Microeconomics 101 Multiple Choice Q’s

Nellie is a student in Vermont. She likes outdoor sports, but whenever she does go out,
she prefers to do one sport at a time (for example, she would prefer not to go running as
well as swimming on the same day).
She goes to the market one day to buy a mountain bike and discovers that most of the
bikes she is interested in cost around $500. She also sees that kayaks are selling for
cheaper than usual. Would Nellie be less or more likely to buy a mountain bike? Why?
A. Kayaks and mountain bikes might be complements for Nellie, and since the price of
kayaks has gone down, Nellie will be more buy likely to buy a mountain bike.
B. Nellie will be less likely to buy a mountain bike since a substitute's price (that is,
the price of kayaks), has decreased.
C. The decline in price of kayaks does not make it any more or less likely for Nellie to
buy the mountain bike.
D. If Nellie was already planning to buy a kayak, she now has more money left over to
buy a mountain bike. She will be less likely to buy the mountain bike now with the
greater left over income since mountain bikes are inferior goods.

The demand function for apples in Gleetown is given by: A = 3-P, where A denotes the
number of apples, and P denotes the price of an apple.
The supply function for apples in Gleetown is given by A = 2P.
What is the market equilibrium?
A. At the equilibrium, the price of apples is P = $1.5, and the number of apples is A =
7 apples.
B. The market equilibrium can be shown on a graph, but we cannot determine the actual
prices or quanitities with the information that has been provided.
C. At the equilibrium, the price of apples is P = $1, and the number of apples is A
= 2 apples.
D. At the equilibrium, the price of apples is P = $0.5, and the number of apples is A =
1 apple.

Why would the government want to impose a price floor?
A. The government's economists may have conducted a positive analysis in order to
recommend that a price floor be imposed to increase economic welfare in the country.
B. The government may have felt that a price floor was necessary to help
producers. This may happen in a case where the producers would have had to sell
their produce at a price that would not allow them to make ends meet (under free
market conditions).
C. The government may have felt that a price floor was necessary to help consumers.
This may happen in a case where the producers were charging prices that were too high
(under free market conditions).
D. The market always adjusts over time in a way that price floors or ceilings become
redundant. Hence, the government should not actually impose price floors, as they don't
have any real effect on the economy over time.

When does a producer have a comparative advantage over another producer in the
production of a good?
A. When he has a lower opportunity cost than the other producer.
B. When he has a higher opportunity cost than the other producer.
C. When he faces a greater demand for the goods he produces.
D. When he does not anticipate any gains from trade for other goods

Which of the following statements about optimal bundles is/are true?
a. An optimal bundle is any point at which the consumer spends all his income, ceteris paribus.
b. An optimal bundle is the point at which the consumer maximizes his utility, irrespective of income. but we do need to take into account the price of each good.
c. An optimal bundle is the point at which the marginal rate if substitution equals 1.
d. There are two conditions that we need to check for, when trying to find the optimal bundle

Rudolph cares about two goods: bells (B) and cakes (C). Let's assume we are plotting C on the horizontal axis, and B on the vertical axis. His preferences are such that his marginal rate of substitution (MRS) is equal to B/C. The price of a bell is $4 and the price of a cake is $5 and he has $80 to spend in all. What can we say about his optimal bundle?
a.
The optimal bundle (C,B)=(4,5)

b.
We cannot find actual numbers for the optimal bundle with the given informaton
c.
The optimal bundle is (C,B)=(8,10)

d.
The optimal bundle is (C,B)=(1,1)

Sirius Black cares about consuming two goods: butter beer and broom sticks. The price of one butter beer is currently $4, and of a broom stick is $79. What is the Economic Rate of substitution for Sirius if we plot broom sticks on the vertical axis and butter beer on the horizontal axis.
a.
4/79
b.
79/4
c.
-4/79
d.
75

Consider a tiny country situated right on the equator that produces mangoes and robots. Assume that it has a linear production possibility curve. If this country uses all of its resources to produce mangoes, it can produce 500 tons of mangoes. If it uses all its resources to produce robots, it can produce 1000 robots. What is this country's opportunity cost of producing 25 robots?
A. (.5) ton mangoes
B. 12.5 tons of mangoes
C. 25/2 tons of mangoes
D. 2 tons of magoes

