Chapter 1

Introduction

MULTIPLE-CHOICE QUESTIONS

1) The best definition of economics is

A) how choices are made under conditions of scarcity.
B) how money is used.
C) how goods and services are produced.
D) how businesses maximize profits.
Answer: A
Level of Difficulty: Easy
2) Managerial economics is best defined as the economic study of
A) how businesses can make the most profits.
B) how businesses can decide on the best use of scarce resources.
C) how businesses can operate at the lowest costs.
D) how businesses can sell the most products.
Answer: B
Level of Difficulty: Easy
3) Managerial economics is best defined as
A) the study of economics by managers.
B) the study of the aggregate economic activity.
C) the study of how managers make decisions about the use of scarce resources.
D) All of the above are good definitions.
Answer: C
Level of Difficulty: Easy
4) Scarcity is a condition that exists when
A) there is a fixed supply of resources.
B) there is a large demand for a product.
C) resources are not able to meet the entire demand for a product.
D) All of the above.
Answer: C
Level of Difficulty: Easy

5) Which of the statements below best illustrates the use of the market process in determining the
allocation of scarce resources?
A) "Let's make this product because this is what we know how to do best."
B) "Although we're currently making a profit on the products we make, we should consider
shifting to products where we can earn even more money."
C) "Everyone is opening video stores, why don't we?"
D) "We can't stop making this product. This product gave our company its start."
Answer: B
Level of Difficulty: Moderate
6) Which of the following is not considered as a factor of production?
A) money
C) land

B) machinery and equipment

D) unskilled labor

Answer: A
Level of Difficulty: Easy
7) Select the group that best represents the basic factors of production.
A) land, labor, capital, entrepreneurship
C) land, natural resources, labor, capital

B) land, labor, money, management skills

D) land, labor, capital, technology

Answer: A
Level of Difficulty: Easy
8) Which of the following is an example of how the question of "what goods and services to
produce?" is answered by the command process?
A) government subsidies for windmill energy production
B) laws regarding equal opportunity in employment
C) government allowance for the deduction of interest payments on private mortgages
D) government regulations concerning the dumping of hazardous waste
Answer: A
Level of Difficulty: Moderate

9) Which of the following is the best example of "what goods and services should be produced?"
A)
B)
C)
D)

the use of a capital intensive versus a labor intensive process of manufacturing textiles
the production of SUVs versus the production of sub-compact cars
the manufacturing of computer workstations in China or in India
the leasing versus the purchasing of new capital equipment

Answer: B
Level of Difficulty: Moderate
10) Which of the following is the best example of "how goods and services should be
produced?"
A)
B)
C)
D)

complying with the technical specifications in the production of an aircraft

the production of jet aircraft for the air force or for a commercial airline
the use of additional workers versus the use of machines in the production of goods
the production of a new manufacturing facility

Answer: C
Level of Difficulty: Moderate
11) From the standpoint of a soft drink company the question of "What goods and services
should be produced?" is best represented by which of the following decisions?
A) whether or not to hire additional workers
B) whether or not to increase its advertising
C) whether or not to shut down selected manufacturing facilities
D) All of the above are examples.
E) None of the above are examples.
Answer: E
Level of Difficulty: Moderate
12) In the text, the authors refer to "Stage II" of the process of changing economics as
A) demand management.
C) diminishing returns.
Answer: B
Level of Difficulty: Easy

B) cost management.
D) profit taking.

13) In the "four-stage" model of change," Stage III is represented by

A) deciding how much to markup costs to set a profitable product price.
B) cost-cutting and restructuring to maintain and improve production.
C) narrowing product lines to those offering the greatest revenue potential.
D) focusing on markets with the greatest growth potential.
Answer: C
Level of Difficulty: Easy
15) Which of the following is the best example of the "command" process?
A) United Airlines buys Northwest Airlines.
B) Striking auto workers force General Motors to shut down its factories.
C) Banks raise their fees on late payments by credit card holders.
D) The FCC requires local telephone companies to provide access to their local networks
before being able to offer long distance service.
Answer: D
Level of Difficulty: Moderate
16) A critical element of entrepreneurship (as opposed to managerial skills) is
A) leadership skills.
C) technology.

B) risk taking.
D) political skills.

Answer: B
Level of Difficulty: Easy
17) In the text, a key factor in the changing "economics of a business" is
A) the need to grow revenues.
C) rising labor costs.
Answer: B
Level of Difficulty: Easy

B) increasing competition.
D) the need to expand market share.

18) Opportunity cost is best defined as

A) the amount given up when choosing one activity over all other alternatives.
B) the amount given up when choosing one activity over the next best alternative.
C) the opportunity to earn a profit that is greater than the one currently being made.
D) the amount that is given up when choosing an activity that is not as good as the next best
alternative.
Answer: B
Level of Difficulty: Moderate
19) The economic concept of "opportunity cost" is most closely associated with which of the
following management considerations?
A) market structure
C) product demand

B) resource scarcity
D) technology

Answer: B
Level of Difficulty: Easy
20) Which of the following is the best example of opportunity cost?
A) a company's expenditures on a training program for its employees
B) the rate of return on a company's investment
C) the amount of money that a company can earn by depositing excess funds in a money
market fund
D) the amount of profit that a company forgoes when it decides to drop a particular product
line in favor of another one
Answer: D
Level of Difficulty: Moderate
21) Which of the following is the best example of the "traditional process"?
A) commercial bank mergers
B) minimum age limits for the purchase of alcoholic beverages
C) auctioning US Treasury bills
D) colleges and universities give admissions preferences to children of alumni
Answer: D
Level of Difficulty: Moderate

