PART 1 A A.
More than 1 year but
MICROECONOMICS
193 QUESTIONS
[1] Source: CMA 1285 1-
15
In the short run, a purely
competitive firm
operating at a loss will
A. Shut down.
B. Continue to operate
as long as price exceeds
average variable costs.
C. Raise the price of its
product.
D. Reduce the size of
its plant to lower fixed
costs.
[2] Source: CMA 1285 1-
16
In an analysis of
economic costs of
Production, long run
means
less than 5 years.
B. Five or more years.
C. A period of time long
enough to turn over top
management.
D. A period of time long
enough for the firm to
make all resource costs
variable in nature.
[3] Source: CMA 1285 1-
17
The marginal utility of a
good refers to
A. The point at which
the consumer's total
utility is
maximized.
B. The point at which
the consumer's total
utility is
minimized.
 C. The change in the
amount of the good [5] Source: CMA 1286 1-7
consumed If a rent control law in a
that increases total competitive housing
utility by one unit. market
establishes a maximum
D. The change in total or ceiling rent that is
utility when consumption above the
of the market or equilibrium
good increases by one rent,
unit.
A. The law has no
effect on the rental
[4] Source: CMA 1286 1-4 market.
Economies and
diseconomies of scale B. A surplus of rental
are important housing units will result.
determinants of the
C. Supply will decrease
A. Type of product as price increases.
demand faced by
individual firms. D. Demand will increase
as price increases.
B. Market demand
curve.
[6] Source: CMA 0687 1-1
C. Pattern of costs in The distribution of
the long run. income among
households in the United
D. Law of diminishing States is primarily
returns. determined by
 A. Transfer payments to
households.
B. Household
purchases of goods and
services.
C. The ownership of
factors of production.
D. Government taxes.
[7] Source: CMA 0687 1-
12
Local electric utilities are
considered to be natural
monopolies because for
these firms
A. Supply curves are
upward sloping.
B. Demand curves are
upward sloping.
C. Average total costs
never fall.
D. Significant
economies of scale are
present.
[8] Source: CMA 1287 1-2
If the demand for
cigarettes in New York is
relatively
elastic, and New York
imposes high taxes on
cigarettes
that result in higher
cigarette prices, then in
New York
A. The quantity of
cigarettes demanded
would
increase.
B. The demand for
cigarettes would
increase.
C. The demand curve
for cigarettes would
become
vertical.
D. Expenditures on
cigarettes would fall.
[9] Source: CMA 1287 1-5
The quantity of output a B. In which both fixed
competitive firm can and variable inputs are
supply at any price is employed.
determined in part by
C. That is subject to
A. Average household economies of scale.
income.
D. That always
B. Consumer tastes and produces economic
preferences. profits.

C. Input prices.
[11] Source: CMA 1287 1-
D. The distribution of 12
income among Natural monopoly
households. conditions, which often
lead to
economic regulation,
[10] Source: CMA 1287 1- refer to
10
In the economic theory of A. Rising marginal
production and cost, the costs.
short
run is defined to be a B. Elastic consumer
production process demand for the product.

A. Which spans a time C. Declining average

period of less than one costs.
year in
length. D. Consumer demand
for the product that is
strongly
 influenced by the A. Perfectly inelastic.
business cycle.
B. Elastic.

[Fact Pattern #1] C. Inelastic.

The theory of price
elasticity of consumer D. Unit elastic.
demand is helpful when a
firm is determining price
changes for a consumer [13] Source: CMA 1288 1-
good or service. The 23
formula for the (Refers to Fact Pattern
coefficient of elasticity, #1)
E, is If the coefficient of
elasticity is zero, then
(relative change in the consumer
quantity demanded) demand for the product is
E= said to be
--------------------------------------
(relative change A. Perfectly inelastic.
in price)
B. Elastic.
[12] Source: CMA 1288 1-
22 C. Inelastic.
(Refers to Fact Pattern
#1) D. Unit elastic.
If the coefficient of
elasticity is two, then the
consumer [14] Source: CMA 1288 1-
demand for the product is 27
said to be
All of the following are
true about perfect
competition
except that
A. There is free market
entry without large
capital
costs for entry.
B. There are many firms
participating in the
market.
C. In the long run, an
increase in profit will
have no
effect on the number of
firms in the market.
D. Firms are price
takers.
[15] Source: CMA 1288 1-
25
If the average household
income increases and
there is
relatively little change in
the price of a normal
good, then
the
A. Supply curve will
shift to the left.
B. Quantity demanded
will move farther down
the
demand curve.
C. Demand will shift to
the left.
D. Demand curve will
shift to the right.
[16] Source: CMA 1288 1-
29
All of the following are
characteristics of
monopolistic
competition except that
A. The firms sell a
homogeneous product.
B. The firms tend not to
recognize the reaction of
competitors when
determining prices.
 C. Individual firms have [18] Source: CMA 0689 1-
some control over the 20
price The measurement that
of the product. uses the factors of
production as
D. The consumer inputs in physical terms
demand curve is highly is
elastic.
A. Economic efficiency.

[17] Source: CMA 1288 1- B. Opportunity cost.

30
The cyclical and C. Technological
seasonal fluctuations in efficiency.
consumer demand for the
products produced by an D. Comparative
oligopoly are advantage.
characteristic of

A. Differentiated [19] Source: CMA 0689 1-

products. 21
The measurement of
B. Sticky prices. using resources now in
lieu of
C. Kinked demand alternative uses of the
curves. resources is

D. Homogeneous A. Economic efficiency.

products.
B. Opportunity cost.
 C. Comparative [21] Source: CMA 0689 1-
advantage. 24
When making a decision
D. Absolute advantage. to increase the robotic
automation equipment in
an existing facility, a firm
[20] Source: CMA 0689 1- takes all of the following
22 into consideration except
The principle of
substitution states that A. Economies of scale.

A. The costs of two B. Opportunity cost.

factors of production are
equal. C. Technological
efficiency.
B. Profit maximization
is maintained while D. The initial cost of the
choosing current facility.
either factor of
production.
[22] Source: CMA 0689 1-
C. The firm chooses 26
more of the less A decrease in the price of
expensive a complementary good
factor of production. will

D. The firm chooses A. Shift the demand

more of the more curve of the joint
expensive commodity to
factor of production. the left.
 B. Increase the price
paid for a substitute
good.
C. Shift the supply
curve of the joint
commodity to
the left.
D. Shift the demand
curve of the joint
commodity to
the right.
[23] Source: CMA 0689 1-
29
If a product is part of the
consumers' basket of
goods, and the Consumer
Price Index increased 7%
for the year while the
price of this normal good
increased 3%, then
A. The supply curve will
shift to the left.
B. Neither the demand
curve nor the supply
curve
will be affected.
C. The demand curve
will shift to the right.
D. The demand curve
will shift to the left.
[24] Source: CMA 1289 1-
4
If the elasticity of
demand for a normal
good is estimated to be
1.5, a 10% reduction in
its price would cause
A. Total revenue to fall
by 10%.
B. Total revenue to fall
by 15%.
C. Quantity demanded
to rise by 15%.
D. Demand to decrease
by 10%.
[25] Source: CMA 1289 1-
11
An industry that is
oligopolistic would be
best characterized by
A. One firm selling a
product with no close
substitutes.
B. The absence of the
profit-maximizing goal.
C. Significant barriers
to entry.
D. Horizontal or flat
demand curves for the
output of
individual firms.
[26] Source: CMA 0690 1-
19
If a normal good
competes with three
similar goods, and all four
goods give the consumer
equal utils of
satisfaction, the demand
for the normal good
A. Is relatively elastic.
B. Is perfectly elastic.
C. Responds as an
inferior good.
D. Is perfectly inelastic.
[27] Source: CMA 0690 1-
20
If oil producers and
retailers were to increase
the price of
gasoline for cars during
the summer season by
$.05 per
gallon, these suppliers
anticipate that the
demand for
gasoline
A. Is relatively elastic.
B. Is relatively
inelastic.
C. Responds as an
inferior good.
D. Is perfectly inelastic.
[28] Source: CMA 0690 1-
21
The Waymand family
typically ate hamburger
as a staple in their diet.
In the last few years, the
family's income has
doubled, and they have
now replaced hamburger
with
steak as a staple in their
diet. This is an example
in which
the demand for
hamburger
A. Is relatively elastic.
B. Is perfectly elastic.
C. Is relatively
inelastic.
D. Responds as an
inferior good.
[29] Source: CMA 0690 1-
22
Utility companies can
ordinarily price their
product, a good that
establishes a
comfortable life-style
(i.e., electricity, gas for
home heating), based on
the assumption that the
demand
A. Is relatively elastic.
B. Is perfectly elastic.
C. Is relatively
inelastic.
D. Is perfectly inelastic.
[30] Source: CMA 0690 1-
23
The demand curve for a
normal good is
A. Upward sloping
because firms produce
more at
higher prices.
B. Upward sloping
because higher-priced
goods are
of higher quality.
 C. Vertical.
D. Downward sloping
because of the income
and
substitution effects of
price changes.
[31] Source: CMA 0690 1-
24
Which one of the
following changes will
cause the demand
curve for gasoline to shift
to the left?
A. The price of gasoline
increases.
B. The supply of
gasoline decreases.
C. The price of cars
increases.
D. The price of cars
decreases.
[32] Source: CMA 0690 1-
26
Which one of the
following examples best
depicts the law
of diminishing returns?
A. Small electric
generating plants are
less efficient
than large plants.
B. A manufacturing
company purchases its
supplier
of materials.
C. An automobile
assembly plant has lower
per-unit
costs at 85% of
capacity than at 95% of
capacity.
D. Passenger airplanes
operate at high costs per
passenger when they
fly half-empty.
[33] Source: CMA 0690 1-
27
A corporation's net The marginal cost curve
income as presented on is the supply curve for
its income the firm in
statement is usually
A. Pure monopoly.
A. More than its
economic profits because B. Monopolistic
opportunity costs are competition.
not considered in
calculating net C. Pure competition.
income.
D. Oligopoly.
B. More than its
economic profits because
economists do not [35] Source: CMA 0690 1-
consider interest 30
payments to be An improvement in
costs. technology that in turn
leads to
C. Equal to its improved worker
economic profits. productivity would most
likely result in
D. Less than its
economic profits because A. A shift to the right in
accountants include the supply curve and a
labor costs, while lowering of the price of
economists the output.
exclude labor costs.
B. A shift to the left in
the supply curve and a
[34] Source: CMA 0690 1- lowering of the price of
29 the output.
 [37] Source: CMA 1290 1-
C. An increase in the 2
price of the output if Tennis rackets and
demand is tennis balls are
unchanged.
A. Substitute goods.
D. Wage increases.
B. Independent goods.

[36] Source: CMA 1290 1- C. Inferior goods.

1
The existence of D. Complementary
economic profit in pure goods.
monopoly will

A. Have no influence on [38] Source: CMA 1290 1-

the number of firms in the 3
industry. Which one of the
following is a
B. Lead to a decline in characteristic of pure
the number of firms in the competition?
industry.
A. Mutual
C. Lead to an increase interdependence.
in product supply.
B. Significant research
D. Lead to a decline in and development
market prices for programs.
substitutes.
C. Product
differentiation.
 D. Standardized
product.
[39] Source: CMA 1290 1-
4
Which one of the
following statements
about supply and
demand is true?
A. If supply increases
and demand remains
constant,
equilibrium price will
rise.
B. If demand increases
and supply decreases,
equilibrium price will
fall.
C. If demand increases
and supply increases,
equilibrium quantity will
fall.
D. If demand increases
and supply decreases,
equilibrium price will
increase.
[40] Source: CMA 1290 1-
5
A government price
support program will
A. Lead to surpluses.
B. Lead to shortages.
C. Improve the
rationing function of
prices.
D. Encourage firms to
leave the industry.
[41] Source: CMA 1290 1-
6
Price ceilings
A. Are illustrated by
government price support
programs in agriculture.
B. Create prices greater
than equilibrium prices.
C. Create prices below
equilibrium prices.
 D. Result in persistent B. Is strongly
surpluses. influenced by diminishing
returns.

[42] Source: CMA 1290 1- C. Is the same as the

7 rising portion of the
Entry into monopolistic marginal
competition is cost curve.

A. Blocked. D. Is ordinarily U-
shaped.
B. Difficult, with
significant obstacles.
[44] Source: CMA 1290 1-
C. Rare, as significant 10
capital is required. A normal profit is

D. Relatively easy, with A. The same as an

only a few obstacles. economic profit.

B. The same as the

[43] Source: CMA 1290 1- accountant's bottom line.
8
The long-run average C. An explicit or out-of-
total cost curve pocket cost.

A. Is horizontal and D. A cost of resources

parallel to the demand from an economic
curve. perspective.
[45] Source: CMA 1290 1-
9 C. Identified with an
Which one of the
following is not a factor
contributing to
economies of scale?
A. Labor specialization.
B. Use of by-products.
C. Efficient use of
capital equipment.
D. Diminishing returns.
[46] Source: CMA 1290 1-
11
A natural monopoly is
A. Identified with a one-
firm industry with
significant
economies of scale and
in which unit costs are
minimized.
B. An important part of
the analysis of
monopolistic
competition.
industry in which
economies of
scale are rapidly
exhausted.
D. Identified with an
industry in which
economies of
scale are few and
diseconomies are quickly
incurred.
[47] Source: CMA 1290 1-
12
A high concentration
ratio is
A. An indicator of
monopolistic power.
B. An indicator of a
highly competitive
industry.
C. Consistent with the
law of demand.
 D. Consistent with C. Steel industry.
monopolistic
competition. D. Auto industry.

[48] Source: CMA 1290 1- [50] Source: CMA 1290 1-

13 15
A supply curve illustrates Marginal revenue is
the relationship between
A. Equal to price in
A. Price and quantity monopolistic
supplied. competition.

B. Price and consumer B. The change in total

tastes. revenue associated with
increasing prices.
C. Price and quantity
demanded. C. Greater than price in
pure competition.
D. Supply and demand.
D. The change in total
revenue associated with
[49] Source: CMA 1290 1- producing and selling
14 one more unit.
A good example of
monopolistic competition
is the [51] Source: CMA 1290 1-
16
A. Agriculture market. The kinked demand curve
is associated with
B. Fast food industry.
 A. The analysis of D. Elasticity of demand
agricultural markets. for apples is less than
1.0.
B. The analysis of
monopolistic
competition. [53] Source: CMA 1290 1-
18
C. The analysis of pure The firm's short-run
competition. supply curve is derived
from the
D. The analysis of
oligopoly. A. Average total cost
curve.

[52] Source: CMA 1290 1- B. Fixed cost curve.

17
If the price of apples C. Marginal cost curve.
declines and total
revenue received by D. Total cost curve.
the firm increases, the

A. Demand for apples is [54] Source: CMA 0691 1-

elastic. 13
If both the supply and the
B. Demand for apples is demand for a good
inelastic. increase, the
market price will
C. Elasticity of demand
for apples is 1.0. A. Rise only in the case
of an inelastic supply
function.
 B. Fall only in the case
of an inelastic supply
function. [56] Source: CMA 0691 1-
15
C. Not be predictable Economic rent is the
with only these facts. total price paid for land
and other
D. Rise only in the case natural resources when
of an inelastic demand there is a(n)
function.
A. Completely elastic
supply function.
[55] Source: CMA 0691 1-
14 B. Completely fixed
Economic goods are total supply.
considered scarce
resources because C. Fixed demand
they schedule.

A. Cannot be increased D. Artificial market

in quantity. price.

B. Are not produced in

adequate quantities. [57] Source: CMA 0691 1-
19
C. Do not exist in When the federal
adequate quantities to government imposes
satisfy all health and safety
demands for them. regulations on certain
products, one of the most
D. Are limited to man- likely
made goods. results is
 A. Greater consumption [59] Source: CMA 0692 1-
of the product. 29
The change in total
B. Lower prices for the product resulting from
product. the use of one
unit more of the variable
C. Greater tax revenues factor is known as
for the federal
government. A. The point of
diminishing average
D. Higher prices for the productivity.
product.
B. Marginal product.

[58] Source: CMA 0692 1- C. Marginal cost.

28
The sum of the average D. The point of
fixed costs and the diminishing marginal
average productivity.
variable costs for a given
output is known as
[60] Source: CMA 0692 1-
A. Long-run average 30
cost. When long-run average
cost is declining over a
B. Average product. range of
increasing output, the
C. Total cost. firm is experiencing

D. Average total cost. A. Increasing fixed

costs.
 [62] Source: CMA 1292 1-
B. Technological 2
efficiency. A perfectly inelastic
supply curve in a
C. Decreasing returns. competitive market

D. Economies of scale. A. Implies a vertical

demand curve.

[61] Source: CMA 1292 1- B. Exists when firms

1 cannot vary input usage.
In any competitive
market, an equal C. Implies a horizontal
increase in both market supply curve.
demand and supply can
be expected to always D. Can exist only in the
long run.
A. Increase both price
and market-clearing
quantity. [63] Source: CMA 1292 1-
3
B. Decrease both price Government price
and market-clearing regulations in
quantity. competitive markets that
set maximum or ceiling
C. Increase market- prices below the
clearing quantity. equilibrium price
will in the short run
D. Increase price.
A. Cause demand to
decrease.
 B. Cause supply to
increase.
C. Create shortages of
that product.
D. Produce a surplus of
the product.
[64] Source: CMA 1292 1-
4 consumption expands.
In competitive product
markets, equilibrium
price in the
long run is
A. A fair price all
consumers can afford.
B. Set equal to the total
costs of production.
C. Set equal to the total
fixed costs of production.
D. Set equal to the
marginal costs of
production.
[65] Source: CMA 1292 1-
5
In the theory of demand,
the marginal utility per
dollar of a
product
A. Increases when
consumption expands.
B. Decreases when
C. Explains why short-
run supply curves are
upward
sloping.
D. Increases as more
units of a variable input
are
added to the production
process.
[66] Source: CMA 1292 1-
6
In the short run, the
supply curve in a
competitive market
shows a positive A. Each additional unit
relationship between of labor is less efficient
price and quantity than
supplied because the previous unit.

A. Consumers will only B. As more labor is

buy more of a product at added to a factory,
a increases in
higher price. output will diminish in
the short run.
B. Of the law of
diminishing returns. C. Increasing the size
of a factory will result in
C. As the size of a lower
business firm increases, average costs.
price must
rise. D. Increasing the size
of a factory will result in
D. Increases in output lower
imply a shift in consumer total costs.
preferences, allowing a
higher price.
[68] Source: CMA 1292 1-
8
[67] Source: CMA 1292 1- When compared with
7 firms in perfectly
Because of the existence competitive
of economies of scale, markets, monopolists
business ordinarily
firms may find that
A. Use more advertising
to increase sales.
 C. Advertising.
B. Charge a higher
price and produce a D. Heterogeneous
higher rate of products.
output.

C. Use more capital and [70] Source: CMA 1292 1-

less labor to avoid 10
problems When markets are
with workers. perfectly competitive,
consumers
D. Charge a higher
price and produce a A. Are able to avoid the
lower rate of problem of diminishing
output. returns.

B. Have goods and

[69] Source: CMA 1292 1- services produced at the
9 lowest
Economic markets that cost in the long run.
are characterized by
monopolistic C. Do not receive any
competition have all of consumer surplus unless
the following producers choose to
characteristics except overproduce.

A. One seller of the D. Must search for the

product. lowest price for the
products
B. Economies or they buy.
diseconomies of scale.
[71] Source: CMA 1292 1-
11
The manner in which
cartels set and maintain
price above
the competitive market
price is to
A. Avoid product
differentiation in order to
decrease
demand for the
product.
B. Advertise more so
market demand
increases.
C. Increase costs so
price must rise.
D. Require cartel
members to restrict
output.
[72] Source: CMA 1292 1-
12
The definition of
economic cost is
A. All the dollar costs
employers pay for all
inputs
purchased.
B. The opportunity cost
of all inputs minus the
dollar
cost of those inputs.
C. The difference
between all implicit and
explicit
costs of the business
firm.
D. The sum of all
explicit and implicit costs
of the
business firm.
[73] Source: CMA 1292 1-
13
In a competitive market
for labor in which
demand is
stable, if workers try to
increase their wage,
A. Employment must
fall.
 B. Government must set D. Mutual
a maximum wage below interdependence of firm
the pricing and output
equilibrium wage. decisions.

C. Firms in the industry

must become smaller. [75] Source: CMA 1292 1-
15
D. Product supply must In microeconomics, the
decrease. distinguishing
characteristic of the
long run on the supply
[74] Source: CMA 1292 1- side is that
14
The distinguishing A. Only supply factors
characteristic of determine price and
oligopolistic markets is output.

A. A single seller of a B. Only demand factors

homogeneous product determine price and
with no output.
close substitute.
C. Firms are not
B. A single seller of a allowed to enter or exit
heterogeneous product the industry.
with no
close substitute. D. All inputs are
variable.
C. Lack of entry and
exit barriers in the
industry.
[76] Source: CMA 1292 1-
17
Any business firm that
has the ability to control
the price of
the product it sells
A. Faces a downward-
sloping demand curve.
B. Has a supply curve
that is horizontal.
C. Has a demand curve
that is horizontal.
D. Will sell all output
produced.
[77] Source: CMA 1292 1-
18
The competitive model of
supply and demand
predicts that
a surplus can arise only if
there is a
A. Maximum price
above the equilibrium
price.
B. Minimum price below
the equilibrium price.
C. Maximum price
below the equilibrium
price.
D. Minimum price above
the equilibrium price.
[78] Source: CMA 1293 1-
3
A natural monopoly
exists because
A. The firm owns
natural resources.
B. The firm holds
patents.
C. Economic and
technical conditions
permit only
one efficient supplier.
D. The government is
the only supplier.
[79] Source: CMA 1293 1- monopoly and
10 monopolistic
If a group of consumers competition, firms
decide to boycott a produce at
particular an output at which
product, the expected
result would be A. Price equals
marginal cost.
A. An increase in the
product price to make up B. Average costs are
lost minimized.
revenue.
C. Price equals average
B. A decrease in the cost.
demand for the product.
D. Marginal cost equals
C. An increase in marginal revenue.
product supply because
of
increased availability. [81] Source: CMA 1293 1-
29
D. That demand for the Price tends to fall in
product would become competitive markets
completely inelastic. when there is a(n)

A. Increase in demand
[80] Source: CMA 1293 1- for the product.
28
In markets that are B. Decrease in quantity
imperfectly competitive, demanded of the product.
such as
 C. Decline in available
labor.
D. Increase in interest
rates.
[82] Source: CMA 1293 1-
30
Product demand
becomes more elastic
the
A. Greater the number
of substitute products
available.
B. Greater the
consumer income.
C. Greater the elasticity
of supply.
D. Higher the input
costs.
[83] Source: CMA 1288 1-
26
In relation to the laws of
supply and demand, an
increase in
supply will
A. Increase the
equilibrium price and the
equilibrium
quantity exchanged.
B. Decrease the
equilibrium price and the
equilibrium
quantity exchanged.
C. Increase the
equilibrium price and
decrease the
equilibrium quantity
exchanged.
D. Decrease the
equilibrium price and
increase the
equilibrium quantity
exchanged.
[84] Source: CMA 1288 1-
28
A characteristic of a
monopoly is that
 A. A monopoly will
produce when marginal
revenue
is equal to marginal
cost.
fixed costs of $10,000
and total variable costs
of $15,000,
the average total cost
per unit is

B. There is a unique A. $20.

relationship between the
market B. $30.
price and the quantity
supplied. C. $50.

