Chapter 21: Theory of Consumer Choice

Section A
1. The theory of consumer choice examine
a. the determination of output in competitive markets.
b. the tradeoffs inherent in decisions made by consumers.
c. how consumers select inputs into manufacturing production processes.
d. the determination of prices in competitive markets.

2. The theory of consumer choice examines how

a. firms make profit-maximizing decisions.
b. consumers make utility-maximizing decisions.
c. wages are determined in competitive labor markets.
d. prices are determined in competitive goods markets.

3. The following diagram shows a budget constraint for a particular consumer.

y
40

30

20

10

10 20 30 40 50 60 70 80 90 x

If the price of X is $10, what is the price of Y?

a. $15
b. $25
c. $35
d. $70

4. A budget constraint illustrates the

a. prices that a consumer chooses to pay for products he consumes.
b. purchases made by consumers.
c. consumption bundles that a consumer can afford.
d. consumption bundles that give a consumer equal satisfaction.

5. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot
summer days. Ice cream costs $5 per gallon, and paperback novels cost $8
each. Karen has a budget of $80, Tara has a budget of $60, and Chelsea has a
budget of $40 to spend on ice cream and paperback novels. Who can afford
to purchase 8 gallons of ice cream and 5 paperback novels?

a. Karen, Tara, and Chelsea

b. Karen only
c. Tara and Chelsea but not Karen
d. none of the women

6. A consumer who doesn't spend all of her income

a. would be at a point outside of her budget constraint.
b. would be at a point inside her budget constraint.
c. must not be consuming positive quantities of all goods.
 d. must be consuming at a point where her budget constraint touches one of
the axes.

7. An increase in income will cause a consumer's budget constraint to

a. shift outward, parallel to its initial position.
b. shift inward, parallel to its initial position.
c. pivot along the horizontal axis.
d. pivot along the vertical axis.

8. The slope of the budget constraint is determined by the

a. relative price of the goods measured on the axes.
b. relative price of the goods measured on the axes and the consumer’s
income.
c. endowment of productive resources.
d. preferences of the consumer.

9. Suppose a consumer spends her income on two goods: iTunes music downloads
and books. The consumer has $100 to allocate to these two goods, the price of a
downloaded song is $1, and the price of a book is $20. What is the maximum
number of books the consumer can purchase?
a. 100
b. 20
c. 10
d. 5

10. A decrease in a consumer's income

a. increases the slope of the consumer's budget constraint.
b. has no effect on the consumer's budget constraint.
c. decreases the slope of the consumer's budget constraint.
d. has no effect on the slope of the consumer's budget constraint.

Chapter 13 (Production and Cost Theory)

Section A

1. Ah Cheong wants to start his own business. The business he wants to start will
require that he purchase a factory that costs $400,000. Ah Cheong currently has
$500,000 in the bank earning 3 percent interest per year.

If Ah Cheong purchases the factory with his own money, what is the annual
implicit opportunity cost of purchasing the factory?
 a. $0
b. $3,000
c. $12,000
d. $15,000

2. When a profit-maximizing firm in a competitive market has a zero economic

profit, accounting profit
a. is negative (accounting losses).
b. is positive.
c. is also zero.
d. could be positive, negative or zero.

3. Siva Kamesh used to work as a telemarketer, earning $25,000 per year. She gave
up that job to start a catering business. In calculating the economic profit of her
catering business, the $25,000 income that she gave up is counted as part of the
catering firm's
a. total revenue.
b. implicit costs.
c. explicit costs.
d. marginal costs.

4. For a firm, the production function represents the relationship between

a. implicit costs and explicit costs.
b. quantity of inputs and total cost.
c. quantity of inputs and quantity of output.
d. quantity of output and total cost.

5.

Number of workers Output

0 0
1 50
2 110
3 180
4 260
5 330

What is the marginal product of the fourth worker?

a. 65
b. 70
c. 75
d. 80

6. The short run total cost curve gets steeper as output increases due to
a. diseconomies of scale.
 b. economies of scale.
c. diminishing marginal product.
d. increasing returns to scale.

7. A certain firm produces and sells staplers. Last year, it produced 7,000 staplers and
sold each stapler for $6. In producing the 7,000 staplers, it incurred variable costs
of $ 28,000 and a total cost of $ 45,000.

The firm's accounting profit for the year was

a. -$ 3,000.
b. -$ 5,000
c. $ 7,000.
d. $ 17,000

8. Opportunity cost differs from the costs measured by an accountant because

opportunity cost includes all
a. profits.
b. implicit costs.
c. conventional depreciation.
d. economic profit.

