The study of microeconomics includes the study of

1.

How firms, workers, consumers, and investors interact

Your Answer: and make decisions in the marketplace.

Correct. Microeconomics is the study of the behavior of individual

economic units: consumers, firms, workers and investors.

Microeconomic models illustrate, amongst other things,

2.

The trade-offs that consumers, workers and firms face and

Your Answer: how these trade offs are best made in the marketplace.

Correct. Microeconomics studies the trade-offs and interactions of

consumers, workers and firms face in the marketplace.

In microeconomics, consumer theory studies

3.

How consumers maximize their well-being by choosing to

Your Answer: purchase one basket of goods versus another, or by
trading-off current for future consumption, given their
limited budgets.
Correct.

Prices in a competitive market

4.

Are determined by interactions of buyers and sellers in a

Your Answer: market for a certain good or service.

Correct. The competitive market price is the price that prevails when
buyers and sellers conduct transactions freely in a market.

Economic theory attempts to

5.

Explain all the intricate workings of the economy.

Your Answer:

Explain observed events and make predictions using

Correct Answer: mathematical models of worker, consumer, firm and
investor decision making processes.

Incorrect. A theory is not judged by its complexity or the reality of its

assumptions but by the power of its predictions.

Positive economic analysis

6.

Is based on observed cause and effect relationships in the

Your Answer: economy.

Correct. Positive economic analysis observes and explains "what is."

7.

Which of the following statements is an example of positive economic

analysis?
The ten percent reduction in the U.S. teen pregnancy
Your Answer: rate that occurred from 2000 to 2002 resulted in a
higher quality of life for American children during the
same time period.
The 2002 U.S. teen pregnancy rate fell ten percent
Correct Answer: from 2000 levels, to 76.4 pregnancies per 1,000
females aged 15-19 years, a historic low for the
nation.
Incorrect. The term "higher quality of life" implies a qualitative analysis
which is generally not included in positive economic analysis.

Normative economic analysis

8.

Analyzes what policies and economic outcomes are best

Your Answer: for society, and is often accompanied by value judgments.

Correct. Normative economics generally addresses questions of "what

ought to be."

9.

Which of the following statements is an example of normative economic

analysis?
Children who attend early childhood programs that
Your Answer: encourage daily reading habits have higher high school
graduation rates than children who do not attend such
programs.
Federally funded public school reading programs
Correct Answer: should only distribute books from an approved reading
list to ensure that students have access to high quality
reading material.
Incorrect. This is an example of positive economic analysis.

10
.

The following statement, "Studies have shown that early childhood reading
is positively correlated with successful college admission. To improve
college admission success for all members of society, federal and state
governments should fund public preschools that emphasize reading as part
of the curriculum."
Is an example of a normative economic policy
Your Answer: recommendation based on positive economic analysis.

Correct. The statement contains both observed cause and effect (positive
economic analysis) and the value judgments (normative economic
analysis) that college admission success is desirable and that this success
should be made available to more people in the society.

In microeconomics, we define a "market" as

11
.

A collection of buyers and sellers that come together and

Your Answer: determine the price of products or services through their
interaction, or their potential for interaction.

Correct. Markets include buyers and sellers that come together in physical
marketplaces or via telephone, telefax, the Internet or other means
enabled by communications technology.

12

It is important for firms to determine the market for their products and
services because

Correctly defining the market and its geographic

Your Answer: boundaries helps firms identify competing or
complementary products, competing firms and the pricing
and production trade offs the firms face.
Correct. In microeconomics, costs, price and competition are all important
variables for determining profitability and production decisions.

In microeconomics, an industry is defined as

13
.

The supply side of a market, or a collection of firms selling

Your Answer: the same or closely related products.

Correct.

14
.

The same product in a market may be sold at different prices by different

firms because
Both 2 and 3.
Your Answer:

Correct. Arbitrage and brand loyalties are both indications that different
prices are or can be charged for similar products.

The nominal price of a good

15
.

Is the absolute, "current-dollar" price of a good,

Your Answer: unadjusted for inflation.

Correct. The nominal price is simply the observed price of a good or

service.

The real price of a good

16
.

Is the real, "constant-dollar" price of a good, adjusted for

Your Answer: inflation.

Correct. The constant dollar price of a good adjusts for changes in the
price due to inflation or deflation.

17
.