C. In optimizing profits, D. $25.

a monopoly will increase
its
supply curve to where [86] Source: CMA 1289 1-
the demand curve 8
becomes In the short run in perfect
inelastic. competition, a firm
maximizes
D. There are multiple profit by producing the
prices for the product to rate of output at which
the the price is
consumer. equal to

A. Total cost.
[85] Source: CMA 1289 1-
7 B. Total variable cost.
If a firm currently
producing 500 units of C. Average fixed costs.
output incurs total
D. Marginal cost.
 A. All possible
combinations of two
[87] Source: CMA 1289 1- different product
9 quantities that a
Because of economies of producer would be willing
scale, as output from to sell.
production
expands, B. All possible
combinations of two
A. The short-run different product
average cost of quantities that will
production yield the same level of
decreases. satisfaction
to the consumer.
B. The long-run average
cost of production C. Combinations of two
increases. different product
quantities
C. The long-run total that are possible, given
cost decreases. a consumer's income and
the
D. The slope of the prices of the two
demand curve increases. products.

D. A consumer's
[88] Source: CMA 0694 1- indifference between
2 varying levels
An indifference curve of income and price
represents changes.
[89] Source: CMA 0694 1- D. 3.80
3
As the price for a
particular product [90] Source: CMA 0694 1-
changes, the quantity 6
of the product demanded If a product's demand is
changes according to the elastic and there is a
following schedule. decrease in
price, the effect will be
Total Quantity
Price A. A decrease in total
Demanded revenue.
per Unit
-------------- -------- B. No change in total
100 $50 revenue.
150 45
200 40 C. A decrease in total
225 35 revenue and the demand
230 30 curve
232 25 shifts to the left.
The price elasticity of
demand for this product D. An increase in total
when the revenue.
price decreases from $50
to $45 is
[91] Source: CMA 0694 1-
A. 0.20 13
The movement along the
B. 10.00 demand curve from one
price-quantity
C. 0.10 combination to another is
called a(n)
 [93] Source: CMA 1294 1-
A. Change in demand. 6
An oligopolist faces a
B. Shift in the demand "kinked" demand curve.
curve. This
terminology indicates
C. Change in the that
quantity demanded.
A. When an oligopolist
D. Increase in demand. lowers its price, the other
firms in the oligopoly
will match the price
[92] Source: CMA 0694 1- reduction,
14 but if the oligopolist
All of the following are raises its price, the other
complementary goods firms
except will ignore the price
change.
A. Margarine and
butter. B. An oligopolist faces
a non-linear demand for
B. Cameras and rolls of its
film. product, and price
changes will have little
C. VCRs and video effect on
cassettes. demand for that
product.
D. Razors and razor
blades. C. An oligopolist can
sell its product at any
price, but
 after the "saturation
point," another C. Elastic.
oligopolist will
lower its price and, D. Inelastic.
therefore, shift the
demand curve
to the left. [95] Source: CMA 1294 1-
8
D. Consumers have no Monopolistic competition
effect on the demand is characterized by
curve,
and an oligopolist can A. A relatively large
shape the curve to number of sellers who
optimize its produce
own efficiency. differentiated products.

B. A relatively small
[94] Source: CMA 1294 1- number of sellers who
7 produce
In the pharmaceutical differentiated products.
industry where a diabetic
must have C. A monopolistic
insulin no matter what market where the
the cost and where there consumer is
is no other persuaded that there is
substitute, the diabetic's perfect competition.
demand curve is best
described as D. A relatively large
number of sellers who
A. Perfectly elastic. produce a
standardized product.
B. Perfectly inelastic.
 C. The population in the
[96] Source: CMA 1294 1- market area is large.
19
If a product has a price D. Few good
elasticity of demand of substitutes are available
2.0, the for the
demand is said to be product.

A. Perfectly elastic.
[98] Source: CMA 0695 1-
B. Perfectly inelastic. 16
Which one of the
C. Elastic. following statements is
not true of
D. Inelastic. indifference curves?

A. Indifference curves
[97] Source: CMA 0695 1- slope downward to the
15 right,
Demand for a product indicating goods are
tends to be price substitutable.
inelastic if
B. Indifference curves
A. The product is indicate that more goods
considered a luxury item. are
preferable to fewer
B. Few good goods.
complements for the
product are C. The marginal utility
available. of a good decreases as
consumption of the
good increases.

D. Indifference curves
cross at their equilibrium
point.
[99] Source: CMA 0695 1-
17
Which one of the
following is not a key
assumption of
perfect competition?
A. Firms sell a
homogeneous product.
B. Customers are
indifferent about which
firm they
buy from.
C. The level of a firm's
output is small relative to
the
industry's total output.
D. Each firm can price
its product above the
industry
price.
[100] Source: CMA 0695
1-18
A market with many
independent firms, low
barriers to
entry, and product
differentiation is best
classified as
A. A monopoly.
B. Monopolistic
competition.
C. An oligopoly.
D. Pure competition.
[101] Source: CMA 0695
1-19
Which one of the
following would cause
the demand curve
for a normal good to shift
to the left?
A. A rise in the price of
a substitute product.
B. A rise in average
household income.
 [Fact Pattern #2]
C. A rise in the price of
a complementary Number of Total
commodity. Average
Workers Product Units
D. A change in Selling Price
consumers' tastes in --------- ------------- -------------
favor of the 10 20
commodity. $50.00
11 25
49.00
[102] Source: CMA 0695 12 28
1-20 47.50
An increase in the market
supply of beef would [103] Source: CMA 1295
result in 1-17
a(n) (Refers to Fact Pattern
#2)
A. Increase in the price The marginal physical
of beef. product when one worker
is added
B. Decrease in the to a team of 10 workers
demand for beef. is

C. Increase in the price A. 1 unit.

of pork.
B. 8 units.
D. Increase in the
quantity of beef C. 5 units.
demanded.
D. 25 units.
 B. $225.00
[104] Source: CMA 1295
1-18 C. $105.00
(Refers to Fact Pattern
#2) D. $47.50
The marginal revenue per
unit when one worker is
added [106] Source: CMA 1285
to a team of 11 workers 1-18
is In preparing a cost-
volume-profit analysis for
A. $35.00 his candle
manufacturing business,
B. $225.00 Joe Stark is considering
raising his
C. $105.00 prices $1.00 per candle.
Stark is worried about
D. $47.50 the impact
the increase will have on
his volume of sales at
[105] Source: CMA 1295 craft fairs.
1-19 Stark is concerned about
(Refers to Fact Pattern the
#2)
The marginal revenue A. Elasticity of demand.
product when one worker
is added B. Substitution effect.
to a team of 11 workers
is C. Nature of supply.

A. $42.00 D. Maximization of
utility.
 [108] Source: CMA 0696
1-4
[107] Source: CMA 0696 The law of diminishing
1-3 marginal utility states
Which one of the that
following statements
concerning pure A. Marginal utility will
monopolies is correct? decline as a consumer
acquires
A. The demand curve of additional units of a
a monopolist is perfectly specific product.
elastic.
B. Total utility will
B. The price at which a decline as a consumer
monopolist maximizes its acquires
profit is where price additional units of a
equals both marginal specific product.
cost and
marginal revenue. C. Declining utils cause
the demand curve to
C. A monopolist's slope
marginal revenue curve upward.
lies below
its demand curve. D. Consumers' wants
diminish with the
D. For a monopolist, passage of
there is a unique time.
relationship
between the price and
the quantity supplied. [109] Source: CMA 0696
1-5
If a product has a price [111] Source: CMA 0696
elasticity of demand of 1-7
2.0, the Monopolistic competition
demand is considered to is characterized by
be
A. A relatively large
A. Perfectly elastic. group of sellers who
produce
B. Perfectly inelastic. differentiated products.

C. Relatively elastic. B. A relatively small

group of sellers who
D. Relatively inelastic. produce
differentiated products.

[110] Source: CMA 0696 C. A monopolistic

1-6 market where the
If a diabetic must have consumer is
insulin no matter what persuaded that there is
the cost, the perfect competition.
diabetic's demand is
considered to be D. A relatively large
group of sellers who
A. Perfectly elastic. produce a
homogeneous product.
B. Perfectly inelastic.

C. Relatively inelastic. [112] Source: CMA 1296

1-1
D. Indifferent. If the federal government
regulates a product or
service in a
competitive market by price.
setting a maximum price
below the C. Produce the same
equilibrium price, what is output and charge a
the long-run effect? higher
price.
A. A surplus.
D. Produce
B. A shortage. substantially less and
charge a lower
C. A decrease in price.
demand.

D. No effect on the [114] Source: CMA 1296

market. 1-3
Which one of the
following statements
[113] Source: CMA 1296 concerning pure
1-2 monopolies is correct?
Compared with firms in a
perfectly competitive A. The demand curve of
market, a a monopolist is perfectly
monopolist tends to elastic.

A. Produce B. The point of profit

substantially less but maximization for a
charge a higher monopoly is
price. where average total
revenue equals average
B. Produce total
substantially more and cost.
charge a higher
 C. The monopolist's Natural monopoly
marginal revenue curve conditions, which often
lies lead to
below the monopolist's governmental regulation,
demand curve. exist when

D. The supply curve of a A. Consumer demand

monopoly is perfectly for a product is perfectly
inelastic. elastic.

B. Marginal costs are

[115] Source: CMA 1296 rising.
1-4
In the long run, a firm C. Consumer demand is
may experience inversely related to the
increasing returns business cycle.
due to
D. Total average costs
A. Law of diminishing are declining.
returns.

B. Opportunity costs. [117] Source: CMA 1296

1-27
C. Comparative A horizontal merger is
advantage. best defined as a merger
of
D. Economies of scale.
A. Two or more firms in
the same industry.
[116] Source: CMA 1296
1-19 B. A manufacturing
company and its supplier.
 Nevertheless, Parker
C. Two or more firms in believes that if she is
different industries. able to obtain
capital resources, she
D. Two or more firms in can gain market share
different stages of the from the two
production process. major competitors.

[118] Source: CMA 0697

[Fact Pattern #3] 1-1
Karen Parker wants to (Refers to Fact Pattern
establish an #3)
environmental testing The large capital outlay
company that would necessary for the
specialize in evaluating equipment is an
the quality of example of a(n)
water found in rivers and
streams. However, A. Entry barrier.
Parker has
discovered that she B. Minimum efficient
needs either certification scale.
or approval
from five separate local C. Created barrier.
and state governmental
agencies D. Production
before she can possibility boundary.
commence business.
Also, the necessary
equipment to begin would [119] Source: CMA 0697
cost several million 1-2
dollars. (Refers to Fact Pattern
#3)
The market structure D. Public goods.
Karen Parker is
attempting to enter is
best described as [Fact Pattern #4]

A. A natural monopoly. Total Units Average

Average Average
B. A cartel. of Product Fixed Cost
Variable Cost Total
C. An oligopoly. Cost
----------- ---------- -------------
D. Monopolistic -----------
competition. 6 $15.00
$25.00 $40.00
7 12.86
[120] Source: CMA 0697 24.00 36.86
1-3 8 11.25
The local video store's 23.50 34.75
business increased by 9 10.00
12% after the 23.75 33.75
movie theater raised its
prices from $6.50 to [121] Source: CMA 0697
$7.00. This is 1-4
an example of (Refers to Fact Pattern
#4)
A. Substitute goods. The total cost of
producing seven units is
B. Superior goods.
A. $90.02
C. Complementary
goods. B. $168.00
 C. $258.02
Games Games
D. $280.00
Played Played
Previous New
[122] Source: CMA 0697 at Previous at New
1-5 Rate Rate
(Refers to Fact Pattern Rate Rate
#4) -------- ----
The marginal cost of ----------- --------
producing the ninth unit Regular
is weekday $10
$11 80 70
A. $23.50 Senior citizen 6 8
150 82
B. $23.75 Weekend 15 20
221 223
C. $25.75 Which one of the
following is correct?
D. $33.75
A. The regular weekday
and weekend demand is
[123] Source: CMA 0697 inelastic.
1-6
Long Lake Golf Course B. The regular weekday
has raised greens fees and weekend demand is
for a elastic.
nine-hole game due to an
increase in demand. C. The senior citizen
demand is elastic, and
weekend
Average Average demand is inelastic.
 vertical merger?
D. The regular weekday
demand is inelastic, and A. A grocery store
weekend demand is buying another grocery
elastic. store in
the same market.

[124] Source: CMA 0697 B. A grocery store

1-17 buying another grocery
Patents are granted in store in a
order to encourage firms state where the first
to invest in company does not do
the research and business.
development of new
products. Patents are C. A hot dog producer
an example of buying a soft drink
manufacturer.
A. Vertical integration.
D. A brewer buying a
B. Market glass company.
concentration.

C. Entry barriers. [126] Source: Publisher

The output and cost
D. Collusion. information for a firm is
presented
below.
[125] Source: CMA 0697
1-18 Output Total Variable
Which one of the Cost Total Cost
following examples best ------ -------------------
describes a ----------
 0 $-0- and capital in any desired
$100 proportions to produce
1 $150 its
$250 product. If wages rise to
2 $260 $20 per hour and capital
$360 equipment rentals rise to
3 $350 $22 per hour, in the long
$450 run the
The marginal cost of the firm will
second unit of output is
A. Use relatively more
A. $100 equipment and relatively
less
B. $110 labor in its production.

C. $150 B. Use relatively more

labor and relatively less
D. $180 equipment in its
production.

[127] Source: Publisher C. Use less of both

A company operating in a labor and equipment in
perfectly competitive its
market has production, but in the
been paying $10 per hour same proportions as
for labor and $20 per before.
hour to
rent a piece of capital D. Lower its average
equipment. The firm can equipment-output ratio
use labor and
raise its average labor-
output ratio.
 conformity with generally
accepted accounting
[128] Source: Publisher principles:
If the price elasticity of
demand for a normal A B
good is C
estimated to be 2.5, a 5% --------- ---------
reduction in its price ---------
causes Sales $100,000
$200,000 $400,000
A. Total revenue to fall Cost of goods sold
by 5%. 60,000 120,000
200,000
B. Total revenue to fall Gross profit 40,000
by 12.5%. 80,000 200,000
Other expenses
C. Quantity demanded 10,000 20,000
to rise by 12.5%. 80,000
--------- ---------
D. Quantity demanded ---------
to decrease by 5%. Net income $ 30,000
$ 60,000 $120,000
=========
[Fact Pattern #5] ======== ========
Companies A, B, and C Shareholders'
had the following results equity $500,000
for last $300,000 $900,000
year as reported on
financial statements [129] Source: Publisher
prepared in (Refers to Fact Pattern
#5)
Assets are equal to
shareholders' equity. The C. Company C.
company has
no long-term debt D. Two were equal.
outstanding. The cost of
internally-generated
equity capital is 12%. [131] Source: Publisher
Which company Below are the grocers'
had the highest economic demand schedules for
profit? Palm Valley
Grapes. Assuming that
A. Company A. John, Towny, and
Dorothea are the
B. Company B. only three customers of
Palm Valley Grapes,
C. Company C. which of the
following sets of prices
D. Cannot be and output levels will be
determined from on the
information given. market demand curve?

Price John Towny

[130] Source: Publisher Dorothea
(Refers to Fact Pattern of Grapes Q Q
#5) Q
Which company had the dx dx dx
highest accounting --------- ---- ----- --------
income? $6 0 1 0
5 1 2 0
A. Company A. 4 2 4 0
3 3 6 1
B. Company B. 2 4 8 2
 1 5 9 3 [133] Source: Publisher
A. ($6, 2); ($1, 17) The amount of
boysenberries demanded
B. ($5, 3); ($1, 17) for the third
quarter rose from 1,250
C. ($4, 4); ($2, 12) units to 1,750 units from
last year.
D. ($4, 0); ($1, 9) This was due to a
decrease in price from
$1.25 to $0.75
[132] Source: Publisher per unit. Therefore, the
Last week, the quantity price elasticity of
of apples demanded fell boysenberries is
from
51,500 units per week to A. 1/3
48,500 units per week. If
this B. 3/2
was a result of a 10%
price increase, what is C. 1
the price
elasticity of demand for D. 2/3
apples?

A. 1.67 [134] Source: Publisher

Suppose the price of
B. 1.06 mood rings rises from $3
to $4 when
C. 0.16 the quantity demanded of
mood rings decreases
D. 0.60 from
1,000 to 900. What would
be the price elasticity of
demand coefficient?

A. 3.00 [136] Source: Publisher

If Tonya used $10,000
B. 2.71 from her savings
account, which
C. 0.37 was paying 5% interest
annually, to invest in a
D. 0.33 saloon, the
opportunity cost of this
investment would
[135] Source: Publisher annually be
Demand price is inelastic
in which range of the A. $500
following
demand schedule? B. The dividend paid by
the coffee shop.
Price Quantity
Demanded C. $10,000
----- -----------------
$22 100 D. $10,500
18 200
14 400
10 600 [Fact Pattern #6]
6 800 Gator Company is selling
A. $22 - $18 in a purely competitive
market
B. $18 - $14 and has the following
cost data.
C. $14 - $10
Average Average
D. $10 - $6 Average
 Fixed Variable If the market price for
Total Marginal Gator's product is $190,
Output Cost Cost this firm
Cost Cost should produce
------ ------- -------- --------
-------- A. 5 units at an
1 $600 $100 economic loss of $70.
$700 $100
2 300 75 B. 6 units and break
375 50 even.
3 200 70
270 60 C. 8 units and break
4 150 73 even.
223 80
5 120 70 D. 8 units at an
190 110 economic profit of $74.
6 100 90
190 190
7 86 105 [138] Source: Publisher
191 200 (Refers to Fact Pattern
8 76 119 #6)
195 230 If the market price for
9 67 138 Gator's product is $290,
205 290 this firm
10 60 160 should produce
220 360
A. 7 units at an
[137] Source: Publisher economic profit of $707.
(Refers to Fact Pattern
#6) B. 8 units at an
economic profit of $760.
 C. 9 units at an
economic profit of $765. C. A shortage of 20
units.
D. 10 units at an
economic profit of $700. D. A shortage of 10
units.

[139] Source: Publisher

(Refers to Fact Pattern [141] Source: Publisher
#6) While walking around a
An equilibrium price will yard sale, Jimbo
be set at happened upon a
bicycle that he personally
A. $110 valued at $55. Jimbo was
able to
B. $190 purchase the bicycle for
$30, even though it was
C. $200 only 2
years old and originally
D. $230 sold for $100. What is
Jimbo's
consumer surplus?
[140] Source: Publisher
(Refer to Figure 1.) If a A. $70
legal price floor of $3.00
is B. $15
declared in the diagram,
what will be the result? C. $45

A. A surplus of 20 units. D. $25

B. A surplus of 10 units.
[Fact Pattern #7]
Holly, a horseshoe maker, A. $30
has collected the
following data B. $33
regarding the local
market for full sets of C. $36
horseshoes.
D. $39
Horseshoe Sets
Horseshoe Sets
Price Demanded [143] Source: Publisher
Supplied (Refers to Fact Pattern
----- -------------- -------------- #7)
$30 400 At each price, there is a
180 60 unit decrease in the
33 375 number of
250 horseshoes supplied for
36 350 every increase in the
290 cost of labor.
39 320 Therefore, the market
320 has a new equilibrium
42 285 price for
345 horseshoes of
45 235
395 A. $36

[142] Source: Publisher B. $39

(Refers to Fact Pattern
#7) C. $42
The market has an
equilibrium price for D. $45
horseshoes of
[144] Source: Publisher A. Perfectly inelastic.
(Refers to Fact Pattern
#7) B. Elastic.
Assume the supply stays
as shown in the previous C. Unit elastic.
table,
and the quantity of D. Inelastic.
horseshoes demanded at
each price
increase by 160 units. [146] Source: Publisher
What will be the new Suppose that a stairway
equilibrium manufacturer's price
quantity? elasticity of
demand was inelastic. If
A. 510 this manufacturer
decided to
B. 480 increase the price of its
stairways, what should
C. 445 have been
the result?
D. 395
A. Total revenues
decreased.
[145] Source: Publisher
When a 5% fall in the B. Total revenues
price of velcro shoes increased.
causes the
quantity demanded to C. Total revenues
increase by 10%, the remain unchanged.
demand for
velcro shoes is said to be
 D. Total revenues were 2,000 $44 8,000
perfectly inelastic. 2,500 42 7,000
3,000 40 6,000
3,500 38 5,000
[147] Source: Publisher 4,000 36 4,000
(Refer to Figure 8.) In the 4,500 34 3,000
diagram, points J and K
have a [148] Source: Publisher
price elasticity of supply (Refers to Fact Pattern
between them of what? #8)
What would equilibrium
A. 1.33 price and quantity be?

B. .75 A. $40 and 6,000

pounds.
C. .40
B. $38 and 3,500
D. 2.50 pounds.

C. $36 and 4,000

[Fact Pattern #8] pounds.
Rock Salt, Inc. has
collected the following D. $34 and 3,000
information pounds.
regarding the current
market for rock salt.
[149] Source: Publisher
Salt Salt (Refers to Fact Pattern
Supplied #8)
Demanded Price What would occur if a
(pounds) legal price floor were set
-------- ----- ------------- at $42?

A. Shortage of 6,000
pounds.
B. Surplus of 6,000
pounds.
C. Shortage of 4,500
pounds.
D. Surplus of 4,500
pounds.
[150] Source: Publisher
Suppose a customer is
deciding between
purchasing
product X and product Y.
The marginal utility of
product X
is 30 and its price is $10.
The marginal utility of
product Y
is 45 and its price is $20.
In agreement with the
utility-maximizing rule,
the consumer should
A. Increase
consumption of product Y
and decrease
consumption of product
X.
B. Increase
consumption of product Y
and increase
consumption of product
X.
C. Increase
consumption of product X
and decrease
consumption of product
Y.
D. Make no change in
consumption of product X
or
Y.
[Fact Pattern #9]
The following table
shows the marginal-utility
schedules for
goods M and N for a
consumer. The price of
good M is
$2, and the price of good
N is $4. The income of
the
consumer is $18.
 [152] Source: Publisher
Good M Good N (Refers to Fact Pattern
-------------- -------------- #9)
Quantity MU Quantity If the consumer wishes
MU to maximize utility, then
-------- -- -------- -- total utility
1 8 1 10 will equal
2 7 2 8
3 6 3 6 A. 24
4 5 4 4
5 4 5 3 B. 36
6 3 6 2
7 2 7 1 C. 48
8 1 8 0
D. Cannot be
[151] Source: Publisher determined.
(Refers to Fact Pattern
#9)
If the consumer wishes [153] Source: Publisher
to maximize utility, then (Refers to Fact Pattern
the #9)
consumer will purchase If the consumer's income
is increased from $18 to
A. 7M and 1N. $24 and
the consumer wishes to
B. 5M and 2N. maximize utility, then the
consumer
C. 3M and 3N. will purchase

D. 1M and 4N. A. 6M and 3N.

B. 8M and 2N.
 C. 2M and 5N.
[155] Source: Publisher
D. 4M and 4N. Jim is satisfying his
hunger by consuming two
desserts, pies
[154] Source: Publisher and cakes. If the
The prices of A and B are marginal utility of a pie is
$5 and $4, respectively. half that of a
The cake, what is the price of
consumer is spending her a pie if the price of a
entire income buying 5 cake is
units of A $8.00?
and 7 units of B. The
marginal utility of both A. $4.00
the fifth unit of
A and the seventh unit of B. $8.00
B is 3. It follows that
C. $12.00
A. The consumer is in
equilibrium. D. $16.00

B. The consumer should

buy more of A and less of [Fact Pattern #10]
B. Following are total utility
data for tapes and CDs.
C. The consumer should Assume
buy less of A and more of that the prices of tapes
B. and CDs are $9 and $12,
respectively, and that
D. The consumer should consumer income is $54.
buy less of both A and B.
Units of Units
of [157] Source: Publisher
Tapes Total Utility (Refers to Fact Pattern
CDs Total Utility #10)
-------- ------------- -------- What is the consumer's
------------- total utility at the
1 9 1 equilibrium point?
16
2 15 2 A. 47
28
3 19 3 B. 51
36
4 21 4 C. 55
40
5 22 5 D. 61
42

[156] Source: Publisher [158] Source: Publisher

(Refers to Fact Pattern
#10)
How many of each
product will the
consumer buy?
A. 1 tape and 4 CDs.
B. 2 tapes and 2 CDs.
C. 2 tapes and 3 CDs.
D. 3 tapes and 3 CDs.
(Refers to Fact Pattern
#10)
If the price of tapes
decreases to $6, then the
consumer
will purchase
A. 4 tapes and 2 CDs.
B. 2 tapes and 4 CDs.
C. 3 tapes and 3 CDs.
D. 4 tapes and 4 CDs.

