CFA Quiz-5

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					五 Investment Tools: Economics: Microeconomic Analysis
1.A: Preliminary Reading: Supply, Demand, and the Market Process
Question ID: 12637 The law of demand states that, given a decrease in:

A. B. C. D.

price, demand will decrease price, demand will increase. real output, demand will increase. real output, demand will decrease.

B
The law of demand states that, given an increase in price, demand will decrease. This relationship exists because higher prices induce some consumers to purchase substitute goods and/or simply forgo the use of the product. Question ID: 12638 The law of supply states that, given a decrease in:

A. B. C. D.

price, supply will increase. price, supply will decrease. real output, supply will increase. real output, supply will decrease.

B
The law of supply states that, given an increase in price, supply will increase and vice versa. This relationship exists because higher prices induce current producers to produce more units and new producers to enter the market. Question ID: 12672 Given a shift to the right in the demand curve, which of the following identifies the short-run response and long-run response of price relative to beginning price?

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Short-Run Response of Price

Long-Run Response of Price Decreases substantially

A.

Decreases modestly

Short-Run Response of Price

Long-Run Response of Price Increases modestly

B.

Increases substantially

Short-Run Response of Price

Long-Run Response of Price Decreases modestly

C.

Decreases substantially

Short-Run Response of Price

Long-Run Response of Price Increases substantially

D.

Increases modestly

B
Given a shift to the right in the demand curve, the price will rise substantially in the short run because there is a limit to how much production can be increased in the short run. However, after more plant and equipment are added (in the long-run), production can be increased significantly which reduces the imbalance between demand and supply. The result is a decline in the price from the initial high level. Question ID: 24810 Given that there is no shift in the supply or demand curve, what will bring the market into equilibrium if the supply for a product exceeds demand? Price will:

A. B. C. D.

increase, demand will increase, and supply will decrease. decrease, demand will decrease, and supply will decrease. decrease, demand will increase and supply will decrease. increase, demand will decrease, and supply will increase.

C
Assuming that there is no shift in the supply or demand curve and supply for a product is too high relative to demand, price must decrease to bring the market into equilibrium. The lower price of the product will increase demand by consumers for the product while discouraging producers to produce more of the product at the lower price. This will in turn reduce the quantity of goods that will be supplied, because fewer producers are willing to supply goods at the lower price.

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Question ID: 24808 Given that there is no shift in the supply or demand curves and the supply for a product is too high relative to demand, which course of action will firms most likely take? Firms will:

A. B. C. D.

increase prices to increase inventory. reduce prices on their excess inventory. increase capacity to increase production. reduce production to increase prices.

B
Given that there is no shift in the supply or demand curves, businesses will either decrease the amount of production or reduce prices in order to reduce the amount of excess inventory they are holding. Increasing capacity for production or increasing prices would result in increasing the amount of excess inventory and bring the market further away from equilibrium.

Question ID: 12676 Which of the following is not relevant to a shift in the supply curve to the left?

A. B. C. D.

Some of the producers have shut down their operations. An environmental tax has been imposed on the production process. The industry is experiencing increased product liability claims. The price of the product decreases.

D
Changes in price will enable movements along the supply curve and will not cause it to shift. Other factors will result in a shift in the supply curve to the left. Question ID: 12675 Which of the following is most relevant to a shift in the demand curve to the right?

A.

The price of the product decreases.

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B. C. D.

The price of substitute goods decreases. The cost of resources used to produce a product increases. Consumers' income increases.

D
An increase in consumers' incomes will make it possible for consumers to be willing to pay higher prices for the same quantity. Higher prices will also lead to an increase in supply. Question ID: 24815 Which of the following will cause a demand curve to shift?

A. B. C. D.

A new technology innovation related to the production of the product. An unexpected political change. A reduced price of resources used in the production of the product. An increased number of consumers in the target market for the product.

D
An increased number of consumers in the target market for the product will increase the demand for the product at all price levels. There will be more consumers willing to purchase the product, causing a shortage of available products at previous price levels. Therefore, the demand curve must shift to reflect the change in quantity demanded at all price levels. Conversely, a reduced price in product resources, technology changes, and political changes will all impact the supply curve not the demand curve.

Question ID: 14116 All of the following will cause the demand curve to shift to the left EXCEPT:

A. B. C. D.

future prices are expected to fall. the price of complementary goods fall. consumer income falls. the price of substitute goods decreases.

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B
The demand curve will shift to the left for all of the possible answers except when the price of complementary goods falls. If the price of complementary goods falls the demand curve will shift to the right. Question ID: 14118 Which of the following factors would NOT cause the demand curve for a normal good to shift to the right or left?

