Chapter Three Microeconomics: Competitive Product Markets and Firm Decisions Part A: Theory and Public Policy Applications

: 1. The market process is a) made up of people, consumers and entrepreneurs attempting to buy and sell on the best terms possible. b) an ongoing information and exchange system. c) self-correcting in that buyers and sellers routinely revise their plans on the basis of their trading experiences. d) all of the above. 2. Competition a) does not occur between buyers and sellers, but does occur among buyers and among sellers. b) is the process by which market participants, in pursuing their own interests, attempt to outdo, outprice, outproduce, and outmaneuver each other. c) stimulates the exchange of information. d) can be described by all of the above. 3. Which of the following is NOT a characteristic of the type of competitive market captured by supply and demand? a) b) c) d) Many sellers produce an identical product. Firms can increase their prices by restricting their production. Firms have freedom of entry into the market. No single firm can influence the market price.

4. The law of demand states there is a) b) c) d) a direct relationship between the price of a good and the quantity demanded. a direct relationship between the price of a good and the quantity supplied. an inverse relationship between the price and the quantity demanded. an inverse relationship between the price and the quantity supplied.

5. The demand curve a) is downward sloping because of the substitution and income effects associated with a price change.
Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010

2 b) shifts to the right if there is a decrease in demand and shifts to the left if there is an increase in demand. c) illustrates the various quantities supplied at various prices. d) can be described by all of the above. 6. The substitution effect a) explains why the supply curve is upward sloping. b) indicates that people will buy more of a good as its price rises (and the prices of all other goods stay the same) because the purchasing power of consumer incomes rise when the price of a good falls. c) indicates that people will buy more of a good as its price falls (and the prices of all other goods stay the same) because the good becomes relatively cheaper compared to other goods. d) explains why the demand curve shifts to the right as the price falls. 7. According to the law of demand, an increase in the price of a good will a) b) c) d) increase the quantity demanded. decrease the quantity demanded. increase demand. decrease demand.

8. Movement down along a demand curve could be caused by a) b) c) d) a decrease in the price. an increase in consumer's desire or taste for the good. an increase in the price of a substitute good. a decrease in consumer incomes.

9. Which of the following will most likely shift the demand curve to the left? a) b) c) d) An increase in the price of a complementary good An expected increase in the future price of the good An increase in consumers' incomes and the product is a "normal" good An increase in the number of buyers

10. Which of the following will cause an increase in the demand for a product? a) b) c) d) An increase in the number of producers An increase in the number of consumers A decrease in the price of a substitute product Consumer expectations that the product will be more abundant in the near future

11. The supply curve is

Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010

3 a) downward sloping because of the substitution and income effects associated with a price change. b) downward sloping because a lower price will result in an increase in the quantity demanded. c) upward sloping because of the substitution and income effects on consumers associated with a price change. d) upward sloping because higher marginal (extra) costs result from increased production. 12. Which of the following will cause an increase in the supply of a product? a) b) c) d) An increase in wages that increases costs of production. An increase in consumer incomes. An advancement in technology that reduces costs of production. An increase in the price of the good.

13. If there is an increase in consumer desire or taste for a good, then the demand for the product will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

14. If there is an increase in the number of buyers, then the demand for the product will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

15. If there is an decrease in the price of a good A, which is a substitute for good B, then the demand for good B will a) b) c) d) increase. decrease. remain the same (Unknown; not enough information to specify among these options.)

16. If there is a decrease in the price of good A, which is a complement for good B, then the demand for good B will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.)

Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010

If there is an expected decrease in the future price of a good. then the supply of good A can be expected to a) b) c) d) increase. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . not enough information to specify among these options. If there is an increase in market wage rates of workers producing good A. then the supply of good A can be expected to a) b) c) d) increase decrease remain the same (Unknown.4 17.) 19. not enough information to specify among these options.) 21. a) a shortage exists and the price will decrease in the near future because buyers will competitively bid down the price. (Unknown. d) a surplus exists and the price will increase in the near future because buyers will competitively bid up the price. to decrease. decrease. (Unknown. (Unknown. to remain the same. not enough information to specify among these options. If there is an increase in profitability of producing goods other than good A. c) a surplus exists and the price will decrease in the near future because sellers will competitively bid down the price. then the near-term demand for the good will a) b) c) d) increase. remain the same. b) a shortage exists and the price will increase in the near future because sellers will competitively bid up the price. remain the same. decrease. If there is an increase in the productivity of producing good A. If quantity supplied exceeds quantity demanded. not enough information to specify among these options. Use the graph below to answer the next four questions.) 20. then the supply of good A can be expected a) b) c) d) to increase.) 18.

shortage will lead to a fall in price. (Unknown. remain the same. shortage will lead to a rise in price. In the graph above. not enough information to say. if the price is $11 and no change occurs in market forces. if the price is $8. 23.5 22. surplus will lead to a rise in price. In the graph above. the price will a) b) c) d) increase. 24. the resulting a) b) c) d) surplus will lead to a fall in price. In the graph above.) Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . shortage will lead to a rise in price. if the price is $16. decrease. the resulting a) b) c) d) surplus will lead to a fall in price. shortage will lead to a fall in price. surplus will lead to a rise in price.

market efficiency. decrease. (Unknown. Price will increase. what will happen in the market? a) b) c) d) Demand will fall. market surplus. 27. c) remain the same. If there is an increase in productivity of producing good A at the same time that there is an increase in consumers' taste for the good.If there is an increase in productivity of producing good A at the same time there is an increase in consumers' taste for the good. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . 28. then the quantity of the good bought and sold in the market will a) increase. d) don't know (not enough information to specify one of the other options) 29.6 25. If demand increases for a product. b) the amount bought and sold to rise. In the above graph. d) all of the above. b) decrease. Supply will fall.) 30. this will cause a) the price of the product to rise. Consider the market for some item of clothing. remains the same. c) a temporary shortage of the product that will be eliminated over time as buyers competitively bid up the price. then the price of the good in the market will a) b) c) d) increase. not enough information to specify among these options. The equilibrium quantity will fall. If this type of clothing suddenly becomes more fashionable. market equilibrium. the efficient (welfare-maximum) output level is a) b) c) d) 100 150 225 350 26. An effective price floor will lead to a a) b) c) d) market shortage.