Let R be the symbol for "at least as good as". Suppose that Bunny has preferences over three bundles A, B and C, such that the following is true: A R C and B R C. Then how would Bunny feel when comparing A and B?
a. He would be indifferent between A and B
b. Can't say
c. A R B
d. B R A

In a small country in the Pacific Ocean, a rural family called the Hayclans produces Bags and Sandwiches. A family member discovers a new way to make Bags, such that the Hayclan family is now able to produce more Bags than it was previously able. Suppose that the Hayclans were functioning efficiently and on their production possibility frontier. If the Hayclan family decided to only produce Sandwiches and no Bags, how many more Sandwiches would it be able to produce than before, given the advancement in the method for producing Bags?
a. No more than before
b. One more Sandwich
c. Can't say how many more, be they will certainly produce more Sandwiches than before
d. As many more Sandwiches as the extra number of Bags that they could produce if they were using all their resources in producing Bags

Which of the following statements about firms (that we studied in class) is true?
a. A firm's goal is to maximize economic profits.
b. Firms are mainly interested in accounting profits.
c. Firms never take opportunity costs into account.
d. A firm mainly worries about revenues and accounting costs when
calculating its profits.

Consider a firm in a perfectly competitive market for perfume. The price of one
bottle of perfume in this market is $60. Suppose you know that the total cost
function for the firm is x2 + 100, where "x" is the number of bottles of perfume.
Calculate the maximum profit for a firm whose marginal cost function is given by
2x. To do this, use the profit maximizing condition for firms in perfect
competition and the formula for profit.
a. 30
b. 800
c. 1700
d. Can't say

Suppose you are told that a firm is producing 500 umbrellas to maximize its
profits, where the price of an umbrella is $2. Its variable cost at this level of
production is $999 and its fixed cost is $50. The firm is thinking about whether it
should shut down or not. Which of the following statements are/is true?
a. The firm will not shut down in the short run.
b. Profits are negative, so it does not make sense for the firm to continue to
produce in the short run.
c. Revenues are able to cover the fixed costs. For this reason, the firm should
not shut down.
d. We can't say much with the given information.

Which of the following is true about perfectly competitive firms?
a. A firm can calculate its total revenue simply by using the average cost and
marginal cost curves.
b. A firm can calculate its profits simply by using the average total cost
curve, marginal cost curve, and price.
c. In the short run, a firm can figure out when to shut down simply by
looking at the average total cost curve, marginal revenues, and prices.
d. A firm's marginal revenue would depend on the number of units being
sold.

Each ton of carrots is selling for $30 in a perfectly competitive market for carrots. A farmer realizes that to maximize profit, he must produce (and sell) 50 tons per week. His total fixed costs are $200 and his total variable costs sum up to $1600. What is his profit?

a.
-100
b.
-300
c.
1500
d.
Can't say with the given information

Consider the same carrot farmer. What else would be true about his behavior?
a.
He has negative profits, but he would not shut down his carrot farming operation.
b.
The price does not exceed average variable cost, so he must shut down.
c.
His revenues are able to cover his variable costs, so he will not shut down
d.
It is not clear whether he would shut down or not.

Consider a perfectly competitive market for a good X that is currently at its long run equilibrium point. Which of the following statements is true?
a.
If demand increases, the market will not be able to adjust back to another long run equilibrium.
b.
If demand decreases, the market will eventually come back to the original long run equilibrium price. This assumes the costs curves remain the same.
c.
Profits for firms at the long run equilibrium point may or may not be zero.
d.
There may be some firms on the margin in the market that may want to leave the market as the outside option is better.

Choose the false statements from below:
a.
A monopoly has only one seller.
b.
Other firms do not enter a monopolistic market because there may be barriers to entry
c.
In a monopoly, not all buyers have complete information about the product.
d.
Patents sometimes lead to the creation of monopolies, but also to more research and development.

A firm has a total cost function given by x2- 5, where x is the number of units of the output in a perfectly competitive market. It realizes that its profit maximizing level of output is 10 units. Suppose that the price of each unit of x is $9.50. What must be true about this firm?
a.
If this firm is operating at this point in the long run, it is at its minimum efficient scale.
b.
The firm is making a profit.
c.
The firm is making losses.
d.
The firm should shut down.

