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ECON 3070 Intermediate Microeconomic The
ECON 3070 Intermediate Microeconomic The
1. As long as the principle of diminishing marginal utility is operating, any increased consumption of a good
a. lowers total utility.
b. produces negative total utility.
c. lowers marginal utility and, therefore, total utility.
d. lowers marginal utility, but may raise total utility.
2. Among all the combinations of goods attainable by a consumer, the one that maximizes total utility is the one
that
a. maximizes the marginal utilities per dollar of each good.
b. maximizes the marginal utilities per pound (or other physical unit) of each good.
c. equates the marginal utilities per dollar of each good.
d. equates the marginal utilities per pound (or other physical unit) of each good.
3. A utility contour (or indifference curve) shows all the alternative combinations of two consumption goods
that
a. can be produced with a given set of resources and technology.
b. yield the same total of utility.
c. can be purchased with a given budget at given prices.
d. equate the marginal utilities of these goods and, therefore, make the consumer indifferent between them.
When answering questions 4-6, consider the accompanying graph of a person’s consumption-indifference curves:
6. This graph also shows the consumer’s marginal rate of substitution in the AB range to be
a. 0a of apples for 0d of butter.
b. 0a of apples for 0b of butter.
c. 0c of apples for 0d of butter.
d. ac of apples for bd of butter.
7. At any given point on an indifference curve, the absolute value of the slope equals
a. unity--otherwise there would be no indifference.
b. the marginal rate of substitution.
c. the consumer’s marginal utility.
d. none of the above.
9. In the presence of declining marginal rates of substitution, consumers who again and again sacrifice a unit of
one good cannot remain on their original consumption-indifference curves (that is, they cannot maintain their
original levels of welfare) unless they receive as compensation
a. again and again equal units of another good.
b. ever smaller units of another good.
c. ever larger units of another good.
d. either (a), (b), or (c), depending on the tastes of the consumer involved.
10. Which of the following is a correct representation of the budget constraint in a world with only food and
shelter, where M = income, Pf = price of food, Ps = shelter price, S = the quantity of shelter, and F = the
quantity of food.
a. M = Pf (S) + Ps(F)
b. F = M/Ps - Pf/Ps(S)
c. S = M/Ps - Ps/Pf(F)
d. F = M(Ps) + Pf/Ps(S)
e. None of the above is correct.
13. In a preference ordering exercise in which two baskets of goods are being considered, it is assumed by
indifference theory that the consumer is able to
a. measure the amount of pleasure expected from the preferred basket.
b. say how much more one basket is valued over the other.
c. calculate only the absolute value of the less desirable basket.
d. make no absolute measure of the value of any of the market baskets.
15. The marginal rate of substitution between food and shelter for a given point on an indifference curve
a. is equal to the absolute value of the slope of the indifference curve at that point.
b. is equal to the rate at which the consumer is willing to exchange the two goods in the marketplace.
c. reflects the relative values the consumer attaches to the two good.
d. is described, in part, by each of the above statements.
16. If a man prefers Budweiser to Schlitz and Schlitz to Pabst, and if he is indifferent between Budweiser and
Miller, he must
a. prefer Miller to Pabst.
b. prefer Schlitz to Miller.
c. be indifferent between Schlitz and Miller.
d. be indifferent between Budweiser and Pabst.
e. be indifferent between Pabst and Miller.
19. If A, B, C, and D are any four market baskets, and if the consumer has ranked them so that D is preferred to
C, A is not preferred to B, and B is not preferred to C, then
a. A is preferred to C.
b. A is preferred to D.
c. B is preferred to D.
d. D is preferred to A.
e. D is not preferred to B.
20. Suppose that a market basket of two goods is changed by adding more to one of the goods and subtracting
one unit from the other.
a. The consumer will rank the market basket more highly after the change.
b. The consumer will rank the market basket less highly after the change.
c. The consumer will be indifferent between the market baskets.
d. Any of the above statements may be true.