[159] Source: Publisher
If a firm's fixed costs are
$500, and its average
variable
costs stay constant
despite various levels of
output, which
of the following must be
true?
A. Marginal cost will
equal average total cost.
B. Marginal cost will be
less than average
variable
cost.
C. Average total cost
will decrease when
output is
increased.
D. Average total cost
will be constant.
[160] Source: Publisher
For a firm, capital costs
$10 per unit and labor
costs $5
per unit. If the marginal
product of labor is 10 and
the
marginal product of
capital is 5, the firm
should
A. Employ less capital
and more labor.
B. Employ more capital
and less labor.
C. Employ less capital
and labor.
D. Employ more capital
and labor.
[161] Source: Publisher
Ekin Inc. has always used
100 units of capital and
100
units of labor to produce
10 automobiles.
Recently, Ekin
has decided to double outputs from 10 units to
both inputs. This 18 units. Microhard is
increase in experiencing
production has resulted
in the production of 15 A. Increasing returns.
more
automobiles. Ekin is B. Decreasing returns.
experiencing
C. Economies of scale.
A. Decreasing returns.
D. Constant returns.
B. Constant returns.

C. Increasing returns. [163] Source: Publisher

During the previous year,
D. Diseconomies of Morrison Inc. produced
scale. 200,000
pogo sticks and sold
them all for $10 each.
[162] Source: Publisher The explicit
Microhard Technologies costs of production were
has always used 100 $700,000, and the
units of implicit costs
labor and 100 units of of production were
capital to produce 10 $200,000. The firm had
keyboards. an accounting
Recently, Microhard has profit of
decided to double both
inputs. A. $1.1 million and
This increase in economic profit of $0.
production has resulted
in increasing the
 B. $1.3 million and (Refers to Fact Pattern
economic profit of $1.1 #11)
million. Civic has an average
variable cost when 4
C. $1.3 million and units of output
economic profit of $1.3 are produced of
million.
A. $150
D. $1.3 million and
economic profit of $1.5 B. $200
million.
C. $250

[Fact Pattern #11] D. $600

The fixed cost of Civic
Co. is $1,000, and Civic's
total [165] Source: Publisher
variable cost is indicated (Refers to Fact Pattern
in the table. #11)
Civic has an average
Output Total Variable total cost when 4 units of
Cost output are
------ ------------------- produced of
1 $ 200
2 360 A. $150
3 500
4 600 B. $250
5 1,000
6 1,800 C. $400
7 2,800
D. $600
[164] Source: Publisher
 B. $50,000
[166] Source: Publisher
(Refers to Fact Pattern C. $50,003
#11)
Civic's marginal cost of D. $80,000
the seventh unit of output
is
[168] Source: Publisher
A. $100 Regardless of output, a
firm has $4,000 a year in
B. $300 total fixed
costs. This same firm has
C. $400 an average variable cost
of $3,
D. $1,000 while producing 1,000
units of output. If the firm
decides to
[167] Source: Publisher produce 1,000 units,
When a firm produces what will be its average
10,000 units of output, its total cost?
total
variable cost is equal to A. $1.00
$50,000. Also, it
experiences B. $3.00
average fixed costs of $3
per unit. What are the C. $4.00
total costs
for producing 10,000 D. $7.00
units?

A. $30,000 [169] Source: Publisher

A firm produces only 5 maximize profits, Mr.
units of output. If total Bojangles will
variable cost recommend that the
is $400, and total fixed firm should
cost is $200, then
A. Not change output.
A. Marginal cost is This firm is at its
$120. profit-maximizing
position.
B. Average total cost is
$600. B. Decrease production.

C. Average fixed cost is C. Increase production.

$200.
D. Shut down.
D. Average variable
cost is $80.
[171] Source: Publisher
Mrs. Robinson is hired as
[170] Source: Publisher a consultant to a firm
Mr. Bojangles is hired as that is
a consultant to a firm currently competing
that is, perfectly. At the current
currently, competing output level
perfectly. At the current the price is $10, the
output level average variable cost is
the price is $20, the $6, the
average variable cost is average total cost is $10,
$15, average and marginal cost is $8.
total cost is $22, and To
marginal cost is $20. In
order to
maximize profits, Mrs. A. Not change the
Robinson will recommend output level, because the
that the monopolist is currently
firm should at the profit-maximizing
output
A. Decrease production. level.

B. Increase production. B. Shut down.

C. Shut down. C. Increase production.

D. Not change D. Decrease production.

production.

[173] Source: Publisher

[172] Source: Publisher The individual purely
As of December 31 of the competitive firm faces a
current year, a demand
monopolist was schedule that is
producing at a level that
experienced price = $18, A. Perfectly inelastic.
average
total cost = $15, average B. Inelastic but not
variable cost = $12, perfectly inelastic.
marginal
revenue = $13, and C. Perfectly elastic.
marginal cost = $14. To
maximize D. Elastic but not
profits in the new year, perfectly elastic.
the monopolist should

[174] Source: Publisher

Spruce Goose Inc. is a At its current production,
chief competitor in the Abba Co., a monopolist,
highly has a
competitive field of small marginal cost of $18, and
jet production. Its total marginal revenue of $21.
revenue Abba
for producing 10 small will maximize profits by
jets is $60. Meanwhile,
its total A. Increasing price
revenue for producing 11 while keeping production
small jets is $77. constant.
Therefore, the
B. Decreasing price and
A. Average revenue for increasing production.
producing 11 units is $17.
C. Decreasing both
B. Average revenue for price and production.
producing 11 units is $77.
D. Increasing both price
C. Marginal revenue for and production.
producing the eleventh
unit is
$17. [Fact Pattern #12]
Demand and cost data for
D. Marginal revenue for Billingsworth, a pure
producing the eleventh monopolist, is shown
unit is below.
$77.
Output Price per Unit
Total Cost
[175] Source: Publisher ------ -------------- ----------
 1 $1,000 $ As a profit-maximizing
500 monopolist, Billingsworth
2 600 520 will sell its
3 500 580 product at a price of
4 400 700
5 300 A. $1,000
1,000
6 200 B. $600
1,500
C. $500
[176] Source: Publisher
(Refers to Fact Pattern D. $400
#12)
Billingsworth, a profit-
maximizing monopolist, [178] Source: Publisher
will produce (Refers to Fact Pattern
how many units? #12)
Billingsworth has decided
A. 1 to put 4 units on the
market. If
B. 2 Billingsworth is able to
sell each unit at the
C. 3 maximum price
that the buyer is willing
D. 4 to purchase it for, how
much would
total revenue be?
[177] Source: Publisher
(Refers to Fact Pattern A. $1,600
#12)
B. $2,500
 C. $2,800 9 250
1,540
D. $4,000
[179] Source: Publisher
(Refers to Fact Pattern
[Fact Pattern #13] #13)
Soggy Shoes, a pure The profit-maximizing
monopolist, has output and price for
accumulated the Soggy Shoes is
following cost data.
A. 5 units and a $450
Quantity price.
Demanded Price per
Unit Total Cost B. 6 units and a $400
-------- -------------- ---------- price.
1 650
410 C. 7 units and a $350
2 600 price.
450
3 550 D. 8 units and a $300
510 price.
4 500
590
5 450 [180] Source: Publisher
700 (Refers to Fact Pattern
6 400 #13)
840 Assume Soggy Shoes is
7 350 able to engage in price
1,020 discrimination and sell
8 300 each unit of the product
1,250 at a price
equal to the maximum C. 8 units.
price the buyer of that
unit would be D. 9 units.
willing to pay. The
marginal revenue that
Soggy Shoes [182] Source: Publisher
obtains from the sale of (Refers to Fact Pattern
an additional unit will #13)
equal its Assume Dry Toes is a
nondiscriminating
A. Total cost. monopolist and
Soggy Shoes is a
B. Average cost. discriminating
monopolist. How much
C. Unit cost. greater of a total
economic profit will
D. Price. Soggy Shoes obtain
than Dry Toes, based
upon the data given for
[181] Source: Publisher Soggy
(Refers to Fact Pattern Shoes?
#13)
Assuming Soggy Shoes is A. $990
a price-discriminating
monopolist, what would B. $1,400
their profit-maximizing
output be? C. $1,560

A. 6 units. D. $2,550

B. 7 units.
[183] Source: Publisher
Suppose the price of a
factor of production is
$10, and the
product's price
(evaluated in a
competitive market) is
$8. If
the last unit of a factor of
production employed has
a C. $18; more.
marginal physical
product of 12, then this
factor's marginal
revenue product is
A. $96
B. $24
C. $10
D. $8
[184] Source: Publisher
The last hour of labor,
hired for $20, produces 6
units of
output selling for $3 per
unit. Therefore, that
labor-hour
adds _______________ to the
firm's profit, so
______________ labor should
be hired.
A. $ 2; more.
B. $ 2; less.
D. $18; less.
[185] Source: Publisher
A particular piece of
equipment, owned by
Meehan Inc., is
to become worthless in
exactly 1 year, the same
time in
which it will produce its
last marginal revenue
product,
valued at $50,000. If the
interest rate is 8%, a firm
would
be willing to buy the
piece of equipment when
the purchase
price is
 A. Below $50,000. C. Four workers.

B. Below $46,296. D. Five workers.

C. Above $46,296.
D. Above $50,000.
[Fact Pattern #14]
[187] Source: Publisher
(Refers to Fact Pattern
#14)
If the wage rate is $35,
the firm will employ

Number of Total A. Two workers.

Product
Workers Production B. Three workers.
Price ($)
--------- ---------- --------- C. Four workers.
1 16 4
2 26 4 D. Five workers.
3 34 4
4 40 4
5 44 4 [188] Source: Publisher
(Refers to Fact Pattern
[186] Source: Publisher #14)
(Refers to Fact Pattern Assume the product has
#14) an increase to a fixed
If the wage rate is $15, price of $6,
the firm will employ then if the wage rate is
maintained at $35, the
A. Two workers. firm will
employ
B. Three workers.
A. Two workers.
 $5. Therefore, the fourth
B. Three workers. unit of the resource will
have a
C. Four workers. marginal revenue product
of
D. Five workers.
A. $3

[Fact Pattern #15] B. $5

Units of Resource Total C. $10

Product Marginal
Product D. $15
----------------- -------------
----------------
1 8 [190] Source: Publisher
8 (Refers to Fact Pattern
2 14 #15)
6 Assume that the firm's
3 18 product still has a price
4 of $5 and
4 21 that the price of the
3 resource is valued at $20.
5 23 It can be
2 concluded that the firm
will employ _____ units of
[189] Source: Publisher the
(Refers to Fact Pattern resource.
#15)
The product that the firm A. 1
produces has a selling
price of B. 3
 product of labor of 10 and
C. 4 a price of labor equal to
$5.
D. 5 Santa Maria's inputs also
have a marginal price of
capital of
[191] Source: Publisher 45 and a price of capital
At current conditions, the of $15. Assuming the firm
firm can sell 15 units of wishes
the to maximize profits,
output at a price equal to Santa Maria should
$1 per unit or 18 units of
the A. Use more labor and
output at a price equal to less capital.
$0.80 per unit. Therefore,
the B. Use less labor and
marginal revenue product less capital.
is
C. Use less labor and
A. $15.00 more capital.

B. $14.40 D. Make no change in

resource use.
C. $.60

D. $.60 [193] Source: Publisher

Pinta Inc., a profit-
maximizing
[192] Source: Publisher manufacturer, employs
Santa Maria Co. employs two
inputs that have a
marginal
resources, resource P
and resource Q. The price
of
resource P is $40 and its
marginal revenue product
(MRP)
for the last unit of P hired
was $240. The price of
resource
Q is $25 and its MRP for
the last unit of Q hired
was
$150. Pinta should

A. Hire more of
resource X and less of
resource Y.

B. Hire less of resource

X and more of resource
Y.

C. Hire less of both

resource X and resource
Y.

D. Hire more of both

resource X and resource
Y.
 PART 1 A
MICROECONOMICS
(ANSWERS)
[1] Source: CMA 1285 1-
15
Answer (A) is incorrect
because assuming price
exceeds average
variable costs, a
shutdown would
result in the loss of the
contribution margin.
Since
fixed costs are not
avoided by shutting
down, the firm
should continue to
produce in the short run
as long as
it covers its variable
costs.
Answer (B) is correct.
In the short run, a firm
should
continue operating as
long as selling price
exceeds
average variable cost
(a contribution margin is
earned). If selling price
drops below average
variable
cost, variable costs as
well as fixed costs are no
longer being met, and
the firm should shut
down.
Answer (C) is incorrect
because in pure
competition
a single firm has no
influence on price.
Answer (D) is incorrect
because this could only
be
accomplished in the
long run.
[2] Source: CMA 1285 1-
16
Answer (A) is incorrect
because no specific time
frame is contemplated
by the definition.
Answer (B) is incorrect
because no specific time
 frame is contemplated not refer to a minimum
by the definition. or maximum.

Answer (C) is incorrect Answer (B) is incorrect

because top because in this context,
management is the
but one of many inputs. term marginal means
The long run is the period incremental change and
within which all inputs does
can be varied. not refer to a minimum
or maximum.
Answer (D) is correct.
In the long run, no Answer (C) is incorrect
resource because marginal utility
costs are fixed. A firm is the
can therefore vary the change in total utility
amount from consumption of an
of any of its inputs. In additional unit of the
the short run, one or good.
more
inputs are fixed. Answer (D) is correct.
Utility is a measure of the
usefulness, or
[3] Source: CMA 1285 1- satisfaction, that results
17 from
consumption. Marginal
Answer (A) is incorrect utility is the amount of
because in this context, increase in utility when
the one additional unit is
term marginal means consumed. Marginal
incremental change and utility diminishes with
does additional
 consumption. apply in the short run
because many costs are
fixed.
[4] Source: CMA 1286 1-4 In the long run, all
costs are variable.
Answer (A) is incorrect
because economies or Answer (D) is incorrect
diseconomies of scale because the law of
do not affect the demand diminishing returns
curve. describes the short-run
phenomenon in which,
Answer (B) is incorrect beyond some point,
because economies or increasing
diseconomies of scale amounts of a variable
do not affect the demand input will contribute less
curve. and
less to the total
Answer (C) is correct. product.
Economies and
diseconomies
of scale affect a [5] Source: CMA 1286 1-7
company's costs. When it
experiences economies Answer (A) is correct. If
of scale, a company's the market rate is less
long-run average costs than
will decrease. the maximum allowed,
Diseconomies a rent control law will
of scale occur when the have no
long-run average costs effect whatsoever.
increase. Economies or
diseconomies of scale do
not
 Answer (B) is incorrect purchases are a result,
because if the higher not a determinant, of
price income
were required to be distribution.
charged, consumers
would Answer (C) is correct.
demand less housing Distribution of income is
and a surplus would determined in large
occur. part by ownership of the
factors
Answer (C) is incorrect of production: land,
because if price labor, capital, and
increases, management.
supply will increase. For example, a union
that monopolizes the
Answer (D) is incorrect labor
because demand will fall supply in an industry
when price increases. may be able to increase
the
incomes of its
[6] Source: CMA 0687 1-1 members. However, other
factors may
Answer (A) is incorrect also play roles. These
because transfer include inherent ability,
payments access
provide only a small to education or
portion of income. training, political
influence, and even
Answer (B) is incorrect sheer luck or the lack
because household thereof.
 Answer (D) is incorrect Answer (C) is incorrect
because studies have because average costs
shown fall
that pretax and after- for any product whose
tax incomes are similarly production involves fixed
distributed. Thus, costs, such as natural
taxation in practice does monopolies.
not
achieve significant Answer (D) is correct.
income redistribution. Economies of scale exist
when a larger output is
associated with a lower
[7] Source: CMA 0687 1- average cost. Since
12 only large firms can
efficiently
Answer (A) is incorrect operate in such
because supply curves circumstances, the
are natural barriers to
normally assumed to be entry are substantial.
upward sloping for most Natural monopolies are
products. The supply those in
curve of a monopolist which significant
may be economies of scale are
essentially flat or even present.
downward sloping. Electric utilities are
examples of such
Answer (B) is incorrect companies.
because demand curves
are
normally downward [8] Source: CMA 1287 1-2
sloping for all products.
 Answer (A) is incorrect percentage change in
because the increase in quantity demanded
price divided by
would decrease the the percentage change
quantity demanded. in price. If the result is
greater
Answer (B) is incorrect than one, demand is
because the price elastic, and total revenue
increase will
would not affect the increase with a
position of the demand decrease in price or
curve. decline with an
increase.
Answer (C) is incorrect
because the price
increase [9] Source: CMA 1287 1-5
would not affect the
position of the demand Answer (A) is incorrect
curve. because in pure (perfect)
competition, a
Answer (D) is correct. particular firm will
Given a relatively elastic produce for a
demand curve, an market in which the
increase in the price, selling price is given; only
such as from costs
a tax increase, would (input prices) can
lead to a decrease in influence the level of
expenditures. Price production.
elasticity of demand
equals the Answer (B) is incorrect
because in pure (perfect)
 competition, a
particular firm will
produce for a
market in which the
selling price is given; only
costs
(input prices) can
influence the level of
production.
Answer (C) is correct. A
competitive firm will
produce at a level at
which marginal cost
equals
marginal revenue
(selling price). Thus, a
change in
input prices affects
marginal cost and the
quantity of
output supplied.
Answer (D) is incorrect
because in pure (perfect)
competition, a
particular firm will
produce for a
market in which the
selling price is given; only
costs
(input prices) can
influence the level of
production.
[10] Source: CMA 1287 1-
10
Answer (A) is incorrect
because the short run
can be
more or less than a
year depending upon a
firm's
ability to change its
inputs.
Answer (B) is correct.
The short run is defined
as a
period so brief that a
firm has insufficient time
to vary
the amount of all
inputs. Thus, the quantity
of one or
more inputs is fixed.
The long run is a period
long
enough that all inputs,
including plant capacity,
can be
 varied. The firm will Answer (B) is incorrect
thus use both fixed and because regulation is
variable necessary when
inputs in the short run. demand for the natural
monopoly's
Answer (C) is incorrect product is inelastic.
because economies of Without regulation, the
scale monopolist could
are associated with the exploit consumers
long run. because they
would have to buy the
Answer (D) is incorrect product regardless of
because economic profits price.
may be earned, either
in the long or short run, Answer (C) is correct. A
when a natural monopoly is an
firm earns more than industry, such as a
the profits needed for it utility, in which
to consumers are
remain in operation. benefited by the
existence of a monopoly.
These
[11] Source: CMA 1287 1- monopolies are
12 regulated by the
government to
Answer (A) is incorrect control prices and
because in a natural prevent abuses. The
monopoly, marginal reason for a
costs continue to natural monopoly is
decrease. that economies of scale
are so
 great that the lowest Answer (A) is incorrect
average cost is reached because perfect
when inelasticity
only one firm is in the exists when the
industry. Fixed costs are quantity demanded is
so constant for all
high that relatively low prices (the coefficient
prices are possible only of elasticity is zero).
at high
levels of sales. If Answer (B) is correct.
competition existed, The coefficient of
each firm's elasticity
share of the market measures the
would be insufficient to responsiveness of the
drive percentage
down unit costs enough change in quantity
to permit charging a low demanded (the
price. numerator) to a
given percentage
Answer (D) is incorrect change in the price of a
because consumer product (the
demand denominator).
would be inelastic and Consumer demand is said
not influenced by to be elastic
business when the coefficient of
cycles. elasticity is greater than
one.