33. we would most likely expect a) b) c) d) the long-run equilibrium price to be lower than the short-run equilibrium price. That which must be given up in order to get something else is called Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . Suppose new genetic engineering results in oranges becoming less susceptible to damage from freezing temperatures. the long-run equilibrium price to be equal to the short-run equilibrium price. The equilibrium price will increase and the equilibrium quantity will increase. b) The outcome of competition will not be efficient to the extent that production costs are imposed on people who do not consume a product. the long-run equilibrium price to be greater than the short-run equilibrium price. market surplus. 34. The equilibrium price will increase and the equilibrium quantity will decrease. What do you expect to happen to the market price and quantity of apples? a) b) c) d) The equilibrium price will decrease and the equilibrium quantity will decrease. Yesterday's newspaper reports results of a study indicating that people who eat lots of apples can expect a significant increase in life expectancy. The equilibrium price will decrease and the equilibrium quantity will increase. The equilibrium price will decrease and the equilibrium quantity will increase. market efficiency. An effective price ceiling will lead to a a) b) c) d) market shortage. Which of the following are shortcomings of free competitive markets? a) Competition sometimes leads to product proliferation. This innovation is expected to save orange growers $1 billion a year in crop losses. d) All of the above. c) Competition can promote socially undesirable goods or services. The equilibrium price will increase and the equilibrium quantity will decrease. what will happen to the equilibrium price and quantity of oranges? a) b) c) d) The equilibrium price will decrease and the equilibrium quantity will decrease. If this technology becomes widely used. e) None of the above 36. The equilibrium price will increase and the equilibrium quantity will increase. If economies of scale are experienced as the market for a good grows. market equilibrium.7 31. 32. 35. a larger number of smaller firms operating within the industry.

) 41. decrease.8 a) b) c) d) an opportunity cost. If the long-run increase in market supply is greater than the long-run increase in market demand. (Unknown.) 40. If the long-run increase in market demand is greater than the long-run increase in market supply. (Unknown. 42. the quantity produced in competitive markets will a) b) c) d) increase. a variable cost. then in the long run. If the long-run increase in market demand is greater than the long-run increase in market supply. the competitive price will a) b) c) d) increase. remain the same. d) Neither a nor b. b) Queues enable firms to lower their costs and prices by more than queues raise the opportunity costs incurred by customers standing in line. a fixed cost. not enough information to specify among these options. not enough information to specify among these options. Which of the following arguments can explain queues in competitive markets? a) Queues are observed in markets because firms make mistakes in stocking goods. a sunk cost. remain the same. If the long-run increase in market supply is greater than the long-run increase in market demand. c) Both a and b.) 39. Which of the following statements about queues is correct? Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . decrease. not enough information to specify among these options. then in the long run. then in the long run. (Unknown. decrease. the quantity produced in competitive markets will a) b) c) d) increase. not enough information to specify among these options. decrease.) 38. then in the long run. remain the same. remain the same. the competitive price will a) b) c) d) increase. 37. (Unknown.

b) Queues are expected in competitive markets and have an optimum length. remains the same. (Unknown.) 47. (Unknown. quantity a) b) c) d) increases. not enough information to specify among these options. When cost of production decreases. When demand decreases. Given the following changes (and only those changes) in market conditions. not enough information to specify among these options. When demand decreases. price a) b) c) d) increases. remains the same. remains the same. remains the same. decreases. c) People's opportunity costs will have nothing to do with the length of queues since queues are the result of a firm’s stocking and pricing mistakes. decreases. What happens to price and quantity: 43. d) An increase in people's opportunity costs in a given market will leave the length of queues unaffected. Assume competitive markets and normal slopes for supply and demand. decreases.) 44. price a) b) c) d) increases. (Unknown.) 45.9 a) Queues indicate inefficiency in markets and are not expected even in perfectly competitive markets. When price of a substitute good B increases the price of substitute good A will a) increase. not enough information to specify among these options. (Unknown. decreases. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . not enough information to specify among these options. predict the directional change in equilibrium price and quantity in the next ten problems. When cost of production decreases.) 46. quantity a) b) c) d) increases.

(Unknown. remain the same. decrease. not enough information to specify among these options. (Unknown. When Hurricane Katrina knocks out several oil refineries along the Gulf Coast. not enough information to specify among these options. decrease. d) (Unknown. remains the same. the quantity of complement good A will a) b) c) d) increase.) 49. not enough information to specify among these options.) 48. not enough information to specify among these options. When the price of a complement good B increases. the quantity of substitute good A will a) b) c) d) increase.) 51. remain the same. When given the conditions in question 52.) 53. remain the same. When the price of a substitute good B increases.) 52. (Unknown. the price of gasoline-powered motor scooters will Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 .) 50. the quantity of gasoline can be expected to a) b) c) d) increase.10 b) decrease. the price of complement good A will a) b) c) d) increase. remain the same. the price of gasoline can be expected to a) b) c) d) increase. decrease. decrease. When the price of a complement good B increases. not enough information to specify among these options. (Unknown. When Hurricane Katrina knocks out several oil refineries along the Gulf Coast. not enough information to specify among these options. decrease. (Unknown. c) remain the same.