9. Greg, a landscaper, is planning on opening his own landscaping company. He

currently earns $40,000 per year working for his uncle. He plans to use $10,000 in
savings to pay for the equipment he needs, though even after use he could sell the
equipment for what he paid, $10,000. The current interest rate on savings is 5
percent. What is the total implicit cost incurred by Greg when he opens his own
business?
a. $40,500
b. $40,000
c. $10,000
d. $50,000

10. "The short run" is defined as a period of time in which

a. all factors (inputs) are variable.
b. all factors (inputs) are fixed.
c. inputs classified as capital are fixed, but other inputs, including labour and
materials, are variable.
d. inputs classified as capital are variable, but other inputs, including labour
and materials, are fixed.

11. When marginal cost (MC) is greater than the average total cost (ATC)
a. MC is falling
b. MC is less than average variable cost
c. ATC is falling
d. ATC is rising
12. Which of the following never rises as output increases?
a. Short run average total cost.
b. Long run average total cost.
c. Short run average variable cost.
d. Short run average fixed cost.

13. Economies of scale

a. deal with what happens if all of the inputs are increased by some proportion.
b. can be shown using a total product curve.
c. imply falling average total costs in the long run.
d. require that at least one factor be fixed.

14. Sunk or "historical" costs are

a. costs associated with current operational decisions.
b. costs that have already been incurred as a result of past decisions.
c. costs that add to the firm's marginal costs.
d. costs that are the major component of a firm's average variable cost.

15. Which of the following is an implicit cost?

(i) the owner of a firm forgoing an opportunity to earn a large salary working for
a Wall Street brokerage firm
(ii) interest paid on the firm's debt
(iii) rent paid by the firm to lease office space
a. (ii) and (iii)
b. (i) and (iii)
c. (i) only
d. (iii) only

16. Which of the following expressions is correct?

a. accounting profit = economic profit + implicit costs
b. accounting profit = total revenue - implicit costs
c. economic profit = accounting profit + explicit costs
d. economic profit = total revenue - implicit costs
 17.

As the number of workers increases,

a. total output increases, but at a decreasing rate.
b. marginal product increases, but at a decreasing rate.
c. marginal product increases at an increasing rate.
d. total output decreases.

18. Suppose that for a particular business, there are no implicit opportunity costs. Then
a. accounting profit will be greater than economic profit.
b. accounting profit will be the same as economic profit.
c. accounting profit will be less than economic profit.
d. the relationship between accounting profit and economic profit cannot be
determined since the amount of explicit opportunity costs is not given.

19. A firm’s average total cost is $60, its average variable cost is $30, and its total
fixed cost is $600. Its output is
a. 20 units.
b. 30 units.
c. 40 units.
d. 50 units.

Section B

Question 1
What are diseconomies of scale? How do they arise?
Diseconomies of scale the property whereby long-run average total cost rises as the quantity of
output increases
Question 2
What are implicit costs? How are they different from explicit costs?
Implicit costs input costs that do not require an outlay of money by the firm
On the other hand, Explicit Cost is the cost which is actually incurred by the organization, during
production.

Question 3
Consider the table below which shows the total fixed costs (TFC) and variable costs (TVC) for
producing dog kennels in a small factory with a fixed amount of capital.

Output per year Total Fixed Total Variable Cost

(000’s of Cost(TFC) ($000’s (TVC) ($000’s
kennels)
0 200 0
1 200 40
2 200 70
3 200 90
4 200 100
5 200 110
6 200 130
7 200 160
8 200 200
9 200 250
10 200 310
11 200 380

a) Compute the average fixed cost (AFC), average variable cost (AVC), marginal cost (MC) and
average total cost (ATC) for each level of output.

b) Explain the relationship between the between marginal cost and average variable cost.

Question 3:
a)
Output TFC TVC AFC AVC ATC MC

0 200 0 n.a. n.a. n.a.

40

1 200 40 200 40 240

30

2 200 70 100 35 135

20

3 200 90 66.67 30 96.67

10
 4 200 100 50 25 75

10

5 200 110 40 22 62

20

6 200 130 33.33 21.67 55

30

7 200 160 28.57 22.85 51.42

40

8 200 200 25 25 50

50

9 200 250 22.22 27.78 50

60

10 200 310 20 31 51

70

11 200 380 18.18 34.55 52.73

b)
The relationship between marginal cost and average variable cost: the difference in variable cost per
unit is marginal cost

Chapter 14
Question 1.
The main characteristics of a competitive market:
- There are many buyers and many sellers in the market
- The goods offered by the various sellers are largely the same
Question 5.
Condition under which a firm decide to exit the market: the revenue it would get from producing is
less than its total cost