[12] Source: CMA 1288 1- Answer (C) is incorrect

22 because inelastic
demand is
 characterized by a
coefficient of less than Answer (C) is incorrect
one. because demand is
inelastic
Answer (D) is incorrect when the coefficient is
because unitary less than one but greater
elasticity than
exists when the zero.
coefficient is exactly
one. Answer (D) is incorrect
because unitary
elasticity
[13] Source: CMA 1288 1- exists when the
23 coefficient is exactly
one.
Answer (A) is correct.
When the coefficient of
elasticity (percentage [14] Source: CMA 1288 1-
change in 27
demand/change in
price) is less than one, Answer (A) is incorrect
demand is inelastic. because it is an attribute
When the of
coefficient is zero, the perfect competition.
demand is perfectly
inelastic. Answer (B) is incorrect
because it is an attribute
Answer (B) is incorrect of
because demand is perfect competition.
elastic
when the coefficient is
greater than one.
 Answer (C) is correct. which no economic
Perfect competition profits are earned.
assumes a
large number of buyers Answer (D) is incorrect
and sellers that act because it is an attribute
independently, a of
homogeneous or perfect competition.
standardized
product, free entry into
and exit from the market, [15] Source: CMA 1288 1-
perfect information, no 25
nonprice competition, no
control over prices Answer (A) is incorrect
(sellers are price takers because the increase in
rather income shifts the
than price setters), and demand, not the supply,
an equilibrium price curve.
equal to
the average total cost. Answer (B) is incorrect
Given free entry into the because moving down an
market and perfect existing demand curve
information, an increase is the effect of a lower
in profits price.
in the industry will The change in income
result in an increase in shifts the economy to a
the number new
of firms in the market. demand curve.
This increase will have
the Answer (C) is incorrect
long-run effect of because a shift to the left
reducing the price to the
level at
 means that consumers when the price is
will buy fewer products changed. A shift in the
at curve itself
each price. This occurs when any of the
leftward shift in response determinants changes.
to Such
increased income is shifts can be caused by
characteristic of an a change in the tastes
inferior good, and
not a normal good. The preferences of
demand for inferior goods consumers toward a
is product, for
inversely related to example, as a result of
income. Hamburger is an a successful advertising
inferior campaign, an increase
good, and steak is a in consumer income (if a
normal good. product is a normal
good), or changes in the
Answer (D) is correct. prices of
The demand schedule is substitute or
a complementary products.
relationship between An increase in
the prices of a product consumer income
and the would shift the demand
quantity demanded at curve to
each price, holding other the right and result in
determinants of the greater consumption of
quantity demanded the
constant. A product at each price.
movement along an
existing demand curve
occurs
[16] Source: CMA 1288 1-
29
Answer (A) is correct.
Monopolistic competition
assumes a large
number of firms with
differentiated
(heterogeneous)
products, and relatively
easy entry
into the market. Sellers
have some price control
because of product
differentiation.
Monopolistic
competition is
characterized by
nonprice competition,
such as advertising,
service after the sale,
and
emphasis on trademark
quality. In the short run,
firms
equate marginal
revenue and marginal
cost. In the
long run, firms tend to
earn normal (not
economic)
profits, and price
exceeds marginal cost,
resulting in
an underallocation of
resources. Firms produce
less
than the ideal output,
and the industry is
populated by
too many firms that are
too small in size. Price is
higher and output less
than in pure competition.
Answer (B) is incorrect
because responses to
competitors' actions
are unnecessary if
products are
sufficiently
differentiated to make
price competition
meaningless.
Answer (C) is incorrect
because product
differentiation permits
some price control.
Answer (D) is incorrect
because the availability
of
 close substitutes to barriers that can be
makes the product either natural, such as an
demand curve absolute cost
elastic. advantage, or artificial,
such as massive
advertising by existing
[17] Source: CMA 1288 1- firms. The price rigidity
30 normally found in
oligopolistic markets can
Answer (A) is incorrect be
because an oligopoly can explained in part by the
have either kinked demand curve
differentiated theory.
(automobiles) or Because competitors
undifferentiated (steel) respond to price changes
products. by
one of the firms in an
Answer (B) is correct. oligopolistic industry, the
An oligopoly consists of demand curve for an
only oligopolist's products
a few firms. Each firm tends to
reacts to decisions of be kinked. Price
other decreases are usually
firms in the industry. matched, with
Prices in a noncollusive no increase in market
market share. Price increases
tend to be rigid, or are often
sticky, because of the not followed, with a
interdependence loss of market share by
among firms. Entry is the first
difficult thanks
 to raise prices. An
oligopoly must often
confront
cyclical or seasonal
fluctuations in the
quantity
demanded. Price
rigidity makes it difficult
for
oligopolists to maintain
sales levels by reducing
price
when the demand curve
shifts to the left or by
increasing sales and
output when demand
increases.
Answer (C) is incorrect
because the kinked
demand
curve explains price
rigidity in an oligopoly.
Answer (D) is incorrect
because an oligopoly can
have either
differentiated
(automobiles) or
undifferentiated (steel)
products.
[18] Source: CMA 0689 1-
20
Answer (A) is incorrect
because economic
efficiency
is measured in dollar
terms.
Answer (B) is incorrect
because opportunity cost
is
defined as the return
possible from the next
best
alternative other than
the one selected.
Answer (C) is correct.
Technological efficiency
is
defined as the
relationship between the
physical
output of a given
technology and the
maximum output
that is possible.
Answer (D) is incorrect
because comparative
 advantage compares within a single country.
the costs of producing
products Answer (D) is incorrect
within a single country. because absolute
advantage
compares input costs
[19] Source: CMA 0689 1- among countries.
21

Answer (A) is incorrect [20] Source: CMA 0689 1-

because economic 22
efficiency
is a comparison Answer (A) is incorrect
measured in dollar terms. because an equality of
costs
Answer (B) is correct. would provide no
Opportunity cost is the incentive or disincentive
benefit to
forgone by using scarce substitute.
resources in a given way.
Thus, it is the benefit Answer (B) is incorrect
that could have been because profits will be
obtained greater if a lower-cost
from the best substitute can be used.
alternative use of the
resources. Answer (C) is correct.
The principle of
Answer (C) is incorrect substitution
because comparative states that, when given
advantage compares a choice, the firm will
the costs of producing choose
products
 the factor of production evaluated when
that is less expensive. In purchasing capital goods.
other words, the
cheaper input will be Answer (D) is correct. A
used as a firm considers such
substitute for the factors
higher-priced input. as price, relationships
with suppliers, product
Answer (D) is incorrect demand, avoidable
because the firm will not future costs, economies
knowingly use more of of scale,
an expensive input if a opportunity costs,
cheaper substitute can technological efficiency,
be used. and the
capital-labor ratio when
evaluating the purchase
[21] Source: CMA 0689 1- of
24 new equipment. The
cost of the current
Answer (A) is incorrect facility would
because this should be not be relevant
evaluated when because it is a sunk cost.
purchasing capital goods.

Answer (B) is incorrect [22] Source: CMA 0689 1-

because this should be 26
evaluated when
purchasing capital goods. Answer (A) is incorrect
because a shift to the left
Answer (C) is incorrect (a
because this should be
 decrease in demand)
would occur if the price
of a
complementary product
increased.
Answer (B) is incorrect
because demand for a
substitute would
decrease, thereby
lowering its
equilibrium price.
Answer (C) is incorrect
because the demand
curve
will shift to the right,
but the supply curve will
not
change.
Answer (D) is correct. A
decrease in the price of a
complementary good
(e.g., gasoline) will cause
the
demand curve of the
joint commodity (e.g.,
automobiles) to shift to
the right (increase). The
lower
price results in greater
demand by consumers at
each
price level. A movement
along an existing demand
curve occurs when the
price for the product is
changed but demand is
constant.
[23] Source: CMA 0689 1-
29
Answer (A) is incorrect
because the supply curve
will
be unaffected, but the
demand curve will shift
to the
right.
Answer (B) is incorrect
because the supply curve
will
be unaffected, but the
demand curve will shift
to the
right.
Answer (C) is correct.
The relative price of the
 normal good is Answer (A) is incorrect
improved relative to because revenue should
other goods as a rise
consequence of as the price drops.
inflation. Thus,
consumers will Answer (B) is incorrect
demand more of the because revenue should
normal good. This rise
increase in as the price drops.
demand is caused not
by a price change but by Answer (C) is correct.
a Elasticity is the change in
favorable change in the demand divided by the
preferences of change in price. An
consumers. As elasticity
a result, the demand of 1.5 means that the
curve for the product will change in demand (the
shift to numerator of the
the right. fraction) will increase by
150% of
Answer (D) is incorrect any change in price
because the supply curve (the denominator)
will measured in
be unaffected, but the absolute terms (the
demand curve will shift minus sign is ignored).
to the Thus, a
right. 10% price reduction
increases demand by
15% (1.5
[24] Source: CMA 1289 1- x 10%).
4
 Answer (D) is incorrect significant barriers to
because the price decline entry, such as high
will capital
lead to increased requirements, which
demand if elasticity is prevent new firms from
greater than entering
1.0. the industry. The
automobile industry is an
example.
[25] Source: CMA 1289 1-
11 Answer (D) is incorrect
because the demand
Answer (A) is incorrect curve
because an industry with for a firm in perfect
a competition is horizontal.
single firm is An
monopolistic. oligopolist's demand
curve is relatively flat but
Answer (B) is incorrect may be
because oligopolists kinked if competitors
have the follow its price decreases
same profit-maximizing but
goal as other firms. not the price increases.

Answer (C) is correct.

An oligopolistic industry [26] Source: CMA 0690 1-
is 19
characterized by only a
few firms. Usually there Answer (A) is correct. A
are normal good that
competes
 with several similar
items will have an
elasticity
greater than one (its
demand is relatively
elastic)
because a given
percentage change in
price will result
in a greater percentage
change in sales as
consumers
shift to or from the
close substitutes. Price
elasticity of
demand is promoted by
the availability of
substitute
goods.
Answer (B) is incorrect
because demand has
perfect
price elasticity if a
small change in price
causes
buyers to reduce their
purchases to zero (an
increase
in price) or to purchase
all of the available supply
(a
decrease in price).
Answer (C) is incorrect
because consumers
purchase
more (less) of a normal
good (such as steak) at
every
price when income
levels increase
(decrease). The
opposite is true of
inferior goods (such as
hamburger). These
effects result because
normal
goods have a positive
income elasticity of
demand
and inferior goods have
a negative income
elasticity.
The availability of close
substitutes affects the
price
elasticity of demand
but not income elasticity.
Answer (D) is incorrect
because inelasticity is
more
 apt to occur when few
substitutes are available.
[27] Source: CMA 0690 1-
20
Answer (A) is incorrect
because if demand is
price
elastic, the quantity
demanded will decline by
a
greater percentage
than the percentage
price
increase.
Answer (B) is correct.
An increase in gasoline
prices
during the summer
implies that demand for
gasoline is
relatively price
inelastic in the short run.
That is, the
price increase will
result in little or no
decline in the
amount demanded, and
total revenues will
increase.
Answer (C) is incorrect
because the distinction
between inferior and
normal goods is based on
the
effects on quantity
demanded of a change in
income.
Answer (D) is incorrect
because perfect
inelasticity
means there would be
no decline in demand
because
of a price increase.
[28] Source: CMA 0690 1-
21
Answer (A) is incorrect
because no information is
given about the effects
of changes in the price.
Answer (B) is incorrect
because no information is
 given about the effects percentage change in
of changes in the price. income.

Answer (C) is incorrect

because no information is [29] Source: CMA 0690 1-
given about the effects 22
of changes in the price.
Answer (A) is incorrect
Answer (D) is correct. because utility products
Consumers purchase are
more price inelastic.
(less) of a normal good
(such as steak) at every Answer (B) is incorrect
price because utility products
when income levels are
increase (decrease). The price inelastic.
opposite is true of
inferior goods (such as Answer (C) is correct.
hamburger). These Utility products are
effects result because typically
normal price inelastic because
goods have a positive they are regarded as
income elasticity of necessities for which
demand few substitutes are
and inferior goods have available.
a negative income That is why utilities are
elasticity. regulated by state
Income elasticity of agencies.
demand equals the The existence of
percentage monopolies and price
change in quantity inelastic
demanded divided by the
 products would permit Answer (B) is incorrect
an unregulated utility to because the demand
take curve is
unfair advantage of downward sloping.
consumers.
Answer (C) is incorrect
Answer (D) is incorrect because a vertical
because utility products demand
are curve signifies that the
not perfectly price quantity demanded does
inelastic. Some not
consumers would change with price.
reduce their
consumption as prices Answer (D) is correct.
rise. Given perfect The demand curve for a
price inelasticity of consumer good (normal
demand, the amount or inferior) is downward
demanded sloping to the right. At
will be the same at all high prices, the amount
prices. demanded is relatively
low. As prices decrease,
the
[30] Source: CMA 0690 1- amount demanded
23 increases. The
substitution effect is
Answer (A) is incorrect the change in the cost
because the demand of a good relative to
curve is others that
downward sloping. will cause a cheaper
good to be substituted for
more
 expensive ones. The
income effect is the
change in
purchasing power
experienced by
consumers as a
result of a price change
(real income increases or
decreases). Both of
these effects cause the
price of a
product and the
quantity demanded to be
inversely
related.
[31] Source: CMA 0690 1-
24
Answer (A) is incorrect
because a price change
causes a movement to
a new point on the
demand
curve, not a shift of the
curve itself.
Answer (B) is incorrect
because a change in
supply
would not affect the
position of the demand
curve; it
would only change the
equilibrium point at
which the
two curves intersect.
Answer (C) is correct. A
shift to the left means
that
the quantity demanded
will be less at each price.
This
result follows because
cars and gasoline are
complementary goods.
If automobile prices
increase,
fewer cars are
purchased, fewer miles
are driven, and
the quantity of gasoline
demanded declines at
each
price.
Answer (D) is incorrect
because a decrease in
car
prices would result in
the sale of more cars and
 increased demand at some point beyond
each gasoline price. The which additional units of
effect the
would be a shift of the variable input will
demand curve to the contribute less and less
right. to the total
product. In other words,
marginal product will
[32] Source: CMA 0690 1- decline. An assembly
26 plant with lower unit
costs at
Answer (A) is incorrect 85% than at 95%
because it illustrates the capacity is experiencing
concept of increasing diminishing
returns to scale. returns.

Answer (B) is incorrect Answer (D) is incorrect

because it illustrates the because it illustrates the
concept of increasing concept of increasing
returns to scale. returns to scale.

Answer (C) is correct.

The law of diminishing [33] Source: CMA 0690 1-
returns 27
states that, when
successive equal Answer (A) is correct.
amounts of a Economic (pure) profit
variable input are equals
applied to a fixed input, total revenue minus
there is economic costs.
Economic costs
 are defined by the former fails to
economists as include a deduction for
opportunity costs, opportunity
which are the values of costs, for example, the
productive resources in salary forgone by an
their entrepreneur who
best alternative uses. chooses to be self-
The return sufficient to employed.
induce
the entrepreneur to Answer (B) is incorrect
remain in business because both economists
(normal profit) and
is an economic cost. accountants treat
Net income as computed interest as a cost.
under
generally accepted Answer (C) is incorrect
accounting principles because economic profits
considers will be less than net
only explicit costs, not income.
such implicit costs as
normal Answer (D) is incorrect
profit and the because economic profits
opportunity costs will be less than net
associated with not income.
using assets for
alternative purposes.
Thus, net [34] Source: CMA 0690 1-
income will be higher 29
than economic profit
because Answer (A) is incorrect
because the marginal
revenue
 curve is downward curve is downward
sloping in these cases. sloping in these cases.
Thus, the Thus, the
point on the MC curve point on the MC curve
equal to MR indicates the equal to MR indicates the
profit-maximizing profit-maximizing
quantity but not the quantity but not the
price. The price price. The price
is found by extending a is found by extending a
perpendicular line up to perpendicular line up to
the the
demand curve from the demand curve from the
MR = MC point. In other MR = MC point. In other
words, the price words, the price
(vertical) coordinate of (vertical) coordinate of
each point each point
on the MC curve does on the MC curve does
not equal the market not equal the market
price at price at
a given level of output a given level of output
except in pure except in pure
competition. In competition. In
this structure, the MR this structure, the MR
curve is the firm's curve is the firm's
demand demand
curve. curve.

Answer (B) is incorrect Answer (C) is correct.

because the marginal Under pure competition,
revenue the
 portion of a firm's profit-maximizing
marginal cost (MC) curve quantity but not the
above price. The price
its average variable is found by extending a
cost curve (the firm perpendicular line up to
cannot cover the
its variable costs below demand curve from the
this shutdown point) is MR = MC point. In other
also words, the price
its supply curve. (vertical) coordinate of
Because the firm is a each point
price taker (the on the MC curve does
marginal revenue (MR) not equal the market
curve is horizontal), price at
increases a given level of output
in supply can occur except in pure
only at higher prices competition. In
because the this structure, the MR
firm produces at the curve is the firm's
level at which MR equals demand
MC. curve.

Answer (D) is incorrect

because the marginal [35] Source: CMA 0690 1-
revenue 30
curve is downward
sloping in these cases. Answer (A) is correct.
Thus, the Enhanced technology and
point on the MC curve worker productivity
equal to MR indicates the would cause the supply
curve to
 shift to the right where
it would intersect with
the
demand curve at a
lower price level. The
shift is
caused by the
producer's ability to
lower costs and
produce more at a
given market price.
Answer (B) is incorrect
because the increased
productivity would
cause a rightward shift in
the
supply curve.
Answer (C) is incorrect
because the rightward
shift
would result in an
intersection with the
demand curve
at a lower price.
Answer (D) is incorrect
because the effect on
wages
cannot be determined
from the information
given.
[36] Source: CMA 1290 1-
1
Answer (A) is correct.
Economic or pure profit is
what remains after all
explicit and implicit costs
have
been deducted from
total revenue. These
costs
include the opportunity
costs of the use of
resources
as well as the
payments made to
others. Economic
profit is normal in a
monopoly because a
monopolist
can bar the entry of
competitors and
influence the
market price.
 Answer (B) is incorrect Answer (A) is incorrect
because, by definition, a because rackets and
pure balls
monopoly consists of are not substitutes for
only one firm. Thus, no each other; both are
decline needed to
in the number of firms play tennis.
can occur unless the
monopolist goes out of Answer (B) is incorrect
business. because rackets and
balls are
Answer (C) is incorrect not independent goods;
because an increase in they are used together.
supply could lower
prices, a result that Answer (C) is incorrect
would not because an inferior good
benefit the monopolist. is
one that experiences
Answer (D) is incorrect increased (decreased)
because the demand for demand
and as consumers' incomes
prices of substitutes decline (rise). Tennis
might increase if the equipment is a leisure
monopolist item, not an inferior good.
charges a price
sufficient to earn an Answer (D) is correct.
economic profit. As sales of tennis rackets
increase, a
corresponding increase
[37] Source: CMA 1290 1- should occur in
2
 the demand for tennis
balls because balls are Answer (D) is correct.
needed Pure competition is
to use the rackets. characterized by
Thus, the two items are numerous buyers and
complementary goods. sellers who
act independently, a
standardized product,
[38] Source: CMA 1290 1- ease of
3 entry into or exit from
the market, perfect
Answer (A) is incorrect information, the
because sellers in pure inability of each firm to
competition act influence
independently. prices, and the absence
of nonprice competition.
Answer (B) is incorrect
because the need for
large [39] Source: CMA 1290 1-
research and 4
development programs
would make it Answer (A) is incorrect
difficult for new because an increase in
participants to enter the supply causes a decline
market. in price if demand is
constant.
Answer (C) is incorrect
because competition is Answer (B) is incorrect
characterized by because an increase in
product similarity; demand and a decline
differentiation in supply both result in
reduces competition. higher
 prices. [40] Source: CMA 1290 1-
5
Answer (C) is incorrect
because an increase in Answer (A) is correct. A
both government price support
demand and supply program will cause
results in a higher producers to supply more
equilibrium goods
quantity. than can be absorbed
by the market if the
Answer (D) is correct. support
An increase in demand price is higher than the
signifies a rightward equilibrium price. The
shift in the demand effect
curve, that is, will be surpluses
an increase in the because the amount
quantity demanded at supplied will
each price. A exceed the amount
decrease in supply demanded.
involves a leftward shift
in the Answer (B) is incorrect
supply curve, that is, a because no shortages
reduction in the quantity will
supplied at each price. occur. Suppliers will be
Each event increases the induced by the higher
equilibrium price if than
other factors are equilibrium price to
constant. Thus, if produce more than the
both events occur, the amount
price will increase. demanded.
 Answer (C) is incorrect Answer (A) is incorrect
because no rationing because price ceilings
would are
occur. Consumers will essentially the opposite
be able to buy all they of price supports. If price
desire is
because supply will subject to a ceiling,
exceed demand. suppliers may receive
less than at
Answer (D) is incorrect the equilibrium level.
because firms will be But the supplier may
encouraged to enter receive
the industry by the more at the equilibrium
availability of rate if the price is
greater revenue than supported.
that provided by
consumer Answer (B) is incorrect
demand. In fact, price because prices may be
support programs are lower
often than at the equilibrium
designed with the level.
intention of keeping
marginal firms Answer (C) is correct.
from leaving the Government imposed
industry. price
ceilings may cause
prices to be set at rates
[41] Source: CMA 1290 1- below
6 equilibrium. Because
prices are set artificially
low,
 demand will tend to number of firms, most
exceed the supply and are likely to be small,
shortages with
will occur. correspondingly low
economies of scale and
Answer (D) is incorrect capital
because price ceilings needs.
cause
shortages if consumers Answer (D) is correct.
demand more than Monopolistic competition
sellers are is
willing to supply. characterized by the
existence of a large
number of
[42] Source: CMA 1290 1- firms, differentiated
7 products, relative ease of
entry,
Answer (A) is incorrect some control of price
because entry is possible by the firms, and
and significant
relatively easy. Blocked nonprice competition
entry is typical of (e.g., by advertising).
monopoly. Entry into
monopolistic
Answer (B) is incorrect competition is more
because difficult entry is difficult than entry
typical of oligopoly. into pure competition,
but it is relatively easy
Answer (C) is incorrect compared with entry
because, given the large into a monopoly.
[43] Source: CMA 1290 1- Answer (D) is correct.
8 The long-run average
total
Answer (A) is incorrect cost curve is normally
because the curve is not U-shaped because the
horizontal. It varies average
with changes in cost per unit declines
production scale. as the firm experiences
economies of scale.
Answer (B) is incorrect However, beyond the
because, although point of
returns to intersection with the
incremental input may marginal cost curve, it
be diminishing and will begin
marginal rising because the
cost rising, average amount added (marginal
total cost may continue cost) to
to total cost is greater
decline. than the average total
cost.
Answer (C) is incorrect
because the average
total [44] Source: CMA 1290 1-
cost curve is a U- 10
shaped curve that is
intersected at Answer (A) is incorrect
its minimum point by because economic (pure)
the rising portion of the profit is the residual
marginal return in excess of
cost curve. normal profit.
Economic profit equals
total revenue minus
 opportunity costs.
These are the sum of [45] Source: CMA 1290 1-
explicit and 9
implicit costs, including
normal profit. Answer (A) is incorrect
because labor
Answer (B) is incorrect specialization
because accounting means more efficient
profit is use of labor and lower
the excess of total costs.
revenue over explicit
costs Answer (B) is incorrect
(out-of-pocket because the ability to use
payments to outsiders). by-products results in
lower costs and thus
Answer (C) is incorrect economies of scale.
because a normal profit
is an Answer (C) is incorrect
implicit cost. because the fixed costs
related to the use of
Answer (D) is correct. capital equipment can be
Normal profit is the level spread
of over more products
profit necessary to when such equipment is
induce entrepreneurs to more
enter and efficiently used.
remain in the market.
Economists view this Answer (D) is correct.
profit as Economies of scale result
an implicit cost of in a
economic activity. decline in the average
cost of production. These
 economies result from law of diminishing
specialization of labor returns assumes a fixed
and component
management, the of input.
ability to use by-products
and
scrap, and more [46] Source: CMA 1290 1-
efficient use of capital 11
equipment.
The law of diminishing Answer (A) is correct. A
returns states that, as natural monopoly occurs
additional units of a when economies of
variable input are scale are very great. In a
combined with natural
a fixed input, marginal monopoly, the unit cost
product will begin to fall of meeting the entire
when demand
the theoretical limit of for a product is
efficiency is exceeded. minimized when there is
Hence, only one firm
this principle is not in the industry. Thus,
applicable to the the presence of two or
discussion of more
economies of scale, firms would prevent the
which explains realization of the
diminishing economies
average cost. of scale necessary to
Moreover, the latter minimize cost. Public
concept assumes utilities are
that all costs are common examples of
variable in the long run, natural monopolies.
whereas the
 Answer (B) is incorrect concentration ratio
because monopolistic indicates that few firms
competition is a market are
structure in which many operating in an
firms industry. Thus, a high
operate. ratio indicates
monopoly power.
Answer (C) is incorrect
because natural Answer (B) is incorrect
monopolies because a highly
exist when economies competitive
of scale are very great. industry would have a
low concentration ratio.
Answer (D) is incorrect
because natural Answer (C) is incorrect
monopolies because the
exist when economies concentration
of scale are very great. ratio has no
relationship to the law of
demand.
[47] Source: CMA 1290 1-
12 Answer (D) is incorrect
because a high
Answer (A) is correct. concentration
The concentration ratio ratio is more indicative
is the of a monopoly than of
percentage of total monopolistic
industry sales competition, which is
attributable to a characterized by
specified number of the the existence of many
largest firms. A high firms.
 Answer (D) is incorrect
[48] Source: CMA 1290 1- because the supply curve
13 shows only the supply,
not the demand.
Answer (A) is correct. A
supply curve illustrates
the [49] Source: CMA 1290 1-
relationship between 14
price and the quantity of
a good Answer (A) is incorrect
that sellers are willing because agriculture is
to supply. As price closer
increases, to pure competition.
the supply will Many producers sell an
increase. undifferentiated
product.
Answer (B) is incorrect
because consumer tastes Answer (B) is correct.
are Monopolistic competition
reflected by the is
demand curve, not the best represented by the
supply curve. fast food industry. Many
firms are in
Answer (C) is incorrect competition, but the
because the demand products are
curve differentiated.
shows the relationship
between price and Answer (C) is incorrect
quantity because the steel
demanded. industry
has few firms and is
best characterized as an
 oligopoly. Moreover, its the change in revenue
products tend to be from selling one
standardized. additional unit
of product, not from a
Answer (D) is incorrect change in prices.
because the auto Moreover, in
industry is market structures other
oligopolistic. Few than pure competition,
producers exist because marginal revenue
of the declines as sales
difficulty of entering increase because
the market. prices eventually must
be lowered to stimulate
demand.
[50] Source: CMA 1290 1-
15 Answer (C) is incorrect
because marginal
Answer (A) is incorrect revenue
because marginal cannot be greater than
revenue price.
equals price in pure
competition. In Answer (D) is correct.
monopolistic Marginal revenue is the
competition, no firm change in total revenue
can affect the price. resulting from producing
Hence, the and
price is the same at all selling one additional
levels of output. unit of product. Marginal
revenue is constant in
Answer (B) is incorrect pure competition but
because marginal declines
revenue is
 as output rises in other Answer (D) is correct.
market structures. The kinked demand curve
Equating is
marginal revenue and characteristic of an
marginal cost is the oligopoly. This
profit-maximizing phenomenon
position for all firms. occurs because
decreases but not
increases tend to
[51] Source: CMA 1290 1- be matched by the
16 other firms in the
industry. Thus,
Answer (A) is incorrect the slope of the
because an agricultural demand curve is likely to
market approximates change
pure competition and significantly above and
exhibits a below the current price.
normal demand curve. An
oligopolist that raises
Answer (B) is incorrect its price is likely to lose
because monopolistic substantially more of
competition is its market share than it
characterized by a would
normal demand gain by a price cut. In
curve. other words, the curve is
relatively elastic with
Answer (C) is incorrect respect to price
because pure increases and
competition is less elastic for price
characterized by a cuts.
normal demand curve.
[52] Source: CMA 1290 1- greater than 1.0 if the
17 total revenue increases
as the
Answer (A) is correct. A result of a price
decline in price decrease.
accompanied by an
increase in total revenue Answer (D) is incorrect
indicates because the elasticity is
that quantity demanded greater than 1.0.
has increased by a
greater
percentage than the [53] Source: CMA 1290 1-
percentage price 18
decrease.
Hence, the price Answer (A) is incorrect
elasticity of demand is because the short-run
greater than supply
1.0. Demand is elastic curve is derived from
when it is greater than the marginal cost curve,
1.0. not the
average total cost
Answer (B) is incorrect curve.
because the increase in
revenue resulting from Answer (B) is incorrect
the price decrease because the short-run
indicates supply
elasticity. curve is derived from
the marginal cost curve,
Answer (C) is incorrect not the
because elasticity must fixed cost curve.
be
 Answer (C) is correct.
In the short run, certain
costs
are fixed regardless of
output. Given that fixed
costs
are incurred even if the
firm shuts down, the firm
gains in the short run
by continuing to operate
if
revenues exceed
variable costs.
Accordingly, the
firm's short-run supply
curve is derived from the
marginal cost curve.
The firm benefits by
producing
until marginal cost
equals marginal revenue.
As long
as the marginal cost is
lower than the marginal
revenue, the firm will
recover some of its fixed
costs
as well as its variable
costs. However, only the
segment of the
marginal cost curve that
lies above
average variable cost
will constitute the short-
run
supply curve. At a price
below the average
variable
cost, the firm's losses
equal its fixed costs plus
some
of its variable costs. In
this case, the firm would
close
down and not supply
anything.
Answer (D) is incorrect
because the short-run
supply
curve is derived from
the marginal cost curve,
not the
total cost curve.
[54] Source: CMA 0691 1-
13
Answer (A) is incorrect
because the degree of
elasticity is not a
sufficient predictor of the
nature of
 the change in market
price.
Answer (B) is incorrect
because the degree of
elasticity is not a
sufficient predictor of the
nature of
the change in market
price.
Answer (C) is correct. If
demand is constant, an
increase in supply will
lower the price of a good.
If
supply is constant, an
increase in demand will
raise
the price. When both
events occur, the effect
depends on the
magnitude of the
changes. Thus, the
market price is not
predictable from the
facts given.
Answer (D) is incorrect
because the degree of
elasticity is not a
sufficient predictor of the
nature of
the change in market
price.
[55] Source: CMA 0691 1-
14
Answer (A) is incorrect
because economic goods
can be increased in
quantity if suppliers want
to
supply more goods.
Answer (B) is incorrect
because the issue is not
whether actual
production is adequate
but whether
potential production
would be adequate to
meet
zero-price demand.
Answer (C) is correct.
Economic goods are
demanded by
consumers but exist in
insufficient
 supply to satisfy all
demands for them. Thus,
economic goods are
scarce because, at a zero
price,
demand would exceed
the potential supply that
can
be produced given the
finite resources (inputs)
available on this planet.
The problem facing
society is
how to allocate a fixed
supply of resources.
Answer (D) is incorrect
because an economic
good
does not have to be
man-made.
[56] Source: CMA 0691 1-
15
Answer (A) is incorrect
because an elastic
supply
function would not be
fixed in total. Economic
rent is
paid when the supply is
perfectly inelastic.
Answer (B) is correct.
Economic rent is the
total
price paid for land and
other natural resources
that
have a completely fixed
supply. Given this perfect
inelasticity, the sole
factor determining rent
for land
and other resources
with a completely fixed
total
supply is demand. A
higher price will not
increase
supply and thereby the
productive potential of
the
economy. Thus, no part
of the rent paid for such
resources provides an
incentive to increase
supply,
and the entire rent is
deemed to be a surplus
(economic rent) by
economists.
 more likely to decline
Answer (C) is incorrect as price rises and the
because a fixed supply quantity
schedule is typical of demanded falls.
resources that receive
economic Answer (D) is correct.
rent. When government
imposes
Answer (D) is incorrect health and safety
because market price is regulations, production
irrelevant to the cost is likely
definition. to increase as a result
of the manufacturer's
efforts to
[57] Source: CMA 0691 1- comply. The increased
19 costs are then passed on
to
Answer (A) is incorrect consumers in the form
because consumption of higher prices.
will Moreover,
either remain the amount the
unchanged or decline manufacturer is willing to
following the supply will
increase in price. decrease.