22. As long as all prices remain constant, an increase in money income results in
a. an increase in the slope of the budget line.
b. a decrease in the slope of the budget line.
c. an increase in the intercept of the budget line.
d. a decrease in the intercept of the budget line.
e. both (a) and (c).
23. If the prices of both goods increase by the same percent, the budget line will
a. shift parallel to the left.
b. shift parallel to the right.
c. pivot about the x axis.
d. pivot about the y axis.
e. none of the above.
26. In spending all his or her income, the consumer chooses the market basket that maximizes his or her utility.
Which of the following statements will be correct?
1. The marginal utility is the same for each commodity.
2. The marginal utility per dollar spent is the same for each commodity.
3. The marginal utility of each commodity is proportional to its price.
a. 1 only.
b. 2 only.
c. 1 and 2 only.
d. 2 and 3 only.
e. 1, 2, and 3.
27. A consumer buys only jellybeans and wrinkle remover and the more of any one he buys, the lower the
marginal utility of that good. In spending all his income, his marginal utility of a pound of jellybeans is 12
and his marginal utility of a jar of wrinkle remover is 15. The price of jellybeans is $8 per pound and the
price of wrinkle remover is $11 per jar. For maximum satisfaction, this consumer should
a. buy more wrinkle remover and fewer jellybeans.
b. by less wrinkle remover and more jellybeans.
c. buy more wrinkle remover and the same quantity of jellybeans.
d. buy the same quantity of wrinkle remover and more jellybeans.
e. remain where he is, since his present position is the best attainable one.
1. Patty buys only two brands of golf balls: “Jack Nickless” and “Olin 1.” The more of any one she buys, the
lower the marginal utility of that ball. In spending all her income, her marginal utility of a “Nickless” is 5
and her marginal utility of an “Olin 1” is 10. The price of a “Nickless” ball is $2 and the price of an “Olin 1”
is $3. Given this information, which of the statements is true?
1. In equilibrium, patty must give up three “Olin 1” balls for two “Nickless” balls.
2. Patty would be willing to give up two “Olin 1”: balls for one “Nickless” ball.
3. Patty could increase her satisfaction by trading “Nickless” for “Olin 1.”
a. 1 only.
b. 2 only.
c. 3 only.
d. 1 and 2 only.
e. 1 and 3 only.
2 Bo Dacious buys 10 classical albums and 15 tubes of suntan lotion along with quantities of other goods.
Suppose that the price of records rises by 90 cents per album and the price of suntan lotion falls by 60 cents
per tube. Other prices and Bo’s income remain unchanged. What will Bo do?
a. Buy more albums and less suntan lotion.
b. Buy fewer albums and more suntan lotion.
c. Buy the same number of albums and more suntan lotion.
d. Remain where she is since her present position is the best attainable one after prices change.
3. Suppose an individual spends all his income on only two goods, good X and good Y. Moreover, suppose
that you were asked to derive his price consumption curve for good Y. Which of the following would be
allowed to vary?
a. Money income.
b. The tastes of the consumer.
c. The price of good X.
d. The price good Y.
7. If a good is normal, then the demand curve for that good must be
a. downward sloping.
b. upward sloping.
c. perfectly elastic.
d. completely inelastic.
e. either (a) or (b); whether it is one or the other depends on the relative magnitudes of the income and
substitution effects.
8. If the demand curve for a good is downward sloping, then the good must be
a. normal.
b. inferior.
c. Giffen.
d. either (a) or (b).
e. either (b) or (c).
9. If the demand curve for a good is upward sloping, then which of the following statements must be true?
1. The good is inferior.
2. The substitution effect is in the opposite direction to the income effect.
3. The substitution effect overwhelms the income effect.
a. 1 only.
b. 2 only.
c. 1 and 2 only.
d. 2 and 3 only.
e. 1, 2, and 3.
10. When a good is an inferior good, the “non-compensated” demand curve will be
a. relatively more elastic than the compensated demand curve.
b. relatively more inelastic than the compensated demand curve.
c. equally elastic but with a different intercept than the compensated demand curve.
d. parallel to the compensated demand curve and to the right.
e. either more elastic or more inelastic depending upon the size of the income effect.
