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Sample test
Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. The price elasticity of demand is the ratio of the a. absolute change in quantity demanded to the absolute change in price. b. absolute change in price to the absolute change in quantity demanded. c. percentage change in quantity demanded to the percentage change in price. d. percentage change in price to the percentage change in quantity demanded. 2. If the elasticity coefficient is 5, this means that a. the percentage change in quantity demanded is 5 times the percentage change in price. b. if quantity demanded fell by 1 percent, price would fall by 5 percent. c. if price was raised 5 percent, quantity demanded would fall by 5 percent. d. if price was raised 5 percent, quantity demanded would rise 5 percent. e. none of the above 3. Price rises from $10 to $16, and the quantity demanded falls from 100 units to 80 units. What is the coefficient of the price elasticity of demand between the two prices? a. 0.22 b. 0.48 c. 2.08 d. 1.00 e. none of the above 4. If the percentage change in quantity demanded is greater than the percentage change in price, demand is a. inelastic. b. unit elastic. c. elastic. d. perfectly inelastic. 5. Suppose at a price of $4 and at a price of $8, John purchases 40 units of good X. Given this information, we know that a. John's entire demand curve for good X is perfectly elastic. b. John's demand for good X is inelastic. c. John's demand for good X is perfectly inelastic between the prices of $4 and $8. d. John's demand for good X is perfectly elastic between the prices of $4 and $8. e. John's demand for good X is unit elastic. 6. If the price of good X falls and the demand for good X is unit elastic, then the percentage rise in quantity demanded is __________ the percentage fall in price, and total revenue __________. a. greater than; rises b. less than; falls c. equal to; remains constant d. greater than; falls e. less than; rises 7. Those who want to use higher cigarette taxes as a means of reducing smoking would prefer the demand curve for cigarettes to be a. perfectly inelastic. b. inelastic. c. unit elastic. d. slightly elastic.
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e.

highly elastic.

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8. For a certain good, when price rises from $90 to $100, quantity demanded falls from 100,000 to 85,000. The coefficient of price elasticity of demand here is a. 0.65. b. 0.98. c. 0.796. d. 1.54. 9. The price elasticity of demand is lowest for which of the following goods? a. Toyotas b. cars c. Fords d. Chevrolets e. It is between a, c, and d. Exhibit 5-1

____ 10. Refer to Exhibit 5-1. The demand curve D1 is a. inelastic. b. elastic. c. unit elastic. d. perfectly elastic. e. perfectly inelastic. Exhibit 5-2

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____ 11. Refer to Exhibit 5-2. The market for good X is initially in equilibrium at $5. The government then places a perunit tax on good X, as shown by the shift of S1 to S2. As a result, the equilibrium price a. rises from $5.00 to $6.25. b. falls from $5.00 to $4.00. c. remains constant at $5.00. d. none of the above ____ 12. Refer to Exhibit 5-2. The market for good X is initially in equilibrium at $5. The government then places a perunit tax on good X, as shown by the shift of S1 to S2. What is the per-unit tax equal to? a. $1.00 b. $2.25 c. $0.25 d. $4.00 e. $1.25 ____ 13. Refer to Exhibit 5-2. The market for good X is initially in equilibrium at $5. The government then places a perunit tax on good X, as shown by the shift of S1 to S2. Approximately what percentage of the tax do producers end up paying? a. 55 percent b. 45 percent c. 70 percent d. 63 percent e. 25 percent ____ 14. Economists Alchian and Demsetz suggest that firms are formed when a. the sum of what individuals can produce alone is greater than what they can produce as a team. b. someone wants to earn profits. c. someone comes up with the idea that customers will buy a new product. d. the sum of what individuals can produce as a team is greater than the sum of what they can produce alone. ____ 15. The more people involved in team production of a given quantity of output, the __________ the cost to any one person from shirking, and so the __________ the probability of shirking occurring. a. higher; higher b. higher; lower c. lower; higher d. lower; lower ____ 16. The easiest way for stockholders to monitor their managers is to
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a. check the value of their stock in the newspaper. b. study the records of the corporation to see how things look. c. hold a company picnic two or three times a year. d. attend the annual meeting of the stockholders. ____ 17. A cost of resources used in production for which no actual monetary payment is made is a(n) __________ cost. a. tacit b. implicit c. covert d. explicit

