Microeconomics Final – Questions from Exams 1 and 2

100 shares of stock in General Motors is considered which type of resource?
- Land
- Labor
- Capital
- It is not a resource

An economic model is useful only if it:
- contains no positive statements
- captures all the complexities of reality
- yields accurate predictions
- has both macro and microeconomic applications

If an economist finds that when consumer incomes increase, consumers buy more cars, Ceteris paribus, then...
- the price of cars must be decreasing
- all other things remain constant
- the price of gas must be decreasing
- the interest rate on car loans must be decreasing

Natural resources are:
- not considered scarce because no one pays for them
- rarely used in production
- included in the category of resources called land
- available in unlimited quantities

The central question in economics is how to:
- deal with the problem of scarcity
- change government economic policy
- change people's wants to match their needs
- manage money and become wealthy

The price of milk would be of particular interest to
- a microeconomist
- a macroeconomist
- neither
- both

To test the theory that if the price of pens rises, then pen purchases fall, an economist would
- collect data on the price of pens and the price of pencils because the two goods are substitutes
- investigate whether people purchase more pens when their income rises
- analyze data on pen purchases linked to the price of pens, holding other factors constant
- ask his or her friends if they would buy fewer pens when the price rises

If the amount of lemonade purchased and the outdoor temperature are directly related, then
- when temp rises, the amount of lemonade purchased rises
- a graph with this relationship would be negatively sloped
- sellers of lemonade hope for cooler temperatures
- the slope of the line reflecting this relationship will be 0

According to marginal analysis, you should choose to do something if the extra benefit:
- is positive
- outweighs the extra cost
- exceeds the benefits of the previous time spent on the activity
- will change the outcome

After the terrorist attacks on September 11, 2001, the United States began devoting substantial resources toward the War on Terrorism, homeland security, and relief efforts. As long as our resources were being used efficiently, the production possibilities curve would suggest that:
- we will have to give up the production of other goods that could have been produced with these resources
- we will be able to produce the same amount of other goods as before
- the military spending will result in an outward shift in the PPC but that the relief effort will result in an offsetting inward shift
- we will be unable to devote the resources necessary toward these efforts unless there is an improvement in technology

Given the possible strategies below, design the best plan for increasing the country's future standard of living
i. build new factories
ii. print money
iii. develop new production technology
iv. sacrifice consumer goods for capital information
iv. tighten immigration
v. produce only enough capital goods to replenish depreciation

- i, ii, and iii only
- i, iii, and iv only
- ii, iv, and v only
- i, ii iii, iv, and v

If an economy is producing at full employment, it means that:
- there are idle resources in this economy
- the economy is producing along its PPC
- the economy is producing at a point that is to the left of the PPC
- the economy is producing at a point that is to the right of the PPC

The law of increasing costs indicates that the opportunity cost of producing a good:
- is proportional to the production of the good
- is constant to the production of the good
- increases as more of the good is produced
- decreases as more of the good is produced

The opportunity cost of watching television is:
- all of the alternative programs that appear on other stations
- zero because there is no money expenditure involved
- the alternative use of the time forgone by watching the program
- zero if it benefits you

Which fundamental economic question requires society to choose the technological and resource mix used to produce goods?
- The What to produce question
- The Why to produce question
- The How to produce question
- The For Whom to produce question

Which of the following causes the production possibilities curve to shift to the right?
- a famine
- a war
- the depletion of oil reserves
- the development of a new technology that improves productivity

A shift occurs in the supply curve for salt when:
- the price of salt increases
- improvements are made in the production process
- salt is found to be associated with high blood pressure
- consumers expect the price of salt to increase in the future

A surplus means a(n):
- excess demand for the product at the current price
- situation where the current market price is too low
- situation where the quantity demanded exceeds the quantity supplied
- excess supply of the product at the current price

According to the law of demand, when will higher corn prices reduce the quantity demanded of corn?
- always
- when the supply of corn is fixed
- when nonprice determinants, like income and the number of buyers, are unchanged
- when there are no shortages or surpluses of corn

An increase in the demand for a product mean that the:
- demand curve shifts to the left
- demand curve shifts to the right
- supply curve shifts to the right
- supply curve shifts to the left

If the United Auto Workers union can obtain a substantial wage increase for auto workers, there will be a(n):
- decrease in the supply of automobiles, which is a shift to the right of the supply curve
- decrease in the supply of automobiles, which is a shift to the left of the supply curve
- increase in the supply of automobiles, which is a shift to the right of the supply curve
- increase in the supply of automobiles, which is a shift to the left of the supply curve