The California minimum wage was $5.75 in 2000 and $7.50 in 2007. The
consumer price index was 172.2 in 2000 and 207.3 in 2007. The California
minimum wage expressed in 2007 dollars was
$7.50 in 2000, meaning the minimum wage in 2007
Your Answer: was unchanged when compared to the minimum wage
in 2000.
$6.92 in 2000, meaning the real minimum wage was
Correct Answer: about 8.4 percent higher in 2007 than in 2000.

Incorrect. In 2000, the minimum wage in 2007$ was

$5.75*(207.3/172.2)=$6.92. The percent change in the real minimum
wage from 2000 to 2007 was ($7.50-$6.92)/$6.92=8.4%.

The producer price index is

18
.

The price index that manufacturers use to annually

Your Answer: adjust production worker wages.
Used to measure the aggregate price level of raw
Correct Answer: materials and other intermediate products bought by
firms, and the prices of finished products sold at the
wholesale level.
Incorrect. Wage adjustments in the economy are normally based on
changes in the Consumer Price Index over time.

19
.

Microeconomics uses constant dollar prices when analyzing markets

because
Constant dollar price calculations enable
Your Answer: microeconomic decision makers to estimate the
inflation rate.
Relative rather than nominal prices drive consumer
Correct Answer: and producer decisions, and relative price trends are
easier to spot once inflation has been removed from
the price data.
Incorrect. Inflation is a broad measure primarily studied in

macroeconomics.

Microeconomic analysis is a powerful planning tool for business because

20
.

Both 2 and 3.
Your Answer:
The models enable decision makers to predict the
Correct Answer: direction of future market price, production and cost
trends in reaction to observed changes in consumer
tastes, input prices or government regulations.
Incorrect. No. 2 is correct, but inflation and unemployment are aggregate
measures studied in macroeconomics.

In microeconomics, the market supply curve illustrates

1.

The relationship between the price of a good or service

Your Answer: and the quantity that firms are willing to supply at each
price.

Correct. The vertical axis illustrates the price and the horizontal axis
illustrates the quantity.

The market supply curve

2.

Slopes upward because the higher the price, the more

Your Answer: firms are willing and able to sell in the market.

Correct. Firms are willing to supply more at higher prices.

Higher fuel costs have caused the supply curve for the air travel market to

3.

Shift up and to the left, as firms offer fewer travel services

Your Answer: at each price.

Correct. The higher input costs lead the air travel industry to charge higher
prices at each quantity, which is illustrated by a shift up and to the left in
the supply curve.

4.

An increase in supply is illustrated by a __________ shift in the market

supply curve and will occur when _______________
Right; input costs fall or an improvement in technology
Your Answer: occurs.

Correct. In this scenario firms can offer a higher quantity at each price.

In microeconomics, the market demand curve illustrates

5.

The relationship between the price of a good and the

Your Answer: amount of that good that consumers are willing and able
to buy within a certain time period.

Correct. The demand curve illustrates the hypothetical quantity consumers

would buy at different prices.

The market demand curve slopes downward because

6.

The lower the price, the higher the quantity demanded, as

Your Answer: consumers are willing and able to buy more of a good or
service at lower prices.

Correct.

7.

An increase in demand for a normal good is illustrated by a __________

shift in the market demand curve and will occur when _______________
Right; consumer incomes rise.
Your Answer:

Correct. Consumers will, all else remaining constant, demand a higher

quantity of a good at each price when their income rises.

8.

A decrease in demand for a normal good is illustrated by a __________

shift in the market demand curve and will occur when _______________
Left; prices fall for substitute goods.
Your Answer:

Correct. This scenario illustrates a decrease in demand as consumers

switch to the lower priced substitute good.

In microeconomics, the equilibrium price is defined as the price at which

9.

The market clearing price where quantity demanded is

Your Answer: equal to the quantity supplied and there are no shortages
or surpluses.

Correct. There is no tendency for change in the market price when the
quantity demanded is equal to the quantity supplied.

The market mechanism is the

10
.

Tendency for price and quantity produced in the economy

Your Answer: to adjust until the market clears and there are no
shortages or surpluses.

Correct. Prices will adjust if there are shortages and surpluses until the
quantity supplied equals the quantity demanded.

11
.

An increase in wages, capital costs and income in the market for a normal
good will lead to
A decrease in supply, an increase in demand in the
Your Answer: market, and a higher equilibrium price.

