease output.
B) Keep output the same since the market price did not change.
C) Increase output.
D) Increase prices.
102. If a perfectly competitive firm is producing at its profit-maximizing output in the short run and fixed costs
decline, the firm should:
A) Use less capital but increase output by hiring more labor.
B) Not change output.
C) Reduce output.
D) Increase output.
103. Which of the following does not affect marginal costs?

A) An increase in property taxes. C) A decrease in Social Security taxes.
B) An increase in payroll taxes. D) All of the above do affect marginal costs.
104. Which of the following affects both marginal and average total cost curves of a firm in the short run?
A) A change in profit taxes. C) A change in payroll taxes.
B) A change in property taxes. D) All of the above.
105. When payroll taxes are lowered, the firm's marginal cost curve:
A) Shifts upward and supply increases. C) Shifts downward and supply increases.
B) Shifts upward and supply decreases. D) Shifts downward and supply decreases.
106. Which of the following would shift the marginal cost curve of a firm in the short run?
A) An increase in the price charged by the firm. C) An increase in property taxes.
B) A decrease in payroll taxes. D) All of the above.
107. Which of the following would influence a firm's long-run decision making?
A) An increase in property tax assessments.
B) A charge on wages for unemployment and disability benefits.
C) An increase in profit taxes.
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Figure 7.1
Total cost
700
Total
Revenue
600
REVENUE OR COST
500
(dollars per unit)
400
300
250
200
100
0 50 90 160 220
QUANTITY
108. Refer to data in Figure 7.1. Total fixed costs for this firm are :
A) Approximately $250. C) Approximately $90.
B) Approximately $100. D) Approximately $450.
109. Refer to data in Figure 7.1. The shape of the total cost curve reflects:
A) Dimin ishing opportunity costs. C) The law of diminishing returns.
B) The law of rising fixed costs. D) Economies and diseconomies of scale.
110. Refer to data in Figure 7.1. The profit-maximizing output for this firm is:
A) Above 220 units. B) 220 units. C) 160 units. D) 90 units.
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Figure 7.2
MC
•
D
23
ATC
AVC
•
C
PRICE OR COST
15
(dollars per unit)
•
B
10
•
A
4
13 25 31 39
QUANTITY
111. Refer to Figure 7.2 for a perfectly competitive firm. If the market price is $15:
A) The firm should produce 31 units. C) Economic profits wil1 be zero.
B) The firm will have normal profits. D) All of the above.
A) The firm should produce 39 units. C) Economic profits are greater than zero.
B) The firm will have above normal pro fits. D) All of the above.
A) The firm should produce 25 units.
B) The firm will continue to operate in the short run.
C) An economic loss wil1 occur.
114. Refer to Figure 7.2 for a perfectly competitive firm. This firm should shutdown at any price below:
A) $4. B) $10. C) $15. D) $23.
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115. Refer to Figure 7.2 for a perfectly co mpetitive firm. At a market price of $23, profit per unit is maximized at
an output of:
A) 13 units. B) 25 units. C) 31 units. D) 39 units.
116. Refer to Figure 7.2 for a perfectly competitive firm. At a market price of $23, total profits are maximized at
an output of:
A) 39. B) 31. C) 25. D) 13.
117. Refer to Figure 7.2 for a perfectly competitive firm. The law of diminishing returns takes effect at an output
of:
A) 39. B) 31. C) 25. D) 13.
118. Refer to Figure 7.2 for a perfectly competitive firm. Which of the following st atements is true for this firm
between the prices of $10 and $15?
A) The firm is experiencing zero economic profits.
B) The firm is experiencing economic profits because the market price is greater than or equal to the
minimum AVC.
C) The firm is experiencing economic losses and should shutdown.
D) The firm is experiencing economic losses but should continue to produce.
Figure 7.3
MC
PRICE OR COST
(dollars per unit)
ATC
PRICE MR
AVC
0 A B C D E
QUANTITY
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119. Refer to Figure 7.3 for a perfectly co mpetitive firm. The cost per unit of product for this firm is the lowest at
a rate of output of:
A) B. B) C. C) D. D) E.
120. Refer to Figure 7.3 for a perfectly competitive firm. The profit per unit is the highest at a rate of output of:
A) A. B) B. C) C. D) D.
121. Refer to Figure 7.3 for a perfectly competitive firm. To maximize total profits, this firm should produce at a
rate of output of:
A) A. B) B. C) C. D) D.
122. Refer to Figure 7.3 for a perfectly competitive firm. If this firm produced at an output of C, it would be:
A) Maximizing profits.
B) Producing too little because MC would be less than the price.
C) Producing too much because it is producing past the output level where diminishing returns begin.
D) Experiencing zero profits.
Figure 7.4
MC
ATC AVC
H
PRICE OR COST
(dollars per unit)
A MR
B G
C F
0 E
K
QUANTITY
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123. Refer to Figure 7.4 for a perfectly co mpetitive firm. At the profit-maximizing output, total revenues would be
equal to:
A) OAHE. B) OBGE. C) BAHG. D) CAHF.
124. Refer to Figure 7.4 for a perfectly competitive firm. At the profit-maximizing output, total costs would be
equal to:
A) OAHE. B) OBGE. C) OCFE. D) BAHG.
125. Refer to Figure 7.4 for a perfectly competitive firm. At the profit-maximizing output, total profits would be
equal to:
A) OAHE. B) OBGE. C) BAHG. D) CAHF.
126. Refer to Figure 7.4 for a perfectly competitive firm. The area CBGF is equal to:
A) Average total cost. B) Average fixed cost. C) Marginal cost. D) Total fixed cost.
127. Refer to Figure 7.4 for a perfectly competitive firm. The area OCFE is equal to:
A) Total variable costs at the output K.
B) Total variable costs at the profit-maximizing output.
C) Average variable costs at the output E.
D) Total fixed cost.
The following multiple-choice questions require critical thinking about In the News and World View articles that
appeared in the text.
128. An In the News article states "T-Shirt Shop Owner's Lament: Too Many T-Shirt Shops." If T-shirt shops are
perfectly competitive firms, then each shop:
A) Is a price taker.
B) Has no market power.
C) Confronts a horizontal demand curve for its own output.
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perfectly competitive firms, then each shop can:
A) Possibly earn an economic profit in the short run.
B) Definitely earn an economic profit in the long run.
C) Set its own price and still earn an economic profit because the shops are independently owned.
perfectly competitive firms, then:
A) There are many T-shirt shops. C) The barriers to entry are low.
B) The shops sell identical products. D) All of the above.
131. An In the News article has the headline "EToys to Close Shop." EToys has made:
A) An investment choice involving short-run decisions.
B) A production choice involving long-run decisions.
C) An investment choice involving long-run decisions.
D) A production choice involving short-run decisions.
132. One In the News article reports EToys will cease to operate. In the long run, a producer:
A) Decides whether to enter or exit an industry. C) Can change both fixed and variable inputs.
B) Makes an investment decision. D) All of the above.
133. An In the News article is titled "GM to Idle Cadillac plant for Four Weeks." GM has made:
A) An investment decision which should shift the supply curve leftward.
B) An investment decision which should shift the supply curve rightward.
C) A production decision which should shift the supply curve leftward.
D) A production decision which should shift the supply curve rightward.
134. One In the News article is titled "GM to Idle Cadillac plant for Four Weeks." This headline describes a:
A) Short run investment decision. C) Long run investment decision.
B) Short run production decision. D) Long run production decision.
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True/False Questions
THE PROFIT MOTIVE
T F 135. The basic incentive to supply goods and services is the expectation of profit.
Answer: True Type: Basic Understanding Page: 150
T F 136. The profit motive encourages businesses to produce the goods and services that consumers desire.
T F 137. Some people start their own business because they crave recognition and control.
ECONOMIC VS. ACCOUNTING PROFITS
T F 138. Accounting costs are always greater than economic costs.
Answer: False Type: Basic Understanding Page: 152
T F 139. Economic profit is zero when a firm's revenues just cover its economic cost.
T F 140. When businesses earn zero economic profit, they have no incentive to stay in business.
T F 141. Normal profit is zero when a firm's revenues just cover its economic cost.
MARKET STRUCTURE
T F 142. Market structure is determined by the asset size of the industry.
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T F 143. A monopoly is a market in which no buyer or seller has market power.
Answer: False Type: Definition Page: 155
T F 144. Perfect competition is a market in which no buyer or seller has market power.
Answer: True Type: Definition Page: 155
THE NATURE OF PERFECT COMPETITION
T F 145. When a firm sets its price on the basis of the price being charged by other firms in the market, there
is evidence that the firm has market power.
T F 146. A perfectly competitive firm has no market power.
T F 147. The market demand curve for a product is always downward sloping.
T F 148. The demand curve confronting a perfectly competitive firm is downward sloping.
THE PRODUCTION DECISION
T F 149. The production decision is a long-run supply decision.
T F 150. The total revenue curve of a perfectly competitive firm is a horizontal line.
T F 151. The primary objective of the producer is to find the rate of output t hat maximizes profit.
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T F 152. Maximizing revenue maximizes profits.
PROFIT MAXIMIZING RULE
T F 153. To maximize profits, a firm should expand production as long as it is making profits.
T F 154. For perfectly competitive firms, marginal revenue always equals price.
T F 155. For perfectly co mpetitive firms which can cover average variable cost, marginal cost equals price at
the profit-maximizing level of output.
T F 156. In the short run, a firm will maximize profits where MR=MC.
T F 157. In the short run, a firm will maximize profits if it increases output when marginal revenue is less
than marginal cost.
T F 158. In the short run, a firm will maximize pro fits if it increases output when marginal revenue is greater
than marginal cost.
T F 159. Only at the output where average revenue equals average total cost will profits be maximized.
THE SHUTDOWN DECISION
T F 160. When price does not cover average total cost at any rate of output, the firm should shut down in the
short run.
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T F 161. In the short run, a firm should continue to produce as long as price exceeds average variable cost.
T F 162. In the short run, a firm should shutdown whenever price exceeds average variable cost.
INVESTMENT DECISION
T F 163. Investment decisions are short-run decisions.
T F 164. The investment decision is a long run choice.
T F 165. In the long run all costs are variable.
DETERMINANTS OF SUPPLY
T F 166. Shortages and surpluses are determinants of short-run supply.
T F 167. For a co mpetitive firm, the supply curve is that part of the average variable cost curve that is above
the short-run marginal cost curve.
T F 168. While property taxes and taxes on profit influence production decisions, they do not influence
investment decisions.
T F 169. A change in the tax rate on corporate profits will not change the firm's investment decision.
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T F 170. An increased tax on profits leaves the optimal rate of output unchanged in the short run.
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Chapter 4: The Costs of Production
THE PRODUCTION FUNCTION
1. Which of the following are factors of production?

A) Output in a production function. C) Land, labor, capital, and entrepreneurship.
B) Productivity. D) All of the above.
2. A production function:
A) Shows the cost of producing any level of output.
B) Is a technological relationship between factors of production and output.
C) Expresses the least-cost method of producing a given level of output.
D) Expresses our ability to produce various combinations of goods, using all of our resources.
3. A production function matches a given combination of factor inputs with the:

A) Lowest average cost of producing the output.
B) Maximum-cost method for combining the inputs.
C) Least cost of producing output.
D) Maximum output that can be technologically produced from the inputs.
4. A production function shows the:

A) Minimum amount of output that can be obtained from alternative combinations of inputs.
B) Maximum quantities of inputs required to produce a given quantity of output.
C) Maximum output we can produce with varying combinations of factor inputs.
D) Output capacity of the entire economy.
5. Which of the following statements is true about the production function?