Chapter 2

The Firm and Its Goals

MULTIPLE-CHOICE QUESTIONS

1) Transaction costs include

A) costs of negotiating contracts with other firms.
B) cost of enforcing contracts.
C) the existence of asset-specificity.
D) All of the above.
Answer: D
Level of Difficulty: Easy
2) A company will strive to minimize:
A) transaction costs.
B) costs of internal operations.
C) total costs of transactions and internal operations combined.
D) variable costs.
Answer: C
Level of Difficulty: Easy
3) The best example of an economic goal of a firm is:
A) providing good products/services to its customers.
B) improving its public image.
C) increasing employee morale.
D) increasing shareholder wealth.
Answer: D
Level of Difficulty: Easy
4) A large corporation's profit objective may not be profit or wealth maximization, because
A) stockholders have little power in corporate decision-making.
B) management is more interested in maximizing its own income.
C) managers are overly concerned with their own survival and may not take all prudent
risks.
D) All of the above.
Answer: D
Level of Difficulty: Moderate

5) One of the weaknesses in pursuing the objective of profit maximization is that it ignores:
A) the timing of cash flows
B) the time-value of money concept.
C) the riskiness of cash flows.
D) All of the above.
Answer: D
Level of Difficulty: Easy
6) Goals which are concerned with creating and maintaining employee and customer satisfaction
and social responsibility are referred to as ________ objectives.
A) social
B) noneconomic
C) welfare
D) public relations
Answer: B
Level of Difficulty: Easy
7) Financial Risk occurs due to variations in returns which:
A)
B)
C)
D)

is induced by leverage
is due to the ups and downs of the economy
is due to changes in government regulations
is a result of changes in exchange rates

Answer: A
Level of Difficulty: Moderate
8) Financial risk is associated with changes in
A) the demand for a firm's products.
B) a firm's debt.
C) a firm's labor costs.
D) government regulations of a firm's activities.
Answer: B
Level of Difficulty: Moderate
9) ________ risk involves variation in returns due to the ups and downs of the economy, the
industry and the firm.
A) Structural
B) Fluctuational
C) Business
D) Financial
Answer: C
Level of Difficulty: Easy
10) Unlike an accountant, an economist measures costs on a ________ basis.
A) explicit
B) replacement
C) historical
D) conservative
Answer: B
Level of Difficulty: Easy

11) _________ maximization is achieved when a company manages its business in such a way
that its cash flows over time, discounted at the appropriate discount rate, will cause the value
of the company's common stock to be at a maximum.
A) profit
C) asset

B) stockholder wealth
D) None of the above.

Answer: B
Level of Difficulty: Easy
12) The calculation of stockholder wealth involves
A) the time-value of money concept.
B) the cash flow stream.
C) business and financial risk.
D) All of the above.
Answer: D
Level of Difficulty: Easy
13) Another name for stockholder wealth maximization is
A) profit maximization.
B) maximization of earnings per share.
C) maximization of the value of the common stock.
D) maximization of cash flows.
Answer: C
Level of Difficulty: Easy
14) Accounting costs
A) are historical costs.
C) usually include implicit costs.

B) are replacements costs.

D) usually include normal profits.

Answer: A
Level of Difficulty: Easy
15) A firm earns a normal profit when its total revenues just offset both the ________ cost
and ________ cost.
A) accounting; opportunity
B) accounting; replacement
C) historical; replacement
D) explicit; accounting
Answer: A
Level of Difficulty: Moderate

16) A firm's "normal profit" is best characterized by the

A) average of a firm's profits over the past five years.
B) amount of profit necessary to keep the price of a firm's stock from changing.
C) amount of profit a firm could earn in its next best alternative activity.
D) the average amount of profit earned in the firm's industry.
Answer: C
Level of Difficulty: Difficult
17) MVA (Market Value Added)
A) will always be a positive number.
C) measures the market value of the firm.

B) may be a negative number.

D) None of the above.

Answer: B
Level of Difficulty: Moderate
18) Opportunistic behavior is best described as a firm
A) gathering as much information as possible before dealing with another entity.
B) attempting to make a profit from its dealings with another entity.
C) firm trying to take advantage of another entity in its dealings with it.
D) selecting another entity to deal with.
Answer: C
Level of Difficulty: Moderate
19) Firms are organized to keep their costs as low as possible by
A) comparing external transactions costs with internal operating cost.
B) analyzing supply and demand conditions.
C) minimizing their use of borrowed funds.
D) utilizing the latest technology.
Answer: A
Level of Difficulty: Moderate

Chapter 3

Supply and Demand (Appendix 3A)

MULTIPLE-CHOICE QUESTIONS

1) How long is the "short-run" time period in the economic analysis of the market?
A) three months or one business quarter
B) total time in which sellers already in the market respond to changes in demand and
equilibrium price
C) total amount of time it takes new sellers to enter the market
D) total amount of time it takes original sellers to leave the market
Answer: B
Level of Difficulty: Moderate
3) Which of the following best applies to the distinction between the "long run" and the "short
run"?
A) The short run is a period of approximately 1-6 months while the long run is any time
frame which is longer.
B) In the short run, only new firms may enter, while in the long-run firms may either enter
or exit the market.
C) The rationing function of price is a short-run phenomenon whereas the guiding function
is a long-run phenomenon.
D) All of the above statements are correct.
Answer: C
Level of Difficulty: Moderate
1) In the short-run if there is a surplus in the market for a product, the rationing function of price
can be expected to cause
A) an increasing shift in the demand for the product.
B) a decreasing shift in the supply of the product.
C) an increase in the market price of the product.
D) a decrease in the market price of the product.
Answer: D
Level of Difficulty: Moderate
4) In the long-run if there is a shortage in the market for a product, the guiding (allocation)
function of price can be expected to cause
A) an increasing shift in the demand for the product.
B) a decreasing shift in the demand for the product.
C) an increasing shift in the supply of the product.
D) a decreasing shift in the supply of the product.
Answer: C
Level of Difficulty: Moderate