) 58. which is a substitute for good B. which is a substitute for good B.) 59. (Unknown.) 56. not enough information to specify among these options. (Unknown. will a) b) c) d) increase. (Unknown. decrease. When an excise tax is imposed on the producers of good B. remain the same. not enough information to specify among these options.) 55. the quantity of good B will a) b) c) d) increase. When given the conditions in question 52 above.11 a) b) c) d) increase. the price of good A will a) increase. remain the same. When an excise tax is imposed on the producers of good B. decrease. (Unknown. When an excise tax is imposed on the producers of good B. the price of good B will a) b) c) d) increase. decrease. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . not enough information to specify among these options. not enough information to specify among these options. not enough information to specify among these options. not enough information to specify among these options. When a subsidy is granted to the buyers of good A. then the price of good A. When an excise tax is imposed on the producers of good B. (Unknown. (Unknown.) 57.) 54. then the quantity of good A. the quantity of gasoline-powered motor scooters will a) b) c) d) increase. decrease. decrease. will a) b) c) d) increase. decrease. remain the same. remain the same. remains the same. remain the same.

remain the same. remain the same. not enough information to specify among these options. price will a) b) c) d) increase. When a subsidy is granted to the producers of substitute good A. (Unknown. When a subsidy is granted to the buyers of good A.) 60. not enough information to specify among these options. the price good B will a) b) c) d) increase. decrease. When a subsidy is granted to the producers of substitute good A. quantity will a) b) c) d) increase.When demand increases.) Given the following changes (and only these changes) in market conditions. not enough information to specify among these options. (Unknown.. decrease. not enough information to specify among these options. decrease. not enough information to specify among these options. predict the directional change in equilibrium price and quantity in the next ten questions. remain the same. 63. c) remain the same.12 b) decrease.) 62. (Unknown. decrease. (Unknown. not enough information to specify among these options. remain the same. When cost of production increases in highly competitive markets.) 61. Assume competitive markets and normal slopes for supply and demand. d) (Unknown.) 65. decrease. the quantity of good B will a) b) c) d) increase. the quantity of Good A will a) b) c) d) increase. remain the same.When demand increases. (Unknown.) 64. price will Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 .

decrease.) 70. price of the good will a) increase. which is a complement to good A.decreases in highly competitive markets.13 a) b) c) d) increase. When cost of production increases in highly competitive markets. Remains the same. which is a complement to good A.) 66. not enough information to specify among these options. When the price of a good B. quantity will a) b) c) d) increase.) 68. (Unknown. decrease. When the price of a substitute good B decreases. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . remain the same. not enough information to specify among these options. the price of good A will a) b) c) d) increase. remain the same. not enough information to specify among these options. (Unknown. remain the same. decrease. decrease.) 67.) 69. the quantity of good A will a) b) c) d) increase. (Unknown. decrease.. decrease. (Unknown. When the price of a substitute good B decreases. (Unknown. not enough information to specify among these options. (Unknown. not enough information to specify among these options. Remain the same. the price of good A will a) b) c) d) increase. decreases. not enough information to specify among these options. When the factories of several major suppliers of a good are blown up.) 71. When the price of a good B. remain the same. the quantity of good A will a) b) c) d) increase.

) 75. (Unknown. When a tariff is imposed on an import collected from the importer. not enough information to specify among these options.) 74. (Unknown.) 73.14 b) decrease. c) remain the same. not enough information to specify among these options. the price of the domestic good that competes with the import in the domestic market will a) b) c) d) increase. the quantity of the domestic good that competes with the import in the domestic market will a) b) c) d) increase. b) decrease. When a tariff is imposed on the import. not enough information to specify among these options.) 77. remain the same. decrease. decrease. remain the same. the price of the imported good will a) b) c) d) increase. not enough information to specify among these options. remain the same. When the factories of several major suppliers of a good are blown up. (Unknown. the quantity of the imported good will a) b) c) d) increase. (Unknown. d) (Unknown. as above. When a tariff is imposed on an import collected from the importer. then the price of the domestic good will Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . When a subsidy is granted to domestic producers of a good that competes with an imported good. c) remain the same. not enough information to specify among these options.) 72. remain the same.) 76. (Unknown. as above. decrease. decrease. not enough information to specify among these options. When a tariff is imposed on the import. quantity of the good will a) increase.

decrease. decrease. then the quantity of the domestic good will a) b) c) d) increase. (Unknown.) 81.) 82. the quantity of the good in foreign markets will a) b) c) d) increase.) 79. then the price of the good in foreign markets will a) b) c) d) increase. Perfect competition is a market structure in which Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . not enough information to specify among these options. remain the same. (Unknown. (Unknown. not enough information to specify among these options. remain the same. When supply increases while the demand decreases (the amount of change in each curve is unknown). (Unknown. When a subsidy is granted to domestic producers of a good that competes with an imported good. decrease. not enough information to specify among these options. remain the same. (Unknown. When a subsidy is granted to domestic producers of a good that competes with an imported good. remain the same. When a subsidy is granted to domestic producers of a good that competes with an imported good.) 83.15 a) b) c) d) increase. When supply increases while the demand decreases (the amount of change in each curve is unknown). not enough information to specify among these options. not enough information to specify among these options. remain the same. (Unknown. not enough information to specify among these options.) 80. then price will a) b) c) d) increase. remain the same.) 78. decrease. then quantity will a) b) c) d) increase. decrease. decrease.

) 89. individual producers and consumers have no control over the market price. the supply of the good will a) b) c) d) increase. all of the above. 84. remains the same. not enough information to specify among these options. (Unknown.) 86. the marginal benefit of the last unit sold equals the marginal cost of production. the price is set by government. output has been maximized given supply and demand constraints. If the price of a good goes down. the output level is inefficient. not enough information to specify among these options. decrease. then the demand a) b) c) d) increases.) 87. remain the same. If the price of a good goes up. not enough information to specify among these options.) 88. all gains from trade have been exploited. the supply of the good will a) b) c) d) increase. If the price of a good goes down. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . If the price of a good goes down. (Unknown. A product improvement will be made a) whenever the additional value of the improvement is greater than the additional cost of the improvement. decreases. remain the same. (Unknown. decreases. (Unknown. remains the same. Markets are said to be efficient when a) b) c) d) e) the market price equals the marginal cost of producing the last unit sold. then the demand a) b) c) d) increases. decrease. 85.16 a) b) c) d) the product is perfect. not enough information to specify among these options.