If the demand for a good decreases because consumer income increases, the good is a(n):
- inferior good
- normal good
- necessity good
- luxury good

The horizontal summation of all individual demands at different given prices results in the:
- market supply curve
- market demand curve
- individual demand curve
- equilibrium demand and supply curves

Which of the following is true for the law of supply?
- buyers decrease the quantity of a good purchased as price increases
- sellers increase the quantity of a good supplied as price increases
- price decreases as more units are supplied
- a decrease in price results from more demand

Which of the following state the definition of supply?
- more of a good is supplied at a lower price
- there is a positive relationship between the price of a good and the quantity that buyers purchase
- there is a positive relationship between the price of a good and the quantity offered for sale by suppliers
- there is a negative relationship between the price of a good and the quantity offered for sale by suppliers

A competitive market economy is unlikely to provide an efficient quantity of some public goods because:
- only the government has the vast resources necessary to produce public goods
- the nature of public goods makes it difficult for producers to withhold them from nonpaying consumers
- the technology involved in the production of public goods makes it difficult for private firms to produce them even though, once produced, they could be marketed efficiently
- private production of public goods generally results in a large amount of profit, which is difficult for a firm to effectively pay out to shareholders

A good that provides external benefits to society has:
- too few resources devoted to its production
- too many resources devoted to its production
- the optimal resources devoted to its production
- not provided profits to producers of the good

A minimum wage that is set below the equilibrium wage will:
- cause increased unemployment
- have no effect on employment
- cause the overall wage to increase
- cause the overall wage to decrease

If the equilibrium price of aspirin is $2.50 and a price ceiling is imposed at $3.00, the market will have a(n):
- surplus
- shortage
- accumulation of inventories
- equilibrium

If the market supply increases and, simultaneously, market demand decreases, the new equilibrium will show:
- market price will decrease, and market quantity exchanged could increase, decrease, or remain unchanged
- market price will increase, and market quantity exchanged will decrease
- market price will increase, and the quantity exchanged could increase, decrease, or remain the same
- market price could increase, decrease, or remain the same, and quantity exchanged will increase

One likely result of a price ceiling is that:
- a surplus of product would result
- the price charged in the market would be above the equilibrium price
- the price charged in the market would be the equilibrium price
- the available product must be rationed

The city of Logan Square needs $40 million for a network of streetlights. There are 20,000 residents in the Logan Square neighborhood, meaning the cost for each resident is $2,000. Mr. Miller refuses to donate $2,000 towards the project. This is an example of the problems encountered with:
- consumer goods
- capital goods
- private goods
- public goods

The positive externality associated with education is:
- producers can get higher prices for their goods and services
- less crowding in the classrooms
- increases in societal well-being and economic growth
- technological progress slows as basic research increases

Which of the following is the most likely effect of lower apple juice prices on the price and quantity purchased of orange juice, a substitute product?
- the price of orange juice will increase, and the quantity purchased will fall
- the price of orange juice will fall, and the quantity purchased will increase
- the price of orange juice will increase, and the quantity purchased will increase
- the price of orange juice will fall, and the quantity purchased will fall

A good is classified as inferior if:
- consumers buy less when the price rises
- consumers buy less when income rises
- consumers buy less when the price falls
- consumers buy more when income rises

A perfectly elastic supply curve is expressed graphically as a(n):
- downward sloping line or curve
- upward sloping line or curve
- vertical line
- horizontal line

An increase in total revenue results occurs from which of the following:
- price decreases when demand is inelastic
- price increases when demand is elastic
- price decreases when demand is elastic
- price increases when demand is unitary elastic

Consider the market for bicycles. If a dealer cuts prices by 10 percent and sells 20 percent more bikes, then demand for bicycles is:
- inelastic, and total revenue will increase
- elastic, and total revenue will increase
- inelastic, and total revenue will decrease
- elastic, and total revenue will decrease

If the government wants to raise tax revenue and shift most of the tax burden to the sellers it would impose a tax on a good with a:
- flat (elastic) demand curve and a steep (inelastic) supply curve
- steep (inelastic) demand curve and a flat (elastic) supply curve
- steep (inelastic) demand curve and steep (inelastic) demand curve
- flat (elastic) demand curve and a flat (elastic) supply curve

In the very short-run period,
- the price elasticity of supply is very elastic
- the price elasticity of demand is very elastic
- the cross elasticity of demand is very inelastic
- the price elasticity of supply is very inelastic

The elastic portion of the downward-sloping straight-line demand curve lies:
- at the intersection with the supply curve
- above the point of unit elasticity
- anywhere to the right of the current market price
- below the point where total revenue is maximized