Correct. The higher costs lead to a left shift in the supply curve and the
higher income leads to a right shift in the demand curve, both of which
would lead to a higher price in the market.

12
.

When a surplus develops in a goods market as a result of a decline in

demand, the market will tend to clear because
The price is allowed to fall, causing a decrease in the
Your Answer: quantity supplied and an increase in quantity demanded,
until the quantity demanded equals the quantity supplied.

Correct. Falling market prices increase the quantity consumers are willing
and able to buy at the same time the large quantity supplied is
discouraged.

Shifts in the supply curve, all else remaining constant, lead to

13
.

Both 1 and 3.
Your Answer:

Correct. An increase in supply, illustrated by a right shift in the supply

curve, would lead to a surplus, all else remaining equal, and so price must
be lowered to sell the additional supply. A decrease in supply, illustrated by
a left shift in the supply curve, would lead to a shortage, all else remaining
equal, and so the price must be raised until the quantity supplied equals
the quantity demanded.

Shifts in the demand curve, all else remaining constant, lead to

14
.

An increase in the market equilibrium price if the shift is

Your Answer: due to an increase in demand.

Correct. An increase in demand, illustrated by a right shift in the demand

curve, would lead to a shortage at the previous equilibrium price, and as
consumers bid up the price of the good a higher quantity supplied is
encouraged, resulting in a higher equilibrium price and quantity in the
market.

15
.

An increase in both supply and demand, all else remaining constant, will
always lead to
A shift to the right in both the supply and demand
Your Answer: curves, resulting in a higher equilibrium price but the
effect on the equilibrium quantity is unknown without
further information.

A shift to the right in both the supply and demand

Correct Answer: curves, resulting in a higher equilibrium quantity but
the effect on the equilibrium price is unknown without
additional information.
Incorrect. While an increase in both supply and demand will lead to a
higher equilibrium quantity bought and sold in the market, the new
equilibrium price depends upon which increase is higher in magnitude. If
supply increases by more than demand, prices will fall, and if demand
increases by more than supply, prices will rise.

The price elasticity of demand

16
.

Measures the sensitivity of quantity demanded to price,

Your Answer: and is calculated using the equation (Q/Q)/(P/P), or
(P/Q) (Q/P).

Correct. The equation represents the percentage change in quantity

demanded divided by the percentage change in price.

When the quantity demanded is very sensitive to changes in price,

17
.

Both 1 and 3.
Your Answer:

Correct. If the percentage change in quantity demanded is greater than

the percentage change in price, the magnitude of the price elasticity of
demand is greater than 1 and demand is price elastic.

Demand will tend to be more price elastic when

18
.

There are many substitutes in the market for the good or

Your Answer: services, the good or service comprises a large part of the
consumer's budget and a long time period is under
consideration.
Correct. Demand tends to be more elastic (more sensitive to price
changes) when there are many substitutes in the market, the goods or
services are a large part of the consumer's budget (the consumer cannot
as easily afford price increases, is able to more easily respond to price
decreases) and a long time period is under consideration (spending habits
are more easily changed in response to price over time).

Price elasticity of demand along a linear demand curve

19
.

Ranges from minus infinity where the demand curve

Your Answer: intersects the Y axis to zero at the X axis.
Both 2 and 3.
Correct Answer:

Incorrect. While this answer is correct, answer number 3 is also correct.

Income elasticity of demand

20
.

Measures the sensitivity of quantity demanded to income,

Your Answer: and is calculated using the equation (Q/Q)/(I/I), or
(I/Q) (Q/I).

Correct. The income elasticity of demand is calculated as the percentage

change in quantity demanded divided by the percentage change in income.

Consumer behavior theory helps firms understand

1.

how consumers always make rational purchasing

Your Answer: decisions in three distinct steps.
how changes in consumer income and price affect
Correct Answer: demand for goods and services.

Incorrect. Consumers do not always behave irrationally and often make

impulse buying decisions.

The three basic assumptions underlying consumer preferences are

2.

Consumers can compare and rank all possible market

Your Answer: baskets of goods and services, their preferences are
transitive and consumers prefer more to less.

Correct.

3.