5) The rationing function of price

A) occurs when there is a movement of resources into or out of markets as a result of
changes in the equilibrium market price.
B) is also known as the guiding function of price.
C) occurs when consumers change their tastes and preferences.
D) occurs only when the market experiences severe shortages.
Answer: C
Level of Difficulty: Moderate
6) Which of the following best describes the "guiding function" of price?
A) In response to a surplus or shortage in two markets, price serves as a "guiding function"
by decreasing in one market and increasing in the other market in the short run.
B) The guiding function of price is the movement of resources into or out of markets in
response to a change in the equilibrium price of a good or service.
C) The guiding function of price occurs when the market price changes to eliminate the
imbalance between supply and demand caused by a shortage or surplus at the original
price.
D) The guiding function usually occurs in the short run while the rationing function usually
occurs in the long run.
Answer: B
Level of Difficulty: Moderate
7) The guiding function of price is
A) the movement of price to clear the market of any shortages or surpluses.
B) the use of price as a signal to guide government on the use of market subsidies.
C) a long-run function resulting in the movement of resources into or out of markets.
D) the movement of price as a result of changes in the demand for a product.
Answer: C
Level of Difficulty: Moderate
8) The "law" of demand can be best described by
A) people will buy things that they enjoy.
B) if incomes rise, people will buy more.
C) a rise in price will cause shortages.
D) a fall in price will increase quantity demanded.
Answer: D
Level of Difficulty: Easy

9) A movement along a demand curve may be caused by a change in:

A) the non-price determinants of demand.
B) the change in consumer expectations.
C) the change in demand.
D) the change in supply.
Answer: D
Level of Difficulty: Easy
10) All of the following are non-price determinants of demand except?
A) tastes and preferences
B) income
C) technology
D) future expectations
Answer: C
Level of Difficulty: Easy
11) Which of the following will result in a decrease in demand for residential housing in the
short run?
A) a decrease in the price of lumber
B) an increase in the wages of carpenters
C) a decrease in real household incomes
D) a decrease in the prices of residential housing
Answer: C
Level of Difficulty: Easy
12) Which of the following would cause a decrease in the demand for fish?
A) The price of red meat increases.
C) The price of chicken decreases.

B) The price of fish increases.

D) The number of fishing boats decreases.

Answer: C
Level of Difficulty:
13) Which of the following refers to a shift in the demand curve?
A) "This new advertising campaign should really increase our demand."
B) "Let's drop our price to increase our demand."
C) "We dare not raise our price because our demand will drop."
D) "If new sellers enter the market, the demand for the product is bound to increase."
Answer: A
Level of Difficulty: Moderate

14) Which of the following can result in a decrease in the demand for I-Pods in the short run?
A) a decrease in the population
B) a decrease in real household incomes
C) a decrease in the price of MP4s
D) All of the above.
Answer: A
Level of Difficulty: Easy
15) A good that is similar to another, and can be consumed in place of it, is called
A) a normal good.
B) an inferior good.
C) a complementary good.
D) a substitute good.
Answer: D
Level of Difficulty: Easy
16) Two goods are ________ if the quantity consumed of one increases when the price of the
other decreases.
A) normal
B) superior
C) complementary
D) substitute
Answer: C
Level of Difficulty: Easy
17) If the price of a substitute increases, which of the following is most likely to happen in the
market for the product under consideration in the short run?
A) Supply will increase.
B) Firms will leave the market.
C) Firms will devote more variable inputs in the production of this good.
D) Firms will devote less variable inputs in the production of this good.
Answer: C
Level of Difficulty: Moderate
18) Which of the following will not cause the demand curve for good X to shift?
A) a change in the price of X
B) a change in the price of Y, a complement
C) a change in the price of Z, a substitute
D) an increase in average disposable real income
Answer: A
Level of Difficulty: Moderate

19) Which of the following will change only the quantity demanded of oranges?
A) an increase in the population
B) a change in the price of tangerines
C) a change in the price of oranges
D) a decrease in the taste & preferences for oranges
Answer: C
Level of Difficulty: Easy
20) Coke and Pepsi are substitutes if:
A) the demand for Coke increases when the price of Pepsi falls
B) the demand for Coke increases when the price of Pepsi rises
C) the supply of Coke increases when the price of Pepsi falls
D) the demand for Coke and Pepsi rise and fall together
Answer: B
Level of Difficulty: Easy
21) All of the following are non-price determinants of supply except?
A) costs
B) technology
C) income
D) future expectations
Answer: C
Level of Difficulty: Easy
22) Which of the following would cause a short - run decrease in the quantity supplied of
personal computers?
A) The price of CPUs decrease.
B) The price of software decreases.
C) The number of PC manufacturers decreases.
D) The cost of manufacturing PCs decreases.
Answer: A
Level of Difficulty: Easy
23) Which of the following will not cause a short-run shift in the supply curve?
A) a change in the number of sellers
B) a change in the cost of resources
C) a change in the price of the product
D) a change in future expectations
Answer: C
Level of Difficulty: Easy

24) Which of the following applies most generally to supply in the long run?
A) Average total cost must decline.
B) Producers are able to make change in all their factors of production.
C) Producers are only able to make change in their variable factors of production.
D) All original producers will leave the market.
Answer: B
Level of Difficulty: Moderate
25) Which of the following could cause a long-run shift in demand as part of the "guiding
function of price"?
A) a change in tastes and preferences
B) an increase in price caused by a shift in supply
C) income shift caused by an economic recession
D) an increase in number of buyers
Answer: B
Level of Difficulty: Difficult
26) Which of the following is a common determinant of both supply and demand?
A) income
B) future expectations
C) tastes and preferences
D) sales tax
Answer: B
Level of Difficulty: Easy
27) Which of the following indicates that there is a shortage in the market?
A) Demand is rising.
B) Demand is falling.
C) Price is rising.
D) Price is falling.
Answer: C
Level of Difficulty: Moderate
28) Which of the following is correct? The supply curve will shift when
A) income, preferences, or the number of suppliers change
B) income, preferences, or the number of buyers change
C) income, preferences, or production technology changes
D) the number of sellers and the number of buyers change
E) production technology and input prices change
Answer: E
Level of Difficulty: Difficult