A) It represents maximu m technical efficiency.
B) It represents the most output attainable from any combinations of factor inputs.
C) It describes the output capacity of a single firm.
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6. Suppose we can describe the production function for the MC Shoe Co. with the equation, TP = 7L (where L
= the number of workers). Based on this information, which of the following statements is true ?
A) The MC Shoe Co. will never experience economies of scale.
B) The law of diminishing returns does not apply at the MC Shoe Co.
C) Diminishing returns begin after the seventh worker.
D) The marginal physical product curve becomes negative at 7 workers.
7. Greater labor productivity means:

A) Lower output per labor hour. C) Lower output per worker.
B) Higher labor cost per unit of output. D) Higher output per worker.
8. Productivity:
A) Increases when the value of output increases relative to the cost of inputs.
B) Decreases when the value of output increases relative to the cost of inputs.
C) Increases when the ratio of output per unit of input rises.
D) Decreases when factors of production cost more.
9. A firm's productivity will increase if:

A) There is an increase in production by the firm. C) The workers are given additional capital to use.
B) The firm h ires more workers. D) The cost of resources increases.
10. Labor productivity will increase in response to:

A) Lower wages.
B) An increase in the amount of capital per worker.
C) Higher resource costs.
11. Technical efficiency is achieved when a firm produces:

A) At the amount indicated by the production function.
B) Below the opportunity cost for the resources it uses.
C) The minimum necessary output to cover the opportunity cost of resources.
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12. Technical efficiency:

A) Requires getting maximu m output from the resources used in production.
B) Requires covering the opportunity costs of the resources used in production.
C) Requires production beyond the production function.
13. When a firm produces at a technically efficient output level, it is:

A) Producing the output at the minimum MC curve.
B) Using the fewest resources to produce a good or service.
C) Producing the output where the AVC curve is at a minimum.
D) Producing the best combination of goods and services.
14. The most desired goods and services that are given up in order to get more of another good is the:
A) Average total cost. B) Variable cost. C) Marginal cost. D) Opportunity cost.
15. Decisions which treat at least one factor of production as fixed are referred to as:
A) Long-run decisions. B) Short-run decisions. C) Efficiency decisions. D) Investment decisions.
16. The period in which at least one input is fixed in quantity is the:
A) Long run. B) Production run. C) Short run. D) Investment decision.
MARGINAL PRODUCTIVITY
17. Marginal physical product is:

A) Total output divided by the quantity of input.
B) Input divided by output.
C) The change in total output divided by the change in input quantity.
D) The change in productivity associated with an additional unit of input.
18. The change in total output associated with one additional unit of input is the:
A) Opportunity cost of the output. C) Marginal physical product.
B) Average productivity. D) Marginal cost.
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19. Marginal physical product is the:

A) Change in total input required to produce one additional unit of output.
B) Change in total output associated with one additional unit of the variable input.
C) Number of units of output obtained from all units of input employed.
D) Additional cost of an additional unit of output.
20. Which of the following is the slope of the production function with respect to an input?
A) Marginal physical product of the input. C) Unit cost of the input.
B) Average product of the input. D) Input price.
21. If a firm could hire all the workers it wanted at a zero wage (i.e. the workers are volunteers), the firm should
hire:
A) Enough workers to produce the output where diminishing returns begins.
B) Enough workers to produce the output where worker productivity is the highest.
C) Enough workers to produce where the MPP = zero.
D) All the workers that can fit into the factory.
22. The law of diminishing returns indicates that marginal physical product of a factor declines as:
A) More output is produced with the most efficient combination of factors.
B) More of the factor is used, holding output constant.
C) More of the factor is used, holding other inputs constant.
23. The law of diminishing returns states that beyond some point, ceteris paribus:
A) The returns on stocks and bonds diminish with higher security prices.
B) The addition to total utility diminishes as more units of a good are consumed.
C) The marginal physical product of a factor of production diminishes as more of that factor is used.
D) The output of any good increases as more of a variable input is used.
24. The law of diminishing returns occurs with each additional unit of a variable input when:
A) Total output begins to decline. C) Total output begins to rise.
B) Marginal physical product becomes negative. D) Marginal physical product begins to decline.
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25. In the short run, the law of diminishing returns:

A) Occurs for only a few economies.
B) Can be observed in every production process.
C) Does not occur in command economies.
D) Can be overcome by using more variable inputs.
26. The law of diminishing returns indicates that at some rate of output:
A) Total output will fall in the long run.
B) Marginal physical product will decline in the long run.
C) Marginal physical product will decline in the short run.
27. Diminishing returns occur because of:

A) Inefficiency in the production process.
B) The use of inferior factors of production.
C) A rising ratio of variable input to fixed input.
D) Lower opportunity costs of the factors of production.
28. Which of the following is the best explanation of why the law of diminishing returns does not apply in the
long run?
A) In the long run, firms can increase the availability of space and equipment to keep up with the increase in
variable inputs.
B) The MPP does not change in the long run.
C) In the long run, firms have more time to find better qualified workers.
D) All factors of production are fixed in the long run.
RESOURCE COSTS
29. Profit is:

A) The difference between total cost and variable cost.
B) The difference between total revenue and total cost.
C) Earned at all points along the production function.
D) Only possible with technical efficiency.
30. The difference between total revenue and total cost is:
A) Marginal cost. B) Average variable cost. C) Fixed cost. D) Profit.
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31. The most desirable rate of output for a firm is the output that:
A) Minimizes total costs. C) Minimizes marginal costs.
B) Maximizes total profit. D) Maximizes total revenue.
32. The shape of the marginal cost curve reflects:

A) The law of dimin ishing returns. C) The law of diminishing marginal utility.
B) The competitiveness of the firm. D) The law of demand.
33. Marginal cost:

A) Is the change in total output from hiring one more factor of production.
B) Is the change in total cost from producing one additional unit of output.
C) Falls when there are diminishing returns.
D) Is the change in the total cost when hiring one more factor of production.
34. The increase in total cost associated with a 1-unit increase in production is:
A) Marginal physical product. B) Marginal cost. C) Marginal revenue. D) Profit.
35. Marginal cost is equal to:

A) Total cost ÷ output. C) Change in total cost ÷ change in input.
B) Change in total cost ÷ change in total output. D) Total cost ÷ input cost.
36. If an additional unit of labor costs $15 and has a MPP of 50 units of output, the marginal cost is:
A) $0.30. B) $0.50. C) $7.50. D) $750.00.
37. If an additional unit of labor costs $20 and has a MPP of 50 units of output, the marginal cost is:
A) $0.50. B) $0.40. C) $20.00. D) $1,000.00.
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38. Marginal cost:

A) Increases as a direct result of diminishing returns.
B) Rises whenever marginal physical product decreases.
C) Rises in the short run because some resources are fixed.
39. Rising marginal costs result from:

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

A) The law of diminishing returns.
B) Decreasing MPP.
C) Adding more variable factors of production to a fixed quantity of other factors of production.
41. Given a constant price per unit for the variable input, marginal cost will increase with greater output if:
A) Marginal physical product is declin ing. C) Total variable cost is decreasing.
B) Marginal physical product is increasing. D) Total fixed cost is increasing.
42. Whenever diminishing returns appear with greater output:

A) Marginal cost will be rising. C) MPP will rise.
B) There are diseconomies of scale. D) All of the above.
DOLLAR COSTS
43. The sum of fixed cost and variable cost at any rate of output is:
A) Total variable cost. B) Total cost. C) Average total cost. D) Average marginal cost.
44. The market value of all resources used in producing a good or service is expressed by:
A) Total costs. B) Implicit costs. C) Fixed costs. D) Variable costs.
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45. An increase in production in the short run always results in an increase in:
A) Average total costs. B) Marginal costs. C) Total costs. D) Average fixed costs.
46. The amount of fixed cost is:

A) The difference between average variable cost and average total cost in the short run.
B) Total cost at an output of zero.
C) The difference between total cost and marginal cost in the long run.
D) Represented by a curve that slopes downward as output increases.
47. In the short run, when a firm produces zero output, total cost equals:
A) Zero. B) Variable costs. C) Fixed costs. D) Marginal costs.
48. Which of the following costs do not change when output changes in the short run?
A) Average variable costs. B) Variable costs. C) Average fixed costs. D) Fixed costs.
49. Costs of production that do not change with the rate of output are:
A) Nonexistent. B) Variable costs. C) Fixed costs. D) Marginal costs.
50. Which of the following costs remains constant at all levels of output?
A) Total costs. B) Variable costs. C) Fixed costs. D) Marginal costs.
51. Which of the following is most likely a fixed cost?

A) Raw materials cost. B) Labor cost. C) Energy cost. D) Property taxes.
52. Which of the following would most likely be a fixed cost?

A) The cost of property insurance.
B) The cost of water used in the production process.
C) The cost of labor used in the production process.
D) The cost of electricity used in the production process.
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53. At any given rate of output, the difference between total cost and fixed cost is:
A) Marginal cost. B) Average variable cost. C) Zero in the short run. D) Variable cost.
54. Costs of production that change with the rate of output are:
A) Sunk costs. B) Variable costs. C) Opportunity costs. D) Fixed costs.
55. Changes in short-run total costs result from changes in only:

A) Variable costs. B) Fixed costs. C) Profit. D) The price elasticity of demand.
56. Changes in marginal costs result from changes in:

A) Variable costs. B) Fixed costs. C) Profit. D) The price elasticity of demand.
57. In the short run, which of the following is most likely a variable cost?
A) Contractual lease payments. C) Property taxes.
B) Labor and raw materials costs. D) Interest payments on borrowed funds.
58. In the long run, which of the following is likely to be a variable cost?
A) Factory rental. C) Interest payments on borrowed funds.
B) Wage costs. D) All of the above are variable costs.
59. In the short run, when a firm produces zero output, variable cost equals:
A) Zero. B) Total cost. C) Fixed cost. D) Marginal cost.
60. In the long run, changes in total costs are caused by changes in:
A) Fixed costs. B) Variable costs. C) Profits. D) Sunk costs.
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61. Which of the following is true as output increases?

A) Fixed costs decline because the costs are spread over greater production.
B) Marginal costs remain fixed.
C) Variable costs rise.
D) Average total costs decline because of diminishing returns.
62. Which of the following costs always increases when output increases by one unit?
A) Total costs. B) Average total costs. C) Marginal costs. D) Fixed costs.
63. Which of the following is equivalent to ATC?

A) FC + VC.
B) AFC + AVC.
C) Change in output divided by change in total cost.
D) Total cost times the quantity produced.
64. Which of the following is equivalent to ATC?

A) FC + VC.
B) FC + MC.
C) Change in total cost divided by change in output.
D) (FC + VC) ÷ Q.
65. Which of the following contributes to the typical U-shape of the ATC curve?
A) The initial dominance of diminishing returns.
B) The eventual dominance of the rising MC curve.
C) The steady impact of a rising AFC curve.
66. Which of the following must always be downward-sloping?