) 92. If the price of the product workers produce goes up. 94. d) better off because the decrease in the price producers receive will exceed the increase in their added cost of production. If a product improvement adds more to consumer value than it adds to production costs. b) better off because the increase in the added value consumers receive will be greater than the increase in the price they pay. consumers will be a) worse off because of the price increase consumers will pay. the demand for labor will a) increase. (Unknown. c) worse off because the increase in producers’ cost will be greater than the higher price they receive. d) only when the improvement comes at no cost. c) worse off because the increase in the price consumers pay is greater than the added cost of production.) 91. in a competitive market. remain the same. not enough information to specify among these options. in a competitive market. (Unknown. d) better off because the decrease in the price consumers pay will exceed the increase in the added cost of production. 93. decrease. If a product improvement adds more to consumer value than it adds to production costs. 90. not enough information to specify among these options. c) whenever the improvement has value. the price of the good in a competitive market will a) b) c) d) increase. If a product improvement adds more to consumer value than it adds to production costs. b) better off because the increase in the price producers receive will be greater than the increase in their added costs. If a product improvement adds more to consumer value than it adds to production costs. decrease. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . the quantity of the good produced and sold in a competitive market will a) b) c) d) increase. producers will be a) worse off because of the cost increase producers will incur.17 b) whenever the total value of the improved product is greater than the total cost of the improved product. remain the same.

remain the same. decrease. If worker productivity goes up. decrease.) 96. remain the same.) Assume competitive labor markets and normal shapes for the demand for and supply of labor. predict the directional change to the equilibrium wage rate and quantity of labor hired. the demand for labor will a) b) c) d) increase. If workers’ opportunity costs rise. The demand for labor increases. decrease. If workers’ opportunity costs rise. remain the same. _________ 102. (Unknown.) 97. d) (Unknown. c) remain the same. 100.) 95. not enough information to specify among these options. not enough information to specify among these options. (Unknown. _________ _________ Quantity of labor _________ _________ _________ _________ 101. The supply of labor decreases. the demand for labor will a) b) c) d) increase. 99.18 b) decrease. the supply of labor will a) b) c) d) increase. The opportunity cost of labor decreases. Given the specified change in market conditions in each question (and no other change for each question). The price of the product produced _________ Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 .) Wage rate 98. Use the following four alternatives: a) b) c) d) Increases Decreases Remains the same (Not enough information to determine. not enough information to specify among these options. (Unknown. not enough information to specify among these options. The productivity of labor increases.

If there is a shortage in a competitive labor market. the quantity of labor supplied will exceed the quantity of labor demanded. decrease. 103. The working environment improves at a cost to employers that is less than the value of the improved environment to workers _________ _________ _________ _________ 104. c) No one individual buyer has the ability to control the price. a) b) c) d) the quantity of labor demanded will exceed the quantity of labor supplied. the wage rate will a) b) c) d) increase. (Not enough information to determine) 108. the quantity of labor supplied will equal the quantity of labor demanded. If the wage rate is held above the equilibrium wage rate. the wage rate will a) b) c) d) increase. d) No one individual seller has the ability to control the price. 107. e) All of the above. If there is a surplus in a competitive labor market. c) Eliminate any shortage. the quantity of labor supplied and demanded will be unaffected. remain the same. decrease. 106. b) Result in a production level exactly desired by consumers. the quantity of labor supplied and demanded will be unaffected. the quantity of labor supplied will equal the quantity of labor demanded. (Not enough information to determine). 105. 109. the quantity of labor supplied will exceed the quantity of labor demanded. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . If a competitive market process exists. b) The amount buyers wish to purchase will eventually match the amount sellers wish to produce and make available in the market. a) b) c) d) the quantity of labor demanded will exceed the quantity of labor supplied. this means a) There are both buyers and sellers of an item. remain the same. If the wage rate is held below the equilibrium wage rate. A competitive market will a) Achieve equilibrium.19 increases..

c) Subtracting the demand for the product from the supply of the product. d) Consumers would be willing and able to pay less to receive the same quantity. e) Subtracting supply from demand at each price. c) The product has become more scarce and consumers therefore want it more. 111. A market is in equilibrium when a) Changes in demand are equal to changes in supply. d) Demand will increase. b) Price changes are always in the same direction as demand changes. 114. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . 112. The market demand curve is determined by a) Adding individual demand curves. and a shortage will occur. b) The income and substitution effects will cause the price to rise. The law of demand illustrates that a) As price decreases. and a shortage will occur. e) The price has decreased and consumers will therefore purchase more of the product. c) A change in price causes a change in supply. he or she means that a) Consumers are willing and able to purchase more at any given price. demand increases. quantity demanded increases. The law of supply illustrates that a) As price increases. b) The amount people wish to purchase is equal to the amount producers wish to produce. quantity supplied increases. c) As price increases. 113. c) Quantity demanded exceeds quantity supplied. quantity demanded increases. If price is below equilibrium a) Demand is too low for equilibrium. e) Consumer preferences are equal to production costs. b) Demand must decrease to cause an increase in quantity supplied. 110. c) The determinants of supply are equal to the determinants of demand. e) Quantity supplied exceeds quantity demanded. d) Adding the demand for the product and the supply of the product.20 d) Eliminate any surplus. b) Adding the quantity supplied by all producers at various prices. b) The demand curve has shifted to the left. quantity supplied decreases. d) As price decreases. When an economist says the demand for a product has increased. d) Whatever happens to price happens to quantity supplied. e) As price decreases. e) Price changes are always in the same direction as supply changes. e) Be characterized by all of the above. d) Equilibrium price equals quantity supplied.