11. A normal good can be defined as one which consumers purchase more of as
a. prices fall.
b. prices rise.
c. incomes fall.
d. incomes increase.
e. the prices of other products increase.
14. The substitution effect of a price decrease for a good with a normal indifference curve pattern
a. is always inversely related to the price change.
b. measures the change in consumption of the good that is due to the consumer’s feeling of being richer.
c. is measured by the horizontal distance between the original and the new indifference curves.
d. Is sufficient information to plot an ordinary demand curve for the commodity being considered.
16. When the substitution effect of a lowered price is counteracted by the income effect, the good in question is
a. an inferior good.
b. a substitute good.
c. an independent good.
d. a normal good.
18. From the curve EF, we know that the demand curve for coffee is
a. elastic at high prices and inelastic at low prices.
b. inelastic at high prices and elastic at low prices.
c. elastic everywhere.
d. unit elastic everywhere.
20. The difference between a price decrease and an increase in income is that
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.
22. Some goods are not closely related to each other and are neither substitutes nor complements. For such
goods, the cross-price elasticity of demand would be
a. positive.
b. negative.
c. zero.
d. Cannot tell without more information.
23. The phenomenon of the backward-bending market supply curve for labor
a. reflects the policy of labor unions.
b. reflects the scarcity of high-priced, highly skilled labor.
c. results from workers’ preference for leisure over work.
d. results from the effect of the decrease in the cost of leisure as wage rates rise.
e. indicates an increasing desire for leisure as income rises.
24. If leisure is an inferior good, the individual’s supply curve for labor is
a. backward bending.
b. completely inelastic.
c. upward sloping.
d. perfectly elastic.
e. not necessarily any of the above.
25. If the income effect resulting from a change in the price of leisure is zero, the individual’s supply curve of
labor is
a. backward bending.
b. completely inelastic.
c. upward sloping.
d. perfectly elastic.
e. not necessarily any of the above.
1. In 1991, the price of gasoline fell significantly. At the new lower price, gasoline is
a. relatively more price elastic.
b. relatively more price inelastic.
c. unaffected in terms of elasticity.
d. unitarily elastic.
e. none of the above.
3. Suppose that the price elasticity of demand for maple syrup has been estimated at -2. If quantity demanded
increased by 10 percent, price must have changed by
a. 5 percent lower.
b. 5 percent higher.
c. 10 percent lower.
d. 10 percent higher.
e. cannot be determined from the given information.
8. The price elasticity of demand is the same thing as the negative of the
a. slope.
b. reciprocal of slope.
c. the first derivative of the demand function.
d. reciprocal of slope times the ratio of price to quantity.
e. all of the above.
10. If the demand curve for a good is downward sloping, then the good must be
a. normal.
b. inferior.
c. Giffen.
d. either (a) or (b).
e. either (b) or (c).
11. Three points on a demand curve can be derived from the price consumption curve drawn perpendicular to
the X-axis, as shown in the adjoining graph. From this graph, we can see that
a. the demand for X is unit elastic.
b. the demand for Y is unit elastic.
c. the demand for X is infinitely elastic.
d. the demand for Y is infinitely elastic.
e. the demand for X is completely inelastic.
12. Three points on a demand curve can be derived from the price consumption curve drawn parallel to the X-
axis, as shown in the adjoining graph. From this graph, we can see that
a. the demand for Y is unit elastic.
b. the demand for X is unit elastic.
c. the demand for Y is infinitely elastic.
d. the demand for X is infinitely elastic.
e. the demand for Y is completely inelastic.
15. If consumers spend $15 million a month on CDs, regardless of whether the price they pay goes up or down,
that implies that their price elasticity of demand for CDs is
a. 0.
b. 1.
c. infinite.
d. 15.
e. cannot be determined.
16. Which of the following will not be a determinant of the price elasticity of demand for a commodity?
a. The absence of substitute for the good.
b. The presence of substitutes for the good.
c. The importance of the commodity in consumers’’ budgets.
d. The length of time period to which the demand curve pertains.
e. The cost of producing the commodity.