An indifference curve measures ______________ and its slope is equal to

____________________
the different combinations of two goods or services
Your Answer: that yield the same level of satisfaction; the price of
one good relative to another.
the different combinations of two goods or services
Correct Answer: that yield the same level of satisfaction; the marginal
rate of substitution.

Incorrect. The slope of an indifference curve is the rate at which one good
can be given up for another good to maintain a constant level of
satisfaction.

In consumer behavior theory, the Marginal Rate of Substitution (MRS) is

4.

The amount of one good which must be substituted for

Your Answer: another in order to hold satisfaction constant along an
indifference curve.

Correct.

Indifference curves have a negative, concave slope because

5.

The principle of diminishing marginal utility requires that

Your Answer: as consumption of one good increases, fewer and fewer of
other goods must be given up to keep the level of
satisfaction constant.
Correct. The marginal rate of substitution along an indifference curve,
-B118, falls as more and more of X is consumed.

In consumer behavior theory, two goods are perfect substitutes

6.

Both 1 and 2.
Your Answer:

Correct.

An ordinal utility function

7.

ranks market baskets from the most to the least

Your Answer: preferred, with the most preferred being the farthest from
the origin.

Correct.

Budget constraints

8.

limit the amount of goods and services that a consumer

Your Answer: can purchase in a given time period.

Correct. Consumers face budget constraints because of their limited

incomes.

9.

The budget line illustrates all combinations of market baskets of two goods
X and Y

that can be purchased with a given income level,

Your Answer: represented by the equation I=PxX+PyY, where Px and
Py are the prices of goods X and Y and I is income.
that can be purchased with a given income level,
Correct Answer: represented by the equation Y= (I/Py) - (Px/Py)X,
where Px and Py are the prices of goods X and Y and I
is income.
Incorrect. The budget line has a downward slope of -(Px/Py) and the Y
intercept is the amount of Y that could be purchased if all income were
spent on Y, or (I/Py) where X=0.

10
.

When the price of one good increases and the price of the other good and
income are held constant, the budget line
rotates so that the intercept is farther from the origin
Your Answer: on the axis representing the good that has
experienced an increase in price.
rotates so that the intercept is closer to the origin on
Correct Answer: the axis representing the good that has experienced
an increase in price.

Incorrect. The slope of the budget line changes to illustrate how fewer of
one good can now be purchased with a constant income level.

11
.

The effect on the budget line of an equal percentage increase in prices and
income due to inflation is
that the budget lines shift parallel out from the origin
Your Answer: with the increase in income, by not by as much as if
prices had remained constant.
none: The budget line does not shift or rotate under
Correct Answer: this scenario.

Incorrect. Purchasing power and the slope of the budget line do not
change when income and prices of both goods increase by the same
percentage.

12
.

Given a consumer's budget constraints, maximizing satisfaction is

illustrated by

the point along the budget curve that touches the

Your Answer: indifference curve illustrated that is the closest to the
origin.
The price is allowed to fall, causing a decrease in the
Correct Answer: quantity supplied and an increase in quantity
demanded, until the quantity demanded equals the
quantity supplied.
Incorrect. The consumer will always choose the indifference curve that is
farthest from the origin but along the budget line.

13
.

The slope of the budget line, where good Y is on the vertical axis and good
X is on the horizontal axis, is constant and equal to
minus 1 times the number of units of X that must be
Your Answer: given up I order to be able to purchase one additional
unit of Y, or -Y/X.
Both 2 and 3.
Correct Answer:

Incorrect. Regardless of price increases, diabetics need insulin to survive.

At the point where the indifference curve is tangent to the budget line

14
.

The marginal rate of substitution is equal to the ratio of

Your Answer: the two goods' prices, and consumer satisfaction is
maximized.

Correct. The point of tangency is always where the budget line, with a
slope of minus 1 times the ratio of the two prices, touches the indifference
curve, with a slope of minus one times the MRS, that is the farthest
attainable curve from the origin.

Marginal utility measures

15
.

the additional satisfaction gained from consuming one

Your Answer: additional unit of a good or service, holding consumption
of all other goods and services constant.

Correct.

16
.

As we move along an indifference curve and consume different market

baskets containing goods X and Y, the change in satisfaction is equal to
zero, and is represented by the equation
Your Answer: 0=MRS=Px(X)+Py(Y), where MU=Marginal Utility.
When the change in one good is positive, there must
Correct Answer: be a change in the opposite direction so that
MUx(X)= -MUy(Y).