b) The price is too high for equilibrium. b) The higher the price the smaller the quantity that will be sold. b) A decrease in the cost of producing the product. c) There is an inverse relationship between price and quantity demanded. e) Demand was too high for producers to make a profit. 121. d) The price is too low for equilibrium. 120. Which of the following may cause a change in demand for a product? a) A change in the profitability of producing another product. c) Price and quantity supplied are inversely related. c) A greater quantity will be produced at any price. e) As price decreases. e) National income. When an economist says the supply of a product has decreased. demand increases. b) A change in production costs.21 115. e) All of the above. b) The change in demand. d) A change in the price of the product. b) As price increases. d) A change in productivity due to a change in technology e) A change in consumer incomes. 119. 118. 117. Which of the following will not cause the demand for ice cream to change? a) A change in population size b) A change in the price of ice cream Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . c) A change in consumer incomes. The income effect measures the effect a price change has on a) The purchasing power of consumer incomes. c) The relative price of other substitutable products. he or she means that a) A smaller quantity will be produced at any price. The law of demand states that a) There is a direct (positive) relationship between price and quantity supplied. d) There is an inverse relationship between price and quantity supplied. Which of the following is not a determinant of supply? a) A change in the price of resources utilized in production. quantity demanded increases. c) A change in the profitability of producing other goods. The law of supply states that a) Price and quantity supplied are positively (directly) related. 116. e) None of the above. d) The inflation rate. d) Price and quantity demanded are inversely related.

c) Is below the equilibrium price. then the product is a) An inferior good. c) A normal good. b) Demand to rise. d) A complementary good. e) None of the above. If the price of product X falls and this causes the demand for product Y to shift to the right then we can conclude a) X and Y are complements. d) The demand for resources (inputs) to rise.22 c) A change in the seasons d) A change in consumer preferences e) A change in consumer incomes 122. c) Demand rises and supply falls. Consider the market for an inferior product. 125. b) Will cause a shift in demand. c) Profits to firm to rise. c) Movement down along the demand curve. If the demand for a product varies inversely with changes in consumer incomes. If consumer incomes rise then a) The equilibrium price and quantity falls. A price at which quantity demanded equals quantity supplied a) Could not possibly exist in the short run. d) X is an inferior good and Y is a normal good. 126. e) All of the above. If the price of a product decreases. A successful advertising campaign will most likely cause a) The equilibrium price and quantity to rise. b) The demand curve to shift to the left. b) The equilibrium price and quantity rises. d) Movement up along the demand curve. 124. e) X and Y are normal goods. d) Is an equilibrium price. c) X and Y are substitutes. e) Is above the equilibrium price. b) X and Y are inferior goods. this causes a) Demand to increase. b) A substitute good. 127. 123. d) The equilibrium price rises and the equilibrium quantity falls. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . e) None of the above.

Assume the supply of sirloin steak is upward sloping. b) There is no pressure upon price to rise or fall. b) Changes in demand and supply. d) Quantity supplied exceeds quantity demanded. c) Quantity demanded exceeds quantity supplied. If the price increases from $4. 129. 130. b) The lower price shifts demand to the right. b) Of the income effect. enabling them to buy more. If a product is in surplus supply.60 per pound a) The supply of sirloin steak will rise. Price ceilings and price floors cause a) An efficient allocation of resources. e) The lower price shifts demand to the left. One reason why the quantity demanded of a good increases as its price decreases is that a) The number of consumers in the market increases. 128. c) The amount consumers want to buy to be different from the amount producers want to produce.25 to $8. b) A greater quantity of sirloin steak will be supplied. c) The lower price increases the purchasing power of consumers. 133. it is most likely because a) The supply of potatoes decreases. d) Potatoes are a normal good. At the equilibrium price a) There is a tendency for the price to rise. e) The supply of sirloin steak will decrease.23 e) None of the above. 131. d) Market equilibrium. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . e) Of the substitution effect. If consumer incomes increase and the demand for potatoes decreases. e) There is a tendency for the price to fall. d) The demand for sirloin steak will decrease. 132. e) None of the above. c) A smaller quantity of sirloin steak will be supplied. c) Potatoes are an inferior good. d) The supply of substitute products increases. we can conclude that a) Quantity demanded exceeds quantity supplied. b) Its price is too low for equilibrium.

b) They are normal products. e) The quantity supplied for product Y will increase. Bacon and eggs are most likely a) Complements b) Substitutes. e) None of the above. d) Is a legal price set by the government that is below the equilibrium level. d) When government imposes price controls. d) Its price will rise. If an increase in the price of product X causes a decrease in the demand for product Y. b) Equilibrium price and quantity must both go down. c) Will cause demand to decrease. 134. fall. but equilibrium quantity may either rise. If demand moves to the right as supply moves to the right. 139.24 c) Its price is above equilibrium. c) Equilibrium quantity must rise. e) Will cause a smaller quantity of watermelons to be demanded. then a) Equilibrium price must increase. An increase in price from $2 per pound to $3 per pound a) Could have been caused by a decrease in quantity supplied. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . fall. d) Equilibrium price and quantity must both go up. e) Consumers want to buy more than is being made available by producers. e) Causes quantity demanded to exceed quantity supplied. but equilibrium price my either rise. c) The price of product Y will increase. b) When the price is high. d) They are complements. c) Occurs when the market is in equilibrium. b) Is a minimum legal price for which a product can be sold. 138. c) When the price is low. 136. or remain unchanged. e) Where demand and supply curves intersect. or remain unchanged. A price floor a) Causes a shortage. we can conclude that a) They are substitutes. 137. 135. d) Could have been caused by an increase in supply. A market is in equilibrium a) When equilibrium price equals equilibrium quantity. b) Will cause a larger quantity of watermelons to be demanded. Assume the demand for watermelons is downward sloping.