17. In 1976, a frost in Brazil killed over 500 million coffee trees and damaged many more. A civil war in
Angola, a major supplier of coffee, cut back its crop. And, an earthquake in Guatemala disrupted the flow
of coffee. In spite of these calamities, these three producers reported an increase in export earnings. On the
basis of this information, which of the following must be true?
a. The demand for coffee is price elastic.
b. The supply of coffee is price elastic.
c. The demand for coffee is price inelastic.
d. The supply of coffee is price inelastic.
e. The demand for coffee is unit elastic.
20. The price elasticity of demand will increase with the length of the period to which the demand curve
pertains because
a. consumers’ incomes will increase.
b. the demand curve will shift outward.
c. all prices will increase over time.
d. consumers will be better able to find substitutes.
e. firms will be better able to produce the good for less.
23. Which of the following is likely to have a negative cross price elasticity of demand?
a. Aluminum foil and cellophane.
b. Jelly beans and licorice sticks.
c. Bethlehem steel and imported Japanese steel.
d. Big Macs and French fries.
e. Buggy whips and bug spray.
24. In a 1956 Supreme Court case, economists for E.I. DuPont discovered that the cross price elasticity between
its cellophane and the prices of similar wrapping materials was large and positive. This evidence suggested:
1. DuPont’s control of cellophane could not be construed as being monopolistic because the other goods
in question were strong substitutes and therefore in competition with each other.
2. The demand of cellophane was price elastic.
3. Cellophane was an inferior good.
a. 1 only.
b. 2 only.
c. 1 and 2 only.
d. 2 and 3 only.
e. 1, 2, and 3.
29. With Y on the vertical axis and X on the horizontal axis, if the price-consumption curve for X is upward
sloping to the right,
a. the price elasticity of demand for X is relatively elastic.
b. the price elasticity of demand for X is relatively inelastic.
c. X is an inferior good.
d. the price elasticity of demand for X is equal to -1.
30. With Y on the vertical axis and X on the horizontal axis, if the price-consumption curve for X is downward
sloping to the right,
a. the price elasticity of demand for X is relatively elastic.
b. the price elasticity of demand for X is relatively inelastic.
c. X is an inferior good.
d. the price elasticity of demand for X is equal to -1.
1. If 1 orchard, 7 workers, and 3 tons of fertilizer yield 1,000 bushels of peaches, while 1 orchard, 7 workers,
and 4 tons of fertilizer yield 1,300 bushels,
a. the average product of labor equals 1,150 bushels.
b. the marginal product of labor cannot be calculated.
c. the average product of fertilizer equals 1,150 bushels.
d. the marginal product of fertilizer cannot be calculated.
When answering the next five questions (2-6), refer to the following graph.
2. The marginal product of labor is rising with increased use of labor until
a. 10 workers are employed.
b. 20 workers are employed.
c. 30 workers are employed.
d. 40 workers are employed.
3. The average product of labor is falling with increased use of labor once
a. 10 workers are employed..
b. 20 workers are employed.
c. 30 workers are employed
d. 40 workers are employed.
10. In the presence of a diminishing marginal rate of technical substitution between labor and capital, output can
be kept unchanged only if
a. equal successive sacrifices of capital go hand in hand with ever smaller increases of labor.
b. equal successive sacrifices of capital go hand in hand with ever smaller sacrifices of labor.
c. equal successive increases in labor go hand in hand with ever smaller increases in capital.
d. qual successive increases in labor go hand in hand with ever smaller sacrifices of capital.
11. If the capital-labor ratio changes from 100 to 150, while the marginal rate of technical substitution between
capital and labor changes from 50 to 100, the elasticity of input substitution
a. cannot be calculated.
b. remains unchanged.
c. equals 2.
d. equals 0.5.
12. If a simultaneous and equal percentage decrease in the use of all physical inputs leads to a larger percentage
decrease in physical output, a firm’s production function is said to exhibit
a. decreasing returns to scale.
b. constant returns to scale.
c. increasing returns to scale.
d. diseconomies of scale.