29) A fall in the price of pesticide use in the production of Cotton, will
A) decrease the supply of Cotton, causing the supply of curve of Cotton to shift to the left
B) increase the supply of Cotton, causing the supply curve of Cotton to shift to the left
C) cause a downward movement along the supply curve of Cotton
D) have no effect on the supply of Cotton
E) none of the above
Answer: E
Level of Difficulty: Difficult
30) Which of the following would lead to a short-run market surplus for tomatoes?
A) The price of tomatoes increases.
B) A new government study shows that tomatoes have a greater risk of contamination from
Salmonella .
C) An increase in the price of potatoes.
D) A decrease in the number of tomato growers.
Answer: B
Level of Difficulty: Difficult
31) Which of the following would cause a leftward shift in the demand curve for a good?
A) an increase in income
B) an increase in the price of a complementary good
C) an increase in the price of a substitute
D) the expectation that there will be a shortage in the availability of the good
Answer: B
Level of Difficulty: Moderate
32) Which of the following would cause a decrease in the price of a good?
A) an increasing shift in the supply of a good and no shift in demand
B) a decreasing shift in the supply of a good and no shift in demand
C) an increasing shift in the demand for good and no shift in supply
D) an increasing shift in the demand for good and a decreasing shift in supply
Answer: A
Level of Difficulty: Difficult
33) A market is in equilibrium when
A) supply is equal to demand.
B) the price is adjusting upward.
C) the quantity supplied is equal to the quantity demanded.
D) tastes and preference remain constant.
Answer: C
Level of Difficulty: Moderate

34) In the short run, a change in the equilibrium price will

A) always lead to inflation.
B) cause a shift in the demand curve.
C) cause a shift in the supply curve.
D) cause a change in the quantity demanded or supplied.
Answer: D
Level of Difficulty: Difficult
35) Comparative statics analysis in economics is best illustrated as
A) the comparison of equilibrium points before and after changes in the market have
occurred.
B) a comparison of two types of markets.
C) the comparison of the percentage of change in the one variable divided by the percentage
change in the other variable.
D) an analytical technique used to show best case scenarios of demand and supply curves.
Answer: A
Level of Difficulty: Moderate
36) An increase in input prices will cause
A) Supply to shift rightward, equilibrium price to rise, and equilibrium quantity to fall
B) Supply to shift leftward, equilibrium price to rise, and equilibrium quantity to fall
C) Supply to shift rightward, equilibrium price to fall, and equilibrium quantity to rise
D) Supply to shift leftward, equilibrium price to fall , and equilibrium quantity to rise
Answer: B
Level of Difficulty: Difficult
37) The switch to the use of ethanol in gasoline is driven primarily by its relatively lower
price. Assuming a competitive market, what effect would this change have on the
equilibrium price and output for gasoline?
A) Price rises, output falls.
B) Price falls, output rises.
C) Price rises, output rises.
D) Price falls, output falls.
Answer: B
Level of Difficulty: Moderate

38) Which of the following would indicate that price is temporarily above its market
equilibrium?
A) There are a number of producers who are left with unwanted inventories.
B) There are a number of customers who are looking for a good but cannot find sellers.
C) New firms decide to enter the market.
D) The government must step in and impose a tax on the good.
Answer: A
Level of Difficulty: Moderate
39) Which of the following statements is false?
A) An increase in demand causes equilibrium price and quantity to rise.
B) A decrease in demand causes equilibrium price and quantity to fall.
C) An increase in supply causes equilibrium price to fall and quantity to rise.
D) A decrease in supply causes equilibrium price to rise and quantity to rise.
Answer: D
Level of Difficulty: Difficult
40) Holding supply constant, an increase in demand will:
A) increase both the quantity and price
B) increase the equilibrium price and decrease the equilibrium quantity
C) decrease the equilibrium price and increase the equilibrium quantity
D) decrease both the quantity and price
Answer: A
Level of Difficulty: Moderate

Chapter 4

Demand Elasticity (Appendix 4A)

MULTIPLE-CHOICE QUESTIONS
1) 1. The price elasticity of demand is a measure of:
A) the responsiveness of the quantity demanded to price changes
B) the quantity demanded at a given price
C) The shift in the demand curve when price changes
D) The demand for a product holding price constant
Answer: A
Level of Difficulty: Easy
2) The elasticity of demand for a product is likely to be greater
A) the smaller the number of substitute products available
B) the smaller the proportion of ones income spent on the product
C) if the product is a luxury rather than an absolute necessity
D) if the product is an imported good rather than a domestically produced good
Answer: C
Level of Difficulty: Moderate
3) If O.P.E.C. increases its price of oil, and still the demand for oil decreases by a very small
amount, we can conclude that the demand for oil is:
A) Relatively elastic
B) Relatively inelastic
C) Perfectly elastic
D) Perfectly inelastic
Answer: B
Level of Difficulty: Easy
4) If the consumption of sugar does not change at all following a price increase from 50 cents per
pound to 65 cents per pound, the demand for sugar is considered to be
A) relatively inelastic.
B) perfectly elastic.
C) perfectly inelastic.
D) unitary elastic.
Answer: C
Level of Difficulty: Easy