Cash payments to a steel mill for steel used in production would be an example of:
- entrepreneurial costs
- fixed costs
- explicit costs
- implicit costs

During the course of a week, McDonald's has enough time to hire or layoff workers, but it does not have enough time to expand its kitchen or add an additional seating area. In this situation, McDonald's:
- has no fixed costs
- is in the short run
- suffers an economic loss
- earns a large profit

Economic profit is:
- total revenues minus variable costs
- total revenues minus implicit costs
- total revenues minus explicit costs
- total revenues minus explicit costs minus implicit costs

Economies of scale imply that within some range one can increase the size of operation and:
- total cost will decrease
- fixed cost will decrease
- average total cost will decrease
- average total cost will increase

The mirror image of the marginal cost curve is the:
- average fixed cost curve
- marginal product curve
- total variable cost curve
- average total cost curve

Which of the following is true about average fixed cost?
- average fixed cost has a u-shape, and marginal cost crosses average fixed cost at its minimum point
- average fixed cost does not vary as output increases
- average fixed cost is the difference between marginal cost and average total cost
- average fixed cost is total fixed cost divided by the quantity of output produced, and it declines steadily as output increases

Which of the following is true at the point where diminishing returns set in?
- both marginal product and marginal cost are at a maximum
- both marginal product and marginal cost are at a minimum
- marginal product is at a maximum and marginal cost is at a minimum
- marginal product is at a minimum and marginal cost is at a maximum

Which of the following is true if the total variable cost curve is increasing at an increasing rate?
- average fixed cost is increasing
- marginal cost is decreasing
- marginal cost is increasing
- average fixed cost is constant

Which of the following statements is true?
- when marginal cost is below average cost, average cost rises; when marginal cost is above average cost, average cost falls
- the marginal product is the output per unit of a variable input
- average variable cost and average fixed cost are u-shaped curves
- when marginal productivity of a variable input is falling then marginal costs of production must be rising

A firm that is a price taker can:
- substantially change the market price of its product by changing its level of production
- sell all of its output at the market price
- sell some of its output at a price higher than the market price
- decide what price to charge for its product

A perfectly competitive firm sells its output for $100 per unit and marginal cost is $100 per unit. To maximize short-run profit, the firm should:
- increase output
- decrease output
- maintain its current output
- shut down

If the market price is $5 and you are currently producing at a level where average total cost is $3 and falling, you should:
- produce until the average total cost and average revenue are equal
- shut down
- produce only enough to cover variable costs
- produce where MR=MC

In the short run, a firm should shut down its business if price is less than:
- ATC
- AR
- MC
- AVC

Maximizing profit means finding the maximum difference between:
- TR and TC
- MR and MC
- price and ATC
- ATC and MC

The short-run supply curve for a perfectly competitive firm is the marginal cost curve
- at all price levels because the firm chooses the profit maximizing quantity of output where marginal revenue equals marginal cost
- above the minimum point of the average variable cost curve because as the price falls, the firm maximizes profit by producing more output to account for a smaller profit margin on each unit
- above the minimum point of the average variable cost curve because the firm maximizes profit by choosing the quantity at which marginal revenue equals marginal cost and below the minimum point of AVC the firm will shut down to minimize its losses
- above the minimum point of the average total cost curve because the firm maximizes profit by choosing the quantity at which marginal revenue equals marginal cost and below the minimum point of ATC the firm will shut down to minimize its losses

When a product is defined at homogeneous,
- buyers prefer one seller's product to another's
- buyers are indifferent as to which seller's product they buy
- sellers are indifferent as to the quantity of the product they sell
- sellers have an incentive to charge a price higher than the market price

Alcoa had a monopoly in the U.S. aluminum market from the late nineteenth century until the end of WWII. Which barrier to entry was the source of Alcoa's monopoly power?
- ownership of a vital resource
- government franchises and licenses
- patents and copyrights
- economies of scale

Because monopolists are protected by high barriers to entry, they:
- may be able to earn long-run economic profits
- will not minimize the per-unit cost of producing their output
- will price their product at the highest possible price
- seek economic profit; however they are not able to earn it in the long run

If pizza used to be produced in a perfectly competitive market, and now the pizza market has become a monopoly, we can expect:
- less pizza to be sold at a higher price
- more pizza to be sold at a higher price
- less pizza to be sold at a lower price
- more pizza to be sold at a lower price

In contrast to a perfectly competitive firm, a monopolist operates in the long run
- at a price higher than marginal cost
- with a profit equal to zero
- at an efficient level of output
- at the minimum point on its average total cost curve