Answer (B) is incorrect

because the costs of [58] Source: CMA 0692 1-
compliance will lead to 28
higher prices.
Answer (A) is incorrect
Answer (C) is incorrect because the use of fixed
because tax revenues are
 costs implies a short- be variable. Thus, the
run analysis. economist's short-run
analysis
Answer (B) is incorrect of cost is similar to the
because average product accounting concept of
is a cost in
nonsense answer. which the sum of
variable and fixed costs
Answer (C) is incorrect is total cost.
because the combination
of
two average costs [59] Source: CMA 0692 1-
produces an average 29
cost, not a
total cost. Answer (A) is incorrect
because the point of
Answer (D) is correct. diminishing average
The sum of the average productivity is the point
fixed at which
costs and the average average productivity
variable costs for a given begins to decline as
output is the average additional
total cost. Recognition of units of input are used.
fixed
costs implies a short- Answer (B) is correct.
run analysis because Marginal product is the
long-run output
analysis assumes a obtained by adding one
period long enough for all extra unit of a variable
costs to input
factor. If the cost of the
input factor is constant, a
 rising marginal product
will result in a declining
marginal cost of output.
If marginal product is
falling,
marginal cost is rising.
Hence, marginal cost is
at a
minimum when
marginal product is at a
maximum.
Answer (C) is incorrect
because marginal cost is
the
addition to total cost as
a result of increasing
production by one unit.
Answer (D) is incorrect
because the point of
diminishing marginal
productivity is that point
at which
marginal productivity
begins to decline as
additional
inputs are added to
production.
[60] Source: CMA 0692 1-
30
Answer (A) is incorrect
because an increase in
fixed
costs could cause
average costs to
increase. Also, by
definition, all long-run
costs are variable.
Answer (B) is incorrect
because technological
efficiency refers to the
ratio of physical output of
a
given technology and
the maximum output that
is
possible. An increase in
technological efficiency
is
only one of the ways
that economies of scale
can
occur.
Answer (C) is incorrect
because a decline in
average
 cost means the firm is
experiencing increasing [61] Source: CMA 1292 1-
returns, 1
not decreasing returns.
Answer (A) is incorrect
Answer (D) is correct. because prices might
When long-run average decline
cost or stay the same
declines as output depending upon the slope
increases, the firm is of the
experiencing demand and supply
economies of scale. curves. For example, if
Average cost falls when the
marginal demand curve were
cost is below it and steeper than the supply
rises when marginal cost curve,
is above prices would decline.
it. Average cost
reaches its minimum Answer (B) is incorrect
when it equals because prices might
marginal cost. Some of increase or stay the
the reasons for this same depending upon the
phenomenon are slope
increased specialization of the demand and
and division supply curves. For
of labor, better use and example, if the
specialization of supply curve were
management, steeper than the demand
and use of more curve,
efficient machinery and prices would increase.
equipment.
 Answer (C) is correct.
In a competitive market,
equilibrium exists when
demand is exactly equal
to
supply. If both demand
and supply increase in
equal
amounts, the market
will still be in equilibrium,
but the
new price may be
higher, lower, or
unchanged
depending upon the
slopes of the demand and
supply
curves. Whatever the
new price, the quantity of
products cleared by the
market should increase.
Answer (D) is incorrect
because prices might
decline
or stay the same
depending upon the slope
of the
demand and supply
curves.
[62] Source: CMA 1292 1-
2
Answer (A) is incorrect
because the elasticity of
supply is not a measure
involving the demand
curve.
Answer (B) is correct.
The elasticity of supply is
a
measure of the
responsiveness of a
change in the
quantity supplied to a
percentage change in the
price
of the commodity. A
perfectly inelastic supply
curve
has an elasticity of
zero. This can occur only
when the
numerator of the
elasticity fraction, the
percentage
change in quantity
supplied, is zero. Thus, a
condition
 of perfect inelasticity of
supply could occur only
when
a firm could not vary
the quantity it supplies,
i.e.,
when the firm cannot
vary its input usage.
Answer (C) is incorrect
because a perfectly
inelastic
supply curve is vertical.
The firm will supply the
same
quantity at all price
levels.
Answer (D) is incorrect
because, in the long run,
a equilibrium price
firm can vary its inputs.
Only in the short-run
situation
is input usage
unchangeable. Hence,
perfectly
inelastic supply is a
short-run condition.
[63] Source: CMA 1292 1-
3
Answer (A) is incorrect
because the amount
demanded will increase
as a result of the
artificially
low price.
Answer (B) is incorrect
because the amount
supplied
will decline as a result
of the artificially low
price.
Answer (C) is correct. A
price ceiling lower than
the
causes shortages to
develop. The
artificially low price
results in an amount
supplied less
than that at the
equilibrium price. It also
causes
consumers to demand
more of the commodity
than at
 the equilibrium price.
Answer (C) is incorrect
Answer (D) is incorrect because both variable
because shortages will and
occur. fixed costs have to be
covered. In the long run,
moreover, all costs are
[64] Source: CMA 1292 1- variable.
4
Answer (D) is correct.
Answer (A) is incorrect In long-run equilibrium,
because the equilibrium price,
price which equals marginal
is the intersection of revenue in a purely
the demand and supply competitive
curves market, will be equal to
and has nothing to do the suppliers' marginal
with what is fair to costs
consumers. of production.
At lower prices, more Allocation of the
consumers would be in economy's resources
the is optimal at this point.
market. Suppliers will continue to
benefit as long as price
Answer (B) is incorrect is greater than the
because the price would marginal
not cost; therefore,
be equal to total costs production will increase
unless the average cost up to the
were point at which marginal
the same as marginal cost exactly equals price.
cost. If
 marginal cost exceeds dollar spent on product
price, suppliers would A should be the same as
have no the
incentive to produce. marginal utility for each
dollar spent on product B,
and so on. However,
[65] Source: CMA 1292 1- the principle of
5 diminishing
marginal utility must be
Answer (A) is incorrect considered. Under this
because the principle of assumption, equal
diminishing marginal increments of additional
utility states that consumption of a
marginal utility product result in less
decreases as than equal
consumption expands. additions of utility to
the consumer. For
Answer (B) is correct. A example,
rational individual when a person is
maximizes total utility thirsty, the first glass of
from income. This water tastes
objective can better than the second,
be accomplished when and the third has even
the utility obtained from less
the utility than the second.
last dollar spent on
each commodity Answer (C) is incorrect
purchased is the because the concept of
same. In other words, marginal utility is a
the marginal utility for measure associated with
each demand,
not with supply.

Answer (D) is incorrect
because marginal utility
is not
associated with inputs
to the production
process; it is
a measure associated
with demand.
[66] Source: CMA 1292 1-
6 to a firm's fixed inputs
Answer (A) is incorrect
because consumers will
buy
less of a product if
prices are higher.
Answer (B) is correct.
The law of diminishing
returns
states that if increasing
amounts of a variable
input are
applied to a fixed input,
there is some point
beyond
which additional units
of the variable input will
contribute less and less
to the total product.
Thus, an
input is used up to the
point at which the
marginal
increase in revenue
from that input is equal
to its
marginal cost. This
means that adding
variable inputs
will result in lower
product
costs, but only up to a
point. Accordingly, a firm
will
increase short-run
supply as long as
marginal revenue
(the price in a purely
competitive market)
exceeds
marginal cost, whether
because of a lower
marginal
cost or a higher price.
Answer (C) is incorrect
because costs decline up
to a
 point as economies of Answer (C) is correct.
scale are achieved. As most firms expand
output,
Answer (D) is incorrect average costs of
because the supply curve production initially tend
is to decline.
independent of the The reasons for this
demand curve, which is include increased
based on specialization
consumer preferences. and division of labor,
better use and
specialization of
[67] Source: CMA 1292 1- management, and use
7 of more efficient
machinery and
Answer (A) is incorrect equipment.
because economies of Consequently, increasing
scale the size of a
refer to the savings in factory often results in
costs as production lower average costs.
increases;
less efficient labor Answer (D) is incorrect
would lead to higher because increasing
costs. factory
size will normally
Answer (B) is incorrect increase total costs, but
because output should result in
increase, although lower average costs.
average productivity may
or may
not change. [68] Source: CMA 1292 1-
8
 greater. All firms should
Answer (A) is incorrect equate marginal revenue
because only goodwill (MR) and marginal cost
advertising is likely to (MC). For a competitive
be used. The monopolist firm, MR equals price at
will all output levels because
already be maximizing the
its profits because it has firm is a price taker.
no However, a monopolist
competitors. must
reduce price to raise
Answer (B) is incorrect sales, so its MR curve will
because monopolists decline with output.
produce a lower rate of Assuming no difference
output than in a between
competitive the MC curves of the
market. purely competitive firm
and the
Answer (C) is incorrect monopolist, the latter's
because the blend of downward-sloping MR
capital curve
and labor is not a will intersect the MC
consideration exclusive curve at a lower output
to the level
monopolist. than that for a
competitive firm. This
Answer (D) is correct. lower output
Competitive markets are level corresponds to a
preferable to other higher point (a higher
types of markets, such as price) on
monopolies, because the demand curve.
price is lower and output

[69] Source: CMA 1292 1-
9
Answer (A) is correct.
The characteristics of
monopolistic
competition are a large
number of firms,
differentiated products,
relatively easy entry into
the
market, some price
control by individual
firms, and
large amounts of
nonprice competition. In
such cases,
price exceeds marginal
cost and resources are
under-allocated. The
industry is typically
populated
by too many firms that
are too small. These
conditions are often
referred to as the waste
of
monopolistic
competition. Prices are
higher and
output is less than with
pure competition.
Answer (B) is incorrect
because economies and
diseconomies of scale
do exist with
monopolistic
competition.
Answer (C) is incorrect
because advertising is an
important element in an
economy characterized
by
monopolistic
competition.
Answer (D) is incorrect
because monopolistic
competition is
characterized by
heterogeneous
products.
[70] Source: CMA 1292 1-
10
Answer (A) is incorrect
because diminishing
returns
 can exist in any market Answer (C) is incorrect
structure. because, in pure
competition,
Answer (B) is correct. the optimal output is
Pure competition is produced. Because
characterized by a resource
large number of buyers allocation is ideal, no
and sellers over- or underproduction
acting independently, occurs, and consumer
homogeneous or surplus (the difference
standardized between what
products, free entry consumers are willing to
into and exit of firms pay and what
from the they actually pay) is
market, perfect nonexistent.
information, no control
over prices, Answer (D) is incorrect
and no nonprice because all suppliers will
competition. Because charge the market
price equals price, given perfect
marginal cost, information in
allocation of resources is the economy.
optimal.
Firms produce the ideal
output, the output at [71] Source: CMA 1292 1-
which 11
average cost is lowest.
Price is lower and output Answer (A) is incorrect
greater than in any because oligopolists do
other market structure. not
attempt to decrease
demand for the product.

Answer (B) is incorrect
because prices are
maintained by
restricting output.
Answer (C) is incorrect
because increased costs
do
not necessarily result in
higher prices.
Answer (D) is correct.
In an oligopolistic
industry, a
cartel can be formed to
add structure to a market
with a few firms. A
cartel arises when a
group of
oligopolistic firms join
together for price-fixing
purposes. This practice
is illegal except in
international markets.
Prices are fixed at an
amount
greater than would
occur under pure
competition.
Members of the cartel
maintain higher prices by
voluntarily restricting
output.
[72] Source: CMA 1292 1-
12
Answer (A) is incorrect
because economic cost
includes not only
explicit costs (dollars
paid), but
implicit costs as well;
implicit costs include
opportunity costs.
Answer (B) is incorrect
because opportunity
costs
and dollar costs should
be added, not subtracted.
Answer (C) is incorrect
because all explicit and
implicit costs should be
added, not subtracted.
Answer (D) is correct.
Economic cost is defined
as
 the sum of all costs,
both implicit and explicit,
of a
firm. Explicit costs
include direct
expenditures made
to those outside the
firm, for example, the
costs of
labor, materials, and
equipment. Implicit costs
are the
payments that would
have been received if
self-owned resources
had been used outside
the
firm's business. Thus,
the lease payments
forgone by
not renting the firm's
building to others is an
implicit
cost. The return
necessary to keep
resources
employed in a given
enterprise (normal profit)
is also
an implicit cost.
[73] Source: CMA 1292 1-
13
Answer (A) is correct.
In a competitive market
for
labor in which demand
is stable, total wages
cannot
increase. If some
workers do increase their
wages,
the increases can
occur only if some
workers are laid
off. Given a stable
demand curve for labor, a
higher
price for this resource
will result in a decrease
in the
amount of labor
demanded (a movement
up the
demand curve).
Answer (B) is incorrect
because a maximum
wage
that is lower than the
equilibrium wage will not
allow
 workers to increase
their wages.
Answer (C) is incorrect
because firms may
choose to
become more capital
intensive rather than
smaller.
Answer (D) is incorrect
because supply will not
decrease if the workers
are more productive after
gaining an increase in
wages.
[74] Source: CMA 1292 1-
14
Answer (A) is incorrect
because oligopolies
contain
several firms; a single
seller is characteristic of
a differentiated or
monopoly.
Answer (B) is incorrect
because oligopolies
contain
several firms; a single
seller is characteristic of
a
monopoly.
Answer (C) is incorrect
because oligopolies are
typified by barriers to
entry; that is the reason
the
industry has only a few
firms.
Answer (D) is correct.
The oligopoly model is
much
less specific than the
other market structures,
but
there are typically few
firms in the industry.
Thus, the
decisions of rival firms
do not go unnoticed.
Products
can be either
standardized. Prices
tend to be rigid (sticky)
because of the
 interdependence
among firms. Entry is
difficult
because of either
natural or created
barriers. Price
leadership is typical in
oligopolistic industries.
Under
price leadership, price
changes are announced
first by
a major firm. Once the
industry leader has
spoken,
other firms in the
industry match the price
charged by
the leader. The mutual
interdependence of the
firms
influences both pricing
and output decisions.
[75] Source: CMA 1292 1-
15
Answer (A) is incorrect
because both demand
and
supply factors
determine price and
output.
Answer (B) is incorrect
because both supply and
demand factors
determine price and
output.
Answer (C) is incorrect
because, in the long run,
firms can enter or exit
an industry.
Answer (D) is correct.
The distinction in
microeconomics
between the short run
and the long
run is that the long run
is a time period long
enough
that all inputs,
including plant capacity,
can be varied.
The short run is a time
period so brief that a firm
has
insufficient time to vary
the amount of all inputs.
Thus,
 in the short run, the
quantity of one or more
inputs is
fixed.
[76] Source: CMA 1292 1-
17
Answer (A) is correct. A
firm that can control the
price of its product is a
monopolist. In a pure
monopoly, the industry
demand curve is also the
monopolist's demand
curve. Because this
curve is not
perfectly elastic, the
monopolist's demand
curve is
downward sloping, not
horizontal like the pure
competitor's.
Answer (B) is incorrect
because a horizontal
supply
curve implies that the
company will produce
any
quantity of output at
the constant price. The
ability to
control one's price
implies a changing price
level.
Answer (C) is incorrect
because a horizontal
demand
curve implies an
unchanging price.
Answer (D) is incorrect
because the supplier
could
not sell all of its output
if the established price
was
higher than what
consumers were willing
to pay.
Also, a monopolist has
no incentive to sell the
maximum that can be
produced.
[77] Source: CMA 1292 1-
18
 Answer (A) is incorrect supply and demand, a
because a maximum surplus can never occur.
price in Pure
excess of the competition leads to
equilibrium price creates perfect equilibrium
neither a between
surplus nor a shortage. supply and demand.
Only when government
Answer (B) is incorrect intervenes with price
because a minimum price controls can a surplus or
below the equilibrium shortage occur. A
price creates neither a surplus can arise if a
surplus minimum
nor a shortage. price is set that
exceeds the equilibrium
Answer (C) is incorrect price. For
because a maximum example, if the
price minimum price is $5 and
(such as rent controls) the
set lower than the equilibrium price is $4,
equilibrium consumers will demand
price leads to fewer
shortages. Producers will goods at $5 than $4,
not be willing but producers will supply
to supply as much as more
consumers demand. goods at $5 than $4.
Thus, a surplus will
Answer (D) is correct. occur.
In the competitive model However, at a price of
of $4, supply would exactly
equal demand.
 large-scale operations
[78] Source: CMA 1293 1- are required to achieve
3 low
unit costs and prices.
Answer (A) is incorrect In a natural monopoly,
because the ownership of the unit
natural resources is not cost (the long-term
a necessary factor in the average cost) of meeting
existence of a natural the
monopoly. entire demand is
minimized when the
Answer (B) is incorrect industry consists
because the ownership of of one firm. Thus,
patents is not a competition would be
necessary factor in the undesirable
existence of a because the presence
natural monopoly. of two or more firms
would
Answer (C) is correct. A prevent the realization
natural monopoly exists of the necessary
because economic and economies of
technical conditions scale.
exist in
the industry or Answer (D) is incorrect
economy that permit only because the government
one efficient is
supplier in a locale. A typically not the
natural monopoly exists supplier when a natural
when monopoly
economies of scale are exists.
very great, that is, when
very
[79] Source: CMA 1293 1- inelastic, customers
10 will continue buying the
product
Answer (A) is incorrect regardless of the price;
because reduced demand a boycott, however,
will drive the price means
downward. that consumers will
stop buying the product.
Answer (B) is correct. A
group boycott will
decrease [80] Source: CMA 1293 1-
the demand for a 28
product (shift the
demand curve to Answer (A) is incorrect
the left). This decrease because price equals
in demand should lead to marginal cost only in
a pure competition.
lower price for the
product assuming that Answer (B) is incorrect
supply is because, for a
constant (the supply monopolist,
curve does not shift). the optimal output is
less than that at which
Answer (C) is incorrect average
because supply remains cost is lowest.
unchanged in the short
run. Answer (C) is incorrect
because a monopolist's
Answer (D) is incorrect price
because, if demand is will not equal average
cost. The firm will stop
 producing before [81] Source: CMA 1293 1-
reaching that level. 29

Answer (D) is correct. Answer (A) is incorrect

Whether a market is because an increase in
competitive or demand should drive
noncompetitive, a firm the price up if supply is
should produce constant.
at the level at which
marginal cost equals Answer (B) is correct.
marginal In a competitive market,
revenue. The difference prices will fall when the
between monopoly and demand curve shifts to
perfect competition is the left
reflected in the marginal or the supply curve
revenue curve. In shifts to the right.
perfect competition, the
price is a Answer (C) is incorrect
constant and therefore because a decline in the
equals marginal revenue, availability of a factor
which is represented by of production, e.g., labor,
a horizontal line. In a increases the cost of
monopoly (or in output and, if other
monopolistic factors are
competition), the price constant, decreases
declines as output the amount produced. A
increases, resulting in a decrease in supply
line of (shift of the curve to the
negative slope. left)
increases price in a
competitive market.
 Answer (D) is incorrect
because an increase in
the
cost of production
tends to increase price.
[82] Source: CMA 1293 1-
30
Answer (A) is correct.
Elasticity is the
percentage
change in quantity
demanded divided by the
percentage change in
price. It is a measure of
how
total revenues will be
affected given a specified
change in price. A
factor affecting the price
elasticity
of demand is the
availability of substitutes.
As price
increases, buyers are
more likely to seek
substitutes.
The more substitutes,
the greater the elasticity.
Answer (B) is incorrect
because the level of
consumer income may
change a demand curve,
but
not elasticity.
Answer (C) is incorrect
because the elasticity of
supply is different from
the elasticity of product
demand.
Answer (D) is incorrect
because the level of input
costs affects the
elasticity of supply, not
demand.
[83] Source: CMA 1288 1-
26
Answer (A) is incorrect
because an increase in
supply will decrease
the equilibrium price and
increase the
equilibrium quantity
exchanged.
 Answer (B) is incorrect more goods are
because an increase in available at each price
supply but demand is
will decrease the unchanged, the price at
equilibrium price and which demand equals
increase the supply
equilibrium quantity will decline.
exchanged.