____ 18. Five months ago Wilson opened up a health club. Which of the following is an implicit cost related to the health club? a. Wilson paid $120 for an outside laundry service to clean the towels used at the club. b. Wilson paid $100 for the pest control exterminator to spray the health club. c. Wilson previously worked as an accountant, earning $3,000 a month. d. Wilson usually eats four hamburgers a day, priced at $3 each. ____ 19. Which of the following statements is false? a. Money must change hands before a cost can be incurred. b. No monetary payment takes place when an implicit cost is incurred. c. Costs may be either explicit costs or implicit costs. d. Cost implies that a sacrifice has been made. ____ 20. Consider the following information about a business Diane opened last year: price = $4, quantity sold = 12,000; implicit cost = $14,000; explicit cost = $20,000. What was Diane's economic profit? a. $28,000 b. $34,000 c. $14,000 d. $42,000 ____ 21. Which of the following statements is true? a. Explicit costs always equal implicit costs. b. Zero economic profit is a smaller dollar figure than normal profit. c. Zero economic profit is a larger dollar figure than normal profit. d. Saying that a firm earned zero economic profit is the same as saying it earned normal profit. e. none of the above ____ 22. Joe is the owner-operator of Joe's Haircuts Unlimited. Last year he earned $100,000 in total revenues and paid $65,000 to his employees and suppliers. During the course of the year, he received three offers to work for other barbers, with the highest offer being $40,000 per year. What are Joe's implicit costs? a. $105,000 b. $65,000 c. $25,000 d. $40,000 e. $60,000 ____ 23. Joe is the owner-operator of Joe's Haircuts Unlimited. Last year he earned $100,000 in total revenues and paid $65,000 to his employees and suppliers. During the course of the year, he received three offers to work for other barbers, with the highest offer being $40,000 per year. What are Joe's economic profits? a. $0 b. $25,000 c. -$5,000 d. $40,000
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____ 24.

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e. $35,000 If a firm earns normal profit, then it has generated revenues a. equal to the sum of implicit and explicit costs. b. greater than total opportunity costs. c. sufficient to cover explicit costs, but not implicit costs. d. sufficient to cover implicit costs, but not explicit costs. A fixed input is an input whose quantity a. can be changed as output changes in the short run. b. cannot be changed as output changes in the short run. c. cannot be changed as output changes in the long run. d. a and c e. b and c Average fixed cost a. is usually greater at lower levels of output than at higher levels. b. does not change as output changes. c. exists only in the short run. d. is usually greater at higher levels of output than at lower levels of output. e. a and c Costs that do not change with output are called __________ costs. a. marginal b. average c. fixed d. variable Which of the following statements is false? a. Since (total) fixed costs are constant as output changes in the short run, it follows that average fixed cost is constant in the short run. b. Marginal cost is the cost of producing an additional unit of output. c. Changes in variable costs are reflected dollar-for-dollar in changes in total cost. d. Fixed costs exist in the short run, but not in the long run. At 200 units of output, total cost is $36,000 and total variable cost is $24,000. What does total fixed cost equal at 200 units? a. $38,000 b. $10,000 c. $12,000 d. $50 e. none of the above "As additional units of a variable input are added to a fixed input, eventually the marginal physical product of the variable input will decline." This is a statement of the a. law of supply. b. average-marginal rule. c. law of diminishing marginal utility. d. law of diminishing marginal returns. The law of diminishing marginal returns is a. the same as economies of scale. b. the same as the law of diminishing marginal utility. c. important for long-run economic analysis. d. relevant to the production of goods, but not services. e. none of the above
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____ 32. Which of the following curves should one look at to observe the law of diminishing marginal returns? a. the average fixed cost curve b. the total fixed cost curve c. the marginal physical product curve d. the long run average total cost curve Exhibit 8-1

