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71 Cards in this Set

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1. Which of the following relates most directly to the law of diminishing marginal utility?
a. After watching two football games, Terry decides to play golf rather than watch a third game.
b. A sports fan enjoys watching Monday night football rather than going to the theater.
c. Two carpenters build their own house rather than hiring a contractor.
d. A musician receives the biggest ovation of the evening after playing the final work of a recital.
a. After watching two football games, Terry decides to play golf rather than watch a third game.
2. If John’s marginal benefit derived from the consumption of another candy bar is greater than the price of the candy bar,
a. John will not purchase any more candy bars.
b. John will increase his total satisfaction by purchasing the candy bar.
c. the opportunity cost of the candy bar is lower than the price.
d. John will decrease his total utility if he purchases the candy bar.
b. John will increase his total satisfaction by purchasing the candy bar.
3. If Mr. McLean thinks the last dollar spent on bowling yields more satisfaction than the last dollar spent on hamburgers, and McLean is a utility-maximizing consumer, he should
a. bowl less, so the marginal satisfaction from expenditures in this area will increase.
b. spend more on hamburgers, so total satisfaction from that activity will increase.
c. eliminate spending on hamburgers.
d. bowl more and spend less on hamburgers.
d. bowl more and spend less on hamburgers.
4. An increase in the consumption of a good resulting from a reduction in price that makes the good cheaper in relation to other goods is called the
a. substitution effect.
b. income effect.
c. real balance effect.
d. inelasticity effect.
a. substitution effect.
5. When a reduction in the price of a good allows a consumer to purchase more of all goods, this effect is called the
a. income effect.
b. substitution effect.
c. elasticity effect.
d. monetary effect.
a. income effect.
6. The market demand for an item is
a. the sum of individual demands.
b. steeper for any given price change than the individual demand curves.
c. independent of the number of individuals in the market.
d. determined by dividing the quantity demanded by each individual by the number of individuals in the market.
a. the sum of individual demands.
7. Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity of demand for the dolls over this range is
a. 2.5.
b. 0.4.
c. 0.5.
d. 5.
e. inelastic.
a. 2.5.
8. If the quantity of oranges purchased decreases by 30 percent as the result of a 15 percent increase in the price of oranges, the price elasticity of demand for oranges is
a. –0.25.
b. –0.50.
c. –1.25.
d. –2.
d. –2.
9. If the price of tickets to Disney World increases 10 percent, and as a result, attendance falls by 15 percent, the demand for the tickets is
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. indeterminate.
a. elastic.
10. A completely vertical demand curve implies a price elasticity of demand that is
a. perfectly elastic.
b. perfectly inelastic.
c. of unitary elasticity.
d. equal to infinity.
b. perfectly inelastic.
11. For which one of the following goods would you expect the demand to be most elastic?
a. salt
b. gasoline, short run
c. automobiles
d. Chevrolet automobiles
d. Chevrolet automobiles
12. Sarah recently got a 10 percent raise. She now purchases 30 percent more in groceries on a weekly basis. Sarah’s income elasticity for groceries is
a. 0.33.
b. 0.5.
c. 1.
d. 3.
d. 3.
13. If the demand for a product increases as the result of a decline in income, it can be concluded that the
a. product is an inferior good.
b. demand for the product is inelastic.
c. price elasticity of demand for the product equals unity.
d. demand for the product is elastic.
a. product is an inferior good.
14. Since it is costly for stockholders to monitor corporate managers, managers may be able to achieve personal perks and pursue other policies that conflict with profit maximization. This is an example of
a. an external benefit.
b. economies of scale.
c. the principal-agent problem.
d. sunk costs.
c. the principal-agent problem.
15. Which of the following is most likely to reduce the incidence of employee shirking?
a. use of the corporate business structure, rather than an individual proprietorship
b. closely relating the pay of workers to their productive contribution
c. payment of identical wage rates to all workers
d. providing workers with a year-end bonus if the business firm loses money during the year
b. closely relating the pay of workers to their productive contribution
16. Which of the following would be considered an implicit cost?
a. health insurance of employees paid for by the firm
b. the water bill of the firm
c. the salaries paid to the managers of the firm
d. foregone rent on assets owned by the firm
d. foregone rent on assets owned by the firm
17. During the short-run period of the production process, a firm will be
a. unable to vary any of its factors of production.
b. able to vary some of its factors of production.
c. able to vary all of its factors of production.
d. able to vary the size of its plant.
b. able to vary some of its factors of production.