5) If the demand for a product is said to be relatively inelastic, the absolute value of the
elasticity coefficient will be:
A) Less than one
B) Greater than one
C) Equal to one
D) Zero
Answer: A
Level of Difficulty: Easy
6) If an item has several good substitutes, the demand curve for that item is likely to be:
A) Relatively inelastic
B) Relatively elastic
C) Perfectly inelastic
D) Unit elastic
Answer: B
Level of Difficulty: Easy
7) Remembering that demand elasticity is defined as the percentage change in quantity divided
by the percentage change in price, if price decreases and, in percentage terms, quantity rises
more than price has dropped, total revenue will
A) increase.
B) decrease.
C) remain the same.
D) either increase or decrease.
Answer: A
Level of Difficulty: Difficult
8) Suppose the price of beans rises from $1.00 a pound to $2.00 a pound, quantity demanded
falls from 10 units to 6 units, the coefficient of elasticity of demand for beans using the arc
elasticity approach is:
A) -1.33
B) - 0.75
C) -0.4
D) - 0.25
Answer: B
Level of Difficulty: Difficult
9) In the above example, the demand for beans is said to be:
A) Relatively Elastic
B) Relatively Inelastic
C) Perfectly Elastic
D) Perfectly Inelastic
Answer: B
Level of Difficulty: Moderate

10) A perfectly elastic demand curve

A) can be represented by a line parallel to the vertical axis
B) is a 45 degree line
C) can be represented by a line parallel to the horizontal axis
D) cannot be represented on a two dimensional graph
Answer: C
Level of Difficulty: Easy
11) The sensitivity of the change in quantity consumed of one good to a change in the price of a
related good is called
A) cross-elasticity.
B) substitute elasticity.
C) complementary elasticity.
D) price elasticity of demand.
Answer: A
Level of Difficulty: Easy
12) The Cross-price-elasticity of demand for coffee and tea is likely to be:
A) Greater than zero
B) Less than zero
C) Zero
D) Infinity
Answer: A
Level of Difficulty: Moderate
13) The Cross-price-elasticity of demand for coffee and coffee-cream is likely to be
A) Greater than zero
B) Less than zero
C) Zero
D) Infinity
Answer: B
Level of Difficulty: Moderate
14) The Cross-price-elasticity of demand for coffee and caskets is likely to be:
A) Less than zero
B) Greater than zero
C) Zero
D) Infinity
Answer: C
Level of Difficulty: Easy

15) When purchases of tennis socks decline following an increase in the price of tennis sneakers
(other things remaining equal), the relationship between these two items can be described as
A) substitutable.
B) complementary.
C) unique.
D) ordinary.
Answer: B
Level of Difficulty: Moderate
16) The owner of a produce store found that when the price of a head of lettuce was raised from
50 cents to $1, the quantity sold per hour fell from 18 to 8. The arc elasticity of demand for
lettuce is
A) -0.56.
B) -1.15.
C) -0.8.
D) -1.57.
Answer: B
Level of Difficulty: Difficult
17) Suppose the price of crude oil drops from $150 a barrel to $120 a barrel. The quantity
bought remains unchanged at 100 barrels. The coefficient of price elasticity of demand in this
example would be:
A) 0.5
B) Infinity
C) 1.0
D) 0
Answer: D
Level of Difficulty: Moderate
18) If a firm decreases the price of a good and total revenue decreases, then
A) the demand for this good is price elastic.
B) the demand for this good is price inelastic.
C) the cross elasticity is negative.
D) the income elasticity is less than 1.
Answer: B
Level of Difficulty: Moderate
19) When total revenue reaches its peak (elasticity equals 1), marginal revenue reaches
A) 1.
B) zero.
C) -1.
D) Cannot be determined from the information provided.
Answer: B
Level of Difficulty: Difficult

20) If the income elasticity of a particular good is negative 0.2, it would be considered
A) a superior good.
B) a normal good.
C) an inferior good.
D) an elastic good.
Answer: C
Level of Difficulty: Easy
Table 1
The following information is provided for Tony Romos income and expenditures.

21). In TABLE 1, Tonys income elasticity of demand for steaks is:

A) 1.0
B) Greater than 1.0
C) Less than 1.0
D) Zero
Answer: B
Level of Difficulty: Difficult
22). In TABLE 1, pizzas are classified as a (n):
A) Normal good
B) Positive good
C) Inferior goods

D) Marginal good

Answer: C
Level of Difficulty: Moderate
23) In TABLE 1, Steaks are classified as a(n):
A) Normal good
B) Positive good

C) Inferior good

Answer: A
Level of Difficulty: Moderate
24). In TABLE 1, Tonys income elasticity of demand for pizzas is:
A) 0
B) Less than zero
C) Greater than 1.0
D) 1.0
Answer: C
Level of Difficulty: Difficult

D) Marginal good

25) The government unit that wants to achieve "revenue enhancement" will find it considerably
more favorable to enact an excise tax on goods whose demand is
A) highly elastic.
B) relatively elastic.
C) highly inelastic.
D) unitary elastic.
Answer: C
Level of Difficulty: Difficult
26) Which of the following instances will total revenue or receipts decline?
A) Price rises and demand is inelastic
B) Price falls and demand is elastic
C) Price rises and demand is elastic
D) Price falls and demand is unit elastic
Answer: C
Level of Difficulty: Moderate
27) If the price of a good is increased and total revenue received from the sale of this good
increases, then the price elasticity of demand for the good is
A) elastic.
B) inelastic.
C) unitary.
D) None of the above.
Answer: B
Level of Difficulty: Moderate
28) If the price of a good is decreased and total revenue received from the sale of this good
does not change, then the price elasticity of demand for the good is
A) elastic.
B) inelastic.
C) unitary.
D) None of the above.
Answer: C
Level of Difficulty: Moderate
29) If the demand for a good is price inelastic and the good price is increased, then the
marginal revenue (MR) received by the seller will
A) not change.
B) decrease.
C) increase.
D) Can't be determined from this information.
Answer: C
Level of Difficulty: Difficult