19. A firm is employing 100 units of labor and 50 units of capital to produce 200 widgets. Labor costs $10 per unit
and capital $5 per unit. For the quantities of inputs employed, MPL = 2 and MPK = 5. In this situation, the firm
a. is producing the maximum output possible given the prices and relative productivities of the inputs.
b. could lower its production costs by using more labor and less capital.
c. could increase its output at no extra cost by using more capital and less labor.
d. should use more of both inputs in equal proportions.
20. Suppose a firm is using two inputs, labor and capital. What will happen if the price of labor falls?
a. The firm’s average cost curve will shift downward.
b. The firm’s marginal cost curve will shift downward.
c. To produce an unchanged output, the firm would use more labor.
d. All of the above.
2. When average total cost rises from $10 to $30 as total production rises from 100 to 300 units, average
variable cost
a. cannot be calculated.
b. equals $10.
c. equals $20.
d. equals $30.
When answering the next four questions (3-6), refer to the following graph.
When answering the next 3 questions (7-9), refer to the graph below:
7. Line B represents
a. marginal cost.
b. average variable cost.
c. average fixed cost.
d. average total cost.
8. The vertical difference, at any level of output, between lines B and C represents
a. marginal cost.
b. average variable cost.
c. average total cost.
d. average fixed cost.
10. At the point where a straight line from the origin is tangent to the variable-cost curve
a. marginal cost equals average total cost.
b. marginal cost equals average fixed cost.
c. marginal cost equals average variable cost.
d. average total cost is minimized.
11. If a profit-maximizing firm’s marginal product of labor equals 1 ton of output, while the marginal product of
capital equals 7 tons of output and the use of capital is priced at $14 per unit, then
a. the price of labor must be $2.
b. the price of labor must be $7.
c. the price of labor must be $14 as well.
d. none of the above is true.
14. If average total cost is 100 for a given output and marginal cost is 70, we then know that average fixed cost is
a. 30.
b. 170.
c. 70.
d. not possible to determine with the information given.
15. If average fixed cost is 40 and average variable cost is 80 for a given output, we then know that average total
cost is
a. 40.
b. 120.
c. 80.
d. not possible to determine with the information given.
16. The output where diminishing returns to production begin is also the output where
a. marginal cost is at a minimum.
b. average total cost is at a minimum.
c. average variable cots is at a minimum.
d. marginal and average cost intersect.
18. Which of the following statements about the relationship between marginal cost and average cost is correct?
a. When MC is falling, AC is falling.
b. AC equals MC and MC’s lowest point.
c. When MC exceeds AC, AC must be rising.
d. When AC exceeds MC, MC must be rising.
When answering the next 3 questions (2-4), refer to the graph below:
6. For a firm operating in a perfect market, its short-run supply is identical with the rising arm of
a. its marginal-cost curve.
b. its average-fixed-cost curve.
c. its average-total-cost curve.
d. none of the above.
9. The statement that marginal cost = marginal revenue leads to profit maximization of loss minimization is true
a. all the time.
b. only in the long run.
c. only if marginal cost is rising at the point of equality.
d. only if average total cost is falling at the point of equality.
10. In perfect competition, when economic profits exist in the short run, they are very tenuous because
a. costs will inevitably increase and eliminate profit.
b. price will fall because market supply will increase.
c. firms are driven to increase output in the short run to the point where average total cost will equal price.
d. firms are driven in the short run to reduce output until average total cost equals price.
12. If a firm is producing where its SMC = price and the LMC is less that LAC, then it would do better in the
long run by
a. increasing output with its existing plant until LMC equals price.
b. increasing plant size until LMC and SMC are identical and equal to price.
c. decreasing plant size until LAC, SAC, and price are equal.
d. doing nothing because it is already at the long-run profit maximizing point.
14. Assume that price is $10. The profit maximizing level of output for the firm is
a. 0A.
b. 0E.
c. 0F.
d. 0G.
15. At the profit maximizing level of output at a price of $10 the firm
a. is making economic profit.
b. is losing money.
c. is making zero economic profit.
d. none of the above.
18. Assume price is $10. The profit maximizing level of output for the firm is
a. 0A where marginal cost just covers AVC.
b. 0B where average profit per unit is the greatest.
c. 0C where marginal cost equals the $10 price.
d. 0K where average cost equals avenge revenue and the firm earns a normal rate of return.
24. In the short run, if price falls, the firm will respond by
a. shutting down.
b. equating average variable cost to marginal revenue.
c. reducing output along its marginal cost curve as long as marginal revenue exceeds average variable cost.
d. none of the above.
26. In a constant cost competitive industry if price rises above its long-run equilibrium level, which of the
following will not occur as the industry adjusts to a new LR equilibrium?
a. New firms will enter the industry.
b. Economic profit will be eliminated.
c. Input prices will rise.
d. Existing firms will increase production.
28. Along the long-run supply curve, all of the following can vary except
a. the level of profits.
b. the number of firms in the industry.
c. input prices.
d. the level of input usage.
1. If the initial demand and supply curves are D1 and S1 , equilibrium price and quantity are
a. OP2 and OQ3 .
b. OP1 and OQ2 .
c. OP2 and OQ1 .
d. OP3 and OQ2 .
3. If the initial demand and supply curves are D1 and S1 , and demand shifts to D2 ,
a. a permanent shortage of X will result.
b. a surplus of Q1 Q3 will occur.
c. a shortage will occur at any price above P3 .
d. a ceiling price of P2 would produce a shortage of Q1 Q3 .
6. If both supply and demand for a good increase at the same time, which of the following must also increase?
a. the equilibrium price
b. the use of substitutes
c. the equilibrium quantity
d. all of the above
7. “If at the initial price there is excess demand, the price will rise. The increase in price has two consequences:
It shifts the demand curve down since people buy less at a higher price; and it shifts the supply curve up
because producers find it profitable to produce more output at a higher price. Price will continue to adjust
until there is no excess demand.”
Which of the following is true about this statement?
a. The quotation is correct.
b. The quotation confuses excess supply with excess demand.
c. The quotation confuses movements along curves with shifts in curves.
d. The quotation confuses short-run adjustments with long-run adjustments.
8. Suppose a vaccine for the common cold is discovered. Although the government begins producing the
vaccine in as large a volume as possible, there is not enough vaccine available to meet demand.
Consequently, the government must also set up an allocation scheme to control the vaccine’s distribution.
Which of the following is true about the price of the vaccine?
a. It was above equilibrium.
b. It was below equilibrium.
c. It was at equilibrium.
d. Nothing can be determined from the information given.
When answering questions 2-6, refer to the following graph about a monopoly firm:
9. In the figure below, for the demand curve shown, marginal revenue for the price reduction from a to b can be
measured by
a. adding x + y.
b. subtracting x from y.
c. measuring only x.
d. subtracting y from x.
e. none of the above.
10. If the LMC curve is below the MR curve at the point of output for a monopolist that is making profit, then the
firm has
a. too large a plant size.
b. too small a plant size.
c. insufficient knowledge about plant size until he knows his short-run marginal cost.
d. insufficient knowledge about plant size until he knows his demand curve.
11. If a monopolist’s demand curve is downward sloping and linear, then its total revenue curve must be
a. identical to the demand curve.
b. a ray from the origin with a slope equal to price.
c. negatively sloped with twice the slope of the demand curve.
d. a rising function of output that increases at an increasing rate.
e. a rising function of output that increases at a decreasing rate, reaches a maximum, then falls.
13. Suppose that an excise tax is imposed on the monopolist’s product. If the monopolist’s marginal cost is
horizontal in the relevant range, which of the following statements must be true?
a. The price will increase by an amount less than the tax.
b. The price will increase by an amount equal to the tax.
c. The price will increase by an amount greater than the tax.
d. The price may either increase or decrease.
e. An excise tax will have no effect on the price-output decision of a monopolist.