c) Increase the quantity demanded of oil. d) We would require more information to determine the movement in price and quantity. 145. d) The price of corn to increase. Consider the market for film processing. b) The demand for corn to decrease. e) None of the above. c) Quantity supplied has increased. b) People will buy less now. d) Supply has shifted to the left. b) Consumer incomes will decrease. 144. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . c) Quantity demanded would increase. what will happen to the market for almonds? a) People will buy the same amount now. e) The demand for corn to increase. then a) Price would decrease b) Supply would increase. d) Overproduced in a competitive market. b) Increase the quantity supplied of oil. then a) Demand will decrease. but equilibrium quantity is indeterminate. e) All of the above. d) Quantity supplied would increase. then we can expect a) The supply of corn to decrease. If everyone expects the price of almonds to rise in the near future. d) Increase the supply of oil e) All of the above. causing a decrease in demand. Consider the market for corn. c) The supply of corn to increase. e) Supply has increased. If the price of fertilizer decreases. If demand decreases but supply increases. e) Equilibrium price will decrease. we can say that a) Equilibrium price will rise. but equilibrium quantity is indeterminate. If there is a technological advance that enables every worker to process twice as much film. 143. 142. c) Equilibrium quantity will rise. The discovery of vast new oil reserves in Texas will a) Decrease the price of oil. 141. If producers require higher prices to produce various quantities. c) The amount bought and sold will increase. but equilibrium price is indeterminate. b) Equilibrium quantity will decrease. 140.25 c) Inferior goods. but equilibrium price is indeterminate.

e) The supply of fruit will decrease. b) Output would rise. b) The demand for fruit will increase. If there is a decrease in the number of popular television programs. e) Supply would decrease. Suppose all blue-collar workers unite and form a national union. 149. Use the graph below to answer the following 4 questions. e) The amount bought and sold will decrease. If a natural disaster destroys California’s fruit crop. What would happen in most markets in this economy? a) Demand would decrease. we can expect a) Demand for commercial movies to increase. b) Demand decreased. b) Fewer commercial movies to be shown on television. d) The profits of commercial movie makers to decrease. Consider the market for commercial movies seen on television.26 d) The supply will increase. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . c) Demand for commercial movies to decrease. c) Demand increased. c) Price would fall. If producers must obtain higher prices to produce various quantites. then a) The supply of fruit will remain unchanged but the demand will decrease. 146. d) Supply increased. e) Both demand and supply increased. c) The price of fruit will drop because people will consume less. we can conclude that a) Supply decreased. d) The supply of fruit will decrease. 148. causing the equilibrium price to increase and the equilibrium quantity to decrease. e) None of the above. Now suppose they have threatened the economy with a national strike and have consequently received a substantial pay increase. d) Supply would increase. 147. causing the equilibrium price to decrease and the equilibrium quantity to increase.

b) Equilibrium quantity will rise. e) Supply has decreased. our original equilibrium price and equilibrium quantity would be a) OE and OA. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . c) Equilibrium price will rise to OF. c) OF and OC. e) All of the above. and equilibrium price and equilibrium quantity will move to OE and OA.27 150. if supply moves from S1 to S2 a) Quantity supplied has increased. b) Demand will decrease from OB to OA. 152. c) A surplus will exist equal to AB. If D1 and S1 are the original demand and supply curves. 151. d) Supply has decreased. d) OD and OA. d) Quantity supplied will increase to OC. b) OG and OB. Given D1. if demand shifts from D1 to D2 a) Demand has increased. and equilibrium price and equilibrium quantity will move to OG and OB. Given S1. e) OD and OB.

c) A whole set of price and quantity supplied combinations. e) Cause demand to exceed supply at that price. d) People will use fewer automobiles. d) Equilibrium price will rise to OG but equilibrium quantity will remain at OB. b) Cause the quantity supplied to exceed the quantity demanded. 156. b) The supply of corn to increase. Economists use the term “supply” to refer to a) The downward sloping line which relates consumer expenditures to different output levels. c) The quantity demanded of wheat to decrease. e) None of the above. e) None of the above. c) A decrease in the demand for lettuce. b) The upward sloping line which relates consumer expenditures to different output levels. 155. we can expect a) The price of wheat to rise. c) People will buy more automobiles at any given price. 154. b) The price of automobiles will decrease. If the population doubles in size. If demand shifts from D1 to D2 and supply shifts from S1 to S2 a) Equilibrium price will rise to OF but equilibrium quantity will remain at OB. b) An increase in the price of lettuce. e) None of the above will happen. b) Equilibrium price will move to OC and equilibrium quantity to OG. 157. A price ceiling imposed on a product will a) Cause sellers to competitively bid down the price over time. e) The supply of corn to decrease. what can be expected to happen to the market for automobiles? a) Automobile manufacturers will decrease supply.28 153. d) Cause fewer resources to be devoted to the product. e) Both equilibrium price and equilibrium quantity will decrease. c) Demand has decreased and supply has increased. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . d) A decrease in the supply of lettuce. d) A particular quantity supplied at a specific price. c) Be a price above equilibrium. d) The demand for wheat to increase. If it is now more profitable for farmers to produce wheat than corn. 158. A successful boycott of lettuce is expected to cause a) An increase in the equilibrium quantity of lettuce bought and sold.