Suppose a perfectly competitive market results in a long-run equilibrium price of $8 and quantity of 500. If this same market were a monopoly, which of the following price and quantity combinations would be the most likely?
- price $10, quantity 350
- price $8, quantity 500
- price $6, quantity 650
- price will equal marginal revenue and quantity will be found where marginal revenue equals marginal cost

The monopolist, unlike the perfectly competitive firm, can continue to earn an economic profit in the long run because of:
- collusive agreements with competitors
- price leadership
- cartels
- extremely high barriers to entry

Which barrier to entry results in the creation of a natural monopoly?
- legal barriers like government franchises
- economies of scale
- ownership of a vital resource
- patents and copyrights

Which of the following best explains why the monopolist's marginal revenue is less than the selling price?
- to sell more units, the monopolist must reduce price on all units sold
- as the monopolist expands output, the average total cost will decline
- the monopolist charges each consumer the highest possible price
- when a firm has a monopoly, consumers have no choice other than to pay the price set by the monopolist

Which of the following is not a necessary condition for effective price discrimination?
- the seller must be able to separate buyers based on their elasticities
- the seller must not be a price taker
- consumers must not be able to resell the products to other consumers
- consumers must tell the seller how much they are willing to pay for the product

A kink in the demand curve facing an oligopolist is caused by:
- rapidly rising marginal revenues
- excessive advertising
- the belief that competitors will follow price increases but not match price decreases
- the tendency of competitors to follow price reductions but not price increases

Assume that an oligopolist has a kinked demand curve. Suppose that the marginal cost curve passes through the gap in the marginal revenue curve. This means price and output will be shown by a point:
- above the curve
- below the curve
- at the kink
- on the upper part of the curve

Exit of existing firms will occur in a monopolistic competitive industry until:
- marginal cost equals zero
- marginal revenue equals zero
- marginal revenue equals marginal cost
- economic profit equals zero

In order to make oil profits as large as possible, OPEC meets to set oil production quotas for its members. OPEC is best classified as a:
- monopoly
- cartel
- kinked demand industry
- price leadership industry

Perfect competition and monopolistic competition are similar because under both market structures,
- there are many firms
- production takes place at the least cost combination
- differentiated products are produced
- entry is difficult

Suppose the Tidy Laundry Detergent Company, which sells 40% of all detergent, is thinking about raising its price. Before Tidy makes the change, they analyze the likely responses of the All-Clean Detergent Company, which sells 35% of all detergent, and Cheerful Detergent Company, which sells 20% of all detergent. Tidy's behavior shows
- mutual interdependence in pricing decisions
- nonprice competition
- difficult entry in oligopolies
- collusion

The kinked demand theory attempts to explain why an oligopolistic firm:
- has relatively large advertising expenditures
- fails to invest in research and development
- infrequently changes its price
- engages in excessive brand proliferation

The marginal revenue curve of a monopolistically competitive firm will always lie:
- below the firm's demand curve
- parallel to the firm's demand curve
- parallel to the firm's quantity axis
- above the firm's demand curve

Tombstones are produced in a monopolistic competitive market. One producer, Rolling Stones, sells 20 tombstones a week at a price of $500 each. Its average total cost is $600. From this information, we can tell:
- new tombstone firms will want to enter
- this producer is losing $2000 a week
- this producer is making an economic profit of $400
- this producer should increase production

Which of the following is a distinction between perfectly competitive and monopolistic competition?
- perfectly competitive firms must compete with rival sellers; monopolistically competitive firms do not confront rival sellers
- monopolistically competitive firms can raise their price without losing sales; perfectly competitive firms must lower their price in order to sell more of their product
- perfectly competitive firms confront a perfectly elastic demand curve; monopolistically competitive firms face a downward-sloping demand curve
- perfectly competitive firms may make either economic profits or losses in the short run, but monopolistically competitive firms always earn an economic profit

Which of the following is not true of a monopolistically competitive firm?
- the firm will maximize profits by producing where MR=MC
- the firm will not likely earn an economic profit in the long run
- the firm will shut down if price is less than average variable cost
- the firm will produce an efficient quantity where average total cost is minimized

Which of the following statements best describes firms under monopolistic competition?
- there is little price or quality competition
- the firms compete, using quality, location, advertising, and price
- firms do not compete using advertising
- there is only one firm so there is no competition

Suppose that R.J. Reynolds raises the price of cigarettes by 10 percent. Although they have no requirement or agreement to do so, the other cigarette firms decide to raise their prices accordingly. This situation is best described as:
- price leadership
- a cartel
- monopolistic competition
- a market with kinked demand