30) If the price elasticity of supply of a good is elastic and the good price increases, then the
increase in the goods supply should be
A) greater than the increase in price.
B) less than the increase in price.
C) the same as the increase in price.
D) Can't be determined from this information.
Answer: A
Level of Difficulty: Difficult
31) Which of the following examples best illustrates the concept of derived demand?
A) an increase in the price of beef results in an increase in the demand for fish
B) the higher the demand for automobiles, the greater the demand for steel
C) the demand for Pepsi vary directly with the price of Coke
D) the demand for good varies inversely with its price
Answer: B
Level of Difficulty: Moderate
32) The derived demand curve for a good component will be more inelastic
A) the larger is the fraction of total cost going to this component.
B) the more inelastic is the demand curve for the final good.
C) the more elastic are the supply curves of cooperating factors.
D) the less essential is the component in question.
Answer: B
Level of Difficulty: Difficult
33) The minimum wage is an example of a government imposed
A) price control.
B) price ceiling.
C) price floor.
D) Both A and B.
E) Both A and C.
Answer: E
Level of Difficulty: Moderate
34) If government imposes a price ceiling on a good that is below the market equilibrium price,
A) a surplus will develop.
B) a shortage will develop.
C) producers will reduce their sales price.
D) consumers will reduce their demand for the good.
Answer: B

Level of Difficulty: Moderate

35) When a government imposes a price floor on a good that is above the market equilibrium
price,
A) a surplus will develop.
B) a shortage will develop.
C) producers will increase their sales price.
D) consumers will increase their demand for the good.
Answer: A
Level of Difficulty: Moderate
36) A tax that is imposed as a specific amount per unit of a good is a(n)
A) excise or specific tax.
B) sales or ad valorem tax.
C) compound duty.
D) income tax.
Answer: A
Level of Difficulty: Easy
37) If government imposes an excise tax on a good and the tax burden is borne equally by
buyers and sellers, then
A) price elasticity of demand is unitary.
B) price elasticity of supply is unitary.
C) the absolute values of price elasticities of demand and supply are equal.
D) None of the above.
Answer: C
Level of Difficulty: Moderate

Chapter 5

Demand Estimation and Forecasting

MULTIPLE-CHOICE QUESTIONS

1) Regression analysis can best be described as:

A) a statistical technique for estimating the best relationship between one variable and a set
of other selected variables.
B) a statistical technique for determining the true values of variables.
C) a statistical technique for creating functional relationships among variables.
D) None of the above.
Answer: A
Level of Difficulty: Moderate
2) If a regression coefficient passes the t-test, it means that:
A) the regression equation is valid.
B) the regression coefficient is significantly different from zero.
C) the regression coefficient can be used for forecasting.
D) the regression coefficient should be included in the regression equation.
Answer: B
Level of Difficulty: Moderate
3) The coefficient of a linear regression equation indicates:
A) the change in the dependent variable relative to a unit change in the independent variable.
B) the change in the independent variable relative to a unit change in the dependent
variable.
C) the percentage change in the dependent variable relative to a unit change in the
independent variable.
D) the percentage change in the independent variable relative to a unit change in the
dependent variable.
Answer: A
Level of Difficulty: Moderate
4) Which of the following is a test of the statistical significance of the entire regression equation?
A) t-test

B) R2

C) F-test

D) Durbin-Watson test

Answer: C
Level of Difficulty: Easy
5) Which of the following is a test of the statistical significance of a particular regression

coefficient?
A) t-test

B) R2

C) F-test

D) Durbin-Watson test

Answer: A
Level of Difficulty: Moderate
6) Which of the following is a measure of the explanatory power of the regression model?
A) t-test

B) R2

C) F-test

D) Durbin-Watson test

Answer: B
Level of Difficulty: Easy
7) R2 is a statistical measure which:
A) determines how important one variable is in explaining the value of another variable.
B) tests the true value of a variable.
C) determines how well an equation can estimate the relationship between one variable
and a set of other variables.
D) All of the above.
Answer: C
Level of Difficulty: Easy
8) When the R2 of a regression equation is very high, it indicates that:
A) all the coefficients are statistically significant.
B) the intercept term has no economic meaning.
C) a high proportion of the variation in the dependent variable can be accounted for by the
variation in the independent variables.
D) there is a good chance of serial correlation and so the equation must be discarded.
Answer: C
Level of Difficulty: Easy
9) Which of the following indicators will always improve when more variables are added to a
regression equation?
A) the magnitudes of the coefficients
C) R2

B) the t-test
D) the standard errors of the coefficients

Answer: C
Level of Difficulty: Easy
10) Which indicator shows how well a regression line fits through the scatter of data points?

A) F-test
C) t-test

B) R2
D) Durbin-Watson test

Answer: B
Level of Difficulty: Easy
11) When a regression coefficient is significant at the .05 level, it means that:
A) there is only a five percent chance that there will be an error in a forecast.
B) there is 95 percent chance that the regression coefficient is the true population coefficient.
C) there is a five percent chance or less that the estimated coefficient is zero.
D) there is a five percent chance or less that the regression coefficient is not the true
population coefficient.
Answer: C
Level of Difficulty: Moderate
12) The t-test is a statistical measure which:
A) tests the true value of a variable.
B) tests the statistical significance of a regression coefficient.
C) tests the statistical significance of a regression equation.
D) None of the above.
Answer: B
Level of Difficulty: Moderate
13) The t-statistic is computed by:
A) dividing the regression coefficient by the standard error of the estimate.
B) dividing the regression coefficient by the standard error of the coefficient.
C) dividing the standard error of the coefficient by the regression coefficient.
D) dividing the R2 by the F-statistic.
Answer: B
Level of Difficulty: Moderate

14) A one-tail test of significance would be used to determine whether:

A) demand for a good is price elastic.

B) two goods are substitutes for each other in supply.
C) two goods are unrelated to each other in demand.
D) supply of a good is price inelastic.
Answer: B
Level of Difficulty: Moderate
15) The F-test is used to determine if:
A) a regression coefficient is significant.
B) multicollinearity exists.
C) a regression equation significantly accounts for the variation in the value of a dependent
variable.
D) an identification problem is present.
Answer: C
Level of Difficulty: Moderate
Answer the following question(s) based on the following regression equation. (Standard errors in
parentheses, n = 150.):
QD = 1000 - 50PA + 10PB + .05I, (20) (7) (.04)
where QD = quantity demanded of good A, PA = price of good A, PB = price of a competing good
B and I = per capita income.
16) Using the "rule of 2," which of the following variables can be deemed statistically
significant?
A) PA
B) PB
C) I
D) All of the above.
E) None of the above.
Answer: A
Level of Difficulty: Difficult
17) For which of the following variables should a "two tail" t-test be applied?
A) P

B) I

Answer: B
Level of Difficulty: Difficult

C) PC

D) Should be applied for all.

18) For the regression equation Q = 100 - 10X1 + 25X2, which of the following statements is
true?
A) X2 is the more important variable because it is positive.
B) When X1 decreases by one unit, Q decreases by 10 units.
C) When X1 increases by 10 units, Q decreases by 1 unit.
D) When X1 increases by one unit, Q decreases by 10 units.
Answer: D
Level of Difficulty: Difficult
19) When using regression analysis for forecasting, the confidence interval indicates:
A) the degree of confidence that one has in the equation's R2.
B) the range in which the value of the dependent variable is expected to lie with a given
degree of probability.
C) the degree of confidence that one has in the regression coefficients.
D) the range in which the actual outcome of a forecast is going to lie.
Answer: B
Level of Difficulty: Moderate
20) The use of a dummy variable in regression analysis:
A) indicates that a researcher does not really know what to include in the equation.
B) indicates that a variable is expected to either have or not have an impact on a dependent
variable.
C) indicates that insufficient data is available for the analysis.
D) indicates the use of hypothetical data.
Answer: B
Level of Difficulty: Moderate
21) In using regression analysis to estimate demand, which of the following problems is most
directly a result of insufficient data?
A) the identification problem
C) the problem of high standard errors
Answer: A
Level of Difficulty: Difficult

B) the problem of a low R2

D) the problem of insignificant F-statistics

22) Which of the following is most likely to indicate a statistically significant regression
coefficient?
A) t > R2

B) R2 > .90

C) t >2

D) > 4

Answer: C
Level of Difficulty:Difficult
23) The F-test is used in forecasting to:
A) establish confidence intervals for testing regression coefficients.
B) examine the degree of multicollinearity among independent variables.
C) determine how well a regression equation can account for dependent variable values.
D) determine whether an identification problem exists.
Answer: C
Level of Difficulty: Moderate

Answer the following question(s) on the basis of the following regression equation. (Standard
errors in parentheses, n = 200):
Q = -500 - 100PA + 50PB + .3I + .2A; R2 =.12, (250) (50) (30) (.1) (.08)
where QD = 10,500, quantity demanded of good A, PA = $10, price of good A.
PB = $8, price of good B, I = $12,000, per capita income, and A = $20,000, monthly advertising
expenditures.
24) Which of the variables does not pass the t-test at the .05 level of significance?
A) PA
B) PB
C) A
D) I
E) All the variables pass the t-test.
Answer: B
Level of Difficulty: Difficult
25) As a researcher, which aspect of the results would be of greatest concern?
A) the negative value of the constant (i.e., -500)
B) the relatively low impact of the competitor's price
C) the fact that not all of the variables are statistically significant
D) the poor fit of the regression line
Answer: D

Level of Difficulty: Difficult

26) As the manager of Good A, which of the following would be of greatest concern (based on
the regression results above)?
A) None of the factors below would be of concern.
B) an impending recession
C) pressure on you by your salespersons to lower the price so that they can boost their sales
D) a price reduction by the makers of good B
Answer: C
Level of Difficulty: Difficult
27) Which of the following cannot be determined on the basis of the above regression results?
A) the degree of price elasticity of good B
B) whether or not good A is "normal"
C) the degree of competition between A and B
D) All of the above can be determined.
Answer: A
Level of Difficulty: Difficult
28) In the estimation of demand, the "identification problem" refers to:
A) the problem of selecting the proper level of significance.
B) the problem of deciding whether to use time series or cross sectional data.
C) the problem of separating out the effects of price on the quantity demanded when supply
cannot be not held constant.
D) the problem of having insufficient variation in prices.
Answer: C
Level of Difficulty: Difficult
29) Which of the following refers to a relatively high correlation among the independent
variables of a regression equation?
A) autocorrelation
B) the identity problem
C) statistically insignificant regression coefficients
D) multicollinearity
Answer: D
Level of Difficulty:Moderate

30) The problem of autocorrelation refers to:

A) independent variables in a regression equation whose values are closely related to each
other.
B) insufficient data to estimate egression coefficient values.
C) regression coefficient values which are not significantly different from zero.
D) regression equation variables which exhibit a similar pattern in their values over a
number of time periods.
Answer: D
Level of Difficulty: Moderate
31) A dummy variable is also called:
A) an approximate variable.
C) a zero-sum variable.

B) a discrete variable.
D) an improper variable.

Answer: B
Level of Difficulty: Easy
32) A manager will have the least confidence in an explanatory variable that:
A) does not pass the F-test.
C) does not pass the t-test.

B) is expressed as a dummy variable.

D) constitutes only a small part of R2.

Answer: C
Level of Difficulty: Moderate
33) From a management policy perspective, which regression result is the most useful?
A) a regression equation that passes the F-test
B) a regression equation whose explanatory variables all pass the t-test
C) a regression equation that has the highest R2
D) a regression equation that has the least number of dummy variables
Answer: B
Level of Difficulty: Difficult
34) The fact that a person with a forceful and persuasive personality but not necessarily the
greatest amount of knowledge and judgment can exercise a disproportionate amount of
influence is a major drawback of:
A) the Delphi method of forecasting.
C) opinion polling.
Answer: D

B) the market research method.

D) the jury of executive opinion approach.

Level of Difficulty: Moderate

35) The forecasting technique, which predicts technological trends and is carried out by a
sequential series of written questions and answers is:
A) the Delphi method.
C) opinion polling.

B) the market research method.

D) the jury of executive opinion approach.

Answer: A
Level of Difficulty: Moderate
36) Average weekly claims for unemployment insurance, money supply and the index of stock
prices are all examples of:
A) leading indicators.
C) lagging indicators.

B) coincident indicators.
D) None of the above.

Answer: A
Level of Difficulty: Easy
37) One of the series included among the lagging indicators is:
A) the change in sensitive material prices.
B) the index of industrial production.
C) employees on non-agricultural payrolls.
D) average duration of unemployment.
Answer: D
Level of Difficulty: Difficult
38) The following is not one of the leading indicators:
A) index of consumer expectations, U. of Michigan.
B) change in consumer price index for services.
C) vendor performance, slower deliveries diffusion index.
D) manufacturers' new orders, nondefense capital goods.
Answer: B
Level of Difficulty: Moderate
39) Which of the following is a leading economic indicator?
A) average hours, manufacturing
C) stock prices, 500 common stocks
Answer: D
Level of Difficulty: Moderate

B) money supply M2
D) All of the above.

40) The method of forecasting with leading indicators can be criticized:

A) for occasionally forecasting a recession when none ensues.
B) for forecasting the direction of the economy but not the size of the change in economic
activity.
C) for frequent revisions of data after original publication.
D) All of the above.
Answer: D
Level of Difficulty: Moderate
41) A general rule of thumb is that if, after a period of increases, the leading indicator index
sustains ________ consecutive declines, a recession (or at least a slowing of the economy)
will follow.
A) three

B) four

C) five

D) six

Answer: A
Level of Difficulty: Easy
42) The forecasting technique which involves the use of the least squares statistical method to
examine trends, and takes into account seasonal and cyclical fluctuations, is known as:
A) compound growth rate projection.
C) time series projection.

B) the Delphi method.

D) exponential smoothing projection.

Answer: C
Level of Difficulty: Easy
43) Quantitative forecasting that projects past data without explaining the reasons for future
trends is called:
A) scientific forecasting.
C) empirical forecasting.
Answer: D
Level of Difficulty: Easy

B) dumb forecasting.
D) nave forecasting.

44) The following is not a drawback of forecasting using the compound growth rate method:
A) only considers first and last observations.
B) considers only equal absolute changes.
C) disregards fluctuations between the original and terminal observations.
D) does not consider any trends in the data.
Answer: B
Level of Difficulty: Moderate
45) Charting observations on a semi-logarithmic graph will help the analyst to ascertain whether:
A) absolute changes from period to period are constant.
B) whether percentage changes from period to period are constant.
C) whether percentage changes from period to period are declining.
D) Both B and C.
Answer: D
Level of Difficulty: Difficult
46) A major problem in projecting with a trend line is that:
A) only straight-line projections can be accommodated.
B) it is valid only if the trend is upward.
C) it will not forecast turning points in activity.
D) it is a very complex method of forecasting.
Answer: C
Level of Difficulty: Difficult
47) The following is the exponential trend equation to forecast sales (S):
A) S = a + b(t)
C) S = a + b(t) + c(t)2
Answer: B
Level of Difficulty: Difficult

B) S = a + bt
D) None of the above.

48) Among the advantages of the ________ technique of forecasting are ease of calculation,
relatively little requirement for analytical skills, and the ability to provide the analyst with
information regarding the statistical significance of results and the size of statistical errors.
A) least-squares trend analysis
C) visual trend-fitting

B) compound growth rate

D) expert opinion

Answer: A
Level of Difficulty: Difficult
49) Among the advantages of the least-squares trend analysis techniques is:
A) the ease of calculation.
B) relatively little analytical skill required.
C) its ability to provide information regarding the statistical significance of the results.
D) All of the above.
Answer: D
Level of Difficulty: Moderate
50) The forecasting method that involves using an average of past observations to predict the
future (if the forecaster feels that the future is a reflection of some average of past results) is
the:
A) moving average method.
B) econometric forecasting method.
C) exponential smoothing method.
D) Both A and B.
E) Both A and C.
Answer: E
Level of Difficulty: Moderate
51) An explanatory forecasting technique in which the analyst must select independent variables
that help determine the dependent variable is called:
A) exponential smoothing.
C) trend analysis.
Answer: B
Level of Difficulty: Easy

B) regression analysis.
D) moving average method.

52) When the more recent observations are more relevant to the estimate of the next period than
previous observations, the naive forecasting method to employ is:
A) exponential smoothing.
C) trend analysis.

B) compound growth rate.

D) moving averages.

Answer: A
Level of Difficulty: Difficult
53) Which of the following is a Leading Economic Indicator?
A) commercial and industrial loans outstanding
B) industrial production
C) average weekly duration of unemployment
D) None of the above.
Answer: D
Level of Difficulty: Easy
54) Which of the following is a Lagging Economic Indicator?
A) change in average labor costs in manufacturing
B) M2 measure of the money supply
C) industrial production
D) None of the above.
Answer: A
Level of Difficulty: Easy
55) The Delphi method is a:
A) smoothing technique in forecasting.
B) consensual forecast based on expert opinions.
C) compound growth approach to forecasting.
D) nave forecasting approach.
Answer: B
Level of Difficulty: Easy
56) The Trend Projection approach to forecasting is represented by:
A) time-series regressions.
C) opinion polls.
Answer: D

B) exponential smoothing.
D) All of the above.

Level of Difficulty: Moderate