(1) Variable Input 0 1 2 3 4 5 6

(2) Fixed Input 1 1 1 1 1 1 1

(3) Quantity of Output 0 20 41 63 86 108 129

(4) MPP of Variable Input A B C D E F

____ 33. Refer to Exhibit 8-1. The numbers that go in blanks A and B are, respectively, a. 20 and 22. b. 0 and 21. c. 20 and 61. d. 1 and 2. e. 20 and 21. ____ 34. Refer to Exhibit 8-1. Diminishing marginal returns set in with the addition of which unit of the variable input? a. the fourth b. the fifth c. the sixth d. the second ____ 35. If labor is the variable input, then MC equals a. MPP divided by the wage rate.. b. average variable (labor) costs divided by MPP. c. average variable (labor) costs multiplied by MPP. d. the wage rate divided by MPP. e. the wage rate multiplied by MPP. ____ 36. If the average variable cost curve is falling, a. the MC curve must be below it. b. marginal cost is greater than average variable cost. c. the MC curve is necessarily falling. d. the MC curve is necessarily horizontal (neither rising nor falling). e. the MC curve is necessarily rising. ____ 37. Which of the following statements is true? a. If the marginal cost curve is above the AFC curve, the AFC curve must be rising. b. Average total cost equals average variable cost minus average fixed cost. c. As output increases, the average variable cost curve gets closer to the average total cost curve. d. The AFC curve is horizontal as output increases.
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Exhibit 8-2

(1) Variable Input 1 2 3 4 5

(2) Price per Variable Input $10 $10 $10 $10 $10

(3) Total Fixed Cost $100 $100 $100 $100 $100

(4) Output 20 21 23 26 28

(5) Marginal Cost

A B C D

____ 38. Refer to Exhibit 8-2. The dollar amounts that go in blanks C and D are, respectively, a. $10.00 and $1.00. b. $10.00 and $3.33. c. $5.00 and $10.00. d. $10.00 and $10.00. e. $3.33 and $5.00. ____ 39. Refer to Exhibit 8-2. The dollar amounts that go in blanks A and B are, respectively, a. $10.00 and $3.33. b. $10.00 and $5.00. c. $10.00 and $10.00. d. $1.00 and $5.00. e. $2.00 and $10.00.

Situation 8-1 Diane's Donuts will begin selling donuts next week. Diane figures that the ingredients necessary to make donuts will cost $.05 per donut. She has paid $4,400 for the donut-making machinery and one year's rent.

____ 40. Refer to Situation 8-l. What will Diane's average variable costs be if she sells 2,500 donuts? a. $0.038 b. $0.088 c. $0.138 d. $0.050 e. There is not enough information to answer the question. ____ 41. Refer to Situation 8-l. What will Diane's average fixed costs be if she sells 2,500 donuts in one week and then goes out of business? a. $1.76 b. $1.81 c. $1.08 d. $84.62 e. There is not enough information to answer the question. ____ 42. Average variable cost equals a. average fixed cost plus average total cost.
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b. c. d. e.

total variable cost divided by the change in output. total variable cost divided by output. price of the variable input times the quantity of the variable input. a and c

Exhibit 8-3

Variable Input (units) 0 1 2 3 4 5

Fixed Input (units) 1 1 1 1 1 1

Output (units) 0 10 25 45 60 70

Marginal Physical Product of Variable Input (units) A B C D E

Fixed Cost (dollars) $50 $50 $50 $50 $50 $50

Variable Cost (dollars) $0 $20 $40 $60 $80 $100

Marginal Cost (dollars) F G H I J

____ 43. Refer to Exhibit 8-3. The average fixed cost of producing 20 units of output is a. $5.00. b. $20.00. c. $50.00. d. $2.50. e. indeterminable with the information given. ____ 44. Refer to Exhibit 8-3. The marginal physical product figures in blanks B and C are, respectively, a. 10 and 15. b. 15 and 20. c. 20 and 15. d. 15 and 10. e. 10 and 10. Exhibit 8-4