An increase in a product supply curve might be caused by a) Some firms entering an industry. d) Buyers will competitively bid down the price.” “quantity demanded. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . e) None of the above. b) Supply has increased.29 159. e) All of the above. b) Sellers will competitively bid up the price. then a) Buyers will competitively bid up the price. b) Supply has increased. e) None of the above. d) Demand has increased. c) An increase in the price of the product. e) None of the above. d) A decrease in consumer incomes. e) Some firms leaving an industry. b) Exists where the demand curve intersects the X axis. 161. c) Exists at an output level in which buyers will pay more than suppliers require. c) Sellers will competitively bid down the price. An efficient output level in any market a) Exists where the supply curve intersects the Y axis.” “supply. then a) Supply has decreased. supply rises. b) If the price rises. e) Means consumer’s or producer’s welfare will be reduced by an expansion or contraction of output. c) Demand has decreased. d) When demand exceeds supply the equilibrium price will rise. If the quantity demanded equals the quantity supplied. b) An increase in the price of an input (resources). If consumers are willing and able to pay a higher price in order to obtain any particular quantity. 162. c) Demand has decreased. c) The price of oranges is cheaper in Florida and therefore the demand is greater in Florida. 164. then a) Demand has increased. d) Exists at an output level in which buyers will not pay as much as suppliers require. In which of the following statements are the terms “demand. d) Supply has decreased.” “quantity supplied” used correctly? a) Changes in demand and supply causes changes in the equilibrium price. If a smaller quantity is supplied at each of the various price levels. 160. 163.

A market operates efficiently if it a) Produces a surplus. Assume an increase in the profitability of firms in a product market. 166. b) Produces an output in which the price consumers are willing to pay exactly equals the price producers are willing to accept. c) Neither a surplus nor a shortage would exist. b) Quantity demanded would equal quantity supplied. e) The equilibrium price of the product to fail. 168. Which of the following would not be a result of perfect price competition? a) The market would be in equilibrium. Which of the following statements is true about competitive markets? a) Non-price competition usually results in a wider variety of products from which consumers can choose. e) Is any period of time less than one year. e) Non-price competition almost always reduces consumer welfare. 170. e) Government price controls would be required. Over the long run a) Demand will fall. 169. d) Price competition is always the most profitable way producers compete. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . c) The equilibrium price of the product to rise. Over time we can expect a) Market supply to decrease. Assume a market is currently earning large profits.30 165. d) The market would maximize output given what consumers were willing to pay and what producers had to receive. b) The demand for resources (inputs) to rise. b) Is any period of time less than one month. b) Competitive markets do not usually offer as wide of a variety of products as do non-competitive markets. c) Produces an output in which the demand curve lies above the supply curve. d) Results in a product which can be purchased at many different prices. e) Produces an output in which the supply curve lies above the demand curve. The short-run is a) Any period of time for which producers can change demand for their products. 167. d) Any period of time in which producers have the ability to alter their production facilities. c) Any period of time for which producers cannot alter their production facilities. c) Most markets compete solely on the basis of price. d) Firms to leave this market.

Supply will rise. c) Allowing market forces to operate will result in a market equilibrium wage rate Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . e) It is always greater than one year. d) Losses will rise. What can be expected to happen over the long run in a market which is losing money? a) The equilibrium price of the product will rise while the equilibrium quantity will fall. 174. Demand will rise.. None of the above. d) Firms will always produce an output in which the price consumers are willing to pay exceeds the lowest price firms are willing to accept. 172. e) Any of the above. Which of the following statements is true concerning the standard model of a competitive market as it applies to labor? a) As the wage rate rises. b) As the wage rate rises. An increase in the demand for a resource might be caused by a) An industry which is losing money. b) Firms are unable to change their production facilities (plan sizes). d) An increase in supply. d) An increase in the price of a complementary resource. and the selling price has increased. Part B: Organizational Economics and Management: 175. e) None of the above. more workers will seek employment. b) The firms in the market will demand more resources (inputs). employers will hire fewer workers.31 b) c) d) e) Supply will fall. More television sets are being sold today than one year ago. 173. c) An increase in the demand for the product the resource produces. The essential characteristics of the long run is that a) Firms are either losing money or earning large profits. c) A decrease in demand. e) An exception to the law of demand. c) Firms do not have any fixed resources. c) New firms will enter the market increasing market supply. 171. b) An increase in demand. b) A decrease in its price. This could have been caused by a) A decrease in supply.

According to the standard model of demand and supply. or shift to the right. an increase in the productivity of workers. c) there is a surplus of labor then wage rates rise. d) will decrease if the wage rate rises. b) not only does worker productivity affect the demand for labor and therefore the wage rate. a decrease in the supply of labor. b) the wage rate is below equilibrium. if the price of the output produced by workers rises. According to the textbook authors. 179. a shortage of labor will result. if the productivity of workers falls. d) All of the above. An increase in the demand for labor can be caused by a) b) c) d) a decrease in the wage rate. but workers' wages also affect their productivity. if a) the wage rate is above equilibrium. d) the demand for labor increases. if the supply of labor increases. b) the equilibrium wage rate will decrease and the equilibrium quantity of labor will decrease. 176. reflecting the fact that businesses hire fewer workers as the wage rate rises. a decrease in the price of the output produced by workers. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . but impossible to determine an equilibrium wage rate. c) the demand for labor is upward sloping and the supply of labor is downward sloping in real-world labor markets. According to the standard model of demand and supply. the quantity demanded of labor will exceed the quantity supplied of labor. one of the problems with the standard demand and supply model as it applies to a real-world labor market is that a) demand and supply analysis simply does not apply to a labor market. or shift to the right. b) will increase. then a) the equilibrium wage rate will decrease and the equilibrium quantity of labor will increase. 180. The demand for labor a) is upward sloping. 177. d) it is possible to determine an equilibrium quantity of labor. 178. c) will increase. the wage rate will rise and the equilibrium quantity of labor seeking and finding a job will fall.32 where the quantity demanded of labor equals the quantity supplied of labor.