Incorrect. The indifference curve holds satisfaction constant.

In consumer behavior theory, the equal marginal principle states that

17
.

utility is maximized when the consumer has equalized the

Your Answer: marginal utility per dollar of expenditure across all goods.

Correct. Satisfaction is maximized when the budget line is tangent to the

indifference curve, or when MRSxy=MUx/Muy=Px/Py (see equation 3.5 in
the textbook) or, rearranged, MUx/Px=MUy/Py.

18
.

A consumer has maximized the amount of satisfaction he can obtain from

consuming two goods, given his budget constraints. If the marginal utility
of consuming the last unit of good X was 25, and the price of X is $5, and
the marginal utility of consuming another unit of Y was 15,
then the consumer will consume more of X and less of
Your Answer: Y in the next time period because the MUx>MUy.
then the price of Y must be $3.
Correct Answer:

Incorrect. The marginal utility per dollar must be equalized, not the
marginal utility. When Py=$3 then MUx/Px=MUy/Py.

19

If the marginal utility of consuming the last unit of good X was 25, and the
price of X is $5, and the marginal utility of consuming another unit of Y

was 15, and the price of Y is also $5, then

the marginal utility per dollar for X is greater than for Y,

Your Answer: and so the consumer should choose a market basket with
more X and less Y in order to increase satisfaction.

Correct. Total satisfaction will increase as the consumer purchases more of

the good that yields more satisfaction per dollar and less of the other
good.

20
.

The increase in a Laspeyres price index over time is greater than the
actual cost of living increase because
A Laspeyres index is a chain-weight index measuring
Your Answer: changes in the cost of living over time using a bundle
of goods and services chosen in the current year and
does not take into account consumers substituting
purchases towards items that have become relatively
cheaper than other goods over time to maintain
satisfaction.
A Laspeyres index is a fixed weight index measuring
Correct Answer: changes in the cost of living over time using a bundle
of goods and services chosen in the base year and
does not take into account consumers substituting
purchases towards items that have become relatively
cheaper than other goods over time to maintain
satisfaction.
Incorrect. A Lespeyres price index is a fixed weight index that uses a
bundles of goods and services chosen in the base year.

3.

If, on an indifference map, a normal good Y is represented on the vertical

axis and good X is represented on the horizontal axis, as the price of Y
falls
the absolute value of the slope of the budget line
Your Answer: increases, the consumer purchases more Y, and the
marginal rate of substitution increases.

Correct. The budget line rotates and shifts up and the consumer will
substitute towards the lower priced Y, causing the MRS to increase.

4.

As the price of a product in the market basket falls, we move down and to
the right along the demand curve for that good and
Both 1 and 3.
Your Answer:

Correct.

5.

If a consumer is choosing from market baskets containing the normal

goods X and Y, as the price of good X falls
the consumer may purchase more of good X and good Y,
Your Answer: depending upon the consumer's preferences, as the
lower price of X increases the consumer's purchasing
power.
Correct. For a normal good X, the consumer will purchase of that good
when prices fall, but the increase in purchasing power enables the
consumer to purchase more of both X and Y.

When the income-consumption curve for a good has a positive slope

6.

the income elasticity of demand is positive and the good

Your Answer: is considered a normal good.

Correct. The quantity demanded for a normal good increases with an

increase in income, and (Q/Q)/ (I/I) is positive.

Holding all else constant, the demand curve

7.

shifts right with an increase in income for a normal good

Your Answer: and shifts right with a decrease in income for an inferior
good.

Correct. Demand for a normal good shifts right with an increase in income.
For an inferior good, the income elasticity of demand is negative, and so
the demand curve shifts in the opposite direction of income.

8.

If an Engel curve begins with a positive slope then becomes negatively

sloped at higher income levels,

the good has a positive income elasticity of demand at

Your Answer: low levels of income but a negative income elasticity of
demand at higher levels of income.

Correct.

9.

The substitution effect measures the change in the quantity demanded of

a good as a result of a change in the relative price of the good, and is
measured by
the increased quantity purchased as the consumer
Your Answer: moves to a point on the new indifference curve
tangent to the new budget line.
the difference between the original quantity
Correct Answer: purchased and the quantity represented by the point
of tangency of a budget line with a slope of
thenew price ratio to the original indifference curve.
Incorrect. This measurement would include both the substitution and the
income effect of the price change.

