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
b. Zero accounting profits
c. Positive accounting profits and positive economic profits
d. Zero economic profits but positive accounting profits

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
b. Neither a perfectly competitive firm nor a monopoly firm
c. A perfectly competitive firm but not a monopoly firm
d. A monopoly firm but not a perfectly competitive firm

3. Which of the following types of firms are guaranteed to make positive economic profit?
a. Both a perfectly competitive firm and a monopoly
b. Neither a perfectly competitive firm nor a monopoly
c. A perfectly competitive firm but not a monopoly
d. A monopoly but not a perfectly competitive firm

4. What is the main difference between a competitive firm and a monopoly firm?
a. The number of customers served by the firm
b. Monopoly firms are more efficient and therefore have lower costs.
c. Monopoly firms can generally earn positive profits over a longer period of time.
d. Monopoly firms enjoy government protection from competition.

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

a. Nike shoes
b. Cotton
c. Perdue Chicken
d. Restaurants

6. A firm in a perfectly competitive market (a price taker) faces what type of demand curve?
a. Unit elastic
b. Perfectly elastic
c. None of the above

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
b. $300 in the short-run and zero in the long run
c. $500 in the short-run and long-run
d. $500 in the short-run and zero in the long run
8. What would happen to revenues if a firm in a perfectly competitive industry raised prices?
a. They would increase
b. They would increase but profit would decrease
c. They would increase along with profit
d. They would fall to zero

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
b. some firms will enter the industry and price will rise
c. some firms will leave the industry and price will fall
d. some firms will enter the industry 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
b. above average profits in the short-run and average profits in the long-run
c. new firms being attracted to the industry
d. demand creating supply
Chapter 10

Multiple Choice Questions

1. An industry is defined as
a. a group of firms producing the exact same products and services.
b. firms producing items that sell through the same distribution channels.
c. firms that have the same resources and capabilities.
d. a group of firms producing products that are close substitutes.

2. Attractive industries have all the following, except

a. high supplier power
b. low buyer power
c. high entry barriers
d. low rivalry

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

a. Government protection through patents or licensing requirements
b. Strong brands
c. Low capital requirements for entry
d. Lower costs driven by economies of scale

4. Buyers have higher power when

a. their suppliers sell a highly differentiated product.
b. they are not a significant purchaser of their supplier's output.
c. switching costs are low.
d. the buyer industry is highly fragmented (buyers are not concentrated)

5. Which of the following is NOT a factor that contributes to higher rivalry in an industry?
a. Numerous competitors.
b. High fixed costs.
c. Fast industry growth.
d. Low switching costs for buyers.

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

a. resource heterogeneity
b. resource immobility
c. barriers to entry
d. imitability

7. If a firm successfully adopts a product differentiation strategy, the elasticity of demand for its
products should
a. increase
b. decrease
c. become marginal
d. be unaffected

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

a. sustainable competitive advantage.
b. competitive parity.
c. cost advantage.
 d. temporary competitive advantage.
e.

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.
b. The strategy reduces costs by at least 10%.
c. The strategy is focused on reducing internal production costs.
d. The methods of achieving cost reductions are difficult 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.
b. a complex competitive advantage.
c. competitive parity.
d. a sustainable competitive advantage.
Chapter 11

Multiple Choice Solutions:

1. The intersection between demand for dollars and the supply of dollars is known as the
a. Inflation rate
b. Exchange rate
c. Price
d. Quantity

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
b. $5,376
c. $1,458
d. Need more information

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

a. US producers will benefit; Chinese consumers will benefit
b. US producers will benefit; Chinese consumers will be hurt
c. US producers will be hurt; Chinese consumers will benefit
d. US producers will be hurt; Chinese consumers will be hurt

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.
b. Prices in the United States would rise, and prices in Mexico would fall.
c. Prices in the United States would fall, and prices in Mexico would rise.
d. Prices in the United States would fall, and prices in Mexico would fall.

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.
b. U.S. consumers would be hurt, and Mexican producers would benefit.
c. U.S. consumers would benefit, and Mexican producers would be hurt.
d. U.S. consumers would be hurt, and Mexican producers would be hurt.

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.
b. The dollar would appreciate relative to the peso, and Mexican prices would decrease.
c. The dollar would depreciate relative to the peso, and Mexican prices would increase.
d. The dollar would depreciate relative to the peso, and Mexican prices would decrease.

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.
b. The dollar would depreciate relative to the peso, and Mexican prices would decrease.
c. The dollar would depreciate relative to the peso, and Mexican prices would increase.
d. The exchange rate would not be affected, and neither would Mexican prices.
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.
b. The Big Mac Index would indicate that the Chinese currency is more under-valued
c. The Big Mac Index is not affected by inflation.
d. The Big Mac Index would indicate that the Dollar is more under-valued.

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.
b. The dollar will appreciate relative to the yuan, and U.S. prices will decrease.
c. The dollar will depreciate relative to the yuan, and U.S. prices will increase.
d. The dollar will depreciate relative to the yuan, and U.S. prices will decrease.

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
b. Accelerate; delay
c. Delay; accelerate
d. Delay; delay
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.
b. unitary elastic.
c. change due to psychological pricing.
d. less elastic.

2. All of the following choices are examples of promoting a firm’s product, except
a. celebrity endorsements.
b. pricing
c. discount coupons.
d. end-of-aisle displays.

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

a. doing nothing.
b. repositioning a product so that it does not directly compete with the substitute.
c. setting the same price on both products.
d. lowering prices on the low-margin products.

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.
b. more elastic than the individual demands.
c. equally elastic as the individual demands.
d. None of the above

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.
b. complements.
c. not related.
d. None of the above

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.
b. there is an increase in the overall demand for their products.
c. the aggregate demand for both goods is more elastic than the demand for the individual
goods.
d. the aggregate demand for both goods is less elastic than the demand for the individual
goods.

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.
b. if MR<MC at capacity, then the firms should price to fill capacity.
c. if LRMR>LRMC at capacity, then the firms should price to fill capacity.
d. if LRMR<LRMC at capacity, then the firms should price to fill capacity.
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.
b. reduce price from $15 to $10.
c. raise price from $7.5 to $10.
d. reduce price from $10 to $7.5.

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.
b. the promotional expenditures made the demand for the advertised products less elastic.
c. the promotional expenditures had no effect on demand elasticity.
d. the owners got it wrong. To cover the promotional expenses, they should have raised the
prices.

10. On average, if demand is unknown and costs of underpricing are _______ than the costs of overpricing,
then _________.
a. smaller; overprice
b. smaller; underprice
c. larger; underprice
d. None of the above