15. Since entry is barred in a monopoly, in the long run the monopolist will
a. do nothing since entry will not force an adjustment.
b. adjust output but leave the price at the short run profit maximizing level.
c. adjust price but leave the output at the short run profit maximizing level.
d. adjust both price and output levels to reflect long run scale of plant adjustments.
e. set price equal to long run average costs.
17. If a monopolist had no costs, the best possible price would be where demand is
a. infinitely elastic.
b. relatively (but not perfectly) elastic.
c. unit elastic.
d. relatively (but not completely) inelastic.
e. completely inelastic.
18. If a monopolist has only fixed costs and chooses that output at which marginal cost equals price, it will
a. earn positive economic profits.
b. earn zero economic profits.
c. incur a loss equal to its variable costs.
d. incur a loss equal to its fixed costs.
e. cannot tell from the information given.
23. If the product demand curve and the industry’s cost curves were the same whether the industry operated
under conditions of perfect competition or monopoly, what could be said about the price and output under
monopoly vis-a-vis the competitive price and output?
a. price would be the same; output would be lower under monopoly.
b. Output would be the same; price would be higher under monopoly.
c. Price would be the same; output would be lower under perfect competition.
d. Price would be higher and output would be lower under monopoly.
e. Both price and output would be lower under perfect competition.
24. The conditions necessary for a firm to be able to price discriminate include
a. segmentable markets.
b. differences in price elasticity of demand among the segments.
c. the inability of customers to transfer products.
d. all of the above.
e. none of the above.
Monopoly – Answers
1. a 2. b 3. c 4. a 5. a 6. b 7. d 8. b 9. d 10. b
11. e 12. b 13. a 14. b 15. d 16. e 17. c 18. d 19. b 20. e
21. c 22. a 23. d 24. d 25. b 26. c
3. The kinked demand curve faced by an oligopolist is based on the assumption that
a. rivals will follow a price increase but not a price cut.
b. rivals will follow a price decrease but not a price increase.
c. rivals will follow both a price decrease and a price increase.
d. rivals will ignore both a price increase and a price decrease.
6. Product differentiation gives each seller a small amount of monopoly power because
a. little or nothing can be said concerning the social desirability or undesirability of product differentiation.
b. there can be little substitution between product groups.
c. the products of other firms are not perfect substitutes.
d. the presence of excess capacity greatly reduces monopoly power.
e. the monopolistic competitor faces a downward sloping demand curve.
7. A monopolistically competitive firm differs from a perfectly competitive firm in that, unlike the perfectly
competitive firm, it
a. faces a downward sloping demand curve.
b. can change the characteristics of its product.
c. can vary the price of its product.
d. tends to operate with excess capacity.
e. all of the above.
9. In the neighborhood of the long-run equilibrium of a monopolistically competitive firm, average cost will be
a. decreasing.
b. constant.
c. increasing.
d. at a minimum.
e. either (a) or (c).
12. The firm under monopolistic competition is likely to produce less and set a higher price than under perfect
competition because
a. the firm faces decreasing returns to scale.
b. the firm faces increasing costs.
c. the firm must incur selling expenses, including advertising.
d. the firm operates where marginal revenue equals marginal cost.
e. the firm faces a downward sloping demand curve.
When answering questions 20-22 refer to the following graph about a monopolistically competitive firm:
1. Suppose a competitive firm produces 100 units of X for a price of $10 a unit. The firm is employing labor
and capital such that the marginal physical product of labor and capital is 20 and 5 and the prices paid to
labor and capital are $60 and $40 respectively. How would you characterize the firm?
a. The firm is in long-run equilibrium.
b. The firm is earning excess profits.
c. The firm should expand production.
d. The firm should contract production.
2. The competitive firm’s marginal value product curve of labor is the firm’s input demand curve for labor if
a. the price of labor is held constant.
b. the prices of other inputs are held constant.
c. the labor is used in fixed proportions with other inputs.
d. the quantities of other inputs are held constant.
4. The competitive firm’s VMP curve for an input slopes downward because
a. the productivity of complementary inputs declines as more are used.
b. the law of diminishing marginal returns applies.
c. the price of the output falls as output increases.
d. none of the above.