A) The marginal cost curve when it is below the average total cost curve.
B) The marginal cost curve when it is above the average total cost curve.
C) The average total cost curve when it is below the marginal cost curve.
D) The average total cost curve when it is above the marginal cost curve.
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67. Which one of the following curves must be falling as output increases when the marginal cost is below it?
A) The average variable cost curve. C) The average fixed cost curve.
B) The average total cost curve. D) All of the above.
68. The average fixed cost curve:

A) Is U-shaped as a result of diminishing returns.
B) Declines as long as output increases.
C) Is intersected at its minimum point by marginal cost.
D) Intersects the marginal cost curve at its minimum point.
69. As the production rate is increased, average fixed costs:

A) Are constant. B) First fall, then rise (in a U-shaped curve). C) Decline. D) Increase.
70. For which of the following costs does the average cost curve fall continuously?
A) Fixed costs. B) Variable costs. C) Total costs. D) All of the above.
71. The average variable cost curve slopes upward with a higher rate of output in the short run because of:
A) The effect of d iminishing returns. C) Diseconomies of scale.
B) The shape of the average fixed cost curve. D) All of the above.
72. In the short run, average costs may rise as a firm increases the rate of production because:
A) Inflation causes the prices of resources to increase.
B) The supply curve for the product shifts.
C) Some inputs, such as plant and equipment, cannot be changed.
73. A U-shaped average total cost curve implies:

A) First, diminishing returns, and then, increasing returns.
B) First, marginal cost below average total cos t, and then marginal cost above average total cost.
C) That total costs are at a minimum at the minimum of the average cost curve.
D) A linear total cost curve.
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74. The marginal cost curve intersects the minimum of the curve representing:
A) TC. B) ATC. C) AFC. D) All of the above.
75. If the marginal cost curve is rising, then which of the following must be true?
A) The average total cost curve must be rising.
B) The average total cost curve must be below the marginal cost curve.
C) The average total cost curve must be above the marginal cost curve.
D) Total costs must be rising.
76. The tendency for total costs to rise more slowly at first and then to increase more quickly results in:
A) First, diminishing returns, and then, increasing returns.
B) First, falling marginal costs, and then, rising marginal costs.
C) First, negative marginal costs, and then, positive marginal costs.
D) First, rising average costs, and then, falling average costs.
77. When the average total cost curve is rising, then the marginal cost curve will be:
A) Below the average fixed cost curve. C) Above the average total cost curve.
B) Falling with greater output. D) Below the average total cost curve.
78. Which of the following contributes to an upward-sloping long-run average total cost curve?
A) Long-run marginal cost above long-run average total cost law of diminishing returns.
B) Long-run marginal cost below long-run average total cost.
C) Economies of scale.
D) The law of diminishing returns.
ECONOMIC VS. ACCOUNTING COSTS
79. Explicit costs:

A) Include only payments to labor.
C) Include the market value of all resources used to produce a good.
D) Are the total value of resources used to produce a good but for which no monetary payment is actu ally
made.
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80. Implicit costs:

A) Include only payments to labor.
C) Include the value of all resources used to produce a good.
D) Are the value of resources used to produce a good but for which no monetary payment is actually made.
81. Economic cost:

A) Includes only implicit costs.
B) Is only the sum of actual monetary payments made for resources used to produce a good.
C) Includes the market value of all resources used to produce a good.
D) Is only the value of resources used to produce a good for which no monetary payment is actually made.
82. Economic cost:

A) Includes both implicit and explicit costs.
B) Is the sum of actual monetary payments made for resources used to produce a good.
C) Includes only implicit costs.
D) Decreases as the level of production increases.
83. The difference between the accountant's and the economist's measurement of costs equals:
A) Exp licit cost. C) Total revenue minus cost.
B) The opportunity cost of unpaid resources. D) Marginal cost.
84. Economic and accounting costs will differ whenever:

A) There is more than one factor of production.
B) The firm fails to maximize its profits.
C) Any factor of production is not paid an explicit factor payment.
D) Firms operate as proprietorships or partnerships instead of as corporations.
85. Accounting costs and economic costs may differ because:

A) The explicit cost for at least one factor is less than the factor's opportunity cost.
B) Accounting costs include implicit costs and economic costs do not.
C) Explicit costs are positive.
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86. Which of the following statements about the relationship between economic costs and accounting costs is
true?
A) Accounting costs are always less than or equal to economic costs.
B) Accounting costs must equal economic costs (by definition).
C) Accounting costs are always greater than economic costs.
D) Accounting costs are equal to or greater than economic costs.
LONG-RUN COSTS
87. In economics, the long run is considered to be:

A) A variable time depending on the nature of business.
B) Six to nine months.
C) One year.
D) More than two years.
88. The situation in which all factors of production as variable are referred to as:
A) The long run. B) The short run. C) The efficiency decision. D) Economies of scale.
89. The period in which there are no fixed costs is the:

A) Production run. B) Long run. C) Short run. D) Implicit run.
90. The long-run average total cost curve is constructed from the:
A) Minimum points of the short-run marginal cost curves.
B) Minimum points of the short-run average variable cost curves.
C) Lowest average total cost for producing each level of output.
D) Minimum points of the long-run marginal cost curves.
91. The long-run marginal cost curve:

A) Is the sum of the short-run marginal cost curves.
B) Declines as long as output increases.
C) Is intersected at its minimum point by long-run average total cost.
D) Intersects the long-run average total cost curve at its minimum point.
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ECONOMIES OF SCALE
92. Economies of scale are reductions in average:

A) Total cost that result from declining average fixed costs.
B) Fixed cost that result from reducing the firm's scale of operations.
C) Total cost that result from using operations of larger size.
D) Fixed cost resulting from improved technology and production efficiency.
93. If a given amount of output can be produced by several small plants or one much larger plant with identical
minimum per-unit costs, this long-run situation reflects the existence of:
A) Economies of scale. C) Constant returns to scale.
B) Diseconomies of scale. D) Diminishing returns.
94. When the size of a factory (and all its associated inputs) doubles and, as a result, output more than doubles:
A) The law of diminishing returns must not apply in the smaller factory.
B) Economies of scale must exist.
C) The short-run ATC curve must be declining.
D) Marginal costs must be declining.
95. Economies of scale:

A) Exist in both the short run and the long run.
B) Explain why average variable and average total costs decline in the short run.
C) Explain why average total costs decline as output increases in the long run.
D) Explain why average total costs increase as output increases in the long run.
96. Economies of scale are reductions in:

A) Average total costs that result from declining average fixed costs.
B) Fixed costs that result from reducing the firm's scale of operations.
C) Marginal costs resulting from improved technology and production efficiency.
D) Minimum average total costs that result from using operations of larger size.
97. Diseconomies of scale are reflected in:

A) The downward-sloping segment of the long-run average total cost curve.
B) The downward-sloping segment of the long-run marginal cost curve.
C) A downward shift of the long-run average total cost curve.
D) The upward-sloping segment of the long-run average total cost curve.
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98. Diseconomies of scale are reflected in:

A) The rising segment of the long-run average total cost curve.
B) The rising segment of the short-run marginal cost curve.
C) Greater efficiency that results from specialization.
D) Downward shifts of the average total cost curve.
99. Which of the following is a long-run concept?

A) Dimin ishing marginal productivity. C) Diseconomies of scale.
B) Dimin ishing returns. D) All of the above.
THE ECONOM Y TOMORROW
100. "Unit labor cost" is the same thing as:

A) The wage rate.
B) The wage rate ÷ MPP.
C) The change in labor cost divided by the change in output.
D) MC.
101. When the wage rate is $7 per hour and the MPP of a worker is 35 units per hour, the unit labor cost is:
A) $0.20 per unit. B) $7.00 per hour. C) $245 per unit. D) $245 per hour.
102. Which of the following will increase productivity?

A) Technological advances. C) Increased labor skills.
B) Increased managerial capabilit ies. D) All of the above.
103. Which of the following would cause a firm's production function to shift upward?
A) An increase in production by the firm. C) Increased training for the firm's workers.
B) Hiring mo re workers. D) An increase in factor costs.
104. Assuming labor is a variable input, an increase in labor productivity would result in:
A) An upward shift in the MPP curve. C) A downward shift in the ATC curve.
B) A downward shift in the MC curve. D) All of the above.
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105. Technological changes that increase productivity shift the:

A) Production function downward.
B) Average total cost curve downward.
C) Marginal cost curve upward as output increases.
106. Higher education levels and better management should:

A) Cause MPP to slope downward.
B) Shift the long-run average total cost curve downward.
C) Lead to greater diseconomies of scale.
107. When the production function shifts upward:

A) MC shifts downward. B) AVC shifts downward. C) ATC shifts downward. D) All of the above.
108. When the production function shifts downward the:

A) MC shifts upward. B) AVC shifts downward. C) ATC shifts downward. D) All of the above.
109. The creation of the World Wide Web has:

A) Reduced informat ion costs. C) Increased productivity.
B) Reduced transaction costs. D) All of the above.
Table 6.1
Units of labor Units of output

0 0
1 15
2 35
3 45
4 52
Page 17
110. What is the marginal physical product of the first unit of labor in Table 6.1?
A) 0. B) 35. C) 17. D) 15.
111. What is the marginal physical product of the second unit of labor in Table 6.1?
A) 20. B) 17. C) 35. D) 5.
112. With which unit of labor do diminishing marginal returns first appear in Table 6.1?
A) The first. B) The second. C) The third. D) The fourth.
113. At what output level in Table 6.1 is labor productivity the highest?
A) 1. B) 2. C) 3. D) 4.
114. If a fifth unit of labor was added to Table 6.1, its MPP would most likely be:
A) Zero. B) 7. C) Less than 7. D) Greater than 7.
115. What is the labor cost per unit of output in Table 6.1 when output is increased from 15 to 35 units of output?
A) 20 units of labor. B) 0.43 units of labor. C) 0.05 units of labor. D) 1 unit of labor.
116. What is the labor cost per unit of output in Table 6.1 when output is increased from 35 to 45 units of output?
A) 10 units of labor. B) 0.78 units of labor. C) 0.10 units of labor. D) 1 unit of labor.
Table 6.2
Outputs (units per day) 0 10 20 30

Total cost (dollars per day) 40 54 62 80
Page 18
117. Average fixed cost at 20 units of output in Table 6.2 is:

A) $1.00. B) $2.00. C) $2.50. D) $4.00.
118. The marginal cost between 20 and 30 units of output in Table 6.2 is:
A) $1.60. B) $4.00. C) $1.80. D) $18.00.
119. Above 10 units of output, the average fixed cost in Table 6.2:
A) Rises above $2.00. B) Remains constant. C) Stays below $0.50. D) Continues to decline.
120. At 20 units of output in Table 6.2 the average variable cost is:
A) $1.10 per unit. B) $1.75 per unit. C) $2.00 per unit. D) $3.10 per unit.
121. For the output levels in Table 6.2, the minimu m of the average variable cost curve occurs at a production rate
of:
A) Zero units per day. B) 10 units per day. C) 20 units per day. D) 30 units per day.
122. At 10 units of output in Table 6.2, the total fixed costs are:
A) $44. B) $14. C) $40. D) $54.
123. At 30 units of output in Table 6.2, the total variable costs are:
A) $30. B) $40. C) $50. D) $80.
Complete Table 6.3. Then use the information in the table to answer the indicated questions.
Table 6.3
Q TFC TVC TC AVC MC

0 ____ ____ 15
1 ____ ____ 23 ____ ____
2 ____ ____ ____ ____ 4
3 ____ 15 ____ ____ ____
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124. Total fixed costs in Table 6.3 are equal to:

A) $0 because the problem involves the long run. B) $15. C) $30. D) $60.
125. The marginal cost of the first unit of output in Table 6.3 is:
A) $3. B) $4. C) $8. D) $15.
126. The total cost of 2 units of output in Table 6.3 is:

A) $15. B) $27. C) $23. D) $65.
127. The total variable cost of 1 units of output in Table 6.3 is:
A) $15. B) $12. C) $30. D) $8.
128. The marginal cost of the third unit of output in Table 6.3 is:
A) $3. B) $4. C) $8. D) $15.
129. The average variable cost of the second unit of output in Table 6.3 is:
A) $15. B) $5. C) $8. D) $6.
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Figure 6.1
130. The marginal physical product of the third unit of labor in Figure 6.1 is:
A) 2.0. B) 6.0. C) 6.67. D) 20.0.
131. The marginal physical product of the fifth unit of labor in Figure 6.1 is:
A) 1. B) 5. C) 20. D) 25.
132. The marginal physical product of labor in Figure 6.1 is negative for the:
A) Third worker. B) Fourth worker. C) Fifth worker. D) Sixth worker.
133. In Figure 6.1 diminishing marginal returns first occur with the:
A) Fifth worker. B) Fourth worker. C) Third worker. D) Second worker.
Page 21
Figure 6.2
d
10 c e
b f
8
g
MPP
6
4 a
h
2 i
j
1 2 3 4 5 6 7 8 9 10
Labor Input (workers per period)
134. In Figure 6.2, if 3 units of labor are used, marginal costs are:
A) Increasing. B) Decreasing. C) Zero. D) Negative.
A) Increasing. B) Constant. C) Decreasing. D) Zero.
136. In Figure 6.2, at which level of labor input is marginal cost minimized?
A) 1. B) 4. C) 9. D) 10.
A) Increasing. B) Constant. C) Decreasing. D) Zero.
Page 22
Use the following to answer question 138:
Figure 6.3
• • •
c d
MARGINAL PHYSICAL PRODUCT
e
5
4 •
b
•
f
•
g
3 MPP
•
a
2
•
h
•
1 i
• j
•
0 1 2 3 4 5 6 7 8 9 10 11
k
LABOR INPUT
138. Refer to Figure 6.3. Maximum production occurs at a level of labor input equal to:
A) 2 workers. B) 4 workers. C) 8 workers. D) 10 workers.
Figure 6.4
Page 23
139. What is the marginal cost of the 120th unit of output in Figure 6.4?
A) $25. B) $100. C) $104. D) $144.
140. What is the total fixed cost in Figure 6.4?

A) $48. B) $10,000. C) $4,800. D) $14,800.
141. What is the total cost of 120 units in Figure 6.4?

A) $10,000. B) $14,800. C) $17,280. D) $17,760.
142. What is the average fixed cost when output is 120 units in Figure 6.4?
A) $10. B) $40. C) $48. D) $4,800.
143. What is the total variable cost when output is 100 units in Figure 6.4?
A) $12,480. B) $104. C) $100. D) $12,000.
Figure 6.5
MC
PRODUCTION COSTS ($)
ATC
AVC
AFC
0 Q1 Q Q Q4
2 3
OUTPUT
Page 24
144. Refer to Figure 6.5. Diminishing returns begin at an output of:

A) Q1 . B) Q2 . C) Q3 . D) Q4 .
145. Refer to Figure 6.5. The vertical distance between the AVC and the ATC curves represents:
A) Marginal costs. C) Average fixed costs.
B) Total fixed costs. D) The increasing efficiency of workers.
146. Refer to Figure 6.5. The vertical d istance between the ATC and AVC curves mu ltip lied by the nu mber o f units
produced equals:
A) Marginal costs. B) Total fixed costs. C) Total variable cost. D) Total cost.
147. Refer to Figure 6.5 at an output of Q4 . The ATC at Q4 multiplied times Q4 equals:
A) Marginal costs. B) Total profit. C) Total revenue. D) Total cost.
148. In Figure 6.5, at what output does this firm maximize technical efficiency?
A) Q1 . B) Q2 . C) Q3 . D) Q4 .
Figure 6.6
Total Cost
PRODUCTION COSTS ($)
Total Fixed Cost
0 10 20 30 40 50
OUTPUT
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149. Refer to Figure 6.6. The vertical difference between the total cost curve and the total fixed cost curve
represents:
A) Total variab le costs. C) Average fixed costs.
B) Total marg inal costs. D) Average variable costs.
150. Refer to Figure 6.6. The best estimate of where diminishing returns begins is at an output of:
A) 10. B) 20. C) 30. D) 40.
Figure 6.7
Long-run average total cost curve
151. In Figure 6.7, a firm that produces over 400 units of output should choose a plant with which short -run
average total cost function?
A) ATC 1 . B) ATC2 . C) ATC 3 . D) Either ATC2 or ATC3 .
152. In Figure 6.7, diseconomies of scale occur at output rates:

A) Up to 200 units per period. C) Between 400 and 500 units per period.
B) Between 200 and 300 units per period. D) Greater than 500 units per period.
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153. In Figure 6.7, the long-run average total cost curve is given by the curved line segment:
A) ACE. B) ABFDGE. C) ABF only. D) BFD.
Figure 6.8
AVERAGE COSTS ($)
#1
#2 #3 #5
#4
0
OUTPUT
154. Refer to Figure 6.8. Economies of scale occur in the following range of factory sizes:
A) #1 to #2. B) #1 to #3. C) #3 only. D) All of the factories exhibit economies of scale.
155. Refer to Figure 6.8. Diseconomies of scale begin:

A) At the minimum points on all five ATC curves.
B) After the third factory.
C) After the fifth factory.
D) None of the factories exhibit diseconomies of scale.
156. An In the News article talks about a joint venture between General Motors and Isuzu to build a new factory
outside Dayton, Ohio. Which of the following statements is true about the costs of this factory?
A) In the planning stage, all construction costs are variable.
B) Once the factory is built, there are fixed costs.
C) Once the factory is built, the ATC and AVC curves are separate.
Page 27
157. One In the News article reports profit for a Houston-based funeral giant is 31 cents on every dollar vs. a profit
of 12 cents for the funeral industry in general. Such profits are most likely the result of:
A) Constant return to scale. C) Higher minimum average costs.
B) Economies of scale. D) A downward shift in the production function.
158. One In the News article reports profit for a Houston-based funeral giant is 31 cents on every dollar vs. a profit
of 12 cents for the funeral industry in general. Such profits are most likely the result of:
A) Economies of scale.
B) Reductions in minimum average costs because of size.
C) A lower ATC curve.
159. One World View article titled "United States Gains Cost Advantage." During the 1990s, unit labor costs in
the United States declined:
A) And the U.S. was less competitive in world markets.
B) Because productivity advances were small and wage increases were high.
C) Because productivity advances were greater than wage increases.
D) And cost curves shifted upward.
160. An In the News article has the headline "United States Gains Cost Advantage." One reason for the increase in
global competitiveness could be:
A) The law of demand. C) Disconomies of scale.
B) The law of dimin ishing returns. D) Lower unit labor costs.
161. An In the News article says productivity advances have contributed to U.S. co mpetit iveness in world markets.
When improvements in productivity reduce costs the production function shifts:
A) Upward and cost curves shift upward. C) Downward and cost curves shift upward.
B) Upward and cost curves shift downward. D) Downward and cost curves shift downward.
THE PRODUCTION FUNCTION
T F 162. The production function shows the maximu m amount of a particular good or service that can be
produced with given combinations of resources.
Page 28
T F 163. The production function shows the minimum output that would equal the opportunity cost of the
resources used to produce the output.
T F 164. The productivity of any input is independent and is not affected by the other resources that are used.
T F 165. When a firm is able to achieve the output indicated by a production function, it is producing with
technical efficiency.
T F 166. Short-run choices imply that at least one factor of production is fixed.
MARGINAL PRODUCTIVITY
T F 167. Total output may continue to rise even though marginal physical product is declining.
T F 168. Total output may continue to rise even though marginal physical product is negative.
T F 169. The marg inal physical product of a variable input eventually declines as more of it is emp loyed with
a given quantity of other (fixed) inputs.
T F 170. The law of diminishing returns indicates that the marginal physical product of a variable input
declines as more of it is employed, ceteris paribus.
T F 171. The law of diminishing returns is reflected in the downward sloping portion of the short -run
marginal cost curve.
Page 29
RESOURCE COSTS
T F 172. The difference between total revenue and total cost is profit.
T F 173. Marginal cost always reflects the cost of variable factors.
T F 174. Whenever MPP is increasing with output, the marginal cost of producing a good must be falling.
T F 175. If MPP declines with greater output, then MC must increase.
DOLLAR COSTS
T F 176. Total cost refers to the market value of all resources used in producing a good or service.
T F 177. The total cost at a zero level of output is always equal to the variable cost.
T F 178. ATC = AFC + AVC.
T F 179. When marginal cost is below average total cost, average variable cost will always fall.
T F 180. When the marg inal cost curve is below the average total cost curve, the average total cost curve must
be falling.
T F 181. The marginal cost curve intersects the minimum of the average total cost curve and also the
Page 30
minimum of the average variable cost curve.
ECONOMIC VS. ACCOUNTING COSTS
T F 182. The difference between the accountant's and the economist's measurement of cost equals implicit
costs.
T F 183. Economic and accounting costs will diverge whenever any factor of production is not paid an
explicit wage.
T F 184. Accounting costs and economic costs differ by the amount of explicit costs.
LONG-RUN COSTS
T F 185. Long-run choices imply that all factors must be variable.
T F 186. There are still some fixed costs in the long run, such as rent.
T F 187. The long-run cost curve is simply a summary of the best short-run fixed cost curves.
ECONOMIES OF SCALE
T F 188. If a larger plant reduces minimum average costs, there are economies of scale.
Page 31
T F 189. If a firm has constant returns to scale, the long-run cost curve will be downward sloping.
T F 190. Diseconomies of scale imply that the average total cost curve is downward -sloping in the long run.
T F 191. More education and better technology contribute to an increase in productivity, ceteris paribus.
T F 192. Unit labor cost represents the increase in output because of an additional worker is hired.
T F 193. Better management shifts the production function downward and the total cost curve upward.
Page 32
Answers to Table
Table 6.3 Answer
Q TFC TVC TC AVC MC

0 15 0 15
1 15 8 23 8 8
2 15 12 27 6 4
3 15 15 30 7.5 3
Page 33
Consumer Choice + Elasticity
THE DETERMINANTS OF DEMAND
1. Status and ego considerations in consumption are:

A) Sociopsychiatric explanations of demand. C) An example of income.
B) Economic determinants of demand. D) All of the above.
2. A movement along a given demand curve between two prices refers to:
A) The price elasticity of demand. C) A change in quantity demanded.
B) A change in demand. D) The law of diminishing marginal utility.
3. When the demand for a good increases:

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

A) Satisfaction obtained from a good or service.
B) Additional satisfaction obtained from one more unit of a good or service.
C) Willingness to buy specific quantities of a good or service at a particular price.
D) Decrease in satisfaction as more of a good or service is consumed.
5. Which of the following determinants of demand is most directly an indication of a consumer's utility for a
good?
A) Income. B) Tastes. C) Expectations of future prices. D) Other goods (availability and prices).
6. The amount of satisfaction obtained from consumption of an additional unit of a good or service is:
A) Never negative. B) Total utility. C) A function of supply. D) Marginal utility.
Page 1
7. Marginal utility for a good is computed as:
A) Total utility divided by quantity.
B) Quantity divided by total utility.
C) The change in quantity divided by total utility.
D) The change in total utility divided by the change in quantity.
8. The additional pleasure or satisfaction from a good declines as more of it is consumed in a given period. This
is the definition of the:
A) Law of demand. C) Law of diminishing total utility.
B) Law of d iminishing marg inal utility. D) Total revenue rule.
9. According to the law of diminishing marginal utility:

A) Consumers will purchase more of a good at a lower price, ceteris paribus.
B) Consumers maximize total utility when the marginal utility per dollar spent is equal for all goods
consumed.
C) Each successive unit of a good consumed yields less additional utility.
D) Consumers behave rationally when the price of a good equals the marginal utility of the good.
10. The law of diminishing marginal utility suggests that:

A) People are willing to buy additional quantities of a good only if its price falls.
B) People will substitute lower-priced goods for more expensive goods, ceteris paribus.
C) Price and quantity demanded are directly related.
D) As marginal utility decreases, the willingness to pay increases.
11. As more satisfaction is achieved from consuming a good with dimin ishing marg inal utility, then total utility:
A) Increases at a decreasing rate.
B) Decreases as long as marginal utility is negative.
C) Decreases as long as marginal utility is positive.
D) Is negative as long as marginal utility is decreasing.
12. At some point during a meal each extra bite provides less and less additional satisfaction. This can be
explained by:
A) The law of demand. C) The law of increasing opportunity cost.
B) The law of dimin ishing marginal utility. D) A shift in the demand curve.
13. Jose goes to an all-you-can-eat buffet at a Chinese restaurant and consumes three plates of food. He does not
Page 2
go back for a fourth plate of food because:
A) The price of the fourth plate is too high.
B) He has reached the point of increasing marginal utility.
C) The marginal utility of the fourth plate would be zero or even negative.
D) His total utility would increase with the fourth plate of food.
14. As consumption increases, total utility must:

A) Fall. C) Increase only if marginal utility increases.
B) Increase as long as marg inal ut ility is positive. D) Increase.
15. If marginal utility is negative, then:

A) Total utility will increase with additional consumption.
B) Total utility will decrease with additional consumption.
C) The good or service being consumed is an inferior good.
D) Total utility is at a minimum.
16. Total utility is maximized when:

A) Price is less than marg inal utility. C) Marginal utility is zero.
B) Price is equal to marginal utility. D) Marginal utility is maximized.
17. Which of the following is not held constant when considering the demand for pizza?
A) Consumer inco mes. C) The price of spaghetti (a substitute).
B) The price of pizza. D) Expectations of higher prices for pizzas.
18. If a good had a zero price (i.e. the good was free), a rational person would consume:
A) An infinite amount of the good.
B) The good until total utility was zero.
C) The good until the marginal utility was maximized.
D) The good until the marginal utility of the last unit was zero.
Page 3
19. The fact that a cup of gold is normally priced higher than a cup of water suggests that:
A) The total utility of gold is higher than the total utility of water.
B) The marginal utility of a cup of gold is greater than the marginal utilit y of a cup of water.
C) Gold is a normal good while water is an inferior good.
D) There are more substitutes for water than for gold.
20. According to the law of demand, ceteris paribus:

A) The quantity demanded increases at lower prices.
B) A consumer will purchase more of a good at higher prices than at lower prices.
C) Price and quantity supplied are directly related.
D) The responsiveness of consumer demand to a change in the price of a good is measured by the price
elasticity of demand.
PRICE ELASTICITY
21. Price elasticity of demand shows how:

A) To compute the slope of the demand curve.
B) Quantity demanded responds to price changes.
C) Quantity demanded responds to changes in the price of other goods.
D) Price responds to quantity changes.
22. The price elasticity of demand is defined as the:

A) Percentage change in quantity demanded times the percentage change in price.
B) Unit change in price divided by the unit change in quantity demanded.
C) Percentage change in quantity demanded divided by the percentage change in price.
D) Unit change in quantity demanded times the unit change in price.
23. For downward-sloping linear demand curves, the price elasticity of demand:
A) Is constant at each point on the curve. C) Tends to be elastic at relatively low prices.
B) Varies throughout the demand curve. D) Is equal to the slope of the demand curve.
24. The price elasticity of demand for a good is likely to be elastic if the marginal utility for that good:
A) Decreases slowly as additional units are consumed.
B) Remains constant as additional units are consumed.
C) Increases rapidly as additional units are consumed.
D) Decreases rapidly as additional units are consumed.
Page 4
25. The demand curve is typically downward sloping because:
A) Of the law of diminishing marginal utility.
B) Consumers will not to pay as much for a good with a low marginal utility as they will for a good with a
high marginal utility.
C) Consumers have limited budgets.
26. Assume the price elasticity of demand for U.S. Frisbee Co. frisbees is –0.5. If the co mpany increases the price
of each frisbee from $6 to $8, the number of frisbees sold will:
A) Decrease by 14.3 percent. C) Increase by 20.0 percent.
B) Decrease by 33.3 percent. D) Increase by 7.0 percent.
27. Assume the price elasticity of demand for JT Chip Co. chips is –2.0. If the company decreases the price of
each bag of chips from $1.89 to $1.49, the number of bags sold will:
A) Decrease by 39 percent. C) Increase by 24 percent.
B) Increase by 47 percent. D) Increase by 39 percent.
28. The price elasticity of demand is calculated using percentage changes in order to:
A) Avoid mistaking elasticity with slope.
B) Make elasticity a percentage figure.
C) Avoid problems associated with units of measurement.
D) Find a constant elasticity along each demand curve.
29. For product X, the price elasticity of demand has an absolute value of 2. Th is means that quantity demanded
will increase by:
A) 1 percent for each 2 percent decrease in price, ceteris paribus.
B) 1 unit for each $2 decrease in price, ceteris paribus.
C) 2 percent for each 1 percent decrease in price, ceteris paribus.
D) 2 units for each $1 decrease in price, ceteris paribus.
30. Assume the price elasticity of demand has an absolute value of 4 for a particular good. This means that
quantity demanded will decrease by:
A) 4 percent for each 1 percent increase in price, ceteris paribus.
B) 1 unit for each $4 increase in price, ceteris paribus.
C) 1 percent for each 4 percent increase in price, ceteris paribus.
D) 4 units for each $1 increase in price, ceteris paribus.
Page 5
31. Suppose the quantity demanded of U.S. cars falls from 4.0 million to 3.0 million as a result of an average
price increase from $20,000 to $25,000 per vehicle. The absolute value of the price elasticity of demand is
closest to:
A) 0.20. B) 1.29. C) 0.78. D) 0.29.
32. Suppose a university raises its tuition by 4 percent and as a result the enrollment of students decreases by 2
percent. The absolute value of the price elasticity of demand is:
A) 0.50. B) 2.0. C) 8.0. D) 6.0.
33. Suppose Harley Davidson increases the price of a particular model of motorcycle by 3 percent and as a result
sales of the model decreases by 1 percent. The absolute value of the price elasticity of demand is:
A) 4.0. B) 3.0. C) 2.0. D) 0.33.
34. A demand curve is described as perfectly inelastic if:

A) The same quantity is purchased regardless of price.
B) The same price is charged regardless of quantity sold.
C) Only quantity demanded can change.
D) It is horizontal.
35. A demand curve that is completely inelastic is:

A) Horizontal. B) Vertical. C) Upward sloping. D) Downward sloping.
36. When the percentage change in quantity demanded is less than the percentage change in price, ceteris
paribus:
A) Demand is elastic. C) Demand is unitary elastic.
B) Demand is inelastic. D) Elasticity is impossible to calculate.
37. A demand curve is described as perfectly elastic if:

A) The same quantity is purchased regardless of price.
B) The same price is charged regardless of quantity sold.
C) Only price can change.
D) It is vertical.
Page 6
38. A demand curve that is completely elastic is:
A) Horizontal. B) Vertical. C) Upward sloping. D) Downward sloping.
39. When the percentage change in quantity demanded is greater than the percent age change in price, ceteris
paribus:
A) Demand is unitary elastic. C) Demand is elastic.
B) Demand is inelastic. D) Elasticity is impossible to calculate.
40. Which of the following influences the price elasticity of demand?

A) Availability of substitutes. B) Price relative to budget. C) Length of time. D) All of the above.
41. Which of the following would be most likely to have a price-elasticity coefficient greater than 1?
A) Cigarettes. B) Coffee. C) An addictive drug. D) Restaurant meals.
42. Which of the following would be most likely to have a price-elasticity coefficient less than 1?
A) An addictive drug. B) Airline travel. C) Restaurant meals. D) New cars.
43. Which of the following is likely to have the most inelastic price elasticity of demand?
A) Automobiles. B) Pickup trucks. C) Hondas. D) The Hondas one Honda dealer sells.
44. Which of the following is likely to have the most elastic price elasticity of demand?
A) Food.
B) Fruit.
C) Peaches.
D) Farmer Betty's peaches (which are exactly like all the other farmer's peaches).
Page 7
45. Ceteris paribus, as the number of substitutes for a good increase, the:
A) Price elasticity of demand should become smaller.
B) Price elasticity of demand should become larger.
C) Cross-price elasticity of demand should become negative.
D) Income elasticity of demand should become negative.
46. Ceteris paribus, as the number of substitutes for a good decrease, the:
47. Ceteris paribus, as the number of substitutes for a good increases the:
48. Which of the following causes demand to be more elastic with respect to price?
A) Shorter periods of time to adjust to a change in price.
B) A steeper demand curve for a given price and quantity.
C) Fewer substitutes.
D) A high ratio of price to income.
49. Ceteris paribus, the higher the ratio of price to income for a particular good, the:
A) More elastic the demand for the good. C) More unitary elastic the demand for the good.
B) Less elastic the demand for the good. D) Smaller the income elasticity for the good.
50. Ceteris paribus, the lower the ratio of price to income for a particular good, the:
A) More elastic the demand for the good. C) More unitary elastic the demand for the good.
B) Less elastic the demand for the good. D) Smaller the income elasticity for the good.
Page 8
51. Which of the following causes demand to be less elastic with respect to price?
A) A longer period of time to adjust to a change in price.
B) A flatter demand curve for a given price and quantity.
C) More substitutes.
D) A low ratio of price to income.
52. Ceteris paribus, the longer the time period, the:

A) Smaller the inco me elasticity for the good. C) More unitary elastic the demand for the good.
B) Less elastic the demand for the good. D) More elastic the demand for the good.
53. Which of the following causes demand to be more elastic with respect to price?
A) Longer periods of time to adjust to a change in price.
B) A lower ratio of price to income.
C) Fewer substitutes.
PRICE ELASTICITY AND TOTAL REVENUE
54. The total revenue effect of a movement along a demand curve can best be predicted using the:
A) Law of d iminishing marg inal utility. C) Utility-maximizing rule.
B) Price elasticity of demand. D) Law of demand.
55. The local baseball team owner hires you to help maximize the team's profits. You are told that costs are
constant because enough help is always hired in case of a full stadium, so assume your task is to maximize
revenues from ticket sales. Your advice to the owner should be:
A) Set the ticket price in the inelastic region of the demand curve in order to increase revenues.
B) Raise the price as high as possible until the number of tickets sold begins to fall.
C) Set the price as low as possible to make sure the stadium is always full.
D) Set the price of tickets at the unitary elasticity price.
56. Assume a good has a downward-sloping, linear demand curve. As the price of this good increases, total
revenue:
A) Increases indefinitely.
B) Decreases indefinitely because the quantity sold will decrease.
C) Remains constant.
D) Increases then decreases.
Page 9
57. Assume a good has a downward-sloping, linear demand curve. As its price increases, consumer expenditures
on this good:
A) Increase indefinitely.
B) Decrease indefinitely because the quantity sold will decrease.
C) Remain constant.
D) Increase then decrease.
58. Moving downward along a linear demand curve results in more:

A) Inelastic demand and a changing slope. C) Elastic demand and a changing slope.
B) Inelastic demand but a constant slope. D) Elastic demand and a constant slope.
59. If the price elasticity of demand is 2.0, and a firm raises its price by 10 percent, the quantity sold by the firm
will:
A) Increase by 10 percent. C) Decrease by 20 percent.
B) Decrease by 10 percent. D) Increase by 20 percent.
60. If the price elasticity of demand is 1.0, and a firm raises its price by 15 percent, the quantity sold by the firm
will:
A) Fall by 15 percent. B) Fall by 6.7 percent. C) Rise by 15 percent. D) Rise by 150 percent.
61. If the price elasticity of demand is 1.0, and a firm raises its price by 10 percent, the total revenue will:
A) Rise by 10 percent. B) Fall by 10 percent. C) Not change. D) Rise by 100 percent.
62. Suppose AAA Airlines is suffering from low revenues and profits. If the company wants to increase ticket
revenue and the price elasticity of demand is 0.75, the company should:
A) Increase the price of tickets.
B) Decrease the price of tickets.
C) Keep the price unchanged because if the price is either increased or decreased total revenues will fall.
D) Advertise. The only option the company has to raise total revenues is to advertise.
Page 10
63. Ashley has budgeted $40 per month for candy bars. No matter how the price of candy bars changes, she
spends exactly $40 per month. What does this behavior imply about Ashley's price elasticity of demand for
candy bars?
A) Her price elasticity of demand must equal zero.
B) Her price elasticity of demand must be unitary.
C) Her price elasticity of demand must be very inelastic since the amount he spends is not responsive to a
price change.
D) Her price elasticity of demand must be very elastic since the quantity demanded can change significantly
if the price of candy bars changes significantly.
64. Assume the price elasticity of demand for Great Fit Shoe Co. shoes is –1.5. If the company decreases the
price of each pair of shoes, total revenue will:
A) Increase because more shoes will be sold.
B) Decrease because the company will be receiving less revenue per pair of shoes.
C) Increase because the percentage increase in the nu mber sold is greater than the percentage decrease in the
price.
D) Impossible to predict because we do not know the percentage change in price.
65. Assume the price elasticity of demand for M C Pret zel Co. p retzels is –0.8. If the co mpany increases the price
of each bag of pretzels, total revenue will:
A) Decrease because fewer bags will be sold.
B) Increase because the company will be receiving more revenue per bag.
C) Increase because the percentage increase in the price is greater than the percentage decrease in the
number of bags sold.
D) Impossible to predict because we do not know the percentage change in price.
66. When demand is price inelastic, ceteris paribus:

A) An increase in price leads to lower total revenue.
B) An increase in total revenue means quantity rises.
C) An increase in total revenue indicates a reduction in price.
D) An increase in price leads to greater total revenue.
67. Maximum total revenue occurs when:

A) Total revenue is 1.0.
B) The absolute value of the price elasticity of demand is 1.0.
C) Price multiplied by quantity is 1.0.
Page 11
68. A price cut will increase the total revenue a firm receives, ceteris paribus, only if the demand for its product
is:
A) Elastic. B) Inelastic. C) Unitary elastic. D) Perfectly inelastic.
OTHER ELASTICITIES
69. Which of the following would best measure the effects of a recession?
A) Income elasticity of demand. C) Cross-price elasticity of demand.
B) Price elasticity of demand. D) Utility-maximizing rule.
70. Suppose the income elasticity of demand for U.S. automobiles is 2.0. If the level of income decreases by 1
percent, the number of U.S. automobiles sold will, ceteris paribus:
A) Rise 0.5 percent. B) Rise 2.0 percent. C) Fall 0.5 percent. D) Fall 2.0 percent.
71. Suppose income falls 1 percent in a year and as a result construction of new ho mes falls fro m 18 million to 16
million units annually. The value of the income elasticity of demand for housing is closest to:
A) 1.13. B) 0.89. C) 2.0. D) 11.8.
72. Suppose the income elasticity of demand for used automobiles is 3.0. If the level of income decreases by 1
percent, the number of used automobiles sold will, ceteris paribus:
A) Rise 0.33 percent. B) Rise 3.0 percent. C) Fall 0.33 percent. D) Fall 3.0 percent.
73. Suppose income falls 5 percent in a year and as a result, housing construction falls from 10 million to 5
million units annually. Based on this information housing starts are:
A) An inferior good. B) A normal good. C) Price elastic. D) Price inelastic.
74. Other things being equal, if inco me increases and as a result, the demand for good X increases, then good X is:
A) An inferior good. B) A luxury good. C) A substitute good. D) A normal good.
Page 12
75. Other things being equal, if income increases and as a result, the demand for good X increases and the
demand for good Y falls:
A) Good X is an inferior good and good Y is a normal good.
B) Good X is a normal good and good Y is an inferior good.
C) Goods X and Y are substitute goods.
D) Goods X and Y are complementary goods.
76. Other things being equal, if income increases and as a result, the demand for good X decreases, then good X
is:
A) An inferior good. B) A normal good. C) A substitute good. D) A complementary good.
77. Which of the following is most likely an inferior good?

A) A Mercedes-Benz automobile. C) A black-and-white television set.
B) An original work of art. D) A luxury vacation.
78. Suppose computer prices at an office supply store fall from $1,000 to $900 and as a result the quantity
demanded of typewriters decreases from 40 to 20 per month. The cross -price elasticity is closest to:
A) 0.16. B) 0.2. C) 5.0. D) 6.3.
79. Assume apples and oranges are substitutes. Suppose apple growers launch a very successful advertising
campaign that convinces consumers apples are a better product. As a result the cross -price elasticity of apples
and oranges will become:
A) Less negative (move closer to zero). C) Less positive (move closer to zero).
B) More negative. D) More positive.
80. Other things being equal, if the price of good X increases and as a result, the demand for good Y increases:
A) Goods X and Y are inferior goods. C) Goods X and Y are complementary goods.
B) Goods X and Y are normal goods. D) Goods X and Y are substitute goods.
81. Other things being equal, if the price of coffee increases significantly, the:
A) Demand for coffee substitutes will decrease. C) Demand for coffee substitutes will increase.
B) Demand for coffee will decrease. D) Quantity demanded of coffee will increase.
Page 13
82. If goods X and Y are substitute goods, an increase in the price of X will, ceteris paribus:
A) Decrease the demand for X. C) Increase the demand for Y.
B) Decrease the demand for Y. D) Not change the demand for Y.
83. When the prices of postage stamps rise, the demand for Internet service increases, ceteris paribus. Postage
stamps and Internet service are therefore:
A) Elastic. B) Inelastic. C) Complements. D) Substitutes.
84. Suppose the price of video game cartridges falls from $40 to $20 and as a result the quantity demanded of
bicycles falls from 40,000 to 20,000 per year. The value of the cross -price elasticity is:
A) Zero. B) 1.0. C) 10.0. D) 2.0.
85. Suppose the price of Honda motorcycles increases by 10 percent and as a result, Harley -Davidson
experiences a 5 percent rise in the quantity of motorcycles demanded. The value of the cross -price elasticity
for Harley-Davidson motorcycles is:
A) 0.5. B) 2.0. C) -0.5. D) 5.0.
86. If goods X and Y are complementary goods, an increase in the price of X will, ceteris paribus:
A) Decrease the demand for X. C) Increase the demand for Y.
B) Decrease the demand for Y. D) Not change the demand for Y.
87. If goods X and Y are complementary goods, a decrease in the price of X will, ceteris paribus:
A) Increase the demand for X. C) Not change the demand for Y.
B) Decrease the demand for Y. D) Increase the demand for Y.
88. Other things being equal, if the price of good X increases and as a result, the demand for good Y decreases,
goods X and Y are:
A) Inferior goods. B) Normal goods. C) Complementary goods. D) Substitute goods.
Page 14
89. If DVD players and DVDs are co mplementary goods, an increase in the price of DVDs will, ceteris paribus:
A) Increase the quantity demanded of DVDs.
B) Increase the quantity demanded of DVD players.
C) Reduce the demand for DVD players.
D) Reduce the demand for DVDs.
90. Suppose the cross-price elasticity of demand for automobiles with respect to the price for gasoline is -0.10. If
gasoline prices rise 20 percent, then automobile sales should, ceteris paribus:
A) Fall by 2 percent. B) Fall by 50 percent. C) Rise by 2 percent. D) Rise by 50 percent.
CHOOSING AMONG PRODUCTS
91. When two or more goods are being purchased, optimal consumptio n is achieved when:
A) Opportunity costs relative to utility are zero for all goods.
B) Marginal utility equals zero.
C) The price elasticity of demand is greatest.
D) The ratio of marginal utility to price is the same for all goods.
92. Assume that Heather always maximizes her total utility given her budget constraint. Every morning for
breakfast Heather has two eggs and three sausages. If the marginal utility of the last eg g is 20 utils and the
price of eggs is $1 each, what can we say about the marginal utility of the last sausage if the price of each
sausage is $2?
A) It must be equal to 40 utils. C) It must be equal to 10 utils.
B) It must be equal to 20 utils. D) Indeterminate.
93. Suppose that Jason has allocated his entire budget to the purchase of apples and bananas. The marginal utility
of the last apple purchased is 10 utils and each apple costs 10 cents. The marginal utility of the last banana
purchased is 10 utils and each banana costs 5 cents. Brian should:
A) Select more apples and fewer bananas because he likes apples more than bananas.
B) Select more bananas and fewer apples because of the lower price for bananas.
C) Select more bananas and fewer apples because he gets more marginal utility per dollar from bananas.
D) Jason has made the choice that gives him the most total utility.
94. Maximum utility is achieved when:

A) Total revenue is the greatest. C) Marginal utility is zero.
B) The price elasticity of demand is 1.0. D) All of the above.
Page 15
95. A consumer maximizes total utility from a given amount of income when the:
A) Marginal utility obtained from the last dollar spent on each good is the same.
B) Marginal utility of the last unit of each good is the same.
C) Total utility obtained from each product is the same.
D) Amount spent for each product is the same.
96. One of the objectives of advertising, from an economic perspective, is to shift the:
A) Supply curve to the left. C) Demand curve to the left.
B) Supply curve to the right. D) Demand curve to the right.
97. A successful advertising campaign will:

A) Increase the demand for the advertised good.
B) Increase the price elasticity of demand for the advertised good.
C) Cause the quantity supplied of the advertised good to increase.
98. The objective of advertising is to:

A) Increase demand and increase the price elasticity of demand.
B) Increase demand and decrease the price elasticity of demand.
C) Increase demand only.
D) Decrease demand and make the price elasticity of demand unitary.
99. A successful advertising campaign will affect the:

A) Supply of the advertised good. C) Quantity supplied of the advertised good.
B) Demand for the advertised good. D) Quantity demanded of the advertised good.
100. When Claudia goes to the gas station she buys 10 gallons of gas no matter what the price per gallon. What
does this imply about her price elasticity of demand for gasoline?
A) It is unitary. B) It is relatively elastic. C) It is perfectly inelastic. D) It is perfectly elastic.
Page 16
Figure 5.1
$200
180
160
120
(per unit)
100
Price
80
40
Demand
0
20 40 80 100 120 160
Quantity Demanded
(per period)
101. In Figure 5.1, total revenue is maximized at the unit price of:
A) $50. B) $60. C) $80. D) $100.
102. In Figure 5.1, at what price is the elasticity of demand unitary?