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____ 45. Refer to Exhibit 8-4. Curve B is a(n) __________ cost curve. a. marginal b. average variable c. average total d. average fixed ____ 46. If explicit costs equal $30,000, implicit costs equal $45,000, and accounting profit equals $23,000, it follows that total revenue equals __________ and economic profit equals __________. a. $75,000; $17,000 b. $53,000; -$22,000 c. $68,000; $25,000 d. $22,000; -$68,000 e. There is not enough information given to answer this question. ____ 47. If AFC is $8 at a quantity of output of 100 units, and ATC is $9 at the same quantity of output, it follows that a. marginal cost is $10. b. AVC is $100. c. total cost is $1,700. d. marginal cost is $100. e. none of the above ____ 48. There is a link between production and cost. We know this because a. there are two periods of production, the short run and the long run. b. what happens to MPP directs what happens to MC. c. average fixed cost continually declines over output. d. average productivity falls when marginal productivity is below it. e. none of the above ____ 49. Unit cost refers to a. average variable cost. b. average fixed cost. c. marginal cost. d. average total cost. e. c or d ____ 50. In the theory of perfect competition, a. sellers of the product are not influenced by other sellers and therefore have virtually complete control over the production and pricing of their product.
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buyers of the product may have a preference as to whom they purchase from based on brand loyalty. c. buyers and sellers of the product know everything that there is to know about the product. d. it can be quite expensive for a firm to enter this type of market, but once the firm is established, it will be a profitable venture. ____ 51. Perfectly competitive industries are a. difficult to enter because there are already so many producers in the industry. b. not particularly appealing or attractive to enter because there tend to be so many buyers that it is difficult to deal with them. c. relatively easy to enter but not so easy to exit from. d. a and b e. none of the above

b.

____ 52. Perfectly competitive firms are price takers for all of the following reasons except that a. each firm is quite small relative to the total market supply. b. buyers and sellers have all the necessary information about prices, etc. c. the product is homogeneous. d. barriers to exit force firms to sell at the market price. ____ 53. The demand curve for a perfectly competitive firm a. is downward sloping. b. is upward sloping. c. is perfectly horizontal. d. is perfectly vertical. e. may be downward or upward sloping, depending upon the type of product offered for sale. ____ 54. In the theory of perfect competition, a. the market demand curve is horizontal. b. the single firm's demand curve is horizontal. c. the single firm's demand curve is downward sloping. d. a and b e. a and c ____ 55. The price at which a perfectly competitive firm sells its product is determined by a. the individual seller based on his costs of production and his profit margin. b. all sellers and buyers of the product, collectively. c. the buyers of the product, because there are so many sellers that they cannot agree on a price. d. the government, because there are so many buyers and sellers of the product that together they cannot agree on the price. ____ 56. Marginal revenue is a. total revenue divided by the quantity of output. b. total profit minus total costs. c. the change in total output brought about by using an additional unit of a variable input. d. the change in total revenue brought about by selling an additional unit of the good. e. the change in total revenue minus the change in total costs. Exhibit 9-1 (1) (2) Quantity (3) Marginal
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Price $12 $12 $12 $12 $12

Sold 100 101 102 103 104

Revenue A B C D

____ 57. Refer to Exhibit 9-1. The dollar amounts that go in blanks A and B are, respectively, a. $1 and $12. b. $12 and $12. c. $12 and $10. d. $12 and $11. ____ 58. Refer to Exhibit 9-1. The data are relevant to a perfectly competitive firm because a. its total revenue is different at different levels of quantities sold. b. its marginal revenue is the same at all quantities sold. c. it must lower price to sell additional units of its product. d. marginal revenue is greater than price. ____ 59. If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing that unit the firm a. added more to total costs than it added to total revenue. b. added more to total revenue than it added to total costs. c. added an equal amount to both total revenue and total costs. d. maximized profits or minimized losses. Exhibit 9-2