Answer (C) is incorrect [84] Source: CMA 1288 1-

because an increase in 28
supply will decrease
the equilibrium price and Answer (A) is correct. A
increase the pure monopoly consists
equilibrium quantity of
exchanged. a single firm with a
unique product. Such a
Answer (D) is correct. firm has
An increase in supply is a significant price
rightward shift in the control. For profit
upward-sloping supply maximization, it
curve. It produces until its
causes a decrease in marginal revenue equals
the equilibrium price and its marginal
thus an cost, unless marginal
increase in the quantity revenue is less than
exchanged, assuming the average
downward-sloping variable cost, which
demand curve does not will cause the firm to
shift. If shut down.
 In a pure monopoly,
price will be higher and
output [85] Source: CMA 1289 1-
lower than in perfect 7
competition.
Answer (A) is incorrect
Answer (B) is incorrect because $20 is
because the monopolist calculated
is in using total fixed costs
control of the quantity instead of total costs,
supplied. Thus, the which
supply can includes total variable
be limited to produce costs.
the profit-maximizing
price. Answer (B) is incorrect
because $30 is
Answer (C) is incorrect calculated
because a monopolist using total variable
will costs instead of total
increase supply as long costs, which
as the demand curve is includes total fixed
inelastic. Inelasticity costs.
means that an increase
in price Answer (C) is correct.
will cause a less-than- The average total cost
proportionate decline in per unit
demand. is calculated by
dividing total costs (fixed
Answer (D) is incorrect + variable)
because there is only one by the number of units
price when a monopoly produced. Thus, $25,000
exists.
 divided by 500 units Answer (C) is incorrect
produces a unit cost of because using only
$50. average
fixed costs ignores
Answer (D) is incorrect variable costs, which
because $25 is the increase in
average total with every unit
of fixed costs per unit produced.
and variable costs per
unit. Answer (D) is correct. A
firm should produce until
the marginal cost
[86] Source: CMA 1289 1- equals marginal revenue.
8 In the
short run, a firm in
Answer (A) is incorrect perfect competition will
because there would be continue
no production until
profit when selling marginal cost equals
price and total costs are selling price,
the same. which is also its
marginal revenue. The
Answer (B) is incorrect result is the
because equating selling short-run maximization
price of profits. As long as
to total variable costs selling
leaves nothing to cover price exceeds marginal
fixed cost, a firm should
costs. continue
producing. In the short
run in perfect
competition, the
 market price equals production costs
marginal revenue decline with economies
because no firm of scale.
can affect price by its
production decisions. Answer (C) is incorrect
because total costs
increase
[87] Source: CMA 1289 1- with increased
9 production; only the
average cost per
Answer (A) is correct. unit declines.
When a firm experiences
economies of scale, the Answer (D) is incorrect
average unit cost of because changes in the
production decreases supply curve do not
as production increases. affect the demand curve.
This
phenomenon is
attributable to spreading [88] Source: CMA 0694 1-
fixed costs 2
over a greater number
of units of output. Both Answer (A) is incorrect
the because an indifference
short-run and long-run curve relates to
average costs are lower consumer desires, not to
because of economies willingness
of scale. to supply different
products.
Answer (B) is incorrect
because long-run unit Answer (B) is correct.
An indifference curve
depicts
 all possible [89] Source: CMA 0694 1-
combinations of two 3
products that will
give equal utility or Answer (A) is incorrect
satisfaction to a because 0.20 equals the
consumer. The 10% decline in price
farther the indifference divided by the 50%
curve is from the origin, change in
the quantity demanded.
higher the level of
utility. Answer (B) is incorrect
because 10.00 assumes a
Answer (C) is incorrect 5% change in price; the
because an indifference correct decline in price is
curve relates to a 10%. It also does not
consumer's utility or calculate the change
satisfaction. over the
There is no relationship average.
to the income of the
consumer. Answer (C) is incorrect
because 0.10 is the
Answer (D) is incorrect percentage change in
because varying levels of price.
income and price
changes are not Answer (D) is correct. A
incorporated into product's price elasticity
the indifference curve; of
these are assumed to be demand is measured as
constant. the percentage change in
quantity demanded
divided by the
percentage change
 in price. If elasticity is
determined by
calculating
percentage changes
over the average, the
price
elasticity is
(150 - 100)
÷ [(150 + 100) ÷ 2]
3.8 =
-----------------------------
($50 - $45)
÷ [($50 + $45) ÷ 2]
[90] Source: CMA 0694 1-
6 with
Answer (A) is incorrect
because a price decrease
on
a product with inelastic
demand causes a
decrease in
total revenue. A price
decrease on a product
with
elastic demand causes
an increase in total
revenue.
Answer (B) is incorrect
because unitary
elasticity
(elasticity = 1.0) results
in no change in revenue.
Answer (C) is incorrect
because the demand
curve
will not shift when
price decreases; instead,
the
equilibrium point will
move to a new position
on the
same curve. A price
decrease on a product
elastic demand
(elasticity > 1.0) results
in an increase
in total revenue.
Answer (D) is correct.
The concept of price
elasticity
is of great practical
concern to management
accountants because a
knowledge of elasticity
tells
 the accountant or complementary
whether a price change products, in the number
will increase of
or decrease total consumers, or in the
revenue. If the demand tastes and preferences of
elasticity is consumers.
greater than one (i.e.,
the product is elastic), a Answer (B) is incorrect
price because a shift in the
decrease will cause an demand
increase in total revenue curve represents
because the demand changes attributable to
increases by a greater something
percentage than the other than price.
price decreases.
Answer (C) is correct.
The demand curve
[91] Source: CMA 0694 1- represents
13 the relationship
between the prices of a
Answer (A) is incorrect commodity
because a change in and the quantity
demand demanded at those
(increase or decrease) prices, holding
causes the demand curve other determinants of
to the quantity demanded
shift. Changes in constant. Movement
demand can occur as a along a demand curve
result of reflects a
changes in consumer change (increase or
income, in the price of decrease) in the quantity
substitute demanded.
 example, when the
Answer (D) is incorrect price of one good
because a change in increases, the
demand demand for a
(increase or decrease) complementary good
causes the demand curve decreases.
to Margarine and butter,
shift. Changes in however, are substitutes
demand can occur as a and
result of their relationship is
changes in consumer direct. When the price of
income, in the price of one
substitute good increases,
or complementary demand for a substitute
products, in the number good also
of increases.
consumers, or in the
tastes and preferences of Answer (B) is incorrect
consumers. because cameras and
rolls of
film are examples of
[92] Source: CMA 0694 1- complementary products.
14 For
instance, when the
Answer (A) is correct. price of cameras
Goods or services are decreases,
complements if the people take more
price change of one has pictures and the demand
an inverse for rolls
relationship to the of film increases.
demand for the other. For
 Answer (C) is incorrect unnoticed. Prices tend
because VCRs and video to be rigid (sticky)
cassettes are examples because of
of complementary the interdependence
products. among firms. Because
A decrease in the price competitors respond
of VCRs will result in only to certain price
increased demand of changes by
video cassettes. one of the firms in an
oligopolistic industry, the
Answer (D) is incorrect demand curve for an
because razors and razor oligopolist tends to be
blades are examples of kinked.
complementary products. Price decreases are
A usually matched by price
decrease in the price of decreases, but price
razors will result in increases are often not
increased followed.
demand for razor If other firms do not
blades. match a lower price, a
price
decrease by an
[93] Source: CMA 1294 1- oligopolist would capture
6 more of the
market. If other firms
Answer (A) is correct. match the price
An oligopoly consists of a decrease, less
few of the market will be
firms. Thus, the captured.
decisions of rivals do not
go
 Answer (B) is incorrect
because price changes
will
have an effect on
demand for an
oligopolist's product.
Answer (C) is incorrect
because an oligopolist
must
essentially match the
price of other firms in the
industry.
Answer (D) is incorrect
because an oligopolist
cannot
shape its demand
curve.
[94] Source: CMA 1294 1-
7 elastic, whereas a
Answer (A) is incorrect
because demand is
perfectly
elastic when buyers are
willing to purchase
however
much of a commodity is
supplied at a constant
price.
Conversely, a price
increase reduces the
quantity
demanded to zero when
demand is perfectly
elastic.
Answer (B) is correct.
The price elasticity of
demand
is the percentage
change in quantity
demanded
divided by the
percentage change in
price. If the
elasticity coefficient is
greater than one, demand
is
coefficient of less than
one means
that demand is
inelastic. If the quantity
demanded
does not change at all
when the price increases,
demand is said to be
perfectly inelastic.

Answer (C) is incorrect
because elasticity means
that
a change in price will
cause a greater
percentage
change in demand.
Answer (D) is incorrect
because the demand for
insulin is perfectly
inelastic, not merely
inelastic.
[95] Source: CMA 1294 1-
8 because monopolistic
Answer (A) is correct.
Monopolistic competition
involves a large number
of firms offering
differentiated
products. Entry is
usually relatively easy,
and some
price control exists, but
nonprice competition
using
advertising and
emphasis on brand
names is
substantial. In the long-
run, prices exceed
marginal
cost and there is an
underallocation of
resources.
Firms produce less than
the ideal output, and the
industry is populated by
too many firms that are
too
small.
Answer (B) is incorrect
competition is
characterized by a large
number of
sellers who produce
differentiated products.
Answer (C) is incorrect
because the market is
not
monopolistic, but
consumers may believe it
to be so
given the differentiation
of products. If a person is
 convinced by Answer (B) is incorrect
advertising that a certain because if the quantity
company is demanded does not
the only one with a change at all when the
specified quality of price
product, increases, demand is
monopoly exists for said to be perfectly
that person. inelastic.

Answer (D) is incorrect Answer (C) is correct.

because monopolistic The price elasticity of
competition is demand
characterized by a large is the percentage
number of change in quantity
sellers who produce demanded
differentiated products. divided by the
percentage change in
price. If the
[96] Source: CMA 1294 1- elasticity coefficient is
19 greater than one, demand
is
Answer (A) is incorrect elastic. Hence, an
because demand is elasticity of 2.0 is elastic.
perfectly
elastic when buyers are Answer (D) is incorrect
willing to purchase because the demand
however would
much of a commodity is be inelastic if the
supplied at a constant elasticity coefficient
price. were less than
one.
 elasticity coefficient is
[97] Source: CMA 0695 1- greater than one, demand
15 is
elastic. If less than one,
Answer (A) is incorrect it is inelastic. Thus, if an
because luxury goods increase in price is
have accompanied by little
greater price elasticity. change in
They are not necessities. quantity demand,
demand is price inelastic.
Answer (B) is incorrect The lack
because the lack of of good substitutes is a
complements can lead reason for price
to greater elasticity. inelasticity.

Answer (C) is incorrect

because the population in [98] Source: CMA 0695 1-
the 16
market area has
nothing to do with price Answer (A) is incorrect
elasticity. because indifference
curves
Answer (D) is correct. have a negative slope.
Price elasticity of They reflect different
demand combinations of goods.
equals the percentage
change in quantity Answer (B) is incorrect
demanded because the farther the
divided by the curve
percentage change in from the origin, the
price. If the higher the total utility.
 Answer (C) is incorrect [99] Source: CMA 0695 1-
because the principle of 17
diminishing marginal
utility applies. Answer (A) is incorrect
because a homogeneous
Answer (D) is correct. product is a key
An indifference curve assumption of perfect
represents all competition.
combinations of two
commodities that Answer (B) is incorrect
give equal utility to a because customer
consumer. The farther indifference regarding
the choice of seller is a key
indifference curve is assumption of perfect
from the origin, the competition.
higher the
level of utility. Answer (C) is incorrect
Indifference curves slope because small firm
downward to output
the right and are relative to the industry
convex to the origin is a key assumption of
because the perfect
utility of each competition.
additional unit of a good
diminishes. Answer (D) is correct.
Hence, indifference Perfect competition is
curves cannot intersect characterized by a
and are market structure with
negatively sloped. many buyers
and sellers acting
independently, a
homogeneous or
 standardized product, number of firms and
free entry into and exit relative ease of market
from entry.
the market, perfect However, monopolistic
information, no control competition is also
over the characterized by
industry price, and the differentiated products,
absence of nonprice some
competition. Moreover, control over price, and
customers are indifferent considerable nonprice
about which firm they competition, e.g.,
buy from because price is through advertising and
the emphasis
only difference on brand awareness.
between one seller and
the next. Answer (C) is incorrect
because an oligopoly
consists of a few firms.
[100] Source: CMA 0695 Products may be
1-18 differentiated or
standardized, and entry is
Answer (A) is incorrect typically
because a monopoly difficult.
consists
of a single seller. Answer (D) is incorrect
because products are
Answer (B) is correct. standardized in pure
Like perfect competition, competition.
monopolistic
competition is
characterized by a large [101] Source: CMA 0695
1-19

Answer (A) is incorrect
because a rise in the
price of
a substitute causes the
demand curve to shift to
the
right.
Answer (B) is incorrect
because a rise in income
causes the demand
curve to shift to the right.
Answer (C) is correct.
The demand curve is the
relationship between
the prices of a
commodity
(vertical axis) and the
quantity demanded at the
various prices
(horizontal axis), holding
other
determinants of
demand constant. A
movement along
an existing demand
curve occurs when the
price is
changed. A shift in a
demand curve may occur
when
one of the determinants
changes. A shift to the
left
represents a decline in
demand. A leftward shift
may
be caused by an
unfavorable change in
the tastes and
preferences of
consumers, a decline in
consumer
income (if the
commodity is a normal
good), a
decrease in the price of
a substitute good, an
increase
in the price of a
complementary product,
or the
expectation of future
price decreases.
Answer (D) is incorrect
because a favorable
change
 in consumers' tastes Answer (D) is correct. If
cause the demand curve demand is constant, an
to shift increase in supply
to the right. should result in a lower
equilibrium
price. The supply curve
[102] Source: CMA 0695 shifts to the right; that is,
1-20 more is supplied at
each price. Thus, the new
Answer (A) is incorrect intersection of the
because the increased supply and demand
supply curves is at a
will lead to a lower lower point on the
price. demand curve. The result
is an
Answer (B) is incorrect increase in the quantity
because an increase in demanded.
supply
increases quantity
demanded, not overall [103] Source: CMA 1295
demand. 1-17

Answer (C) is incorrect Answer (A) is incorrect

because pork is a because the 11th worker
substitute will
for beef. Hence, the cause total production
lower price of beef will to increase to 25 units,
shift an
demand for pork to the increment of five.
left, resulting in a lower
equilibrium price. Answer (B) is incorrect
because eight units is the
 marginal product of
adding two workers to a
team of
ten workers.
Answer (C) is correct.
According to the table,
11
workers can produce
25 units, which is an
increase
of five over the 20 units
that 10 workers can
produce. This
additional five units is
known as the
marginal physical
product generated by the
11th
worker.
Answer (D) is incorrect
because 25 units will be
the
total production by all
11 workers, not the
marginal
product added by the
11th.
[104] Source: CMA 1295
1-18
Answer (A) is correct.
The total revenue
produced
by 11 workers would be
$1,225 (25 units x $49).
With 12 workers
producing a total of 28
units at
$47.50 each, the total
revenue would be $1,330.
The
$1,330 of revenue
represents an increment
of $105
over the revenue
generated by 11 workers.
Dividing
the $105 increment by
the three incremental
units (28
- 25) produces marginal
revenue of $35 per unit.
Answer (B) is incorrect
because $225 is the total
increment when the
number of workers
increases
from 10 to 11.

Answer (C) is incorrect
because $105 is the total
increase in revenue for
three additional units, not
the
marginal revenue per
unit.
Answer (D) is incorrect
because $47.50 is the
new
price per unit, not the
marginal revenue.
[105] Source: CMA 1295
1-19
Answer (A) is incorrect
because $42 is the sales
price variance
produced by multiplying
the 28 units
times the $1.50 decline
in price; it ignores the
revenue
produced by the extra
units.
Answer (B) is incorrect
because $225 is the total
increment when the
number of workers
increases
from 10 to 11.
Answer (C) is correct.
The marginal revenue
product
represents the increase
in total revenue resulting
from
the additional
production of an
additional worker.
The total revenue
produced by 11 workers
would be
$1,225 (25 units x $49).
With 12 workers
producing
a total of 28 units at
$47.50 each, the total
revenue
would be $1,330. The
$1,330 of revenue
represents
an increment of $105
over the revenue
generated by
11 workers.
 Answer (D) is incorrect
because $47.50 is the
new
price per unit, not the
marginal revenue.
[106] Source: CMA 1285
1-18
Answer (A) is correct.
As prices are increased,
total
revenue may increase
or decrease depending
on the
price elasticity of
demand (percentage
change in
quantity demanded ÷
percentage change in
price). If
demand is elastic
(elasticity > 1.0), a price
increase
will tend to reduce total
revenues. If demand is
inelastic, a price
increase will tend to
raise total
revenues. Thus,
concern about the effect
the price
increase will have on
revenues relates to the
price
elasticity of demand.
Answer (B) is incorrect
because the substitution
effect is implicit in the
concept of elasticity. The
fewer
substitutes, the less
elastic will be the
demand for a
good.
Answer (C) is incorrect
because, in
cost-volume-profit
analysis, the nature of
the supply
curve is not considered.
Answer (D) is incorrect
because utility theory is
also
implicit in the concept
of elasticity. If demand is
 elastic, consumers sloped. The reason is
derive less utility from that the demand curve
paying a faced by
higher price. Thus, the monopolist is also
elasticity is Joe's negatively sloped; that is,
dominant price
concern. must decrease to
increase sales. However,
a price
[107] Source: CMA 0696 cut to increase sales
1-3 applies not only to the
incremental units but
Answer (A) is incorrect also to all other units.
because the demand Each
curve in additional unit adds its
pure competition is price minus the sum of
perfectly elastic. the
reductions on
Answer (B) is incorrect preceding units to total
because a monopolist's revenue. Thus,
profit marginal revenue
is maximized when (change in total revenue)
price exceeds marginal declines as
revenue output rises, and the
and marginal cost. marginal revenue curve
will lie
Answer (C) is correct. below the demand
In a pure monopoly, the curve. If marginal
marginal revenue curve revenue equaled
is negatively the price change, the
(downwardly) marginal revenue and
demand
 curves would be the additional consumption
same. of a product result in
smaller
Answer (D) is incorrect additions of utility to
because a monopolist the consumer. For
has no example, a
supply curve. Because glass of water on a hot
a monopolist equates day tastes great, the
marginal second
revenue and marginal glass less so, and the
cost, but marginal third even less.
revenue is
not price, different Answer (B) is incorrect
demand curves may because total utility will
result in increase with
different prices at the additional units of
same output level. Thus, product, but the
price increases are at a
and quantity supplied declining rate; the
do not have a unique principle applies
relationship. to marginal utility, not
total utility.

[108] Source: CMA 0696 Answer (C) is incorrect

1-4 because diminishing
marginal
Answer (A) is correct. utility results in a
The principle of downward-sloping
diminishing demand curve.
marginal utility states
that equal increments of
 Answer (D) is incorrect equals the percentage
because the utility change in quantity
principle demanded
applies not to time but divided by the
to additional units of percentage change in
product. price. If the
demand coefficient is
greater than 1.0, demand
[109] Source: CMA 0696 is
1-5 elastic. If the
coefficient is less than
Answer (A) is incorrect 1.0, demand is
because an elasticity of inelastic. If the
2.0 is elasticity coefficient is
relatively elastic, not exactly 1.0,
perfectly elastic. demand has unitary
elasticity.
Answer (B) is incorrect
because an elasticity Answer (D) is incorrect
coefficient greater than because an elasticity
1.0 is elastic. coefficient greater than
1.0 is elastic.
Answer (C) is correct.
The price elasticity of
demand [110] Source: CMA 0696
measures the 1-6
responsiveness of a
change in quantity Answer (A) is incorrect
demanded to a change because demand is
in the price of a product. elastic
It when the coefficient
exceeds 1.0.

Answer (B) is correct.
Price increases can most
easily be passed along
to consumers when
demand is
inelastic. If the demand
coefficient is less than
1.0, the
percentage change in
quantity demanded is
less than
the percentage change
in price. If demand does
not
change at all (i.e., an
elasticity of zero), as may
be
true of insulin, the
demand for the product is
perfectly
inelastic.
Answer (C) is incorrect
because demand is
relatively
inelastic when the
coefficient is greater
than 0.0 but
less than 1.0.
Answer (D) is incorrect
because the appropriate
technical term is
perfectly inelastic.
[111] Source: CMA 0696
1-7
Answer (A) is correct.
Monopolistic competition
is
characterized by a
large number of firms
offering
differentiated products.
Entry into the market is
relatively easy, firms
have some price control,
and
substantial nonprice
competition exists, such
as
advertising.
Answer (B) is incorrect
because monopolistic
competition is
characterized by a
relatively large
group of sellers.
 Answer (C) is incorrect
because the market is
not
monopolistic. There are
many sellers.
Answer (D) is incorrect
because products are not
homogeneous in
monopolistic
competition; although
products may appear to
be similar, they have
differences in service,
quality, or other
attributes.
[112] Source: CMA 1296
1-1
Answer (A) is incorrect
because a surplus arises
when the price is set
above the equilibrium
point.
Supply will exceed
demand.
Answer (B) is correct.
Price fixing is the setting
of
mandatory or artificial
prices. It often interferes
with
the free operation of
the market. A price
ceiling is a
price below the
equilibrium point. The
result is a
shortage because
consumer demand will
exceed
supply.
Answer (C) is incorrect
because a decrease in
demand (a leftward
shift in the demand
curve) may
result when future
prices are expected to
decline.
However, given a price
set below equilibrium,
pressure on prices is
upward.
Answer (D) is incorrect
because the price ceiling
will
cause shortages.