A) $100. B) $200. C) $40. D) $160.
103. In the $80 to $40 price range in Figure 5.1, demand is:
A) Perfectly price elastic. B) Price inelastic. C) Unitary price elastic. D) Price elastic.
104. If price were raised from $100 to $120 in Figure 5.1, ceteris paribus:
A) Demand would decrease. C) Total revenue would increase.
B) Quantity demanded would increase. D) Total revenue would decrease.
105. In the $160 to $180 price range in Figure 5.1, the absolute value of the price elasticity of demand is:
A) 9.0. B) 1.0. C) 5.7. D) 0.175.
Page 17
106. Over the price range from $80 to $40 in Figure 5.1, ceteris paribus:
A) Demand is inelastic. C) Demand is increasing.
B) Total revenue is maximized. D) All of the above are correct.
Figure 5.2
$100
90
80
(per unit)
60
Price
50
40
20 Demand
0
10 20 40 50 60 80
Quantity Demanded
(per period)
107. In Figure 5.2, total revenue is maximized at the unit price of:
A) $40. B) $80. C) $60. D) $50.
108. In the $40 to $20 price range of Figure 5.2, demand is:
A) Perfectly p rice elastic. C) Unitary price elastic.
B) Perfectly p rice inelastic. D) Relatively price inelastic.
109. If price were raised from $80 to $90 in Figure 5.2, ceteris paribus:
A) Demand would decrease. C) Total revenue would remain the same.
B) Total revenue would decrease. D) Total revenue would be maximized.
Page 18
110. In the $40 to $20 price range of Figure 5.2, the absolute value of the price elasticity of demand is closest to:
A) 2.0. B) 1.0. C) 2.3. D) 0.4.
111. If price were reduced from $80 to $60 in Figure 5.2, ceteris paribus:
A) Total revenue would increase. C) We can be certain that profits would increase.
B) Demand would increase. D) All of the above are correct.
112. In Figure 5.2, consumer expenditures on this good are maximized at a price of:
A) $100. B) $50. C) $20. D) $60.
Table 5.1
Utility schedule
Quantity Total Marginal

consumed utility utility
1 10 10
2 _____ 6
3 18 _____
4 _____ 1
113. In Table 5.1, the marginal utility of the third unit is:
A) 18. B) 6. C) 2. D) 1.
114. In Table 5.1, the total utility when two units are consumed is:
A) 10. B) 16. C) 18. D) 19.
115. In Table 5.1, the total utility when four units are consumed is:
A) 19. B) 53. C) 18. D) 10.
Page 19
116. In Table 5.1, diminishing marginal utility occurs:
A) With the second and fourth units only. C) Only with the second unit.
B) With the first and third units. D) With all units after the first.
Table 5.2
Utility schedule

1 25 25
2 _____ 22
3 60 _____
4 65 _____
117. In Table 5.2, the marginal utility of the third unit is:
A) 13. B) 60. C) 5. D) 22.
118. In Table 5.2, the marginal utility of the fourth unit is:
A) 22. B) 5. C) 60. D) 65.
119. In Table 5.2, the marginal utility of the fourth unit is:
A) 78. B) 65. C) 60. D) 5.
120. In Table 5.2, the total utility when two units are consumed is:
A) 25. B) 22. C) 47. D) 60.
Page 20
Table 5.3
Demand schedule for automobiles
Price of auto Number of new autos

(dollars per auto) (millions per year)
$25,000 10
22,000 12
121. In Table 5.3, what is the total revenue from automobile sales at a price of $22,000 per auto?
A) $300 billion per year. C) $250 billion per year.
B) $264 billion per year. D) $14 billion per year.
122. Which of the following elasticities can be computed using the data in Table 5.3?
A) The price elasticity of demand. C) The cross-price elasticity of demand.
B) The income elasticity of demand. D) The quantity elasticity of demand.
123. What is the value of the price elasticity of demand wh ich can be calculated fro m the information in Table 5.3?
A) 0.70. B) 0.35. C) 0.67. D) 1.42.
124. In Table 5.3, as price increases from $22,000 per car to $25,000 per car:
A) The demand curve for cars shifts to the left. C) The quantity of cars demanded increases.
B) Total revenue falls. D) All of the above.
Table 5.4
Demand schedule for automobiles
Price of auto Number of new autos

(dollars per auto) (millions per year)
$20,000 10
18,000 30
Page 21
127. Which of the following elasticities can be computed using the demand schedule in Table 5.4?
A) The income elasticity of demand. C) The price elasticity of demand.
B) The cross-price elasticity of demand. D) The quantity elasticity of demand.
128. According to Table 5.4, the price elasticity of demand is.

A) 9.5, and total revenue will decrease if price decreases.
B) 9.5, and total revenue will increase if price decreases.
C) 0.11, and total revenue will decrease if price increases.
D) 0.11, and total revenue will increase if price decreases.
129. In Table 5.4, as price decreases from $20,000 per car to $18,000 per car:
A) There is movement along the demand curve. C) The quantity of cars demanded increases.
B) Total revenue increases. D) All of the above.
Co mplete Table 5.5. Then use the information in the table to answer the indicated questions. Assume the price of cola
is $4 per unit and the price of pretzels is $2 per unit.
Table 5.5
Michael's utility schedule
Units of TU of MU of
Units of cola TU of cola MU of cola pretzels pretzels pretzels
1 40 40 1 30 30
2 _____ 32 2 _____ 20
3 96 24 3 66 16
4 112 _____ 4 78 _____
5 124 _____ 5 84 _____
Page 22
130. In Table 5.5, what is the total utility of 2 units of cola?
A) 32. B) 40. C) 72. D) 96.
131. In Table 5.5, what is the marginal utility of the fifth unit of cola?
A) 6. B) 12. C) 16. D) 24.
132. Refer to Table 5.5. Suppose Michael has $8 to spend on cola and pretzels. What combina tion should he
purchase in order to maximize his utility?
A) 2 colas and 2 pret zels. C) 1 cola and 2 pretzels.
B) No colas and 4 pret zels. D) 2 colas and no pretzels.
133. Refer to Table 5.5. If Michael has $8 to spend on cola and pretzels, what is his maximu m utility?
A) 72. B) 78. C) 90. D) 138.
134. Refer to Table 5.5. If M ichael has $14 to spend on cola and pretzels, what combination should he purchase in
order to maximize his utility?
A) 2 colas and 3 pret zels. C) 3 colas and 1 pretzel.
B) 1 cola and 5 pret zels. D) 2 colas and 2 pretzels.
Figure 5.3
4
MARGINAL UTILITY
3
(utils)
0
1 2 3 4 5
6 7
-1
-2
QUANTITY OF APPLES
Page 23
135. Refer to Figure 5.3. The total utility of 5 apples is:
A) 1 utils. B) 17 utils. C) 18 utils. D) 20 utils.
136. Refer to Figure 5.3. The total utility of 2 apples is:

A) 2 utils. B) 5 utils. C) 6 utils. D) 11 utils.
137. Refer to Figure 5.3. Total utility is maximized at:

A) 6 apples. B) 7 apples. C) 1 apple. D) 3 apples.
138. Refer to Figure 5.3. With no budget constraint, a rational consumer will consume _________ apples.
A) Zero. B) One. C) Six. D) An infinite amount.
Figure 5.4
11
10
7
TOTAL UTILITY
6
(utils)
1
0
1 2 3 4 5 6
QUANTITY OF TACOS
139. Refer to Figure 5.4. Marginal utility:

A) Becomes negative at some level of taco consumption beyond 6 tacos.
B) May never become negative.
C) Becomes negative after the fourth taco.
D) Becomes negative after the first taco because of diminishing marginal utility.
Page 24
140. Refer to Figure 5.4. With no budget constraint, a rational consumer will consume _________ tacos.
A) Six. B) Four. C) Three. D) An infinite amount.
141. If tacos were free, the consumer represented in Figure 5.2 would consume:
A) An infinite amount. B) 6 tacos. C) 1 taco. D) 4 tacos.
Figure 5.5
A
PRICE
P2
P1
0
B A
QUANTITY
142. Refer to Figure 5.5. Assume the two demand curves in Figure 5.5 are parallel. Which curve is relatively more
price inelastic between P1 and P2 ?
A) AA.
B) BB.
C) Cannot be determined.
D) Both curves have the same slope and, therefore, the same price elasticity.
143. Refer to Figure 5.5. Assume the two demand curves in Figure 5.5 are parallel. Which curve is relatively more
price elastic between P1 and P2 ?
A) AA.
B) BB.
C) Cannot be determined.
D) Both curves have the same slope and, therefore, the same price elasticity.
Page 25
Figure 5.6
P1 •A
P2
•C
Demand
0 B D
QUANTITY
144. Refer to Figure 5.6. If the area 0P1 AB is less than the area 0P2 CD, we can conclude that the price elasticity of
demand between Point A and Point C is:
A) Elastic.
B) Inelastic.
C) Unitary.
D) Impossible to determine. It depends on whether the price has increased or decreased.
145. Refer to Figure 5.6. Suppose that the areas 0P1 AB and 0P2 CD are equal. We can conclude that the price
elasticity of demand between Point A and Point C is:
A) Elastic.
B) Inelastic.
C) Unitary.
D) Impossible to determine. It depends on whether the price has increased or decreased.
146. Refer to Figure 5.6. Comparing the price elasticity of demand at points A and C, we can say that:
A) The elasticities are the same because the points are on the same demand curve.
B) Point A has a greater price elasticity of demand.
C) Point C has a greater price elasticity of demand.
D) Indeterminate because specific price data is not given.
Page 26
147. One In the News article reports "… young women spend a lot more money on clothing, personal care items,
and their pets." A successful advertising campaign should shift the:
A) Demand curve to the left. C) Supply curve to the left.
B) Demand curve to the right. D) Supply curve to the right.
148. One In the News article differentiates the spending habits of wo men and men : "Men spend twice as much as
women do on television and stereo equipment … young women spend a lot more money on clothing,
personal care items, and their pets." Which determinant of demand is most likely involved?
A) Income. B) Tastes. C) Expectations. D) Other goods (availability and prices).
149. One of the lessons to be learned in the World View article titled "Cigarette Smuggling: A Lesson in Price
Elasticity" is:
A) Raising taxes on a good for which there are many substitutes may not result in higher revenues or
reduced consumption.
B) Raising taxes may encourage significant tax-evading behavior.
C) When high potential profits are involved, entrepreneurs will sometimes become involved in illegal
activities.
150. According to the World View article titled "Cigarette Smuggling: A Lesson in Price Elasticity," if all states
and countries raised cigarette taxes by the same amount at the same time, the price elasticity of demand of
cigarettes would be:
A) Less price elastic.
B) More price elastic.
C) Equal to unitary price elasticity.
D) The same as the cross-price elasticity of demand.
151. One In the News article states “For every 10 percent decline in the price, youth smoking rises by almost 7
percent…" Given this information, the price elasticity of demand for smoking amongst youth must be:
A) 0.70 and relat ively elastic. C) 1.42 and relatively elastic.
B) 0.70 and relat ively inelastic. D) 1.42 and relatively inelastic.
Page 27
152. One In the News article, titled "Stung By the Economy, Americans Lose Their Appetite for Dining Out,"
reports that a decrease in income causes a decrease in the consumption of restaurant meals . Based on this
information, restaurant meals are:
A) A complementary good. B) A substitute good. C) A normal good. D) An inferior good.
153. One In the News article, titled "Stung By the Economy, Americans Lose Their Appetite for Dining Out,"
reports that a decrease in income causes a decrease in the consumption of restaurant meals. Based on this
information, which of the following is true about restaurant meals?
A) Demand has shifted to the left.
B) Demand has shifted to the right.
C) There has been a decrease in quantity demanded.
D) There has been an increase in quantity demanded.
154. One In the News article is titled "DVD Sales are Soaring as Prices Drop." If a decrease in the price of DVDs
causes an increase in the sales of DVD players, then the two goods are:
A) Normal. B) Inferior. C) Substitutes. D) Complements.
155. One In the News article is titled "DVD Sales are Soaring as Prices Drop." If a decrease in the price of DVDs
causes an increase in the sales of DVD players, then:
A) The cross-price elasticity of demand is greater than zero.
B) The cross-price elasticity of demand is equal to zero.
C) The cross-price elasticity of demand is less than zero.
D) The price elasticity of demand must be elastic for DVD players.
APPENDIX
156. An indifference curve shows:

A) The maximu m utility that can be achieved for a given consumer budget.
B) The maximu m utility that can be achieved for different amounts of a good.
C) The combinations of goods giving equal utiity to a consumer.
D) The optimal consumption combinations between two goods.
157. Which of the following is used to depict alternative combinations of goods that are equally satisfying?
A) An indifference map. B) An indifference curve. C) A demand curve. D) A budget constraint.
Page 28
158. An indifference curve represents:
A) All combinations of two goods that are equally satisfying.
B) A constant level of utility.
C) A greater level of total utility the farther it is from the origin.
159. A budget line represents:

A) Consumption possibilities.
B) The combinations of goods giving equal utility to a consumer.
C) The combinations of price and quantity available to a consumer.
D) The amount of income that is required to purchase a given amount of a good.
160. Which of the following is used to depict all combinations of goods that are affordable with a given income
and given prices?
A) An indifference curve. B) An indifference map. C) A demand curve. D) A b udget constraint.
161. A budget line represents:

A) The combinations of goods giving equal utility to a consumer.
B) The demand curve.
C) Combinations of two goods which can be purchased with a given budget.
D) The amount of income that is required to purchase a given amount of a good.
162. The slope of the budget constraint is always equal to the:

A) Marginal rate of substitution.
B) Ratio of the price of one good to the price of the other good.
C) Income of the consumer.
D) Reciprocal of the marginal utility of one good.
163. The point where the budget line and an indifference curve are tangent:
A) Represents an optimal consumption point.
B) Indicates the quantity and price that would appear on a demand curve.
C) Indicates that the relative marginal utilities of the goods equal their relative prices.
Page 29
164. The optimal consumption combination:
A) Maximizes total utility subject to a budget constraint.
B) Is the point of tangency between the budget constraint and an indifference curve.
C) Occurs when the marginal rate of substitution equals the ratio of the prices of the two goods.
165. The slope of the budget constraint, when a consumer has reached optimal consumption of two goods, is equal
to the:
A) Marginal rate of substitution. C) Ratio of the marginal utilities of the two goods.
B) Ratio of the prices of the two goods. D) All of the above.
166. The rate at which a consumer is willing to exchange one good for another refers to the:
A) Marginal rate of substitution. C) Optimal consumption combination.
B) Slope of the budget constraint. D) Ratio of the prices of the two goods.
167. The slope of the indifference curve is equal to the:

A) Ratio of the price of one good to the price of the other good.
B) Income of the consumer.
C) Marginal rate of substitution.
D) Slope of the demand curve.
Page 30
Use the indifference curves and the budget lines in Figure 5.7 to answer the indicated questions. Assume the price of
Y is $1 per unit.
Figure 5.7
168. Refer to Figure 5.7. If the price per unit of good X is $3, the consumer would maximize utility at point:
A) A. B) B. C) C. D) D.
169. Refer to Figure 5.7. If the price per unit o f good X is $3, the consumer would maximize utility by consuming:
A) 30 units of Y. B) 21 units of Y. C) 10 units of Y. D) 25 units of Y.
170. Refer to Figure 5.7. If the price per unit of good X is $1, optimal consumption is found at point:
A) B. B) D. C) E. D) C.
171. Refer to Figure 5.7. If the price per unit o f good X is $1, the consumer would maximize utility by consuming:
A) 25 units of Y. B) 21 units of Y. C) 15 units of Y. D) 10 units of Y.
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172. In Figure 5.7, given an income of $30 and a price for good Y of $1, which of the following two points
represent optimal consumption?
A) A when price of X is $3 and C when price of X is $1.
B) B when price of X is $1 and D when price of X is $3.
C) A when price of X is $1 and D when price of X is $3.
D) B when price of X is $1 and C when price of X is $3.
Use the indifference curves and budget lines in Figure 5.8 to answer the indicated questions. Assume the price of Y is
$3 per unit.
Figure 5.8
173. The income per period available to the consumer depicted in Figure 5.8 is:
A) $30. B) $60. C) $42. D) $90.
174. Refer to Figure 5.8. If the price per unit of good X is $9, the consumer would maximize utility at point:
A) A. B) B. C) C. D) D.
175. Refer to Figure 5.8. If the price per unit of good X is $3, the consumer's optimal co mbination of goods X and
Y is found at point:
A) B. B) C. C) D. D) All of the points above yield equal utility.
Page 32
176. Refer to Figure 5.8. If the price per unit of good X is $9, the co mb ination wh ich yields the most satisfaction is:
A) 21 units of X and 3 un its of Y. C) 5 units of X and 25 units of Y.
B) 15 units of X and 15 units of Y. D) 3 units of X and 21 units of Y.
177. Refer to Figure 5.8. If the price per unit of good X is $3, the co mb ination wh ich yields the most satisfaction is:
A) 20 units of X and 10 units of Y. C) 5 units of X and 25 units of Y.
B) 15 units of X and 15 units of Y. D) 3 units of X and 21 units of Y.
DETERMINANTS OF DEMAND
T F 178. Status and ego considerations in consumption are economic explanations of demand.
T F 179. An expected increase in the price of a good causes a rightward shift in demand, while a higher
current price of a good causes a movement along the demand curve.
T F 180. When the price of a good is expected to fall next month, there should be a downward movement
along the current demand curve.
T F 181. When the price of a good is expected to fall next month, the current demand curve should shift to the
left.
Page 33
THE DEMAND CURVE
T F 182. Marginal utility represents the additional satisfaction obtained from one more unit of a good or
service.
T F 183. The law of diminishing marginal utility does not apply to goods that a person really enjoys.
T F 184. If there is no budget constraint, utility maximization is achieved when marginal utility is zero.
T F 185. Utility maximization is always achieved where total revenue is maximized.
PRICE ELASTICITY
T F 186. The price elasticity of demand is influenced by all of the determinants of demand.
T F 187. All price elasticities of demand along downward-sloping demand curves have a negative value
because of the inverse relationship between price and quantity demanded.
T F 188. A horizontal demand curve has an elasticity of zero.
T F 189. A demand curve is perfectly elastic if consumers reduce their quantity demanded to zero when price
rises by even the slightest amount.
T F 190. A demand curve is perfectly inelastic if consumers reduce their quantity demanded to zero when
price rises by even the slightest amount.
Page 34
T F 191. Elasticity of demand is unitary at the point on a linear demand curve for which total revenue is
maximized.
Answer: True Type: Complex Understanding Page: 100
PRICE ELASTICITY AND TOTAL REVENUE
T F 192. If the absolute value of the price elasticity of demand is 2.0, total revenue will increase if price
increases.
Answer: False Type: Complex Understanding Page: 105
T F 193. If the absolute value of the price elasticity of demand is 0.50, total revenue will increase if price
increases.
T F 194. A price change does not change total revenue if demand is unitary elastic.
OTHER ELASTICITIES
T F 195. If income increases, the demand for a normal good will increase.
T F 196. An increase in consumer income will shift the demand curve of an inferior good to the right.
T F 197. A negative cross-price elasticity indicates goods are substitutes because a positive percentage
increase in one good results in a negative percentage increase in the other.
T F 198. Advertisers currently spend about $1 million per year to change the demand for products.
Page 35
T F 199. A successful advertising campaign induces consumers to buy more of the product at any given price
than before.
T F 200. A successful advertising campaign will make demand for the product less price elastic.
APPENDIX
T F 201. An indifference curve represents combinations of two goods which provide an individual the same
total utility.
T F 202. The closer the indifference curve is to the origin, the more total utility it yields.
T F 203. A budget line shows all the combinations that provide the consumer with equal utility.
Page 36
Answers to Table
Table 5.1 Answer
Utility schedule

1 10 10
2 16 6
3 18 2
4 19 1
Table 5.2 Answer

Utility schedule

1 25 25
2 47 22
3 60 13
4 65 5
Table 5.5 Answer

Michael's utility schedule
Units of TU of MU of
Units of cola TU of cola MU of cola pretzels pretzels pretzels
1 40 40 1 30 30
2 72 32 2 50 20
3 96 24 3 66 16
4 112 16 4 78 12
5 124 12 5 84 6
Page 37

Chapter 5: The Competitive Firm: Multiple Choice Questions

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Chapter 5: The Competitive Firm: Multiple Choice Questions

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Chapter 5: The Competitive Firm

Chapter 5: The Competitive Firm

Multiple Choice Questions

THE PROFIT MOTIVE

1. Which of the following is a reason that individuals own small businesses?

Answer: D Type: Basic Understanding Page: 150

2. Economists assume the principal motivation of producers is:

Answer: C Type: Basic Understanding Page: 150

Answer: D Type: Basic Understanding Page: 150

Answer: C Type: Definition Page: 150

5. Profit is defined as:

Answer: D Type: Definition Page: 150

6. Which of the following is a reason that individuals own small businesses?

Answer: D Type: Basic Understanding Page: 150

7. The profit motive can encourage businesses to:

Answer: D Type: Basic Understanding Page: 151

ECONOMIC VS. ACCOUNTING PROFITS

Answer: A Type: Complex Understanding Page: 152

9. In defining economic costs, economists recognize:

Answer: B Type: Basic Understanding Page: 152

10. Explicit costs:

Answer: B Type: Definition Page: 152

11. Implicit costs:

Answer: C Type: Definition Page: 152

12. Accounting costs and economic costs differ because:

Answer: C Type: Basic Understanding Page: 152

13. Economic profit:

Answer: C Type: Definition Page: 152

14. A firm that makes zero economic profits:

Answer: D Type: Basic Understanding Page: 152

15. Economic costs and economic profits are:

Answer: A Type: Definition Page: 152

16. Normal profit is:

Answer: D Type: Basic Understanding Page: 154

17. Normal profit implies that:

Answer: D Type: Definition Page: 154

18. Greater-than-normal profit represents:

Answer: D Type: Basic Understanding Page: 154

Answer: A Type: Complex Understanding Page: 152

Use the following to answer questions 20-26:

Answer the indicated questions on the basis of this information.

Answer: D Type: Analytical Page: 152

Answer: A Type: Analytical Page: 152

Answer: C Type: Analytical Page: 152

Answer: D Type: Analytical Page: 152

Answer: B Type: Analytical Page: 152

Answer: C Type: Analytical Page: 152

Answer: B Type: Analytical Page: 152

Answer: D Type: Basic Understanding Page: 154

28. A monopoly occurs when:

Answer: A Type: Basic Understanding Page: 155

29. Market structure is determined by the:

Answer: B Type: Basic Understanding Page: 155

30. Perfect competition is a situation in which:

Answer: D Type: Basic Understanding Page: 155

THE NATURE OF PERFECT COMPETITION

Answer: C Type: Definition Page: 156

Answer: A Type: Definition Page: 156

Answer: D Type: Basic Understanding Page: 156

34. A perfectly competitive firm is a price taker because:

Answer: A Type: Basic Understanding Page: 156

35. A competitive firm: