MOCK EXAM ECONOMICS

The higher the interest rate: *

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A. the greater the present value of a future amount.

B. the smaller the present value of a future amount.
 
C. the greater the level of inflation.
D. None of the statements associated with this question are correct.

 
Accounting profits are: *
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A. total revenue minus total cost.

 
B. total cost minus total revenue.
C. marginal revenue minus total cost.
D. total revenue minus marginal cost.

 
Economic profits are: *
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A. total revenue minus total cost.

B. marginal revenue minus marginal cost.
C. total revenue minus total opportunity cost.
 
D. total profits of the economy as a whole.

 
Which of the following is an implicit cost to a firm that produces a good or service? *
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A. Labor costs
B. Costs of operating production machinery
C. Foregone profits of producing a different good or service
 
D. Costs of renting or buying land for a production site

 
The primary inducement for new firms to enter an industry is: *
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A. increased technology.
B. availability of labor.
C. low capital costs.
D. presence of economic profits.
 
 
As more firms enter an industry: *
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A. accounting profits increase.

B. economic profits decrease.
 
C. prices rise.
D. None of the statements associated with this question are correct.

 
Scarce resources are ultimately allocated toward the production of goods most
wanted by society because: *
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A. firms attempt to maximize profits.

 
B. they are most efficiently utilized in these areas.
C. consumers demand inexpensive goods and services.
D. managers are benevolent.

 
The buyer side of the market is known as the: *
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A. income side.
B. demand side.
 
C. supply side.
D. seller side.

 
The law of demand states that, holding all else constant: *
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A. as price falls, demand will fall also.

B. as price rises, demand will also rise.
C. price has no effect on quantity demanded.
D. as price falls, quantity demanded rises.
 
 
Which of the following would NOT shift the demand for good A? *
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A. Drop in price of good A

B. Drop in price of good B
 
C. Consumer income
D. Change in the level of advertising of good A

Correct answer
A. Drop in price of good A

 
Changes in the price of good A lead to a change in: *
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A. demand for good A.

B. demand for good B.
 
C. the quantity demanded for good A.
D. the quantity demanded for good B.

Correct answer
C. the quantity demanded for good A.

 
A change in income will NOT lead to: *
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A. a movement along the demand curve.

 
B. a leftward shift of the demand curve.
C. a rightward shift of the demand curve.
D. All of the statements associated with the question are correct.

 
If good A is an inferior good, an increase in income leads to: *
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A. a decrease in the demand for good B.

B. a decrease in the demand for good A.
 
C. an increase in the demand for good A.
D. no change in the quantity demanded for good A.

 
Which of the following is probably NOT a normal good? *
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A. Designer dresses
B. Lobster
C. Macaroni and cheese
 
D. Expensive automobiles

 
If A and B are complements, an increase in the price of good A would: *
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A. have no effect on the quantity demanded of B.

B. lead to an increase in demand for B.
C. lead to a decrease in demand for B.
 
D. None of the statements associated with this question are correct.

 
Graphically, a decrease in advertising will cause the demand curve to: *
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A. become steeper.
B. shift rightward.
C. become flatter.
D. shift leftward.
 
 
Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. From the
law of demand we know that ax will be: *
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A. less than zero.

 
B. greater than zero.
C. zero.
D. None of the statements associated with this question are correct.

 
Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. If ay is
positive, then: *
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A. goods y and x are complements.

B. goods y and x are inferior goods.
C. goods y and x are normal goods.
 
D. goods y and x are substitutes.

Correct answer
D. goods y and x are substitutes.

 
Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. If aM is
negative, then good y is: *
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A. a normal good.
B. an inferior good.
 
C. a complement.
D. a substitute.

 
A price ceiling is: *
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A. the minimum legal price that can be charged in a market.

B. the maximum legal price that can be charged in a market.
 
C. above the initial equilibrium price.
D. equal to the initial equilibrium price.

 
Assume that the price elasticity of demand is −2 for a certain firm's product. If the firm
raises price, the firm's managers can expect total revenue to: *
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A. decrease.
 
B. increase.
C. remain constant.
D. either increase or remain constant, depending upon the size of the price increase.

 
A price elasticity of zero corresponds to a demand curve that is: *
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A. horizontal.
B. downward sloping with a slope always equal to 1.
C. vertical.
 
D. either vertical or horizontal.

 
If the absolute value of the own price elasticity of steak is 0.4, a decrease in price will
lead to: *
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A. a reduction in total revenue.

 
B. an increase in total revenue.
C. no change in total revenue.
D. None of the preceding statements is correct.

 
Demand is perfectly elastic when the absolute value of the own price elasticity of
demand is: *
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A. zero.
B. one.
C. infinite.
 
D. unknown.

 
The demand curve for a good is horizontal when it is: *
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A. a perfectly inelastic good.

B. a unitary elastic good.
C. a perfectly elastic good.
 
D. an inferior good.

 
Suppose Q xd = 10,000 − 2 Px + 3 Py − 4.5M, where Px = $100, Py = $50, and M =
$2,000. What is the own price elasticity of demand? *
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A. −2.34
B. −0.78
C. −0.21
 
D. −1.21
 
Which of the following factors would NOT affect the own price elasticity of a good?  *
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A. Time
B. Price of an input
 
C. Available substitutes
D. Expenditure share

 
Lemonade, a good with many close substitutes, should have an own price elasticity
that is: *
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A. unitary.
B. relatively elastic.
 
C. relatively inelastic.
D. perfectly inelastic.

 
We would expect the demand for jeans to be: *
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A. more elastic than the demand for clothing.

B. less elastic than the demand for clothing.
 
C. the same as the demand for clothing.
D. neither more elastic, less elastic, nor the same elasticity as that of the demand for clothing.

Correct answer
A. more elastic than the demand for clothing.

 
If the cross-price elasticity between goods A and B is negative, we know the goods
are: *
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A. inferior goods.
B. complements.
 
C. inelastic.
D. substitutes.

 
The difference between a price decrease and an increase in income is that *
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A. A price decrease does not affect the consumption of other goods, while an increase in income
does.
B. An increase in income does not affect the slope of the budget line, while a decrease in price
does change the slope.
 
C. A price decrease decreases real income, while an increase in income increases real income.
D. A price decrease leaves real income unchanged, while an increase in income increases real
income.

 
Which of the following is true? *
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A. Indifference curves may intersect.

B. At a point of consumer equilibrium, the MRS always equals 1.
C. If income increases, a consumer will always consume more of a good.
 
D. None of the preceding statements is correct.

Correct answer
D. None of the preceding statements is correct.

 
If the price of good X is $10 and the price of good Y is $5, how much of good X will the
consumer purchase if her income is $15? *
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A. 0
B. 2
C. 3
D. Cannot tell based on the above information.
 
 
Individuals who purchase services and goods for the purpose of consumption are: *
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A. consumers.
 
B. managers.
C. workers.
D. agents.
 
The property that implies that indifference curves are convex to the origin is: *
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A. more is better.
B. completeness.
C. transitivity.
D. diminishing marginal rate of substitution.
 
 
The idea that a consumer is limited to selecting a bundle of goods that is affordable is
captured by the:
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A. budget constraint.
 
B. indifference curve.
C. consumer equilibrium.
D. price changes.

 
The combinations of goods X and Y that are affordable to the consumer are defined by
the: *
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A. consumption set.
B. income line.
C. budget constraint.
D. budget set.
 
 
At the point of consumer equilibrium, the slope of the budget line is equal to the: *
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A. market rate of indifference.

B. indifference curve.
 
C. marginal rate of substitution.
D. consumer preference.

Correct answer
C. marginal rate of substitution.

 
If you are in the business of selling chicken and the price of chicken and the price of
beef both were to drop dramatically, what should you do with your inventory level of
chicken? *
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A. Keep it the same.

B. Decrease the inventory.
C. Increase the inventory.
 
D. Get into the beef business.

 
A price increase causes a consumer's "real" income to: *
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A. decrease.
 
B. increase.
C. remain unchanged.
D. vary along the budget line.

 
Suppose the production function is Q = min {K, 2L}. How much output is produced
when 4 units of labor and 9 units of capital are employed? *
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A. 2
B. 4
C. 8
 
D. 9

 
Suppose the production function is given by Q = 3K + 4L. What is the average product
of capital when 10 units of capital and 10 units of labor are employed? *
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A. 3
 
B. 4
C. 7
D. 45

Correct answer
C. 7
 
The production function for a competitive firm is Q = K.5L.5. The firm sells its output
at a price of $10, and can hire labor at a wage of $5. Capital is fixed at 25 units. The
profit-maximizing quantity of labor is: *
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A. 1.
B. 2.
 
C. 10.
D. None of the answers are correct.

Correct answer
D. None of the answers are correct.

 
Which of the following conditions is true when a producer minimizes the cost of
producing a given level of output? *
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A. The MRTS is equal to the ratio of input prices.

B. The marginal product per dollar spent on all inputs is equal.
C. The marginal products of all inputs are equal.
D. The MRTS is equal to the ratio of input prices, and the marginal product per dollar spent on all
inputs is equal.
 
 
Suppose the long-run average cost curve is U-shaped. When LRAC is in the increasing
stage, there exist: *
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A. economies of scope.
B. diseconomies of scope.
C. economies of scale.
D. diseconomies of scale.
 
 
Constant returns to scale exist when long-run average costs: *
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A. increase as output is increased.

B. decrease as output is increased.
C. remain constant as output is increased.
 
D. None of the preceding statements is correct

 
Two firms producing identical products may merge due to the existence of: *
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A. economies of scope.
B. economies of scale.
 
C. cost complementarities.
D. All of the preceding statements are correct.

 
Which of the following "costs" could a firm that wants to remain in business avoid if it
halted current production? *
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A. Fixed costs
B. Variable costs
 
C. Sunk costs
D. Opportunity costs

 
If a firm's production function is Leontief and the price of capital goes down, the: *
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A. firm must use less labor in order to minimize the cost of producing a given level of output.
B. firm must use more capital in order to minimize the cost of producing a given level of output.
C. firm must use less capital in order to minimize the cost of producing a given level of output.
D. cost-minimizing combination of capital and labor does not change.
 
 
Changes in the price of an input cause: *
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A. isoquants to become steeper.

B. slope changes in the isocost line.
 
C. parallel shifts of the isocost lines.
D. changes in both the isoquants and isocosts of equal magnitude.

 
Which of the following is true under monopoly? *
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A. Profits are always positive.

B. P > MC.
 
C. P = MR.
D. All of the choices are true for monopoly.

 
Which of the following is true? *
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A. A monopolist produces on the inelastic portion of its demand.

B. A monopolist always earns an economic profit.
C. The more inelastic the demand, the closer marginal revenue is to price.
D. In the short run, a monopoly will shut down if P < AVC.
 
 
"Monopolistic competition is literally a kind of competition. Hence, there is no
deadweight loss in a monopolistically competitive market." *
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A. The statement is by definition correct but empirically incorrect.

B. The statement is correct.
 
C. The statement is incorrect.
D. None of the preceding answers is correct.

Correct answer
C. The statement is incorrect.

 
Collusion is: *
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A. legal in the United States.

B. not possible when firms interact repeatedly forever.
C. more likely in industries with a large number of firms.
 
D. None of the preceding answers is correct.

Correct answer
D. None of the preceding answers is correct.

 
"An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly
it is." This statement is: *
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A. true.
B. false.
 
C. true of homogeneous product industries.
D. None of the preceding answers is correct.

 
A market is NOT contestable if: *
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A. all producers have access to the same technology.

 
B. consumers respond quickly to a price change.
C. existing firms cannot respond quickly to entry by lowering their price.
D. there are sunk costs.

Correct answer
D. there are sunk costs.

 
Which of the following is true for perfect competition but not true for monopolistic
competition and monopoly? *
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A. MC = MR
 
B. P = MC
C. Positive long run profits
D. P = MC and positive long run profits

Correct answer
B. P = MC

 
In the absence of price regulation, a monopolist: *
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A. charges a price below MR.

B. charges a price above MC.
C. charges a price equal to MR.
 
D. charges a price above MC and equal to MR.
Correct answer
B. charges a price above MC.

 
Which of the following is true for a monopoly? *
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A. A monopoly always makes a positive profit.

B. A price ceiling on a monopoly is always desirable.
C. Price does not equal marginal cost.
 
D. A price ceiling on a monopoly is always desirable and price does not equal marginal cost.

 
Which of the following is NOT a valuable role of government in a free market
society? *
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A. To reduce negative externalities.

B. To enhance rent-seeking activities.
 
C. To reduce market power.
D. To provide public goods.

 
The purpose of the Clean Air Act (1970) was to: *
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A. reduce market power.

B. control negative externalities.
 
C. improve competition across international markets.
D. help make information easily obtainable for producers and consumers.

 
Which of the following is true concerning negative externalities? *
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A. Firms tend to produce more than the efficient level of output.

 
B. Society gains because firms do not pay the external costs of production.
C. Perfect competition is better than monopoly from the viewpoint of society even in the
presence of negative externalities.
D. With negative externalities, a monopoly will always produce an output level less than is socially
efficient.
 
Which of the following is antitrust legislation? *
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A. Sherman Act
 
B. Securities and Exchange Act
C. Lanham Act
D. Sherman Act and Lanham Act

 
The presence of government in the market leads to: *
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A. benefits at no cost to society.

B. rent seeking.
 
C. externalities.
D. adverse selection.

 
A price ceiling imposed on a monopoly may: *
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A. lead to a shortage.
B. lead to no shortage.
C. drive the monopolist out of business.
D. All of the statements associated with this question are correct.
 
 
Which of the following is a public good? *
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A. National defense
 
B. Telephones
C. Electricity
D. All of the statements associated with this question are public goods.

 
The Clean Air Act and its amendments increase the production costs of the firms in a
covered industry through increased: *
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A. fixed costs while marginal cost is unchanged.

B. marginal cost while fixed costs remain the same.
C. fixed costs and increased marginal costs.
 
D. average cost while marginal cost is unchanged.

 
When the government imposes an excise tax on foreign imports: *
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A. domestic consumers are harmed.

B. domestic firms benefit.
C. domestic firms are harmed.
D. domestic consumers are harmed and domestic firms benefit.
 
 
Which cost measures the pollution cost to society? *
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A. Internal cost
B. External cost
 
C. Social cost
D. External cost and social cost

 
If a firm has been proven liable for a false ad, it has to: *
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A. terminate the false ad.

B. recall any product with the false claim on it.
C. compensate more than the damage it has caused.
D. All of the statements associated with this question are correct.