Chapter 9

Multiple Choice Questions

1. In the long-run, which of the following outcomes is most likely for a firm?
a. Zero accounting profits but positive economic profits [ firms do not earn positive economic
profit in the long-run]
b. Zero accounting profits [zero accounting profit implies negative economic profit, and firms
do not earn negative economic profit in the long-run]
c. Positive accounting profits and positive economic profits [ firms do not earn positive
economic profit in the long-run]
d. Zero economic profits but positive accounting profits [correct; in the long-run economic
profit is driven to zero]

2. At the individual firm level, which of the following types of firms faces a downward-sloping demand
curve?
a. Both a perfectly competitive firm and a monopoly firm [the demand curve for the output of a
perfectly competitive firm is flat]
b. Neither a perfectly competitive firm nor a monopoly firm [one of the two types does face a
downward-sloping demand curve]
c. A perfectly competitive firm but not a monopoly firm [the demand curve for the output of a
perfectly competitive firm is flat]
d. A monopoly firm but not a perfectly competitive firm [correct; monopoly firms face a
downward-sloping demand curve]

3. Which of the following types of firms are guaranteed to make positive economic profit?
a. Both a perfectly competitive firm and a monopoly [in the long-run, economic profit for both
types of firms will be zero]
b. Neither a perfectly competitive firm nor a monopoly [correct; no firm is guaranteed to make
positive economic profit]
c. A perfectly competitive firm but not a monopoly [in the long-run, economic profit for
competitive firms will be zero]
d. A monopoly but not a perfectly competitive firm [in the long-run, economic profit for
monopoly firms will be zero]

4. What is the main difference between a competitive firm and a monopoly firm?
a. The number of customers served by the firm [competitive firms and monopoly firms may or
may not have similar numbers of customers]
b. Monopoly firms are more efficient and therefore have lower costs. [monopoly firms may or
may not have lower costs]
c. Monopoly firms can generally earn positive profits over a longer period of time. [correct;
this profit is a reward for doing something unique, innovative, or creative—something that
gives the firm less elastic demand.]
d. Monopoly firms enjoy government protection from competition. [not necessarily; other
factors can contribute to the lack of rivals]

5. Which of the products below is closest to operating in a perfectly competitive industry?

a. Nike shoes [branding of the shoes reduces the “closeness” of substitute products]
b. Cotton [correct; agricultural commodities are close to perfectly competitive industries]
c. Perdue Chicken [branding of the chicken reduces the “closeness” of substitute products]
 d. Restaurants [branding and other differentiation efforts reduce the “closeness” of substitute
restaurants]

6. A firm in a perfectly competitive market (a price taker) faces what type of demand curve?
a. Unit elastic [a unit elastic demand curve is downward sloping; firms in perfectly competitive
markets do not face unit elastic or downward sloping demand curves]
b. Perfectly inelastic [demand is not inelastic for competitive firms]
c. Perfectly elastic [correct; the demand curve for the output of a perfectly competitive firm is
perfectly elastic (flat)]
d. None of the above [one of the answers is correct]

7. A competitive firm’s profit maximizing price is $15. At MC=MR, the output is 100 units. At this level of
production, average total costs are $12. The firm’s profits are
a. $300 in the short run and long run [long-run profit will be driven down to zero]
b. $300 in the short-run and zero in the long run [correct; (15-12)*100. Long run profit is
always driven to zero.]
c. $500 in the short-run and long-run [short-run profit will be price minus average cost times
quantity; long-run profit will be driven down to zero]
d. $500 in the short-run and zero in the long run [short-run profit will be price minus average
cost times quantity]

8. What would happen to revenues if a firm in a perfectly competitive industry raised prices?
a. They would increase [a competitive firm can only sell at the industry price]
b. They would increase but profit would decrease [a competitive firm can only sell at the
industry price]
c. They would increase along with profit [a competitive firm can only sell at the industry price]
d. They would fall to zero [correct; a competitive firm can only sell at the industry price. If the
firm raises price, it would sell nothing]

9. If a firm in a perfectly competitive industry is experiencing average revenues greater than average
costs, in the long-run
a. some firms will leave the industry and price will rise [firms are unlikely to leave if revenues
are greater than costs]
b. some firms will enter the industry and price will rise [price is unlikely to increase if firms
enter the industry]
c. some firms will leave the industry and price will fall [firms are unlikely to leave if revenues
are greater than costs; if they did leave, price would not fall]
d. some firms will enter the industry and price will fall [correct; firms will be attracted to the
higher-than-average revenues. As more firms enter the industry, supply will increase and
price will fall.]