18. Fixed costs are best defined as
a. costs that do not vary with output.
b. costs that are at a minimum when output approaches the firm’s capacity.
c. the amount that one more unit of output adds to total costs.
d. costs that decline as output increases.
a. costs that do not vary with output.
19. Which of the following will become smaller and smaller as the firm expands output?
a. average total cost
b. average fixed cost
c. marginal cost
d. total fixed cost
b. average fixed cost
20. Mr. Hudson notes that if he produces 10 pairs of shoes per day, his average fixed cost (AFC) is $14 and his marginal cost is $8; if he produces 20 pairs of shoes per day, his MC is $15. What is his AFC when output is 20 pairs of shoes per day?
a. $5
b. $7
c. $8
d. $15
b. $7
afc(14)x10(q)=140, 140(tfc)/20=__
21. If average fixed costs equal $60 and average total costs equal $120 when output is 100, the total variable cost must be
a. $40.
b. $60.
c. $6,000.
d. $8,000.
c. $6,000.
120x100=12,000(Atc) 60 x 100=6,000(afc) tvc=12,000(Atc)-6,000(afc)=___
22. Use the table below to answer the following question.
Units of Total Fixed Total Variable
Output Cost (dollars) Cost (dollars)
1 1,000 1,200
2 1,000 2,400
3 1,000 3,600
4 1,000 5,000
5 1,000 6,600
What is the average total cost at an output level of four units?
a. $1,200
b. $1,400
c. $1,500
d. $2,000
c. $1,500
tfc+tvc(5k+1k)=6,000/q(4)=_____
23. The marginal cost of a good is
a. lower for competitive firms than for monopolists.
b. the cost of an additional unit.
c. equal to fixed cost at high output levels.
d. equal to variable cost when the firm is maximizing profit.
b. the cost of an additional unit.
24. Use the table below to answer the following question.
Units of Output Total Fixed Cost (dollars) Total Variable Cost (dollars)
1 150 25
2 150 48
3 150 70
4 150 100
What is the marginal cost of producing the third unit of output?
a. $22
b. $23.33
c. $73.33
d. This cannot be determined from the data.
a. $22
add tfc-tvc for 3 and 2. subtract 220-198 and 3-2

220-198/3-2=____
25. In the short run, a firm will eventually experience rising per-unit costs because of
a. economies of scale.
b. diseconomies of scale.
c. the law of supply.
d. the law of diminishing returns.
d. the law of diminishing returns.
26. The increase in total output that results from a unit increase in the employment of a variable input is equal to the input’s
a. total product.
b. marginal product.
c. average product.
d. marginal cost.
b. marginal product.
27. If two workers can produce 22 units of output, and the addition of a third worker increases output to 30 units, the marginal product of the third worker is
a. 8 units.
b. 10 units.
c. 22 units.
d. 30 units.
a. 8 units.
28. If a firm increases its output and finds that its average total cost decreases as a result, this implies that
a. marginal cost exceeds average total cost.
b. the cost of producing an additional unit of output is more than the average total cost.
c. average fixed cost is increasing.
d. average total cost exceeds marginal cost.
d. average total cost exceeds marginal cost.
29. As output is expanded, if MC is more than ATC,
a. ATC must be at its minimum.
b. ATC must be at its maximum.
c. ATC must be increasing.
d. the firm must be earning economic profit.
c. ATC must be increasing.
30. Larger firms will often have lower minimum per-unit costs than smaller firms because
a. employee shirking is less of a problem.
b. large-scale output allows greater specialization for both labor and machines in the production process.
c. mass production techniques, with high setup and development costs, are appropriate only when a small output is planned.
d. all of the above are correct.
b. large-scale output allows greater specialization for both labor and machines in the production process.
31. A downward-sloping portion of a long-run average total cost curve is the result of
a. economies of scale.
b. diseconomies of scale.
c. diminishing returns.
d. the existence of fixed resources.
a. economies of scale.
32. Which of the following would cause a firm’s cost curves to shift upward?
a. a reduction in resource prices
b. a decrease in taxes
c. an improvement in technology
d. an increase in government regulations
d. an increase in government regulations
33. Which of the following would most likely cause a firm’s cost curve to shift downward?
a. an increase in resource prices
b. an increase in government regulations
c. a decrease in taxes
c. a decrease in taxes
34. When making choices, suppliers should not allow sunk costs to directly affect their current decisions because
a. sunk costs do not reflect foregone opportunities accompanying current choices.
b. sunk costs will not influence the accounting costs of a firm.
c. sunk costs influence the demand for products, not the supply.
d. past choices fail to provide any information relevant to current decision making.
d. an increase in demand for the firm’s product
a. sunk costs do not reflect foregone opportunities accompanying current choices.
35. At what output in Figure 1 would the firm’s per-unit cost of production be minimized?
a. 3
b. 4
c. 5
d. 6
b. 4
equiliberum
36. According to Figure 1, what is the firm’s approximate total cost when it produces three units?
a. 10
b. 16
c. 48
d. 60
c. 48
3x16=___
37. What is the firm’s total cost in Figure 1 when it produces four units?
a. 11
b. 15
c. 60
d. 75
c. 60
4x15=__
38. A firm in a price-taker market
a. must take the price that is determined in the market.
b. must reduce its price if it wants to sell a larger quantity.
c. must be large relative to the total market.
d. can exert a major influence on the market price.
a. must take the price that is determined in the market.
39. Which one of the following is a price taker?
a. a star baseball player
b. a North Carolina furniture manufacturer
c. a local retail clothing shop
d. an Indiana cattle farmer (beef producer)
d. an Indiana cattle farmer (beef producer)
40. Which of the following is characteristic of a competitive price-taker market?
a. There is free entry into and exit from the market.
b. Individual firms can exert a perceptible influence on the market price.
c. The firms in the market produce differentiated products.
d. All of the above are true.
a. There is free entry into and exit from the market.
41. In a competitive price-taker market, the barriers limiting the entry into or exit from the market are
a. low.
b. high.
c. low for entry but high for exit.
d. high for entry but low for exit.
a. low.
42. Which of the following best explains why a firm in a competitive price-taker market must take the price determined in the market?
a. The short-run average total costs of firms that are price takers will be constant.
b. If a price taker increased its price, consumers would buy from other suppliers.
c. Firms in a price-taker market will have to advertise in order to increase sales.
d. There are no good substitutes for the product supplied by a firm that is a price taker.
b. If a price taker increased its price, consumers would buy from other suppliers.
43. When a firm is operating in a price-taker market, marginal revenue will always equal
a. average total cost.
b. one minus the elasticity of the market demand curve.
c. total revenue.
d. price.
d. price.
44. If a firm is a price taker and wants to earn as much profit as possible, it should expand output
a. to the quantity at which marginal cost is minimized.
b. as long as marginal cost is less than price.
c. to the quantity at which average total costs are minimized.
d. to try to sell all the output it can produce so that its average fixed costs will be minimized.
b. as long as marginal cost is less than price.
45. When the marginal cost of a price-taker firm is more than the market price of its product, the firm should
a. expand output.
b. reduce output.
c. maintain output.
d. charge more than the market price.
b. reduce output.
46. If a firm competing in a price-taker market seeks to maximize profit, the firm should
a. increase output whenever marginal cost is less than average total cost.
b. increase output whenever marginal revenue is less than marginal cost.
c. choose the output where per-unit profit is greatest.
d. increase output whenever price exceeds marginal cost.
d. increase output whenever price exceeds marginal cost.
47. The schedule of total costs for a chair-manufacturing firm is presented in the table above. If the market price of chairs is $100, which output should this price-taker firm produce to maximize profit?

Units of Output Total Cost (dollars)
100 11,000
200 20,000
300 29,400
400 39,500
500 50,500
a. 200
b. 300
c. 400
d. 500
b. 300
difference in total cost divided by differnce in units of output etc. 11000/100, 9000/100, 9400/100 = median
48. Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC) and that the market price is expected to rise at least to ATC in the near future. In the short run, a firm that is a price taker would
a. immediately shut down and get out of the industry.
b. continue to produce a quantity such that marginal revenue equals marginal cost.
c. shut down temporarily, in hopes of restarting in the near future.
d. cut price and expand output in hopes of achieving economies of scale
b. continue to produce a quantity such that marginal revenue equals marginal cost.
49. “I’m losing money, but having invested so much in equipment, I simply cannot afford to shut down.” If the firm were attempting to maximize profit, this decision may be
a. correct if the firm is covering its fixed costs.
b. incorrect because a firm experiencing economic losses should never continue to operate; it is contrary to the idea of profit maximization.
c. correct if the firm is covering its variable costs and expects the price of its product to rise in the near future.
d. incorrect since the firm’s fixed costs are sunk costs.
c. correct if the firm is covering its variable costs and expects the price of its product to rise in the near future.
50. If an amusement park that is highly profitable during the summer months is unable to cover its variable costs during the winter months, it should
a. raise its prices during the winter months.
b. lower its prices during the summer months.
c. operate during the summer but shut down during the winter months.
d. operate during all months of the year as long as its profits during the summer exceed its losses during the winter.
c. operate during the summer but shut down during the winter months.
51. If a firm is making zero economic profit, it
a. will be forced to shutdown and leave the market.
b. will also generally be making zero accounting profit.
c. is doing as well as typical firms in other markets.
d. will not survive in the long run.
c. is doing as well as typical firms in other markets.
52. Which of the following is essential for long-run equilibrium in a price-taker industry?
a. zero economic profit
b. a price equal to average variable cost
c. a highly elastic industry supply curve
d. a highly inelastic industry supply curve
a. zero economic profit
53. There are 1,000 identical firms in a price-taker industry. In the short run, total revenues of each firm exceed total costs. What will happen in the long run?
a. Nothing, because each firm is already maximizing its profits.
b. Many firms will enter the market and each firm will eventually operate at a loss.
c. Additional firms will enter the market, and price will be driven down to where each firm will be making just enough to stay in business.
d. Additional firms will enter the market, but the price will remain the same because the existing firms will not allow price to decrease.
c. Additional firms will enter the market, and price will be driven down to where each firm will be making just enough to stay in business.
54. Which of the following is a residual reward that accrues to business decision makers who use resources so as to increase their value?
a. opportunity cost
b. earnings of employees
c. economic profit
d. interest earnings of corporate bondholders
c. economic profit
55. Figure 2 depicts the cost curves of a firm in a price-taker industry. At what output would the firm’s per-unit cost be at a minimum?
a. 100
b. 125
c. 150
d. an output greater than 150
b. 125
56. For Figure 2, if the market price is $30, indicate the firm’s profit-maximizing output and maximum profit.
a. profit-maximizing output, 125; maximum profit, zero
b. profit-maximizing output, 125; maximum profit, between $1,000 and $1,250
c. profit-maximizing output, 150; maximum profit, $1,500
d. profit-maximizing output, 150; maximum profit, between $1,250 and $1,500
a. profit-maximizing output, 125; maximum profit, zero
57. The average total cost (ATC) and marginal costs (MC) of a firm producing in a price-taker industry are depicted in Figure 3. If the current market price of the firm’s product is $15, what output should this firm produce?
a. 10
b. 15
c. 20
d. 25
b. 15
58. If the market price in Figure 3 increases to $20, what should the firm do?
a. produce an output of 15
b. expand output to 20
c. expand output to 25
d. increase its price to $25
b. expand output to 20
59. When the market price in Figure 3 is $20, the firm’s maximum profit will be approximately (Since this is difficult to see on this particular graph, note that the ATC at a quantity of 20 is $17)
a. zero.
b. $3.
c. $60.
d. $400.
c. $60.
20-17=3(20)=___
60. How can you tell whether a firm is a price taker or a price searcher?
a. Price takers must accept the market price if they are going to sell any of their output, but price searchers will be able to increase their quantity sold if they are willing to cut their price.
b. Price searchers must accept the market price if they are going to sell any of their output, but price takers will be able to increase their quantity sold if they are willing to cut their price.
c. Price takers operate in competitive markets, but price searchers do not.
d. Price searchers operate in competitive markets, but price takers do not.
a. Price takers must accept the market price if they are going to sell any of their output, but price searchers will be able to increase their quantity sold if they are willing to cut their price.