10
.

The income effect measures the change in the quantity demanded of a

good
as a result of the change in relative prices and
Your Answer: purchasing power, holding satisfaction constant.
as a result of the change in the purchasing power
Correct Answer: and is calculated as the total effect on quantity
demanded minus the substitution effect.

Incorrect. The level of satisfaction that can be obtained changes in the

opposite direction of the price change, due to a change in purchasing
power.

11
.

A consumer maximizes satisfaction by consuming 4 units of clothing

(represented on the vertical axis of an indifference map) and 2 units of
food (represented on the horizontal axis). If the price of food increases
from $5 to $6, the price of clothing remains at $5 and the budget remains
$30, the consumer will move to an indifference curve with a
_________________________ level of satisfaction and the new marginal
rate of substitution will be equal to _____________________________.

lower; 5/6
Your Answer:
lower; 6/5
Correct Answer:

Incorrect. When satisfaction is maximized given a certain budget, the

marginal rate of substitution is equal to the price of the good represented
on the X axis divided by the price of the good represented on the Y axis,
or 6/5 in this example.

12
.

On an indifference map, clothing costs $5 per unit and is represented on

the vertical axis and food costs $5 per unit and is represented on the
horizontal axis. The price of food falls because good weather creates a
bumper harvest. If, at the new satisfaction maximizing market basket, the
marginal rate of substitution is 3/5, what is the new, lower price of food?
$3.00
Your Answer:

Correct. When the consumer purchases the satisfaction maximizing market

basket the marginal rate of substitution is equal to P-food/P-clothing, the
slope of the budget curve and the indifference curve at the point of
tangency, or $3/$5.

The market demand curve is

13
.

the horizontal sum of the individual demand curves of all

Your Answer: consumers in the market; it will shift right as the
number of consumers in the market increase.

Correct

14
.

If a firm's marketing executive has estimated the price elasticity of

demand for the good the firm sells at -1.5,
the executive understands that demand is price
Your Answer: inelastic and an increase in price will cause total
consumer expenditures on the good to rise.

the executive understands that demand is price

Correct Answer: elastic and an increase in price will cause total
consumer expenditures on the good to fall.

Incorrect. When the absolute value of the price elasticity of demand is

demand is greater than 1 demand is price elastic, and an increase in price
causes total revenue to fall and vice versa.

15
.

If a firm finds that its price elasticity of demand is equal to -0.5, a firm can
expect that an increase in price will
increase total sales and revenue but the effect on
Your Answer: profits is unknown.
increase sales and profitability, as total revenue will
Correct Answer: rise and total costs will fall.

Incorrect. With inelastic demand and an increase in price, the percentage

decrease in quantity demanded is less than the percentage increase in
price, which raises revenue, lowers total costs since a lower quantity is
being produced, and increases profitability.

16
.

If a firm finds that its price elasticity of demand is equal to -2.5, a firm can
expect that an increase in price will
increase sales and total revenue but the impact on
Your Answer: profitability is unknown without further information.
decrease total sales and revenue but the effect on
Correct Answer: profits is unknown without further information.

Incorrect. When demand is price elastic total revenue falls with a price
increase.

Consumer surplus is equal to

17
.

the difference between the price a consumer is willing to

Your Answer: pay for a good and the actual price paid for the good: If
the consumer is willing to pay $7 and the price is $5,
then consumer surplus for that transaction is $2.

Correct.

18
.

Aggregate consumer surplus, when the price at the vertical intercept of

the demand curve is $20, the equilibrium market price is $10 and the
equilibrium quantity is 20, is equal to
1/2($20x$10x20)=$2000
Your Answer:
1/2($10x20)=$100
Correct Answer:

Incorrect. Consumer surplus is equal to the area of the triangle below the
demand curve and above the price, or 1/2($10x20)=$100

A network externality occurs when

19
.

the appeal of and demand for a good increases as more

Your Answer: consumers purchase the goods or services due to the
"bandwagon effect."

Correct. Demand for a good or service can vary directly with the number
of consumers purchasing the good or service.

If the income elasticity of demand for a good is 1.5,

20
.

quantity demanded will increase by $1,500 for each

Your Answer: $1000 increase in income.
quantity demanded will increase by 7.5% with a 5%
Correct Answer: increase in income.

