Multiple Choice Questions:
1.The price elasticity of demand is the ratio of the
a. absolute change in quantity demanded to the absolute change in price.
b. absolute change in price to the absolute change in quantity demanded.
c. percentage change in price to the percentage change in quantity demanded.
d. percentage change in quantity demanded to the percentage change in price.
2.If the percentage change in quantity demanded is greater than the percentage change in price, demand is
a. inelastic.
b. unit elastic.
c. elastic.
d. perfectly elastic.
e. perfectly inelastic.
3.A good will tend to have a low price elasticity of demand if
a. it has few substitutes.
b. a person spends a high percentage of his or her budget on it.
c. a person has a long period of time to adjust to price changes.
d. the good is expensive.
4.If demand is inelastic and price rises,
a. quantity demanded will remain unchanged.
b. total revenue will rise too.
c. total revenue will fall as the quantity demanded falls.
d. demand will fall.
e. supply will increase.
5.If the cross price elasticity of demand for good A with respect to good B is 0.87, then good A is
a. an inferior good.
b. a normal good.
c. a substitute for good B.
d. a complement to good B.
6.Income elasticity of demand for a normal good is
a. less than zero.
b. greater than zero.
c. equal to zero.
d. none of the above
7.Most economists say that the firm's goal or objective is to maximize
a. sales.
b. employment.
c. profits.
d. worker satisfaction.
e. none of the above
8.Utility is an artificial construct used as a means of measuring the
a. price of a good.
b. costs of producing a good.
c. difference between the price and the value of a good.
d. satisfaction one receives from the consumption of a good.
9.The law of diminishing marginal utility can be stated as follows:
a. As the amount of a good consumed increases, the sum of satisfaction received tends to decrease.
b. As the amount of a good consumed increases, the additional satisfaction gained from consuming additional units tends to decrease.
c. As the amount of a good consumed decreases, the additional satisfaction gained from consuming additional units tends to increase.
d. As the amount of a good consumed increases, the sum of satisfaction received tends to increase but at a diminishing rate.
e. b and d
a. 20
b. 18
c. 16
d. 14
e. 10
11.Suppose for a consumer the marginal utility (MU) of bread is 10 utils and the MU of milk is 20 utils; the price of bread is $1 and the price of milk is $1. Given this,
a. more utility per dollar is gained from consuming milk than bread.
b. more utility per dollar is gained from consuming bread than milk.
c. the same amount of utility per dollar is gained from consuming milk as bread.
d. the consumer is in consumer equilibrium.
12.If a person is receiving greater utility per dollar from consuming one good than another, it follows that he or she is
a. maximizing disutility.
b. not maximizing utility.
c. maximizing utility.
d. There is not enough information to answer the question.
13.Suppose a consumer is purchasing Coke (c) and pretzels (p) in quantities such that he is achieving consumer equilibrium. Then the price of Coke increases. Which of the following will be true?
a. MUC/PC = MUP/PP
b. MUC/PC > MUP/PP
c. MUC/PC < MUP/PP
d. We cannot say for certain what will happen to the MUC/PC relative to the MUP/PP.
14.Suppose a consumer is purchasing Coke and pretzels in quantities such that she is achieving consumer equilibrium. Then the price of Coke decreases. The consumer will likely __________ her consumption of Coke and the marginal utility of Coke will __________ while the total utility from Coke will __________.
a. increase; increase; increase
b. increase; decrease; decrease
c. increase; decrease; increase
d. decrease; increase; increase
e. decrease; decrease; decrease
15.The diamond-water paradox is illustrated by which of the following statements?
a. Water, a necessity, has a relatively low price whereas diamonds, usually a luxury, have a relatively high price.
b. Although water appears to have a relatively low price when compared to diamonds, in reality, it has a relatively higher price.
c. Although water appears to have a relatively low price when compared to diamonds, in reality, the prices are equal.
d. Although water appears to have a relatively low price when compared to diamonds, at the margin, water has the relatively higher price.
e. Although water appears to have a relatively low price when compared to diamonds, at the margin, the prices are equal.
16.To resolve the diamond-water paradox, it is important to note that under most circumstances,
a. the marginal utilities of water and diamonds are directly related.
b. the marginal utilities of water and diamonds are about the same.
c. the marginal utilities of water and diamonds are inversely related.
d. the marginal utility of water is higher than the marginal utility of diamonds.
e. the marginal utility of water is lower than the marginal utility of diamonds.
17.Economists believe that firms are formed when
a. the sum of what individuals can produce as a team is greater than the sum of what individuals can produce working alone.
b. the sum of what individuals can produce working alone is greater than the sum of what individuals can produce as a team.
c. what each individual can produce as a member of a team is greater than what each individual can produce working alone.
d. the sum of what individuals can produce as a team is equal to the sum of what individuals can produce working alone.
e. none of the above
18.Economists predict that the __________ the cost of shirking to an individual, the __________ shirking that individual will undertake, ceteris paribus.
a. lower; less
b. higher; less
c. lower; more
d. higher; more
e. b and c
19.A __________ is a form of business that is owned by one individual who makes all the business decisions, receives the entire profits, and is legally responsible for the debts of the firm.
a. partnership
b. corporation
c. proprietorship
d. limited partnership
e. none of the above
20.Which of the following is not an advantage of a corporation?
a. Owners have limited liability.
b. It has perpetual life.
c. It has better access to credit markets.
d. Profit is taxed twice.
21.If the owner of a firm earns zero economic profit, he or she has earned total revenue equal to his or her
a. implicit costs.
b. explicit costs.
c. accounting profit.
d. implicit costs plus explicit costs.
e. none of the above
22.In what sense are profit and loss signals?
a. They signal resources where to move.
b. They signal what goods consumers may want to buy and what goods they may not want to buy.
c. They are important for government and business accounting procedures.
d. a and b
e. all of the above
23.The law of diminishing marginal returns states that as ever larger amounts of a variable input are combined with
a. fixed inputs, the marginal physical product of the variable input immediately declines.
b. other variable inputs, the marginal physical product of the variable input declines.
c. fixed inputs, eventually the marginal physical product of the variable input declines.
d. other variable inputs, eventually the marginal physical product of the variable input declines.
24.A rising marginal cost curve is a reflection of a
a. falling marginal physical product curve.
b. rising marginal physical product curve.
c. falling average fixed cost curve.
d. rising average variable cost curve.
25.A "price taker" is a firm that
a. does not have the ability to control the price of the product it sells.
b. does have the ability, albeit limited, to control the price of the product it sells.
c. can raise the price of the product it sells and still sell some units of its product.
d. sells a differentiated product.
e. none of the above
26.The perfectly competitive firm maximizes profit at the output where
a. price equals marginal cost.
b. marginal revenue equals marginal cost.
c. average variable cost equals average fixed cost.
d. a and b
e. all of the above
27. Refer to Exhibit 2. Curve A is a(n) __________ cost curve.
a. marginal
b. average variable
c. average total
d. average fixed
28. Refer to Exhibit 2. Curve B is a(n) __________ cost curve.
a. marginal
b. average variable
c. average total
d. average fixed
29. In the short run, the best policy for a perfectly competitive firm is to
a. shut down its operation if price ever falls below average total cost.
b. produce and sell its product as long as price is greater than average variable cost.
c. shut down its operation if price falls between average total cost and average variable cost.
d. a and c
e. none of the above
30. The perfectly competitive firm's short-run supply curve is the
a. upward-sloping portion of its average total cost curve.
b. horizontal portion of its marginal revenue curve.
c. portion of its average variable cost curve that lies above the average fixed cost curve.
d. upward-sloping portion of its marginal cost curve.
e. portion of its marginal cost curve that lies above its average variable cost curve.