Consider a firm that produces a unique product, for which it has a patent. No other firms are therefore allowed to enter this market. What would be true about this firm's behavior?
a.
This firm's marginal revenue will typically be below the market price.
b.
The firm faces a flat demand curve.
c.
The market has a flat supply curve.
d.
This is a case of perfect competition.

Consider the same firm and market as in Q1. Which of the following statements is false?
a.
The firm wants to maximize profits.
b.
The profits that this firm makes are lower than what it would make if there were many firms in the market.
c.
Because of the patent, the firm would be more likley to invest in research and development for the product.
d.
The firm sets marginal revenue equal to marginal cost to maximize profits.

Consider a monopolistic firm whose marginal cost curve is given by: 3x, where x is the number of units being produced. Its marginal revenue is given by 40-x. What is the quantity that the firm will produce in order to maximize its profits?
a.
Can't say.
b.
1 unit.
c.
5 units.
d.
10 units.

Which of the following statements about monopolies is true?
a.
Monopolies may or may not be productively efficient.
b.
Monopolies are usually allocatively efficient, that is, net social surplus is usually maximized.
c.
The same quantity being produced is typically observed in monopolies and perfectly competititve markets.
d.
The same price is typically observed in monopolies and perfectly competitive markets.

Which of the following statements about oligopolies is true?
a.
There may be many firms in an oligopolistic market.
b.
There may be barriers to entry in an oligopoly.
c.
There is often incomplete or imperfect information in an oligopoly.
d.
Oligopolistic firms never collude.

Which of the following statements is false?
a.
Oligopolies with two firms are called duopolies
b.
In all oligopolies, firms want to maximize their profits
c.
In all oligopolies, firms never behave strategically. That is, they never take into account the actions of other firms in the market when making their production decisions.
d.
The interaction of firms in an oligopolistic market is often modeled as a game by economists.

Which of the following statements about oligopolies is false?
a.
In Bertrand competition, firms compete by setting quantities.
b.
In Cournot competition, firms want to maximize profits.
c.
In Bertrand competiton, each firm takes the actions of the other firm(s) into accoutn when making its own decisions.
d.
In both Bertrand and Cournot competition, firms must calculate their profits for which they need to know their total revenues and total costs.

Consider a duopoly with two firms: Firm A and Firm B. They can either produce a "low" quantity or "high" quantity. Their payoffs are shown in "Game B". Which if the following statements is false?
a.
Firm A's payoff if it produces the low quantity and Firm B produces the high quantity is 60. Firm B's payoff in this case is 120.
b.
Firm A's dominant strategy is to produce the low quantity
c.
Given the equilibrium in this game, Firm A and B could potentially be better off if they colluded to produce the low quantity
d.
Firm B's dominant strategy is to produce the high quantity.

Choose the false statement from below:
a.
The total profit made by all firms in an oligopolistic market is lower than what a monopolist would make.
b.
The total profit made by all firms in an oligopolistic market is lower than the total profits that would be made by firms in perfect competition.
c.
The price in an oligopolistic market is lower than the price that a monopolist would set.
d.
The quantity in an oligopolistic market is higher than what you'd see in a monopoly.

Suppose that several of the ingredient used to make bread becomes very expensive. Which of the following statements is false?
a.
The price of factors of production are now more expensive for firms that produce and sell bread. The supply curve therefore shifts to the left.
b.
It is a complement that has become expensive for consumers, so it is the demand curve that first shifts to the left.
c.
Equilibrium price in the market increases
d.
Equilibrium quantity in the market decreases

Which of the following statements is true?
a.
Price elasticity of demand can never take the value 1.
b.
Price elasticity of demand is said to be inelastic if it is less than 1 (in absolute value)
c.
Cross price elasticity measures the responsiveness of the demand for a good, to changes in its own price.
d.
Elasticity of demand is not useful when trying to figure out what would happen to revenues as a result of a price increase.

Consider a country that makes books and dresses. If it only makes books, it can produce 1000 of them. If it only makes dresses, it can make 500 of them. You can assume that the production possibility curve is linear. Which of the following statements is true?
a.
The opportunity cost for this country to make 1000 books is 500 dresses
b.
The opportunity cost for this country to make one book is 2 dresses
c.
The opportunity cost for this country to make a dress is 6 books
d.
This country will only want to produce one product, never both.