Incorrect. Income elasticity of demand is based on percentage changes:

Absolute changes in income cannot be used to estimate the effect of a
change in income on quantity demanded.

1.

A firm's cost minimizing production decisions are made by

understanding the firm's input-output function

Your Answer: (production technology) and the input prices the firms
faces, and then deciding how much of each input to use
for a given level of output.
Correct.

The factors of production

2.

Are inputs the firm must use in the production process,

Your Answer: and include labor, materials and capital.

Correct.

The firm's production function

3.

Both 1 and 3.
Your Answer:

Correct.

The short run describes a period of time that lasts

4.

Period of time over which one or more factors of

Your Answer: production cannot be changed.

Correct.

A short run production function

5.

Focuses on the additional output resulting from

Your Answer: increasing the amount of inputs, holding at least one
input constant.

Correct. Often capital is held constant and labor is allowed to vary when

studying short run production functions.

6.

If two laborers each produce an average of 300 units, and when a third
laborer is hired output increases to 810 units,
Both 2 and 3.
Your Answer:

Correct. Average product is 270, which is lower than the 300 average
product produced with two laborers.

7.

The average product of labor is maximized when the marginal product of

labor
equals the average product of labor.
Your Answer:

Correct. APL rises until it intersects MPL and then APL falls. Therefore,
when they intersect, that is when APL = MPL, APL is maximized.

8.

In the typical production function in the economy, the marginal product of

labor first rises and then falls because
All of the above.
Your Answer:

Correct.

Diminishing marginal returns occurs because

9.

as more laborers are hired, workers increasingly share

Your Answer: use of other fixed inputs, and so their ability to be
increasingly productive is limited.

Correct.

The production isoquant measures

10
.

all possible combinations of two inputs that yield the

Your Answer: same level of output.

Correct.

11
.

If capital is represented on the vertical axis and labor on the horizontal

axis, the marginal rate of substitution (MRTS) is equal to
(-K/L) or (MPK/MPL), where MPK is the marginal
Your Answer: product of capital and MPL is the marginal product of
labor.
minus one times the slope of the isoquant, or the
Correct Answer: marginal product of labor divided by the marginal
product of capital (MPL/MPK).

Incorrect. The MRTS is equal to minus one times the slope of the isoquant,
(-K/L), which is equal to (MPL/MPK).

A movement along the isoquant curve is represented by the equation

12
.

(MPK)K + (MPL)L = 0.
Your Answer:

Correct.

13
.

If capital is represented on the vertical axis and labor on the horizontal

axis, the marginal rate of substitution (MRTS) falls in value
All of the above.
Your Answer:

Correct.

If the marginal rate of technical substitution MRTS is equal to 4, then

14
.

the marginal product of capital is equal to 2 and the

Your Answer: marginal product of labor is equal to 8.

Correct. MRTS is equal to the marginal product of labor divided by the

marginal product of capital.

15
.

If along an isoquant capital is reduced by 1 unit and labor is increased by

4,
four laborers are needed to replace the output lost
Your Answer: by reducing capital by one, and so the marginal rate
of technical substitution is equal to 4.
four laborers are needed to replace the output lost
Correct Answer: by reducing capital by one, and so the marginal rate
of technical substitution is equal to 1/4.

Incorrect. The MRTS is equal to 1/4, -(K/L), or -(-1/4).

When two inputs are perfect substitutes

16
.

The production isoquant is a straight line with a negative

Your Answer: slope and the MRTS is constant regardless of the level of
inputs.

Correct.

A fixed-proportion production function

17
.

has an L-shaped isoquant, since input combinations

Your Answer: are fixed for each level of production.
All of the above.
Correct Answer:

Incorrect. This answer is correct, but so are numbers 1 and 3.

18
.

Increasing output by changing the scale of the operation refers to the

process of
increasing all total output by holding one input
Your Answer: constant and then determining how much of the
other input is required to double output.
increasing all production inputs by the same
Correct Answer: proportion to increase output.

Incorrect. Scaling up requires increasing all production inputs at the same

time.

A firm experiencing constant returns to scale finds that

19
.

a doubling of production inputs results in a doubling of

Your Answer: total output.

Correct.

A firm experiencing constant returns to scale finds that

20
.

the isoquants are equally spaced on the isoquant map as

Your Answer: output is increased proportionally.

Correct.