10. A sudden decrease in the market demand in a competitive industry leads to

a. losses in the short-run and average profits in the long-run [correct]
b. above average profits in the short-run and average profits in the long-run [a decrease in
demand would lead to lower prices]
c. new firms being attracted to the industry [a decrease in demand would lead to lower prices;
lower prices would not attract new firms to the industry
d. demand creating supply [demand does not create supply]
Chapter 10
Multiple Choice Questions

1. An industry is defined as
a. a group of firms producing the exact same products and services. [the products are not
necessarily exactly the same]
b. firms producing items that sell through the same distribution channels. [products within an
industry may be sold through different distribution channels]
c. firms that have the same resources and capabilities. [firms within an industry may have
different resources and capabilities]
d. a group of firms producing products that are close substitutes. [correct]

2. Attractive industries have all the following, except

a. high supplier power [correct; high supplier power would allow suppliers to capture more of
the industry value]
b. low buyer power [low buyer power is positive for an industry; it means buyers capture less
value]
c. high entry barriers [high entry barriers help protect the industry from the threat of potential
entrants]
d. low rivalry [low rivalry is positive for an industry; firms do not compete as aggressively]

3. Which of the following is NOT an example of an entry barrier?

a. Government protection through patents or licensing requirements [patents and licensing do
slow entry into an industry]
b. Strong brands [brands help deter entry because potential entrants will have to invest capital
and time to build a competing brand]
c. Low capital requirements for entry [correct; if capital requirements are low, it will be less
costly (easier) to enter]
d. Lower costs driven by economies of scale [this is an entry barrier as potential entrants know
they will not be cost-competitive unless they can achieve scale]

4. Buyers have higher power when

a. their suppliers sell a highly differentiated product. [highly differentiated products mean
buyers have lower power because it is more costly to switch to a rival product]
b. they are not a significant purchaser of their supplier's output. [purchasing a large volume of
a particular supplier’s output leads to higher negotiating power]
c. switching costs are low. [correct; low switching costs put buyers in a better negotiating
position because it is easier to buy a rival’s product]
d. the buyer industry is highly fragmented (buyers are not concentrated) [fragmented buyers
do not have more negotiating power].

5. Which of the following is NOT a factor that contributes to higher rivalry in an industry?
a. Numerous competitors. [more competitors generally leads to greater rivalry as cooperative
outcomes are hard to achieve with many competitors]
b. High fixed costs. [high fixed costs are associated with higher rivalry; when fixed costs are
high and marginal costs are low, there is pressure to cut price to build volume in order to
make some contribution to covering fixed costs]
c. Fast industry growth. [correct; high growth reduces rivalry because firms are less worried
about fighting over existing sources of demand given that demand is growing]
d. Low switching costs for buyers. [low switching costs means firms have a high incentive to
compete for buyers to get them to switch]

6. The concept that describes firms possessing different bundles of resources is

 a. resource heterogeneity [correct]
b. resource immobility [resource immobility describes the fact that resources resist transfer or
copying]
c. barriers to entry [barriers to entry are factors that reduce threat of entry to an industry]
d. imitability [imitability refers to whether a resource can be copied]

7. If a firm successfully adopts a product differentiation strategy, the elasticity of demand for its
products should
a. increase [increased elasticity means buyers would be more price sensitive; if the product is
successfully differentiated, buyers should become less price sensitive]
b. decrease [correct; decreased elasticity means buyers would be less price sensitive. If the
product is more differentiated, buyers should be less price sensitive.]
c. become marginal [marginal is not a term used to describe demand elasticity]
d. be unaffected [elasticity should be affected]

8. When a resource or capability is valuable and rare, a firm may gain a

a. sustainable competitive advantage. [the resource or capability must also be difficult to
imitate / substitute for the competitive advantage to be sustainable]
b. competitive parity. [a valuable and rare resource or capability should help the firm do better
than just achieve parity]
c. cost advantage. [not necessarily; the advantage might be related to differentiation]
d. temporary competitive advantage. [correct; valuable and rare resources lead to a temporary
competitive advantage]

9. Which of the following is critical for a firm adopting a long-term cost-reduction strategy?
a. The firm must also differentiate its product or service. [the firm does not necessarily have to
differentiate too]
b. The strategy reduces costs by at least 10%. [a cost advantage of less than 10% is still
meaningful]
c. The strategy is focused on reducing internal production costs. [the strategy could be focused
on some other type of cost and still be successful]
d. The methods of achieving cost reductions are difficult to imitate. [correct; for the advantage
to be sustainable, it must be difficult for rivals to imitate]