Consider another country (call this country: Country 2; and you can call the country in Q15: Country 1), which also produces books and dresses. If it uses all its resources to produce books, it can produce 600 books. If it uses all its resources to produce dresses, it produces 800 dresses. Which of the following statements is true?
a.
Country 2's opportunity cost of producing 60 books is 40 dresses.
b.
Country 2's opportunity cost of producing 1 dress is 600/800 books.
c.
It is hard to say what the opportunity costs are given this information
d.
Country will only produce dresses and no books

Consider the information given to you in the last two questions about Country 1 (in Q15) and Country 2 (in Q16). Which of the follwing statements is true?

a.
Country 1 has the absolute advantage in producing both books and dresses
b.
Country 2 has the absolute advantage in producing books
c.
Country 1 has both the absolute and the comparative advantage in producing books.
d.
Country 2 does not have the absolute advantage in producing anything

Which of the following statements about government policies is true?
a.
Governments may impose price floors to help consumers when the price seems too high
b.
Governments may impose price ceilings to help consumers when the price seems too high
c.
When an economist is asked what the government "should" or "should not" do, this type of question is said to be a "positive" question.
d.
When an economist is asked what would happen to equilibrium quantity in the market if the government were to impose a price ceiling, this type of question is said to be a "normative" question.

Which if the following statements about government policies is false?
a.
Governments may impose a tax on a good to encourage its consumption
b.
Transfers would typically lead to consumers having higher utility than before
c.
Governments sometimes use a combination of both taxes and transfers to achieve some policy goal
d.
Taxes and transfers may be useful policy tools since they do affect consumer behavior in some way

Which of the following statements about demand curves is false?
a.
Demand curves typically slope downwards, since consumers are willing to pay less for higher quantities
b.
The demand curve shows the willingness to pay, or marginal benefit (to the consumer) for each unit consumed. In this sense, the price is nothing but this willingness to may or marginal benefit to the consumer.
c.
The demand curve and price help us determining what consumer surplus would be
d.
The demand curve tells us what the producer surplus is

Using available data from a country, an economist produces a graph that has number of years spent in school on the horizontal axis, and wealth on the vertical axis. The graph looks like a U: that is, it is first downward sloping when number of years in school is low, then flattens out gradually, and finally becomes upward sloping at greater number of years in school. The economist can draw the following conclusions from this graph:
a.
The graph tells us how number of years in school affects wealth in one's life.
b.
The graph does not give us a clear relationship between years in school, and wealth.
c.
If schooling is a reasonable measure of human capital, the graph gives us the relationship between human capital and wealth.
d.
The graph tells us how wealth that one is born into affects years in school.

The demand function for lemons is given by: L = 160-3P, where L denotes the number of lemons, and P denotes the price of a kilogram of lemon in Dollars. The supply function for lemons in is given by L = P. What is the market equilibrium?
a.
The equilibrium is given by L=40 kilograms of lemons, and P=40 Dollars
b.
The equilibrium is given by the price at which demand is maximum
c.
The equilibrium is given by the price and quantity at which the supply is the highest possible
d.
We cannot say what the equilibrium is in this market with the given information

Which of the following statements about price elasticity of supply is false?

a.
Price elasticity of supply measures the responsiveness of quantity supplied to changes in the price of the product.
b.
Price elasticity of supply may also measure the responsiveness of quantity supplied to changes in prices of factors of production.
c.
Price elasticity of supply is always positive, even if we don't take the absolute value.
d.
To calculate the price elasticity of supply, we only need data on price changes and the corresponding changes in quantity supplied, of a particular product.

Let R be a symbol for "at least as good as." If all Minnie cares about are bows and shoes, and she is currently consuming the bundle B0 = (4,7), that is, 4 bows and 7 shoes, which of the following statements about her must be false?
a.
Given the assumptions we made about preferences in class, we know that Minnie will prefer a bundle B1 = (5,7) to the bundle B0
b.
If Minnie prefers B1 (from part (a) above) to a bundle B2 , we can argue that she will prefer B2 to the bundle B0
c.
Given the assumptions we made about preferences, we know that Minnie will likely prefer average bundles to extreme bundles of bows and shoes.
d.
Given the information in the queston, we are not sure which of the two goods (bows and shoes) Minnie likes more.

Which of the following statements about the budget constraint 9X + 5Y = 1350 is false? (Here, X and Y are quantities of the two goods that a consumer cares about)
a.
The slope of the budget constraint is either -5/9 or -9/5, depending on which good you place on the horizontal axis, and which good you place on the vertical axis.
b.
Suppose you place the good Y on the y-axis. The y-intercept of this budget constraint is 270.
c.
The budget constraint shows us the biggest bundles (in terms of quantities if X and Y) that the consumer can afford.
d.
Suppose you place good X on the y-axis. In this case, the y-intercept will be -150.

The Museum of Modern Art (MOMA) in New York City is short on funds and decides to raise the entry fee in hopes of raising its revenues. Which of the following statements is true?

a.
MOMA will calculate its revenues in a day by using information on number of people visiting the museum, and the costs of maintaining and running the museum
b.
MOMA's idea to raise entry fees in order to raise its revenues makes sense since higher revenues is the outcome when people pay higher entry fees
c.
Higher entry fees will lead to fewer people visiting the museum
d.
Even if we have information about the price elasticity of demand for entry into the museum, we cannot say what will happen when the entry fees are raised by the museum

Consider a lady from medieval Europe called Freya, who consumes two goods: potatoes and cloth. Suppose that she considers potatoes as inferior, while she views cloth as a normal good. What would now be true if the price of potatoes falls?
a.
Freya will consume more potatoes as both the substitution and income effects are positive for potatoes
b.
Freya will end up consuming more cloth since we know that she now feels richer
c.
The substitution effect for cloth is positive
d.
The income effect for potatoes is negative

Which of the following statements about cost curves is false?
a.
Cost curves are downward sloping
b.
Cost curves may depend on a number of factors such as technology used in production
c.
The marginal cost curve intersects the average cost curve at the latter's minimum point
d.
The minimum point of the long run average cost curve is called the Minimum Efficient Scale

The cost of the metal used in making laptops becomes very expensive. What will happen in the market? Choose the true statement from the ones listed below:

a.
There will be a decrease in demand
b.
There will be an increase in demand
c.
There will be a decrease in quantity demanded
d.
None of the above

Consider the same situation as in Q9 - that is, the metal used in making laptops has become very expensive. Choose the statement that is true from the statements below:
a.
There is an increase in supply
b.
There is a decrease in supply
c.
There is an increase in quantity supplied
d.
There is a decrease in quantity supplied

Consider a firm in a perfectly competitive market for puppets. The price of one puppet in this market is $40. Suppose you know that total cost function for the firm is x2+100, where "x" is the number of puppets. Calculate the profit for a firm whose marginal cost function is given by x/2. To do this, use the profit maximizing condition for firms in perfect competition, and the formula for profit.
a.
Can't say
b.
1200
c.
3300
d.
-3300

Which of the following statements about the minimum wage is true?

a.
A minimum wage acts like a price ceiling and leads to underemployment
b.
A minimum wage acts like a price floor and leads to more jobs than there are people looking for employment
c.
A minimum wage acts like a price floor and leads to fewer jobs than there are people looking for employment
d.
A minimum wage is typically lower than the labor market equilibrium wage

Which of the following statements about the poverty line below is false?
a.
Anyone whose income is below the Dollar amount indicated by the poverty line is classified as poor.
b.
The poverty line can change if prices of goods change.
c.
The poverty line is typically different in different regions or countries.
d.
"Extreme" poverty is when someone lives on under $10 a day.

Which of the following statements about consumer surplus is true?
a.
In order to calculate consumer surplus, we take into account the benefits and costs to suppliers.
b.
In order to calculate consumer surplus, we only need to know the marginal benefit of consuming a product to the consumer.
c.
Consumer surplus is the difference between the consumer's total willingness to pay (total benefit) and what the consumer actually paid (total expenditure).
d.
Consumer surplus is the entire area under the demand curve.