5. The demand curve for labor for a monopolist when other inputs are fixed is equal to its
a. marginal value product curve.
b. marginal revenue product curve.
c. horizontal summation of the firm’s demand curve at different output prices.
d. marginal physical product curve.
6. Because a monopoly hires workers up to the point where their marginal revenue product equals the wage
rate, the monopoly will
a. pay less than the going wage rate.
b. pay a wage equal to the value of the marginal product of labor.
c. pay less than the value of the marginal product of labor.
d. pay workers what they are worth to society.
7. A monopsony is
a. the sole supplier of an input.
b. the sole supplier of an output.
c. the sole buyer of some type of input.
d. a unionized industry.
8. Given the cost and demand functions assumed in the diagram, the firm would hire
a. 0Q1 .
b. 0Q2 .
c. 0Q3 .
d. 0Q4 .
10. If a union organized labor in the industry and got the firm to pay a wage of w2 , the firm wuld employ
a. 0Q1 .
b. 0Q2 .
c. 0Q3 .
d. 0Q4 .
11. If the firm and union agreed to a wage of w1 , the firm would employ
a. 0Q1 .
b. 0Q2 .
c. 0Q3 .
d. 0Q4 .
14. The profit-maximizing, perfectly competitive firm will employ each input in an amount such that
a. the marginal product of each input is equal.
b. the marginal product of each input is zero.
c. the input price equals the input’s marginal product divided by the product price.
d. the marginal product of the input equals the input price multiplied by the firm’s marginal revenue.
e. the input price equals the input’s marginal product multiplied by the product price.
15. Sam’s Furniture Manufacturing Company is producing rocking chairs and wishes to expand. It is currently
selling these chairs at $45 wholesale. The marginal product of adding another worker is 2 per week. What is
the value of marginal product of adding another worker?
a. $22.50
b. $45
c. $90
d. $2
e. Cannot be determined from the information provided.
16. If an additional worker costs you $15 per hour, and that person can add 25 units of output to the firm, you
should hire that person as long as
a. 25 remains above $15.
b. 25/$15 is greater than zero.
c. $15/25 is great than zero.
d. the value of the marginal product is above $15.
e. None of the above.
17. Which of the following would cause the demand curve for an input to shift?
a. A change in technology.
b. A change in demand for the product being produced.
c. An increase in the number of firms in the industry.
d. All of the above.
18. When a firm has several variable inputs, the demand for any one of them is
a. the value of marginal product curve.
b. composed of two points along a shifting VMP curve.
c. undefined for a single input.
d. the vertical summation of the demand for all inputs.
e. None of the above.
20. The Great Pumpkin, in an attempt to make the pumpkin pickers better off, legislates that pumpkin pickers
must be paid a wage no less than $15 per day. If our profit-maximizing farmer complies, which of the
following will be correct?
1. Each of the pumpkin pickers our farmer had previously hired will become better off.
2. The value of the average product of labor will rise.
3. The quantity of pumpkin output will fall.
a. 1 only.
b. 1 and 2 only.
c. 2 and 3 only.
d. 1 and 3 only.
e. 1,2, and 3.
When answering questions 21-24, refer to the graph below about a labor monopsony facing competitive sellers of
labor:
22. If the monopsony and a labor union now negotiated a wage of 0B,
a. employment would rise.
b. unemployment would appear.
c. the entire portion of the marginal-outlay-on-labor curve drawn in the graph would become invalid.
d. all of the above would occur.
23. Furthermore, if the monopsony and a labor union negotiated a wage of 0B,
a. monopsonistic exploitation would continue but would decrease.
b. labor’s marginal value product would be reduced along the line shown.
c. unemployment would actually fall.
d. all of the above would occur.
25. The imposition by government of a minimum wage (above the existing wage level) will
a. reduce employment in a competitive labor market.
b. reduce, raise, or leave unchanged employment in a monopsonistic labor market.
c. result in (a) and (b).
d. reduce employment in any labor market.