10. When a resource or capability is valuable, rare, hard to imitate, and non-substitutable firms may gain
a. a temporary competitive advantage. [the advantage should be more than just temporary]
b. a complex competitive advantage. [“complex” is not a word used to describe the nature of
competitive advantage]
c. competitive parity. [a resource or capability that is valuable, rare, hard to imitate, and non-
substitutable should help the firm do better than just achieve parity]
d. a sustainable competitive advantage. [correct]
Chapter 11

Multiple Choice Solutions:

1. The intersection between demand for dollars and the supply of dollars is known as the
a. Inflation rate [the inflation rate is the rate that reflects the aggregate increase in price level]
b. Exchange rate [correct; the exchange rate reflects the price point at which demand for
dollars (those who want to buy dollars and sell the foreign currency) and supply of foreign
exchange (those who want to sell dollars and buy the foreign currency) intersect]
c. Price [Here “price” is the exchange rate]
d. Quantity [quantity indicates the amount of dollars traded for the foreign currency in the
market for foreign exchange.]

2. An individual in the United States wants to buy office equipment from England that costs 2,800
pounds. If the exchange rate is $1.92, how much will it cost him in dollar terms?
a. $2,800 [This is what the cost would be if the currencies were equal, in other words if $1 = 1
pound]
b. $5,376 [correct; If 1 pound = $1.92, then to purchase 2800 pounds worth of goods, you
would need 2800*1.92 = $5,736]
c. $1,458 [If 1 pound = $1.92, then you would need more than 2800 dollars to purchase
equipment costing 2800 pounds. Think of it as if every pound is costing you $1.92]
d. Need more information [There is enough information provided to answer the question]

3. If the Chinese yuan devalues relative to the US dollar, then

a. US producers will benefit; Chinese consumers will benefit [A currency devaluation helps
domestic firms by increasing demand but hurts domestic consumers by increasing domestic
price. It also hurts foreign firms by decreasing demand but helps foreign consumers by
decreasing price.]
b. US producers will benefit; Chinese consumers will be hurt [A currency devaluation helps
domestic firms by increasing demand but hurts domestic consumers by increasing domestic
price. It also hurts foreign firms by decreasing demand but helps foreign consumers by
decreasing price.]
c. US producers will be hurt; Chinese consumers will benefit [A currency devaluation helps
domestic firms by increasing demand but hurts domestic consumers by increasing domestic
price. It also hurts foreign firms by decreasing demand but helps foreign consumers by
decreasing price.]
d. US producers will be hurt; Chinese consumers will be hurt [Correct: A currency
devaluation helps domestic firms by increasing demand but hurts domestic consumers by
increasing domestic price. It also hurts foreign firms by decreasing demand but helps
foreign consumers by decreasing price.]

4. Following a peso appreciation relative to the dollar, which of the following results is expected to
occur?
a. Prices in the United States would rise, and prices in Mexico would rise. [Since it takes fewer
pesos for Mexicans to buy US goods and services, the peso appreciation increases demand
for US goods and services. The depreciation also means that it takes more dollars for US
consumers to buy Mexican goods and so decreases demand for Mexican goods and services.
The former would increase prices for US goods and services, and the latter would decrease
prices for Mexican goods and services]
b. Prices in the United States would rise, and prices in Mexico would fall. [Correct: Since
it takes fewer pesos for Mexicans to buy US goods and services, the peso appreciation
increases demand for US goods and services. The depreciation also means that it takes more
dollars for US consumers to buy Mexican goods and so decreases demand for Mexican goods
 and services. The former would increase prices for US goods and services, and the latter
would decrease prices for Mexican goods and services]
c. Prices in the United States would fall, and prices in Mexico would rise. [Since it takes fewer
pesos for Mexicans to buy US goods and services, the peso appreciation increases demand
for US goods and services. The depreciation also means that it takes more dollars for US
consumers to buy Mexican goods and so decreases demand for Mexican goods and services.
The former would increase prices for US goods and services, and the latter would decrease
prices for Mexican goods and services]
d. Prices in the United States would fall, and prices in Mexico would fall. [Since it takes fewer
pesos for Mexicans to buy US goods and services, the peso appreciation increases demand
for US goods and services. The depreciation also means that it takes more dollars for US
consumers to buy Mexican goods and so decreases demand for Mexican goods and services.
The former would increase prices for US goods and services, and the latter would decrease
prices for Mexican goods and services]

5. Following a peso appreciation relative to the dollar, which of the following results is expected to
occur?
a. U.S. consumers would benefit, and Mexican producers would benefit. [A currency
devaluation helps domestic firms by increasing demand but hurts domestic consumers by
increasing domestic price. It also hurts foreign firms by decreasing demand but helps
foreign consumers by decreasing price.]
b. U.S. consumers would be hurt, and Mexican producers would benefit. [A currency
devaluation helps domestic firms by increasing demand but hurts domestic consumers by
increasing domestic price. It also hurts foreign firms by decreasing demand but helps
foreign consumers by decreasing price.]
c. U.S. consumers would benefit, and Mexican producers would be hurt. [A currency
devaluation helps domestic firms by increasing demand but hurts domestic consumers by
increasing domestic price. It also hurts foreign firms by decreasing demand but helps
foreign consumers by decreasing price.]
d. U.S. consumers would be hurt, and Mexican producers would be hurt. [correct; A
currency devaluation helps domestic firms by increasing demand but hurts domestic
consumers by increasing domestic price. It also hurts foreign firms by decreasing demand
but helps foreign consumers by decreasing price.]

6. Following an increase in Mexican interest rates relative to U.S. interest rates, which caused Mexican
investors to borrow abroad to invest domestically, which of the following is expected to occur?
a. The dollar would appreciate relative to the peso, and Mexican prices would increase. [An
increase in foreign borrowing means that Mexicans are borrowing dollars in the US, and then
selling those dollars to buy pesos, which is an increase the supply of dollars in the market for
foreign exchange. This decreases the price of a dollar measured in the foreign currency, also
called a dollar depreciation. The dollar depreciation also means that it takes more dollars
for US consumers to buy Mexican goods and services and so decreases demand for Mexican
goods and services, which results in a decline in prices for Mexican goods and services.]
b. The dollar would appreciate relative to the peso, and Mexican prices would decrease. [An
increase in foreign borrowing means that Mexicans are borrowing dollars in the US, and then
selling those dollars to buy pesos, which is an increase the supply of dollars in the market for
foreign exchange. This decreases the price of a dollar measured in the foreign currency, also
called a dollar depreciation. The dollar depreciation also means that it takes more dollars
for US consumers to buy Mexican goods and services and so decreases demand for Mexican
goods and services, which results in a decline in prices for Mexican goods and services.]
c. The dollar would depreciate relative to the peso, and Mexican prices would increase. [An
increase in foreign borrowing means that Mexicans are borrowing dollars in the US, and then
selling those dollars to buy pesos, which is an increase the supply of dollars in the market for
foreign exchange. This decreases the price of a dollar measured in the foreign currency, also
called a dollar depreciation. The dollar depreciation also means that it takes more dollars
 for US consumers to buy Mexican goods and services and so decreases demand for Mexican
goods and services, which results in a decline in prices for Mexican goods and services.]
d. The dollar would depreciate relative to the peso, and Mexican prices would decrease.
[An increase in foreign borrowing means that Mexicans are borrowing dollars in the US, and
then selling those dollars to buy pesos, which is an increase the supply of dollars in the
market for foreign exchange. This decreases the price of a dollar measured in the foreign
currency, also called a dollar depreciation. The dollar depreciation also means that it takes
more dollars for US consumers to buy Mexican goods and services and so decreases demand
for Mexican goods and services, which results in a decline in prices for Mexican goods and
services.]

7. Following an increase in Mexican interest rates relative to U.S. interest rates, which caused US
investors to invest in Mexican Bonds. Which of the following would occur?
a. The dollar would appreciate relative to the peso, and Mexican prices would increase. [this
foreign borrowing only impacts the exchange rate when those borrowed funds are then
resold to purchase foreign currency (the peso) for use in Mexican domestic investment]
b. The dollar would depreciate relative to the peso, and Mexican prices would decrease. [this
foreign borrowing only impacts the exchange rate when those borrowed funds are then
resold to purchase foreign currency (the peso) for use in Mexican domestic investment]
c. The dollar would depreciate relative to the peso, and Mexican prices would increase. [this
foreign borrowing only impacts the exchange rate when those borrowed funds are then
resold to purchase foreign currency (the peso) for use in Mexican domestic investment]
d. The exchange rate would not be affected, and neither would Mexican prices. [correct;
the exchange rate is only affected when the borrowed funds are then resold and used to
purchase foreign currency. If they continue to invest abroad, then exchange rate and foreign
prices would not be affected]