61. Which of the following is true?
a. The demand curve confronting a price taker is perfectly elastic, while the demand curve confronting a competitive price searcher is downward sloping.
b. The demand curve confronting a price taker is of unitary elasticity, while the demand curve confronting a competitive price searcher is downward sloping.
c. The demand curve confronting a price taker is unitary elastic, while the demand curve confronting a competitive price searcher is inelastic.
d. The demand curve confronting a price taker is perfectly inelastic, while the demand curve confronting a competitive price searcher is perfectly elastic.
a. The demand curve confronting a price taker is perfectly elastic, while the demand curve confronting a competitive price searcher is downward sloping.
62. Which of the following most closely approximates the conditions of a competitive price-searcher market?
a. the market for Grade A eggs, which is characterized by a large number of firms producing a homogeneous product
b. the restaurant industry, which is characterized by firms producing a differentiated product in a market with low entry barriers
c. local cable television service, where a licensed supplier competes with firms offering satellite service
d. the market for jumbo aircraft, where one major domestic firm competes with one major foreign firm
b. the restaurant industry, which is characterized by firms producing a differentiated product in a market with low entry barriers
63. What role do losses play in a competitive price-searcher market?
a. They penalize a firm for producing a differentiated product.
b. They signal that more resources are needed in a particular market.
c. They show firms that barriers to entry are high.
d. They send a message that more value would be created if the resources were used to produce other goods.
d. They send a message that more value would be created if the resources were used to produce other goods.
64. Some economists argue that competitive price-searcher markets are inefficient because
a. the firms earn economic profits in the long run.
b. the firms’ marginal costs and marginal revenues are not always equal.
c. firms do not produce the output rate that would minimize their average total costs.
d. barriers to entry are high.
c. firms do not produce the output rate that would minimize their average total costs.
65. Compared to the outcome when the firms are price takers, competitive price-searcher markets will result in
a. a wider variety of products and higher prices.
b. less product variety and higher prices.
c. a wider variety of products and lower prices.
d. less product variety and lower prices.
a. a wider variety of products and higher prices.
66. In both price-taker and competitive price-searcher markets, short-run economic profits will lead to
a. long-run economic profits.
b. the exit of firms from the market and the eventual restoration of zero long-run economic profits.
c. the entry of additional firms into the market and the eventual restoration of zero long-run economic profits.
d. the entry of additional firms into the market, which increases the demand for the product of each firm in the market.
c. the entry of additional firms into the market and the eventual restoration of zero long-run economic profits.
67. Price discrimination occurs when
a. firms maximize their profit by setting price equal to marginal cost.
b. a seller charges different prices to different consumers of the same product or service.
c. a seller charges the same price to consumers of a different product or service.
d. a seller charges different prices to consumers, discriminating by race or gender of the consumer.
b. a seller charges different prices to different consumers of the same product or service.
68. Which of the following is a necessary condition for price discrimination to be profitable?
a. All consumers must have an identical demand for the product.
b. Groups of consumers with different demand elasticities must be easily distinguishable.
c. The market demand for the product must be highly elastic.
d. It must be possible for buyers to resell the product at a low cost.
b. Groups of consumers with different demand elasticities must be easily distinguishable.
69. For effective price discrimination to occur, a seller must
a. be a pure monopolist.
b. have large economies of scale and control over a key natural resource.
c. face a horizontal demand curve for its product.
d. be able to prevent consumers from reselling the product to other consumers.
d. be able to prevent consumers from reselling the product to other consumers.
70. In order for effective price discrimination to occur, a seller must
a. be a pure monopolist.
b. have large economies of scale and control over a key natural resource.
c. face a horizontal demand curve for its product.
d. have at least two distinguishable groups of consumers.
d. have at least two distinguishable groups of consumers.
71. If a profit-maximizing restaurant is going to increase its revenues by charging senior citizens (persons age 65 and over) lower prices than other customers,
a. the demand of senior citizens for the services of the restaurant must be inelastic.
b. senior citizens must have lower incomes than other potential customers.
c. the demand of senior citizens for the services of the restaurant must be elastic.
d. senior citizens must have higher incomes than other potential customers.
e. other customers must enjoy food more than senior citizens.
c. the demand of senior citizens for the services of the restaurant must be elastic.