____ 60. Refer to Exhibit 9-2. If the firm produces the quantity of output at which marginal revenue (MR) equals marginal cost (MC), is it guaranteed maximum profit or minimized loss? a. Yes, when MR = MC, it follows that MR - MC = 0, and thus the firm maximizes profit and minimizes losses. b. No, at the quantity of output at which MR = MC, it could be the case that average variable cost is greater than price and the firm would do better to shut down. c. Yes, when the firm produces the quantity at which MR = MC, it has maximized both revenue and profit. d. Yes, because if the MC curve is rising, the average total cost curve always lies below it
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and thus profit is earned. Exhibit 9-3 (1) Price $10 $10 $10 $10 $10 $10 $10 $10 (2) Quantity Sold 40 41 42 43 44 45 46 47 (3) Total Cost $374 $376 $380 $385 $390 $400 $412 $425

____ 61. Refer to Exhibit 9-3. What quantity of output would the profit-maximizing firm produce? a. 41 units b. 42 units c. 43 units d. 45 units e. none of the above ____ 62. Consider the following data: equilibrium price = $10, quantity of output produced = 100 units, average total cost = $8, and average variable cost = $7. What will the firm do and why? a. Shut down in the short run, because it is taking a loss of $200. b. Continue to produce in the short run, because price is greater than average variable cost. c. Shut down in the short run, because average variable cost is less than average total cost. d. Continue to produce in the short run, because firms are always stuck with having to produce in the short run. ____ 63. Consider the following data: equilibrium price = $7.50, quantity of output produced = 100 units, average total cost = $9, and average variable cost = $8. What will the firm do and why? a. Shut down in the short run, because price is below average variable cost. b. Shut down in the short run, because it will be taking a loss of $50. c. Continue to produce in the short run, because price is greater than average variable cost. d. Continue to produce in the short run, because firms are always stuck with having to produce in the short run. e. none of the above Exhibit 9-4

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____ 64. Refer to Exhibit 9-4. The firm sells its product at P 1 and produces Q1. Given this situation, a. total variable cost is equal to areas 1 + 2. b. total revenue is equal to area 1. c. total cost is equal to areas 2 + 3. d. a and b e. a, b, and c ____ 65. Refer to Exhibit 9-4. Where can you find the lowest price that will motivate the firm to produce Q1 in the short run? a. at the horizontal line running to "ATC" b. at the horizontal line running to "AVC" c. P1 d. $0 ____ 66. Assume the following for a certain industry: (l) there is no incentive for firms to enter or exit the industry; (2) for some firms in the industry, short-run average total cost is greater than long-run average total cost at the level of output where marginal revenue equals marginal cost; (3) all firms in the industry are currently producing the quantity of output at which marginal revenue equals marginal cost. Is the industry in long-run competitive equilibrium? a. Yes. b. No, because of number 2. c. No, because of numbers 2 and 3. d. No, because of numbers 1 and 2. e. No, because of numbers 1, 2, and 3. ____ 67. If the perfectly competitive firm is producing an output level at which price equals marginal cost, it is a. earning profits. b. taking losses. c. earning normal profit. d. There is not enough information to answer the question.

Sample test Answer Section

MULTIPLE CHOICE
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1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

ANS: C ANS: A ANS: B ANS: C ANS: C ANS: C ANS: E ANS: D ANS: B ANS: D ANS: A ANS: B ANS: B ANS: D ANS: C ANS: A ANS: B ANS: C ANS: A ANS: C ANS: D ANS: D ANS: C ANS: A ANS: B ANS: E ANS: C ANS: A ANS: C ANS: D ANS: E ANS: C ANS: E ANS: B ANS: D ANS: A ANS: C ANS: E ANS: B ANS: D ANS: A ANS: C ANS: D ANS: B

DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF:

Easy Moderate Moderate Moderate Moderate Moderate Easy Moderate Moderate Easy Moderate Moderate Difficult Moderate Easy Moderate Easy Easy Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Easy Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Difficult Moderate Difficult Difficult Moderate Moderate Moderate Moderate Moderate

NOT: NEW

NOT: NEW

NOT: NEW

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45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67.

ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS:

C B E B D C E D C B B D B B B B D B A D B B D

DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF:

Moderate Difficult Difficult Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Easy Moderate Moderate Moderate Difficult Moderate Moderate Moderate Difficult Difficult Difficult Moderate

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