8. In July 2014 the price of a Big Mac was $4.80 in the United States while in China it was only $2.73 at
market exchange rates. So the "raw" Big Mac index says that the yuan was under-valued by 43% at
that time. How would domestic inflation in China affect the Big Mac Index?
a. The Big Mac Index would indicate that the Chinese currency is less under-valued.
[Correct: If domestic inflation increased the Chinese price of a Big Mac to say, $4.80, then the
Big Mac Index would say that the Chinese yuan and the dollar were in long run equilibrium,
or that the yuan is less undervalued.]
b. The Big Mac Index would indicate that the Chinese currency is more under-valued [If
domestic inflation increased the Chinese price of a Big Mac to say, $4.80, then the Big Mac
Index would say that the Chinese yuan and the dollar were in long run equilibrium, or that
the yuan is less undervalued, not more.]
c. The Big Mac Index is not affected by inflation. [Domestic inflation would affect the price in
yuan of the Big Mac in China, which would affect the value of the index.]
d. The Big Mac Index would indicate that the Dollar is more under-valued. [The July 2014
index indicates that the dollar is over-valued; increases in the price in China would reduce
not increase the indicated dollar over-valuation.]

9. If the U.S. economy strengthens, consumer incomes increase, and consumers buy more imported
goods and services. How will this affect exchange rates?
a. The dollar will appreciate relative to the yuan, and U.S. prices will increase. [To buy imports,
US consumers have to exchange more dollars for yuan. This increase in the supply of dollars
in the market for foreign exchange reduces the “price” of a dollar measured in yuan, which is
a dollar depreciation.]
b. The dollar will appreciate relative to the yuan, and U.S. prices will decrease. [To buy
imports, US consumers have to exchange more dollars for yuan. This increase in the supply
 of dollars in the market for foreign exchange reduces the “price” of a dollar measured in
yuan, which is a dollar depreciation.]
c. The dollar will depreciate relative to the yuan, and U.S. prices will increase. [Correct:
To buy imports, US consumers have to exchange more dollars for yuan. This increase in the
supply of dollars in the market for foreign exchange reduces the “price” of a dollar measured
in yuan, which is a dollar depreciation.]
d. The dollar will depreciate relative to the yuan, and U.S. prices will decrease. [To buy imports,
US consumers have to exchange more dollars for yuan. This increase in the supply of dollars
in the market for foreign exchange reduces the “price” of a dollar measured in yuan, which is
a dollar depreciation.]

10. If buyers expect future price increases, they will ___________ their purchases to avoid it. Similarly,
sellers will __________ selling to take advantage of it.
a. Accelerate; accelerate [buyers, anticipating the price increase, will accelerate their
purchasing, hoping to pay less now, while sellers will delay purchasing, hoping to receive a
higher price for the same good in the future.]
b. Accelerate; delay [correct; buyers, anticipating the price increase, will accelerate their
purchasing, hoping to pay less now, while sellers will delay purchasing, hoping to receive a
higher price for the same good in the future.]
c. Delay; accelerate [buyers, anticipating the price increase, will accelerate their purchasing,
hoping to pay less now, while sellers will delay purchasing, hoping to receive a higher price
for the same good in the future.]
d. Delay; delay [buyers, anticipating the price increase, will accelerate their purchasing, hoping
to pay less now, while sellers will delay purchasing, hoping to receive a higher price for the
same good in the future.]
Chapter 12

Multiple Choice Questions

1. After massive promotion of Rihanna’s latest music album, the producers reacted by raising prices for
her albums. This implies that promotion expenditures made the album demand
a. more elastic. [When demand becomes more elastic, the right response is to reduce price.]
b. unitary elastic. [The question does not indicate any specific level of elasticity, only that it
changed as a result of the promotion.]
c. change due to psychological pricing. [This may or not be true, but the question is how does
promotion expenditure changes demand elasticity.]
d. less elastic. [correct; when promotion makes demand less elastic, the right response is to
increase price.]

2. All of the following choices are examples of promoting a firm’s product, except
a. celebrity endorsements. [This is a common component of product promotion.]
b. pricing [correct; pricing often responds to changes in demand brought about by
promotions]
c. discount coupons. [These are a form of promotion designed to focus consumers on prices.]
d. end-of-aisle displays. [These are a form of promotion designed to focus consumers on
prices.]