enable employers to be more selective in the people they hire. 181. Offering higher than equilibrium wages can be expected to a) increase the cost of losing a job. 182. d) take the job because the employer obviously cares for the well-being of employees. d) all of the above. d) all of the above 185. they should a) immediately take the job because of the high pay b) rarely take the job because the company will likely not survive and their jobs will be insecure. 186. Offering higher than equilibrium wages may a) b) c) d) enable employers to be more demanding of workers to extract more productivity. both immediately and in the future. Which of the following statements is true concerning overpayment of workers? Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . c) inspire effort from those who can't be monitored directly on a daily basis. a wage rate above equilibrium. 183.33 c) the equilibrium wage rate will increase and the equilibrium quantity of labor will increase. c) consider carefully what will be expected of them. unemployment is caused by a) b) c) d) a wage rate below equilibrium. d) the equilibrium wage rate will increase and the equilibrium quantity of labor will decrease. 184. all of the above. b) reduce the misuse of funds and other company resources by managers who are difficult to monitor. a shortage of workers. c) reduce training costs and increase efficiency over time. According to the standard market model. the presence of lazy workers. Overpayment to employees is likely to a) reduce the number of workers who slack. b) prompt some workers to put up with some strict rules and to be obedient to management. If potential employees are offered premium wages or salaries. increase the cost to workers of quitting their jobs.

34 a) A person who quickly fails at a high salary can end up doing far worse than the person who begins his or her career by succeeding at a more modest salary. c) may be abandoned if the company is purchased by another firm who has no compulsion to hold to the original owner's prior commitments. c) The abolishment of mandatory retirement systems by Congress can create unexpected gain in wealth by some older workers. 188. 189. Deferred compensation plans a) imply being paid more than you are worth now at the expense of being paid less than you are worth in the future. c) Initial "underpayment" of employees may be acceptable to workers if "overpayment" is likely in the future. b) Mandatory retirement systems can be explained by the need to cutoff overpayment to older workers. d) all of the above. d) All of the above. c) Deferred compensation is almost never acceptable to employees because it is viewed as another form of exploitation by companies. will typically reduce worker productivity and lifetime income. 187. 190. as discussed in chapter 2. d) All of the above. Which of the following statements is true? a) Manipulation of a worker's career wage structure. b) may not be able to fulfill the promise of overpayment to employees if the company faces stiff competition in the future. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . c) are rare in the real world. d) All of the above. b) typically reduce productivity and payments to workers over time. b) Firms may "overpay” their workers because they have "underpaid" their workers early in their careers. b) Management must pay workers an amount equal to what they are worth over the course of their careers or else workers will leave the company. a) is generally more difficult for a start-up company because of its lack of history in keeping its promises of more pay later. Which of the following statements is true? a) Mandatory retirement systems can be explained by the expected physical impairment of workers as they age. d) require credible commitments by firms to keep their promises of more pay over time. A twisted pay structure. or earning path over time.

b) can be expected to reduce productivity overall. Employers can impose higher work demands on workers in competitive labor markets Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . c) can increase the starting wages of younger workers because wage overpayments later in life are reduced. c) can both lower workers' starting wages and raise their productivity and career incomes. 195. Being able to make "credible commitments" can be important to firms because such an ability a) can lower the starting wages of workers. 194. c) companies are expected to meet with financial difficulty from competition down the road. d) neither a nor b.35 191. The abolition of mandatory retirement systems a) can hurt some older workers who are years from retirement. 193. he a) was trying to be socially responsible. c) expected Ford's productivity demands placed on workers to go up. demoted. The abolition of mandatory retirement systems by Congress a) will tend to help those who are about to retire. Companies and employees can both benefit from buyout offers to workers if a) workers have a lower discount rate than owners. b) expected worker absenteeism to go up because workers did not then have to put in as many hours to earn the same weekly wages. d) all of the above. 196. d) all of the above. d) expected Ford's profits to go down. When Henry Ford doubled his workers' wage rate in 1914. c) will cause most young workers to be no better off because the reduction in their underpayment while young will be offset by their reduction in overpayment when older. and who can hang on to their overpayments. who work for large companies. not given raises or have their pay cut. b) retirement systems are underfunded. b) can raise worker productivity over their careers. b) can help some older workers who are fired. d) all of the above. 192.

b) decrease work demands and lower the wage rate and lower their products’ price. d) none of the above. d) both b and c. c) do nothing because the surplus in the labor market will not affect the final product market. then employers in perfectly competitive final product markets can be expected to a) leave work demands and the wage rate as they are and raise their products’ price. b) goes up by more than the added costs to employers. c) He relaxed work demands so that the supply of labor would increase. c) decrease work demands and raise the wage rate and hold the final product price constant. If workers in competitive labor markets place more value on relaxed work than on the loss of worker productivity that may result. c) seek to use the work of their initial workers as “sweat equity” when they don’t have the track record to raise financial capital. How could Henry Ford justify paying his workers double the going wage rate? a) He demanded an increase in worker productivity that was greater than the added wage rate b) He expected the added wage rate to lead to a shortage of workers. 198. Startup firms use stock options as a means of paying their workers because they a) are trying to get labor for nothing.36 so long as the wage rate a) goes up by more than the negative value workers place on the greater work demands. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . b) increase the wage rate paid their workers. 197. b) don’t have the track record to make credible commitments to pay underpay workers initially and to pay above market wages in the future. 199. producers who face a surplus of labor at the current wage rate will be pressed to a) decrease the wage rate paid their workers. e) all of the above. 200. d) None of the above. In perfectly competitive product markets. d) none of the above. d) increase work demand and keep the wage rate and the final product price the same the same. c) goes down by more than the added costs of the greater work demands to employers.

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