When one hired hand works on a strawberry farm, 200 kilograms of the fruits are produced. When a second person is added to work on the farm, the quantity increases to 310 kilograms. Choose the correct statement from below:
a.
The marginal product of labor in going from 1 to 2 workers is 110 kilograms
b.
The average product of labor for producing 310 kilograms is 150
c.
With the information given, we can neither know the average or marginal product for any level of production
d.
The marginal product of labor in going from 1 to 2 workers is 310

Which of the following statements about long run equilibrium in a perfectly competitive market is false?
a.
Long run marginal cost = Marginal Revenue
b.
Price = Long run average total cost
c.
Long run marginal cost = Long run average total cost
d.
Long run average total cost > Long run average variable cost

Which of the following statements about the Long Run Supply curve is false?

a.
When costs don't change, the long run supply curve is flat
b.
The long run supply curve is what you get when you join all the long run equilibria points (demand = supply) in the market
c.
The long run supply curve may be upward sloping if costs are rising as the industry size increases
d.
The long run supply curve is nothing but the upward sloping portion of a typical firm's marginal cost curve

Choose the false statement from below:
a.
One could argue that AT and T operates in an oligopolistic market
b.
One could argue that salt is sold in a perfectly competitive market
c.
One could argue that Levis jeans are sold in a market that can be classified as monopolistic competition
d.
One could argue that the market for cars is a monopoly

Which of the following statements about monopolistic competition is true?
a.
In this market, products are identical
b.
In this market, there are a few firms
c.
In this market, marginal revenue is less than the price
d.
Firms in this market may make a positive profit in the long run

Which of the following statements about equilibrium prices and equilibrium quantities is true?
a.
Price in a monopoly is lower than price in an oligopoly
b.
Quantity in monopolistic competition is lower than quantity in perfect competition
c.
In the long run, profits are higher in monopolistic competition than in perfect competition
d.
In the long run, firms in all markets make zero profits

Watches are selling for $100 in a town, and the demand at this price is 40. If
the price was to decrease to $80, the demand would increase by 20. What is
the price elasticity of demand?
(a) 1
(b) 0.4
(c) 2.5
(d) -20
(e) Can't say

Consider two countries A and B, where both have the same resources. If A uses
all its resources to produce pens, it can produce 100 of them. If it uses all its
resources to make pencils, it can produce 700 pencils. If B uses all its resources
to produce pens, it can produce 200 of them. If it uses all its resources to make
pencils, it can produce 400 pencils. Using this information, which country has
a comparative advantage in making pens?
(a) A
(b) B
(c) Neither (since they are the same)
(d) Can't say

Let R be a symbol for "at least as good as". Suppose that all a consumer
cares about are goods X and Y, and she is currently consuming the bundle B =
(10,10), that is, 10 units of both X and Y. Which of the following statements
about her must be false?
(a) Consider the bundles B1 = (9,2) and B2 = (2,1). Then, B1RB2
(b) Consider the bundles B1 = (1,1) and B2 = (0,2). Then, B2RB1
(c) The consumer generally feels that an average bundle would be at least as
good as consuming an extreme bundle
(d) Can't say

A government in some country wants to discourage the consumption of a sweet
soda (that has a lot of sugar and harmful chemicals in it), without banning it
from the market. Which of the following statements is true?
(a) One way to discourage consumption is to give a subsidy, thereby effectively
lowering its price for consumers.
(b) If the government imposes a tax on the product, consumers will consume
less of the product, and will have as much utility as before.
(c) If the government imposes a tax on the product, and also provides a transfer,
consumers will consume less of the product, but depending on how
large the transfer is, it is also possible for them to have as much utility as
before.
(d) None of the above statements is true.

Which of the following statements about marginal cost is false?
(a) Marginal cost is the change in average cost given a unit change in the level
of output.
(b) Marginal cost equals price when profit is maximized by a perfectly competitive
firm.
(c) Marginal cost equals marginal revenue when profit is maximized by any
firm.
(d) There is a part of the marginal cost curve that represents the supply curve
of a firm.

Consider a firm in a long run equilibrium in a perfectly competitive market.
Which of the following statements is false?
(a) This firm has zero profits.
(b) The firm is operating at a point such that the price prevailing in the market
is equal to the minimum of the long run average total cost of the firm.
(c) The firm does not exit the market, but if demand decreases, it may want to
exit.
(d) Price is not equal to the marginal cost for this firm

Which of the following statements about different types of markets is true?
(a) An oligopoly may have many firms.
(b) A monopoly never has barriers to market entry, but it is always the case
that other firms choose not to enter.
(c) In monopolistic competition, there are many firms.
(d) In monopolistic competition, products must be identical.