3. A firm that acquires a substitute product can reduce cannibalization by

a. doing nothing. [The prices charged prior to acquiring a substitute would no longer be
optimal.]
b. repositioning a product so that it does not directly compete with the substitute. [correct; If
consumers do not perceive the products as substitutes, then cannibalization is reduced.]
c. setting the same price on both products. [Substitute products usually have different prices
(e.g., a manual and electric saw).]
d. lowering prices on the low-margin products. [This is the opposite of the appropriate price
response to acquiring a substitute product.]

4. A shoe-producing firm decides to acquire a firm that produces shoe laces. This implies that the firm’s
aggregate demand (shoes + laces) will be:
a. less elastic than the individual demands. [Aggregate demand of substitutes is less elastic
than the individual demands. However, shoes and laces are likely complements.]
b. more elastic than the individual demands. [correct; shoes and laces are complements and
aggregate demand of complements is more elastic than the individual demands.]
c. equally elastic as the individual demands. [shoes and laces are complements, and therefore
the aggregate demand is not equal to the individual demands.]
d. None of the above [common ownership of complements changes the elasticity of aggregate
demand]

5. After firm A producing one good acquired another firm B producing another good, it lowered the
prices for both goods. One can conclude that the goods were
a. substitutes. [when acquiring a substitute, prices on both goods should be raised, not
lowered]
b. complements. [correct; when acquiring a complement, prices on both goods should be
lowered.]
c. not related. [when goods are unrelated, common ownership does not affect the optimal
price.]
d. None of the above [one of the answers is correct.]

6. Firms tend to raise the price of their goods after acquiring a firm that sells a substitute good because
 a. they lose market power. [a loss of market power generally leads to lower prices]
b. there is an increase in the overall demand for their products. [whether or not demand
increases, firms still raise prices after acquiring a substitute good.]
c. the aggregate demand for both goods is more elastic than the demand for the individual
goods. [when demand becomes more elastic, the correct response is to lower prices.]
d. the aggregate demand for both goods is less elastic than the demand for the individual
goods. [correct; the aggregate demand for substitute products is less elastic than the
individual demands.]

7. For products like parking lots and hotels, costs of building capacity are mostly fixed or sunk and
firms in this industry typically face capacity constraints. Therefore,
a. if MR>MC at capacity, then the firms should price to fill capacity. [correct; when MR>MC, it
is optimal to reduce price to sell more, but one cannot sell more than capacity allows.]
b. if MR<MC at capacity, then the firms should price to fill capacity. [when MR<MC, you are
losing money and should increase price and sell less.]
c. if LRMR>LRMC at capacity, then the firms should price to fill capacity. [long run costs and
benefits help determine how much capacity to build, but not how to price once it is built.]
d. if LRMR<LRMC at capacity, then the firms should price to fill capacity. [long run costs and
benefits help determine how much capacity to build, but not how to price once it is built.]

8. A firm started advertising its product and this changed the product’s elasticity from -2 to -1.5. The
firm should
a. raise price from $10 to $15. [correct; using the formula (P-MC)/P=1/|e|, prices rise by
50%.]
b. reduce price from $15 to $10. [since demand became less elastic, price should increase, not
decrease.]
c. raise price from $7.5 to $10. [using the formula (P-MC)/P=1/|e| would indicate that prices
would have to rise by more than 33% following the change in elasticity.]
d. reduce price from $10 to $7.5. [since demand became less elastic, price should increase, not
decrease.]

9. After running a promotional campaign, the owners of a local hardware store decided to decrease the
prices for the advertised prices sold in their store. One can infer that
a. the promotional expenditures made the demand for the advertised products more elastic.
[correct; promotional activity that makes demand more elastic should be accompanied by a
decrease in price.]
b. the promotional expenditures made the demand for the advertised products less elastic.
[When demand becomes less elastic, the appropriate response is to increase price.]
c. the promotional expenditures had no effect on demand elasticity. [If elasticity had not
changed, then there would have been no reason to decrease prices.]
d. the owners got it wrong. To cover the promotional expenses, they should have raised the
prices. [promotional expenses are a fixed cost and do not directly impact the price except by
changing the elasticity of demand.]

10. On average, if demand is unknown and costs of underpricing are _______ than the costs of overpricing,
then _________.
a. smaller; overprice [if the costs of underpricing are smaller, then one should not overprice.]
b. smaller; underprice [correct; since the costs of underpricing are smaller, one should
underprice.]
c. larger; underprice [since the costs of underpricing are larger, one should avoid
underpricing.]
d. None of the above [one of the above combinations is correct.]