[113] Source: CMA 1296
1-2
Answer (A) is correct.
Competitive markets are
preferable to other
types of markets, such as
monopolies, because
price is lower and output
greater. All firms should
equate marginal revenue
(MR) and marginal cost
(MC). For a competitive
firm, MR equals price at
all output levels because
the
firm is a price taker.
However, a monopolist
must
reduce price to raise
sales, so its MR curve will
decline with output.
Assuming no difference
between
the MC curves of the
purely competitive firm
and the
monopolist, the latter's
downward-sloping MR
curve
will intersect the MC
curve at a lower output
level
than that for a
competitive firm. This
lower output
level corresponds to a
higher point (a higher
price) on
the demand curve.
Answer (B) is incorrect
because a monopolist
produces less and
charges a higher price
than a pure
competitor.
Answer (C) is incorrect
because a monopolist
produces less and
charges a higher price
than a pure
competitor.
Answer (D) is incorrect
because a monopolist
produces less and
charges a higher price
than a pure
competitor.

[114] Source: CMA 1296
1-3
Answer (A) is incorrect
because the demand
curve of
a pure competitor is
perfectly elastic. Such a
firm is a
price taker that can sell
all of its output at the
market
price but none of its
output at a higher price.
Answer (B) is incorrect
because profit is
maximized
when marginal revenue
equals marginal cost.
Answer (C) is correct. A
pure monopolist
constitutes
the industry; that is, the
negatively sloped
industry
demand curve is the
pure monopolist's
demand
curve. Accordingly, the
pure monopolist must
reduce
price to increase sales,
and the marginal revenue
curve will also be
negatively sloped.
Moreover,
marginal revenue will
be less than price
(average
revenue) because the
price reductions
necessary to
increase sales apply to
all units that might
otherwise
have been sold at a
higher price. This
relationship
explains why the
marginal revenue curve
lies below
the demand curve. The
latter is a function of
price
and quantity demanded.
Answer (D) is incorrect
because the supply curve
is
 unrelated to the market Answer (C) is incorrect
structure of the because the principle of
producer's comparative advantage
industry. states that world output
is
maximized when each
[115] Source: CMA 1296 output is produced by the
1-4 nation with the lower
opportunity cost.
Answer (A) is incorrect
because, under the law of Answer (D) is correct.
diminishing returns, if In a competitive market,
increasing amounts of a equilibrium exists when
variable demand is exactly equal
input are applied to a to
fixed input, there is some supply. If both demand
point and supply increase in
beyond which equal
additional units of the amounts, the market
variable input will still be in equilibrium,
will contribute less and but the
less to the total output. new price may be
higher, lower, or
Answer (B) is incorrect unchanged
because an opportunity depending upon the
cost slopes of the demand and
is the benefit forgone supply
by not choosing the next curves. Whatever the
best new price, the quantity of
use of a scarce products cleared by the
resource. market should increase.

[116] Source: CMA 1296
1-19
Answer (A) is incorrect
because elasticity of
demand
is unrelated to market
structure.
Answer (B) is incorrect
because, if marginal
costs are
rising, multiple smaller
firms are preferable to a
single
producer.
Answer (C) is incorrect
because consumer
demand is
unrelated to the market
structure of the supplier.
Answer (D) is correct. A
natural monopoly exists
because economic and
technical conditions
exist in
the industry or
economy that permit only
one efficient
supplier in a locale. A
natural monopoly exists
when
economies of scale are
very great, that is, when
very
large-scale operations
are required to achieve
low
unit costs and prices.
In a natural monopoly,
the unit
cost (the long-term
average cost) of meeting
the
entire demand is
minimized when the
industry consists
of one firm. Thus,
competition would be
undesirable
because the presence
of two or more firms
would
prevent the realization
of the necessary
economies of
scale.
[117] Source: CMA 1296
1-27
 Answer (A) is correct. A
merger is a business
combination in which
an acquiring firm absorbs
a of the production process
second firm, and the
acquiring firm remains in
business as a
combination of the two. A
horizontal
merger is the union of
two or more companies
that
engage in the same or
similar activities; in other
words, two firms in the
same industry.
Answer (B) is incorrect
because a merger
between a
manufacturer and its
supplier or distributor is a
vertical merger.
Answer (C) is incorrect
because a merger
between
firms in different
industries is a
conglomerate merger.
Answer (D) is incorrect
because a merger
between
firms in different stages
is
vertical.
[118] Source: CMA 0697
1-1
Answer (A) is correct. A
large capital outlay
necessary to enter an
industry is an entry
barrier.
Entry barriers are
characteristic of
monopolistic
competition, oligopoly,
and monopoly. In these
market structures, the
barriers are successively
more
difficult to overcome,
with the strongest
barriers
existing in a monopoly
structure.
 Answer (B) is incorrect
because the minimum Answer (D) is incorrect
efficient scale is the because the production
lowest output at which possibility boundary is
long-term a macroeconomic
average unit cost is concept. It
minimized. A natural depicts the short-run
monopoly maximum gross domestic
occurs when only one product obtainable
firm can produce at the given full production and
MES. full
The reason is that employment of existing
economies of scale can resources (land, labor,
continue to capital, and
be obtained at output entrepreneurial ability).
levels in excess of the
total
market demand. [119] Source: CMA 0697
Accordingly, the lowest 1-2
unit costs
are achieved when one Answer (A) is incorrect
producer exists. because a natural
monopoly
Answer (C) is incorrect exists when economic
because a barrier to or technical conditions
entry permit
may be created by the only one efficient
firms already operating in supplier. It arises when
the economies
industry. An example is of scale are very great,
an ongoing advertising that is, when very large
campaign.
 operations are needed because an
to achieve low unit costs oligopolistic industry
and usually has
prices. Thus, the unit substantial economies
cost of meeting demand of scale. Hence, a new
is entrant
minimized when the needs to begin as a
industry has one firm. large producer. Other
barriers,
Answer (B) is incorrect such as existing firms'
because a cartel is a control of technology or
group of raw
oligopolistic firms that materials, the need for
have joined together for substantial advertising,
price-fixing purposes. or
The practice is illegal costly licensing
except in requirements, may make
international markets. entry
difficult.
Answer (C) is correct.
An oligopoly is Answer (D) is incorrect
characterized because monopolistic
by a few firms in the competition is
industry (but more than characterized by a
one). relatively large
Prices tend to be rigid number of firms in the
because of the industry, differentiated
interdependence products, relatively
among firms. Entry is easy entry into the
difficult market, and
large amounts of
nonprice competition.
 Answer (B) is incorrect
because superior
[120] Source: CMA 0697 (normal)
1-3 goods are defined as
those for which demand
Answer (A) is correct. is
The increase in prices at positively correlated
the with income.
movie theater caused
consumers to demand Answer (C) is incorrect
fewer because sales of a
movies at the theater complementary good
and more movies at the are negatively correlated
video with
store (where prices changes in the price of
were unchanged). Thus, its complement. For
cross-elasticity of example,
demand existed because sales of tennis balls
the decrease with an
percentage change in increase in
quantity demanded of tennis racquet prices.
videos
was correlated with the Answer (D) is incorrect
percentage change in the because public goods are
price of movie theater characterized by the
tickets. The correlation difficulty of excluding
was individuals
positive, so the goods from their benefits.
are substitutes. Examples are national
defense
and public parks.

[121] Source: CMA 0697
1-4
Answer (A) is incorrect
because $90.02 is the
total
fixed cost.
Answer (B) is incorrect
because $168 is the total
variable cost.
Answer (C) is correct. If
seven units can be
produced at an average
cost of $36.86 each,
multiplying that amount
by seven produces the
total
cost of $258.02.
Answer (D) is incorrect
because $280 is the total
cost if average total
cost for seven units were
$40.00.
[122] Source: CMA 0697
1-5
Answer (A) is incorrect
because $23.50 is the
variable cost of the
eighth unit.
Answer (B) is incorrect
because $23.75 is the
variable cost of the
ninth unit.
Answer (C) is correct.
Marginal cost is the
incremental cost of
producing one additional
unit.
Thus, the marginal cost
of the ninth unit is the
increment over the
total cost for eight units.
The total
cost for eight units at
$34.75 each is $278, and
the
total cost for nine units
at $33.75 each is
$303.75, so
the total cost for nine
units is $25.75 greater
than the
total for eight units.
This $25.75 is the
marginal cost
 of the ninth unit. elasticity coefficient is
greater than one, demand
Answer (D) is incorrect is
because $33.75 is the elastic. If the
average cost per unit coefficient is less than
for nine units. one, demand is
inelastic. If elasticity is
calculated as the change
[123] Source: CMA 0697 over
1-6 the average, the
coefficient for senior
Answer (A) is incorrect citizens
because weekday indicates that demand
demand is is elastic.
elastic.
(150 - 82) ÷ [(150 +
Answer (B) is incorrect 82) ÷ 2]
because weekend ------------------------------ =
demand is 2.05
inelastic. (8 - 6) ÷ [(8 + 6) ÷
2]}
Answer (C) is correct. The coefficient for
The price elasticity of weekends indicates that
demand demand is
is the percentage inelastic.
change in quantity
demanded (223 - 221) ÷ [(223 +
divided by the 221) ÷ 2]
percentage change in -------------------------------
price. If the = .03
(20 - 15) ÷ [(20 + 15)
÷ 2]

Answer (D) is incorrect
because weekday
demand is
elastic, and weekend
demand is inelastic.
[124] Source: CMA 0697
1-17
Answer (A) is incorrect
because vertical
integration is
the combination of a
company with a supplier
or a
customer.
Answer (B) is incorrect
because market
concentration is the
degree to which a few
producers
dominate an industry.
Answer (C) is correct.
Entry barriers exist in all
market structures other
than perfect competition.
The
fewer the firms in an
industry, the greater the
barriers
tend to be. Entry
barriers include the
existence of
substantial economies
of scale (low unit costs
can be
achieved only by large
producers). They also
include
barriers created by
existing firms. For
example, large
advertising
expenditures may be
necessary to
compete. Control of
raw materials or
technology is
another barrier.
Consequently, patents
held by
existing firms may
serve as an entry barrier
because
they prevent potential
competitors from using
certain
 technology. Patents are same or similar
rights granted by the activities.
federal
government to Answer (B) is incorrect
inventors to allow them because the purchase of
the exclusive a
use of their inventions grocery store by
for a specified period. another similar store,
whether or not
Answer (D) is incorrect in the same market, is a
because a patent is a horizontal merger, a
contract between the combination of two
government and an companies that engage in
inventor. the
There is no collusion. same or similar
activities.

[125] Source: CMA 0697 Answer (C) is incorrect

1-18 because a hot dog
producer's purchase of
Answer (A) is incorrect a soft drink manufacturer
because the purchase of is a
a conglomerate merger, a
grocery store by combination of
another similar store, companies in
whether or not unrelated industries.
in the same market, is a
horizontal merger, a Answer (D) is correct. A
combination of two vertical merger is a
companies that engage in combination of two
the companies, one of which
supplies
 inputs for the other. A cost of the first unit of
brewer's purchase of a production.
glass
company is an Answer (D) is incorrect
example. The glass because $180 is the
company could average
supply glass for the cost of production for
brewer's bottles. two units.

[126] Source: Publisher [127] Source: Publisher

Answer (A) is incorrect Answer (A) is correct. A

because $100 is the fixed firm should employ inputs
cost of production. such that the marginal
products per dollar of
Answer (B) is correct. input are
Marginal cost is the equal. Because the
additional wage rate increased by
cost of producing one more than
more unit of output. the rental rate, the
Because marginal product of labor
total cost increased was
from $250 to $360, the reduced with respect to
marginal the marginal product of
cost of the second unit equipment. By using
is $110. more equipment and less
labor,
Answer (C) is incorrect the company's marginal
because $150 is the product for equipment
marginal will be
 reduced and its
marginal product for
labor will rise
until the two are equal.
Answer (B) is incorrect
because the company
should
use relatively less labor
than before. Labor costs
went up at a greater
rate than equipment
costs.
Answer (C) is incorrect
because the company
should
not decrease the
amounts of both inputs if
it wishes to
maintain output and
profitability.
Answer (D) is incorrect
because the company
has an
incentive to increase
the equipment-output
ratio.
[128] Source: Publisher
Answer (A) is incorrect
because revenue should
rise
as the price falls when
elasticity exceeds 1.0.
Answer (B) is incorrect
because revenue should
rise
as the price falls when
elasticity exceeds 1.0.
Answer (C) is correct.
Price elasticity is the
percentage change in
quantity demanded
divided by
the percentage change
in price. An elasticity of
2.5
means that the change
in demand will increase
by
250% of any change in
price measured in
absolute
terms (the minus sign is
ignored). Hence, a 5%
price
 reduction increases imputed interest at 12%
demand by 12.5% (2.5 x of shareholders' equity is
5%). subtracted from the
accounting profit.
Answer (D) is incorrect Imputed
because the price decline interest is $60,000 for
will A, $36,000 for B, and
lead to increased $108,000 for C.
demand if elasticity is Accordingly, Company B
greater than has the
1.0. highest economic profit
($60,000 accounting
income
[129] Source: Publisher - $36,000 interest on
capital = $24,000).
Answer (A) is incorrect
because Company A has Answer (C) is incorrect
a because Company C's
negative economic economic profit is
profit ($30,000 - $60,000 $12,000 ($120,000 -
= $108,000).
-$30,000).
Answer (D) is incorrect
Answer (B) is correct. because Company B has
Economic profit is the the
excess highest economic
of revenues over profit.
economic costs,
including costs for
materials, labor, and [130] Source: Publisher
the cost of capital. Thus,
 Answer (A) is incorrect
because Company A's
$30,000 income is less
than that of Company C.
Answer (B) is incorrect
because Company B's
$60,000 income is less
than that of Company C.
Answer (C) is correct.
Accounting income was
given
for each company.
Company C had the
highest
accounting income at
$120,000.
Answer (D) is incorrect
because the three
companies
all have different levels
of accounting income.
[131] Source: Publisher
Answer (A) is incorrect
because demand would
be 1
when the price is $6.
Answer (B) is correct.
This type of problem is
solved
by means of trial and
error. Check each of the
answer alternatives to
determine whether both
points
represent a level of
demand for a given price.
Answer
(B) is correct because
total demand would be 3
at a
price of $5, and total
demand would be 17 (5 +
9+
3) at a price of $1.
Answer (C) is incorrect
because demand would
be
6, not 4, when the price
is $4, and demand would
be
14, not 12, when the
price is $2.
Answer (D) is incorrect
because demand would
be 6
 when the price is $4 is calculated by
and 17 when the price is dividing the percentage
$1. change in
quantity demanded by
the percentage change in
[132] Source: Publisher price. The numerator
and denominator are
Answer (A) is incorrect computed
because 1.67 is the as the change over the
inverse average, which results in
of the elasticity. the
same percentage
Answer (B) is incorrect regardless of whether
because 1.06 is the result there is an
of increase or a decrease.
adding the 6% quantity Thus, the change in
decline to 1. quantity
of 3,000 units (51,500 -
Answer (C) is incorrect 48,500) divided by the
because the price average of 50,000
elasticity of [(51,500 + 48,500) ÷ 2]
demand is found by equals
dividing the 6% quantity 6%. Dividing the 6%
decline quantity decline by the
by the 10% price 10%
increase, not by adding price increase
them. produces an elasticity of
0.6.
Answer (D) is correct.
The price elasticity of
demand [133] Source: Publisher
 Answer (A) is incorrect of 1,000 units (3,500 -
because 1/3 represents 2,500) divided by the
the average of 3,000
increase in quantity [(3,500 + 2,500) ÷ 2]
sold. produces a
quantity increase of
Answer (B) is incorrect 1/3. The $.50 price
because 3/2 is the decline
inverse of divided by the average
price elasticity. price of $1 produces a
price
Answer (C) is incorrect decline of 50%. Dividing
because 1 is based on the quantity increase by
the the
original quantity and price change (1/3 ÷ .5)
price rather than the equals a price elasticity
average of
quantity and price. 2/3.

Answer (D) is correct.

The price elasticity is [134] Source: Publisher
calculated by dividing
the percentage change in Answer (A) is incorrect
quantity by the because 3.00 is the
percentage change in inverse
price. The of the price increase
numerator and divided by the original,
denominator are not the
computed as the average, price.
change over the
average. Thus, the
change in quantity
 Answer (B) is incorrect $1 divided by the
because 2.71 is the average price of $3.50
inverse results in a
of the correct price increase of
coefficient. 28.571%. Dividing
10.526% by
Answer (C) is correct. 28.571% results in an
The price elasticity is elasticity coefficient of .
calculated by dividing 3684,
the percentage change in or .37 rounded.
quantity demanded by
the percentage change in Answer (D) is incorrect
price. The numerator because 0.33 would be
and denominator are both the
computed as the percentage change in
change over the average, price if the original, not
which the
results in the same average, price were
percentage regardless of used in the denominator.
whether
there is an increase or
a decrease. Thus, the [135] Source: Publisher
change
in quantity demanded Answer (A) is incorrect
of 100 units divided by because $22 - $18 has a
the coefficient of 3.335
average quantity (.667 ÷ .2).
demanded of 950
produces a Answer (B) is incorrect
quantity decrease of because $18 - $14 has a
10.526%. The price coefficient of 2.668
increase of (.667 ÷ .25).
 Answer (C) is incorrect
because $14 - $10 has a
coefficient of 1.2 (.4 ÷ .
333).
Answer (D) is correct.
Inelasticity is a condition
in
which the elasticity
coefficient is less than
one. Thus,
the coefficient should
be calculated for each of
the
ranges. As the price
drops from $10 to $6,
demand
increases from 600 to
800. The quantity
increased by
28.57% (200 ÷ 700). The
price decline was 50%
($4 ÷ $8). Dividing
28.57% by 50% produces
an
elasticity coefficient
of .571, which is less
than one.
[136] Source: Publisher
Answer (A) is correct.
Opportunity cost is
defined as
the return available
from the best alternative
investment. Since the
interest on the $10,000
would
be $500, that is the
opportunity cost of the
investment in the
saloon.
Answer (B) is incorrect
because the dividend
would
be the return on the
new investment, not the
opportunity cost.
Answer (C) is incorrect
because the $10,000 is
the
cost of the investment,
not the opportunity cost.
Answer (D) is incorrect
because only the $500 of
return given up is the
opportunity cost.

[137] Source: Publisher
Answer (A) is incorrect
because the firm will
break
even at 5 units.
Answer (B) is correct. A
firm should produce at
the
level where marginal
cost equals marginal
revenue. At
6 units, marginal
revenue of $190 equals
the marginal
cost. Since average
total cost is also $190,
the firm
will break even.
Answer (C) is incorrect
because the firm will lose
money at 8 units, as the
average total cost will be
less
than revenue.
Answer (D) is incorrect
because the firm will lose
money at 8 units, as the
average total cost will be
less
than revenue.
[138] Source: Publisher
Answer (A) is incorrect
because marginal costs
are
less than marginal
revenue; thus, a rational
firm will
increase production.
Answer (B) is incorrect
because marginal costs
are
less than marginal
revenue; thus, a rational
firm will
increase production.
Answer (C) is correct.
The firm will produce 9
units
because at that level
marginal cost equals
marginal
 revenue. At $290 per at the level where
unit, revenue will be marginal cost equals
$2,610. marginal
At $205 per unit, revenue. Competitors
expenses will be $1,845, are in long-run
leaving equilibrium
$765 profit. when price equals
minimum average cost.
Answer (D) is incorrect All of this
because marginal costs occurs at a price of
are $190.
higher than marginal
revenue; thus, profit Answer (C) is incorrect
would be because $200 is higher
less than with output of than
9 units. the minimum average
total cost.

[139] Source: Publisher Answer (D) is incorrect

because $230 is higher
Answer (A) is incorrect than
because $110 is lower the minimum average
than total cost.
the average total cost
at all levels of
production. [140] Source: Publisher

Answer (B) is correct. Answer (A) is correct.

The equilibrium price will At a price of $3, the
be quantity
 demanded will be 10,
while the quantity Answer (A) is incorrect
supplied will because the price of a
be 30. Thus, there will new
be a surplus of 20 units. bicycle is irrelevant
since the bicycle
Answer (B) is incorrect purchased was
because, at a price floor not new.
of
$3, demand will exceed Answer (B) is incorrect
supply by 20 units, because $15 results from
resulting subtracting both the
in a surplus. $30 and $55 from the
price of a
Answer (C) is incorrect new bicycle.
because, at a price floor
of Answer (C) is incorrect
$3, demand will exceed because $45 results from
supply by 20 units, deducting the
resulting maximum price from the
in a surplus. new price
without regard to the
Answer (D) is incorrect price actually paid.
because, at a price floor
of Answer (D) is correct.
$3, demand will exceed The consumer surplus is
supply by 20 units, the
resulting excess of price over
in a surplus. the amount a consumer
is willing

[141] Source: Publisher

 to pay. Subtracting the price at which quantity
$30 price from the $55 supplied and quantity
Jimbo demanded are equal. At
was willing to pay a price of $39, supply and
produces a consumer demand are equal at
surplus of 320 units.
$25.

[143] Source: Publisher

[142] Source: Publisher
Answer (A) is incorrect
Answer (A) is incorrect because quantity
because quantity demanded
demanded exceeds quantity
exceeds quantity supplied at this price.
supplied at this price.
Answer (B) is incorrect
Answer (B) is incorrect because quantity
because quantity demanded
demanded exceeds quantity
exceeds quantity supplied at this price.
supplied at this price.
Answer (C) is correct.
Answer (C) is incorrect The equilibrium price is
because quantity the
demanded price at which quantity
exceeds quantity supplied and quantity
supplied at this price. demanded are equal. At
a price of $42, supply and
Answer (D) is correct. demand are equal at
The equilibrium price is 285 units.
the
 Answer (D) is incorrect
because, at $45, the
quantity
supplied is still greater
than the quantity
demanded.
[144] Source: Publisher
Answer (A) is incorrect
because quantity
demanded
exceeds quantity
supplied at this level.
Answer (B) is incorrect
because quantity
demanded
exceeds quantity
supplied at this level.
Answer (C) is incorrect
because quantity
demanded
exceeds quantity
supplied at this level.
Answer (D) is correct.
The equilibrium quantity
is the
amount at which
quantity demanded and
quantity
supplied are equal. At a
price of $45, the level
demanded will be 395,
the same as the quantity
supplied.
[145] Source: Publisher
Answer (A) is incorrect
because perfect
inelasticity
occurs when the
coefficient is zero.
Answer (B) is correct. If
the elasticity coefficient
is
greater than one,
demand is classified as
elastic.
Since the percentage
change in quantity
demanded is
10% and the price
change is 5%, the
elasticity
coefficient is 2.0 (10%
÷ 5%).
 increased 10%, the
Answer (C) is incorrect quantity demanded would
because unitary decline
elasticity by less than 10%.
refers to a condition in Therefore, total revenues
which the coefficient is would
equal increase.
to one.
Answer (C) is incorrect
Answer (D) is incorrect because an inelastic
because an inelastic demand
condition exists when would lead to increased
the coefficient is less revenues as prices rise.
than one.
Answer (D) is incorrect
because demand, not
[146] Source: Publisher revenues, is inelastic.

Answer (A) is incorrect

because an inelastic [147] Source: Publisher
demand
would lead to increased Answer (A) is correct.
revenues as prices rise. Elasticity measures the
percentage change in
Answer (B) is correct. quantity demanded
Inelasticity refers to the compared
condition in which the to a percentage change
percentage change in in price. The numerator
quantity (quantity change) and
is less than the the denominator (price
percentage change in change)
price. If price
 are computed as the failing to use average
change over the average. quantities and prices.
The
quantity change Answer (D) is incorrect
between points J and K because 2.50 results
is 50. from
Dividing 50 by the failing to use average
average of 75 produces a quantities and prices.
quantity
increase of 66.7%. The
price decline of $4 [148] Source: Publisher
divided
by the average of $8 is Answer (A) is incorrect
a price change of 50%. because, at a price of
Dividing 66.7% by 50% $40,
produces an elasticity of demand is 2,000 and
1.33, which is greater supply is 8,000.
than one. A demand
greater Answer (B) is incorrect
than one means because, at $38, there is
demand is defined as a
elastic. surplus of 1,500 units.

Answer (B) is incorrect Answer (C) is correct.

because .75 is the Equilibrium is defined as
inverse of the
the elasticity level at which supply
coefficient. and demand are equal.
Equilibrium occurs at a
Answer (C) is incorrect price of $36 when supply
because .40 results from and
demand are both 4,000.
 will be 2,400 units,
Answer (D) is incorrect while supply will be 7,000
because, at a price of units.
$34, Thus, there will be a
demand exceeds supply surplus of 4,500 units.
by 1,500 units.

[150] Source: Publisher

[149] Source: Publisher
Answer (A) is incorrect
Answer (A) is incorrect because more Y would
because a shortage is not increase costs more
an than would be saved by
option shown on the the
chart. decline in X for a given
level of utility.
Answer (B) is incorrect
because a surplus of Answer (B) is incorrect
6,000 because both products
pounds will occur at a cannot be increased
price of $44. without violating budget
constraints.
Answer (C) is incorrect
because there is a Answer (C) is correct.
surplus, Utility is maximized when
not a shortage, since a
supply exceeds demand consumer's budget line
at a is tangent to the highest
price of $42. possible indifference
curve. A consumer should
Answer (D) is correct. be
At a price of $42, demand
 indifferent between 2
units of Y (2 x 45 = 90)
and 3
units of X (3 x 30 = 90).
Since the 3 units of X
cost
less (3 x $10 = $30)
than 2 units of Y (2 x $20
= (8 + 7 + 6 + 5 + 4 + 10 +
$40), the consumer
would want more units of
X and
fewer units of Y.
Answer (D) is incorrect
because an increase in X
will
produce greater utility
for a given budget.
[151] Source: Publisher
Answer (A) is incorrect
because it produces a
total
utility of only 45.
Answer (B) is correct.
The solutions approach is
to
calculate the total
utility provided by each
of the
answer combinations
using a trial-and-error
approach. 5M and 2N
produces a total utility of
48
8). This answer is the
highest of any of the
possible combinations.
Answer (C) is incorrect
because it produces a
total
utility of only 45.
Answer (D) is incorrect
because it produces a
total
utility of only 36.
[152] Source: Publisher
Answer (A) is incorrect
because the maximum
utility
is 48.
 Answer (B) is incorrect
because the maximum
utility
is 48.
Answer (C) is correct.
Without violating the
budget
constraint, utility can
be maximized at 48.
Maximum
utility occurs when the
quantity of M is 5 and N is
2.
Answer (D) is incorrect
because the maximum
utility
is 48.
[153] Source: Publisher
Answer (A) is correct.
All of the answer
combinations are
within the income
constraint. Thus,
the solutions approach
is to determine which
combination maximizes
total utility. A
combination of
6M and 3N produces a
total utility of 57 (8 + 7 +
6
+ 5 + 4 + 3 + 10 + 8 + 6).
Answer (B) is incorrect
because it produces a
total
utility of only 54.
Answer (C) is incorrect
because it produces a
total
utility of only 46.
Answer (D) is incorrect
because it produces a
total
utility of only 54.
[154] Source: Publisher
Answer (A) is incorrect
because the consumer is
not
in equilibrium when she
is buying products whose
 marginal utility are not
the same per dollar of
utility.
Answer (B) is incorrect
because product A is
higher
priced per unit of
utility.
Answer (C) is correct. A
rational consumer's
objective is to
maximize the total utility
and the
marginal utility on the
last dollar of income.
Since
products A and B sell
for different prices, they
should
not have the same
utility. B offers the same
utility of 3
at a price of $4. Thus, it
is logical for the
consumer to
purchase more of B,
which offers the same
utility at a
lower price. It can be
concluded that she
should buy
less of A and more of B.
Answer (D) is incorrect
because a reduction in
purchases will reduce
total utility.
[155] Source: Publisher
Answer (A) is correct. A
consumer will equalize
the
marginal utility for each
dollar available. Thus, if
the
marginal utility of X is
half that of Y, then X
must
have a price equal to
half that of Y. Since Y is
$8, X
must sell for $4.
Answer (B) is incorrect
because X must be less
than
Y since it has a lower
marginal utility.

Answer (C) is incorrect
because X must be less
than
Y since it has a lower
marginal utility.
Answer (D) is incorrect
because the price of X
will
be half, not double, that
of Y.
[156] Source: Publisher
Answer (A) is incorrect
because it violates the
income constraint.
Answer (B) is incorrect
because total utility is
only
43.
Answer (C) is correct.
With an income of $54, a
consumer can purchase
3 CDs (a total of $36) and
2 because 55 is available
tapes ($18), resulting in
a total utility of 51 (15 +
36).
Answer (D) is incorrect
because it violates the
income constraint.
[157] Source: Publisher
Answer (A) is incorrect
because 47 is less than
the
51 available under the
correct option.
Answer (B) is correct.
With an income of $54, a
consumer can purchase
3 CDs (a total of $36) and
2
tapes ($18), resulting in
total utility of 51 (15 for
the 2
tapes and 36 for the 3
CDs).
Answer (C) is incorrect
only
 if the income constraint Answer (D) is incorrect
is violated. because it violates the
income constraint.
Answer (D) is incorrect
because 61 is available
only [159] Source: Publisher
if the income constraint
is violated. Answer (A) is incorrect
because marginal cost
will be
[158] Source: Publisher less than average total
cost.
Answer (A) is incorrect
because the total utility Answer (B) is incorrect
is because marginal cost
only 49 (21 + 28). will be
equal to average
Answer (B) is incorrect variable cost.
because it violates the
income constraint. Answer (C) is correct.
Since fixed costs are
Answer (C) is correct. fixed in
Of the combinations total, they will decline
given, per unit as production
answers (B) and (D) increases. Thus,
violate the income average total cost will
constraint. A decrease
combination of 3 tapes when output is
and 3 CDs will maximize increased.
utility at 55 (19 + 36).
 Answer (D) is incorrect
because average total
cost
will decline since fixed
costs are constant in
total.
[160] Source: Publisher
Answer (A) is correct.
Since the marginal
product of
labor is greater per
dollar of cost (10 ÷ $5 = 2
units
per dollar) than the
marginal product of
capital (5 ÷
$10 = .5 unit per dollar,
the firm should use more
labor and less capital).
Answer (B) is incorrect
because capital is more
expensive than labor
per unit of output.
Answer (C) is incorrect
because a reduction in
both
capital and labor would
reduce output.
Answer (D) is incorrect
because it would be more
advantageous to use
more labor and less
capital.
[161] Source: Publisher
Answer (A) is incorrect
because returns are
increasing.
Answer (B) is incorrect
because returns are
increasing.
Answer (C) is correct. If
output increases at a
greater
rate than inputs, the
firm is experiencing
increasing
returns to scale, or
economies of scale.
Answer (D) is incorrect
because the firm is
 experiencing constant when a
economies of scale. doubling of inputs results
in less than
a doubling of output.
[162] Source: Publisher

Answer (A) is incorrect [163] Source: Publisher

because returns are
decreasing when Answer (A) is incorrect
output does not rise as because the $200,000 of
fast as implicit costs is not
inputs. deductible in computing
accounting income.
Answer (B) is correct.
When output increases at Answer (B) is correct.
a Implicit costs are
smaller percentage amounts that
than inputs, the firm is would have been
experiencing received if self-owned
decreasing returns to resources
scale, or had been used outside
diseconomies of scale. the firm's business.
Economic
Answer (C) is incorrect profit is pure profit, or
because the firm is the excess of revenue
experiencing over
diseconomies of scale. both explicit and
implicit costs. Revenues
Answer (D) is incorrect of $2
because returns are not million minus explicit
costs of $700,000 result
in
 accounting income of
$1.3 million. That amount
is
reduced by the
$200,000 of implicit costs
to arrive at
economic profit of $1.1
million.
Answer (C) is incorrect
because economic
income
will be less than
accounting income when
there are
implicit costs.
Answer (D) is incorrect
because implicit costs
reduce
accounting income
rather than increase it.
[164] Source: Publisher
Answer (A) is correct. If
total variable cost is
$600
when 4 units are
produced, the average
would be
$150 ($600 ÷ 4).
Answer (B) is incorrect
because $200 is the
average
when 5 units are
produced.
Answer (C) is incorrect
because $250 is based on
a
cost of $1,000, which
was for 5 units.
Answer (D) is incorrect
because $600 is the total
cost, not the average
cost.
[165] Source: Publisher
Answer (A) is incorrect
because $150 represents
only the variable costs.
Answer (B) is incorrect
because $250 represents
only the fixed costs.
Answer (C) is correct.
The average total cost
 includes both fixed and Answer (B) is incorrect
variable costs. Fixed because $300 is the
costs average
total $1,000, which variable cost of 6 units.
would be $250 per unit
when Answer (C) is incorrect
production is 4. Add the because $400 is the
$250 of average fixed average
cost variable cost for 7
to the $150 of average units.
variable cost ($600 ÷ 4)
to Answer (D) is correct.
arrive at a $400 The marginal cost of the
average total cost. seventh unit would be
equal to the increment in
Answer (D) is incorrect total
because $600 represents costs over what it costs
the to produce 6 units. Fixed
total of variable costs costs are not
rather than the average considered since they do
cost. not, by
definition, increase
with changes in
[166] Source: Publisher production. Total
variable costs increase
Answer (A) is incorrect from $1,800 to $2,800, an
because $100 is the increment of $1,000.
marginal The $1,000 is the
cost of the fourth unit. marginal cost
of the seventh unit.
[167] Source: Publisher
Answer (A) is incorrect
because $30,000
represents
only the fixed costs.
Answer (B) is incorrect
because $50,000
represents
only the variable costs.
Answer (C) is incorrect
because the total fixed
costs
are $30,000, not $3.
Answer (D) is correct. A
firm's total costs consist
of
both variable and fixed
costs. If the average
fixed
cost for 10,000 units is
$3, the total fixed costs
are
$30,000. Adding the
$30,000 of fixed costs to
the
$50,000 of variable
costs produces total
costs of
$80,000.
[168] Source: Publisher
Answer (A) is incorrect
because the average
variable
cost is added to, not
subtracted from, the
average
fixed cost.
Answer (B) is incorrect
because $3 is the
variable
cost, not the total cost.
Answer (C) is incorrect
because $4 is only the
fixed
cost per unit, not the
total cost.
Answer (D) is correct.
At a production level of
1,000
units, the average fixed
cost is $4 ($4,000 ÷ 1,000
units). Adding the $4 of
average fixed cost to the
$3
 of average variable
cost produces a total
cost of $7.
[169] Source: Publisher
Answer (A) is incorrect
because the marginal
cost
cannot be accurately
determined from the
information
given, but is most likely
equal to the $80 of unit
variable cost.
Answer (B) is incorrect
because the average
total
cost is $120.
Answer (C) is incorrect
because the average
fixed
cost is $40.
Answer (D) is correct. If
total variable cost is
$400
for 5 units, the average
variable cost is $80. The
average fixed cost is
$40 ($200 ÷ 5), and the
average total cost is
$120 ($80 + $40).
[170] Source: Publisher
Answer (A) is correct.
For profit maximization, a
firm
operating under pure
competition should
equate price
to marginal cost. Since
price and marginal cost
are
both $20, the firm
should not change
output.
Answer (B) is incorrect
because a firm should not
decrease output when
price is at least equal to
marginal cost.
Answer (C) is incorrect
because there is no
incentive
 to increase production
when marginal cost is
equal to
selling price.
Answer (D) is incorrect
because a firm should not
shut down as long as
price exceeds variable
cost; any
excess of price over
variable cost provides a
contribution toward the
coverage of fixed costs.
[171] Source: Publisher
Answer (A) is incorrect
because a firm in pure
competition should
increase production as
long as the
marginal cost is less
than selling price.
Answer (B) is correct. A
firm should continue
increasing production
as long as marginal cost
is less
than selling price. Profit
is maximized when
marginal
cost equals selling
price.
Answer (C) is incorrect
because a firm should not
shut down as long as
selling price exceeds
variable
cost.
Answer (D) is incorrect
because a firm in pure
competition should
continue increasing
production as
long as the marginal
cost is less than selling
price.
[172] Source: Publisher
Answer (A) is incorrect
because the monopolist
is
not at the profit-
maximizing level when
marginal
 revenue is lower than Answer (A) is incorrect
marginal cost. because the demand
curve
Answer (B) is incorrect would be perfectly
because a firm should not elastic.
shut down as long as
marginal revenue Answer (B) is incorrect
exceeds because the demand
variable cost. curve
would be perfectly
Answer (C) is incorrect elastic.
because the firm should
not Answer (C) is correct.
increase production The demand curve faced
when marginal cost is by a
greater firm operating under
than marginal revenue. perfect competition is
perfectly
Answer (D) is correct. A elastic (horizontal)
monopolist should not because the firm is a
continue producing at price taker. It
the current level when must sell at the market
marginal price. If the firm tries to
revenue is less than increase its price,
marginal cost. demand will drop to zero.
Decreasing output
will result in increased Answer (D) is incorrect
profits. because the curve would
be
perfectly elastic.
[173] Source: Publisher
[174] Source: Publisher
Answer (A) is incorrect
because the average
revenue
for 11 units is $7.
Answer (B) is incorrect
because the average
revenue
for producing 11 units
is $7.
Answer (C) is correct. If
the revenue for 11 units
is
$77, and the revenue
for 10 units is $60, there
is
marginal revenue of
$17 on the eleventh unit.
Answer (D) is incorrect
because total revenue is
$77;
marginal revenue is
$17.
[175] Source: Publisher
Answer (A) is incorrect
because increasing price
will
result in lower demand
for a normal good.
Answer (B) is correct. A
monopolist should
continue
increasing production
until marginal cost is
equal to
marginal revenue. Thus,
decreasing price and
increasing production
will enhance profitability.
Answer (C) is incorrect
because decreasing price
and output will reduce
profits.
Answer (D) is incorrect
because increasing price
will
reduce demand.
[176] Source: Publisher
Answer (A) is incorrect
because, at this level,
 marginal costs are less
than marginal revenues. [177] Source: Publisher

Answer (B) is incorrect Answer (A) is incorrect

because, at this level, because, at a price of
marginal costs are less $1,000, only 1 unit will
than marginal revenues. be sold.

Answer (C) is correct. Answer (B) is incorrect

Profit on 1 unit would be because, at a price of
$500 ($1,000 of $600,
revenue minus $500 only 2 units will be sold.
cost). Profit for
2 units would be $680 Answer (C) is correct.
($1,200 - $520). For 3 Profits will be maximized
units, at a
profit would be $920 production level of 3
($1,500 - $580). This is units. To sell 3 units, the
the price
maximum profit since, would have to be set at
at production levels of 4 $500.
or
more, marginal cost Answer (D) is incorrect
exceeds marginal because, at a price of
revenue. $400,
sales will be 4 units,
Answer (D) is incorrect but profits will be lower
because profit is less than at 3
than units.
when 3 units are
produced.
[178] Source: Publisher
 pay for 4 units.
Answer (A) is incorrect
because $1,600 would be
the total revenue based [179] Source: Publisher
on the price that the
fourth Answer (A) is incorrect
customer would be because it produces
willing to pay. lower
profits than would the
Answer (B) is correct. sale of 6 units.
The first customer is
willing to Answer (B) is correct. A
pay $1,000, the second monopolist will keep
customer $600, the third producing as long as
customer $500, and the marginal revenues
fourth customer $400, for exceed
a marginal costs. This
total revenue of $2,500. condition exists at 6
units, but not
Answer (C) is incorrect at 7. Thus, the optimal
because $2,800 would be output is at 6 units with a
the revenue if five unit
customers paid their price of $400. Any other
maximum level will result in lower
amount. profits.

Answer (D) is incorrect Answer (C) is incorrect

because it is based on because, at these levels,
the marginal revenues are
maximum amount that less than marginal costs;
the first customer is thus,
willing to
 profits are less than at Answer (C) is incorrect
6 units. because the only cost
that
Answer (D) is incorrect might be related to
because, at these levels, marginal revenue would
marginal revenues are be
less than marginal costs; marginal cost.
thus,
profits are less than at Answer (D) is correct. If
6 units. a monopolist can
practice
price discrimination,
[180] Source: Publisher any marginal revenue will
be
Answer (A) is incorrect equal to the price
because the only cost charged to the next
that customer.
might be related to
marginal revenue would
be [181] Source: Publisher
marginal cost.
Answer (A) is incorrect
Answer (B) is incorrect because 6 units produce
because the only cost less
that profit for the price-
might be related to discriminating
marginal revenue would monopolist than
be does the sale of 8 units.
marginal cost.
Answer (B) is incorrect
because 7 units produce
less
 profit for the price-
discriminating
monopolist than
does the sale of 8 units.
Answer (C) is correct.
Even a price-
discriminating
monopolist must
evaluate the relationship
between
marginal cost and
marginal revenue. The
$300 of
marginal revenue at 8
units is greater than the
related
marginal cost of $230
($1,250 - $1,020). The
$250
marginal revenue on
the ninth unit is less than
the
$290 marginal cost
($1,540 - $1,250). Thus,
profit is
maximized at 8 units.
Answer (D) is incorrect
because the marginal
revenue
is less than the
marginal cost.
[182] Source: Publisher
Answer (A) is correct.
Without price
discrimination,
profits would be $1,560
($2,400 of revenues for 6
units - $840 costs). With
price discrimination,
profits
would be $2,550
($3,800 of revenues for 8
units -
$1,250 costs).
Answer (B) is incorrect
because $1,400 is the
difference in revenues,
not profits.
Answer (C) is incorrect
because $1,560 is the
profit
at 6 units.
Answer (D) is incorrect
because $2,550 is the
profit
 at 8 units.

[184] Source: Publisher

[183] Source: Publisher
Answer (A) is incorrect
Answer (A) is correct. because less labor
Marginal revenue product should be
is used.
marginal revenue ($8)
times the marginal Answer (B) is correct.
product (12 When marginal cost ($20)
units), or $96. exceeds marginal
revenue ($18), the firm
Answer (B) is incorrect should cut
because the marginal back the factors of
revenue production. Thus, less
product is the total for labor
12 units at $8 each. should be hired since
the last hour produces a
Answer (C) is incorrect $2 loss
because $10 is the cost ($20 - $18).
of
the additional Answer (C) is incorrect
production, not the because the additional
output. revenues of $18 do not
equate to profits since
Answer (D) is incorrect there
because $8 is the are additional costs.
marginal
revenue product for 1 Answer (D) is incorrect
unit, but 12 units were because the additional
produced.
 revenues of $18 do not rate is 8%.
equate to profits since
there Answer (D) is incorrect
are additional costs. because a buyer would
not
be willing to pay above
[185] Source: Publisher $46,296 when the
interest
Answer (A) is incorrect rate is 8%.
because a buyer would
not
be willing to pay above [186] Source: Publisher
$46,296 when the
interest Answer (A) is incorrect
rate is 8%. because two workers
would
Answer (B) is correct. result in lower profits
The present value of than would hiring five
$50,000 workers.
one year in the future is
$46,296 at 8% interest. Answer (B) is incorrect
Thus, a buyer should be because three workers
willing to pay that would result in lower
amount or profits than would hiring
less. five
workers.
Answer (C) is incorrect
because a buyer would Answer (C) is incorrect
not because four workers
be willing to pay above would
$46,296 when the
interest
 result in lower profits marginal cost, but this
than would hiring five is not true for the third
workers. worker.
Thus, only two workers
Answer (D) is correct. would be hired.
With five workers (at
total Answer (B) is incorrect
wages of $75), because marginal costs
production would be 44 would exceed marginal
units, and revenues.
revenues would be
$176 ($4 x 44). Profit Answer (C) is incorrect
would be because marginal costs
$101 ($176 - $75). Any would exceed marginal
lesser number of workers revenues.
would produce lower
profits. Note that the Answer (D) is incorrect
marginal because marginal costs
revenue of the fifth would exceed marginal
worker ($16) is greater revenues.
than the
$15 marginal cost.
[188] Source: Publisher

[187] Source: Publisher Answer (A) is incorrect

because two workers
Answer (A) is correct. would
At a wage rate of $35, not be as profitable as
the four workers.
marginal revenue of the
second worker exceeds Answer (B) is incorrect
the because three workers
 would not be as
profitable as four
workers.
Answer (C) is correct.
At a wage rate of $35 and
with a price increase to
$6, the marginal revenue
of
the fourth worker
exceeds the marginal
cost, but this
is not true for the fifth
worker. Thus, four
workers
would be hired.
Answer (D) is incorrect
because the marginal
revenue
produced by the fifth
worker would be less
than the
marginal cost.
[189] Source: Publisher
Answer (A) is incorrect
because the marginal
product
is 3 units, not $3.
Answer (B) is incorrect
because marginal
revenue is
for 3 units, not 1.
Answer (C) is incorrect
because the marginal
product
for the fourth unit of
resource is 3 units of
output, not
2.
Answer (D) is correct.
Since the fourth unit of
input
results in a marginal
product of 3 units, the
marginal
revenue product will be
$15 (3 units x $5).
[190] Source: Publisher
Answer (A) is incorrect
because 3 units would be
more profitable than 1.
 Answer (B) is correct. A
firm will produce as long
as
the marginal revenue
exceeds the marginal
cost. At
long-run equilibrium,
marginal cost will equal
marginal
revenue. At 3 units, the
marginal product is 4
units of
output, or $20. Thus,
marginal revenue equals
marginal cost.
Answer (C) is incorrect
because the marginal
revenue
is less than the $20
marginal cost.
Answer (D) is incorrect
because the marginal
revenue
is less than the $20
marginal cost.
[191] Source: Publisher
Answer (A) is incorrect
because $15 is total
revenue
for 15 units.
Answer (B) is incorrect
because $14.40 is total
revenue for 18 units.
Answer (C) is incorrect
because the marginal
revenue
product is negative, not
positive.
Answer (D) is correct.
Revenue totals $15 at 15
units
but will decline to
$14.40 if the price drops
to $.80.
Thus, the marginal
revenue product is a
negative $.60
($14.40 - $15.00).
[192] Source: Publisher
Answer (A) is incorrect
because labor is too
costly
 relative to capital. equal MRPs per dollar
of input, so there is no
Answer (B) is incorrect advantage to
because a reduction in expanding one resource
both at the expense
inputs would reduce of the other.
profits.
Answer (B) is incorrect
Answer (C) is correct. because the resources
The firm should use less have
labor equal MRPs per dollar
and more capital of input, so there is no
because capital offers a advantage to
greater expanding one resource
marginal product per at the expense
dollar (45 ÷ $15 = 3 per of the other.
dollar)
than does labor (10 ÷ Answer (C) is incorrect
$5 = 2 per dollar). because a reduction in
both
Answer (D) is incorrect resources would reduce
because an increased profits.
use of
capital would increase Answer (D) is correct.
profits. Because both resources
have
equal MRPs, and they
[193] Source: Publisher are positive, the firm
should
Answer (A) is incorrect use more of each
because the resources resource.
have