A. B. C. D.

An increase in the price of a complementary good. A decrease in the price of the good. A decline in consumer income. An increase in the price of a substitute good.

B
A change in price will not cause the demand curve to shift to left or right. A change in price will simply cause movement along the demand curve. Question ID: 24818 Which of the following will cause a shift in the demand curve to the left?

A. B. C. D.

The product becomes less popular with consumers. Consumers expect the price of the goods to increase in the next period. The price of substitute goods increases. Consumer income increases.

A
Changes in consumer tastes and preferences cause a shift in the demand curve. A decreased preference for the product will cause the demand curve to shift to the left. The demand curve will shift to the right with an increase in the price of substitute goods, consumer expectations of increasing prices in the future, or increase in consumer income.

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Question ID: 24812 All of the following factors will cause a demand curve to shift EXCEPT changes in:

A. B. C. D.

the cost of production for the product. the number of consumers in the market. the prices of related goods. consumer tastes and preferences.

A
Changes in the cost of production for the product will not cause a shift in the demand curve. Changes in production costs will cause the supply curve to shift. Therefore, this will result in a movement along a specific demand curve, resulting from a change in price. Factors that cause a demand curve to shift are changes in: consumer income, the prices of related goods, consumer expectations, the number of consumers in the market, consumer tastes and preferences, and demographics.

Question ID: 24819 In the short run, producers will respond to a decrease in demand most likely by:

A. B. C. D.

increasing the amount of labor used in production. increasing the amount of capital expenditures. reducing the price of goods. reducing the amount of capital expenditures.

C
In the short run, producers will reduce the price of goods to bring the market into equilibrium with the price consumers are willing to pay. Producers can change their plant capacity in the long run by changes in capital expenditures. Increasing the amount of labor used in production would most likely increase the price of the goods.

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Question ID: 24820 In the long run, a shift in the supply curve to the right will result in:

A. B. C. D.

an increase in price and an increase in quantity. a decrease in price and a decrease in quantity. a decrease in price and an increase in quantity. an increase in price and a decrease in quantity.

C
A shift in the supply curve to the right resulting from an increase in supply will cause the price of goods to decrease. More consumers will demand the product at the lower price and quantity increases at the new market equilibrium.

Question ID: 12680 Given a shift to the left in the demand curve, which of the following identifies the short-run response and long-run response of supply relative to beginning supply? Short-run Response of Supply Long-Run Response of Supply Increases Modestly

A.
Decreases modestly

Short-run Response of Supply

Long-Run Response of Supply Decreases Substantially

B.
Decreases modestly

Short-run Response of Supply

Long-Run Response of Supply Decreases Substantially

C.
Increases modestly

Short-run Response of Supply

Long-Run Response of Supply Increases Substantially

D.
Increases modestly

B
Given a shift to the left in the demand curve, the lower price that results forces producers to produce fewer units. A producer can usually produce fewer units by working employees less, but to reduce production even more requires shutdown of plant and equipment, which takes time. In the long run, given the shutdown of plant and equipment, production can be reduced
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even more. Question ID: 24821 New legislation setting a price ceiling will most likely cause:

A. B. C. D.

a market surplus. an increase in production. a decrease in demand. a market shortage.

D
Price ceilings restrict the producer from increasing the selling price. The lower price will stimulate demand by consumers at this lower price. However, since producers will not be able to increase price there is little incentive for them to increase supply. Hence, production and supply will be limited at the price ceiling leading to a market shortage.

Question ID: 12681 Which of the following statements regarding supply and demand is TRUE? A price: ceiling means that the price is higher than equilibrium, resulting in a shortage of goods. floor means that the price is lower than equilibrium, resulting in a shortage of goods. floor means that the price is lower than equilibrium, resulting in a surplus of goods. ceiling means that the price is lower than equilibrium, resulting in a shortage of goods.

A.

B.

C.

D.

D
Price ceilings are legally set maximum prices sellers may charge. Ceilings are usually initiated during inflationary periods, this will prevent the producer from increasing the selling price to cover rising costs. As a result this will lead to a reduction in supply that will cause a shortage.

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Question ID: 24822 Government legislation setting a price floor will least likely result in:

A. B. C. D.

increased supply. increased demand. increased production. a surplus.

B
Price floors are minimum prices that buyers must pay for a good. Price floors allow producers to receive a price above the equilibrium price. Therefore, producers will increase production and supply. Buyers will reduce their consumption at the higher price, resulting in a surplus.

Question ID: 12682 The invisible hand principal refers to the tendency of:

A. B. C. D.

market prices to rise and fall in response to supply and demand interaction. the stock market to rise during periods of rapid economic growth. market prices to direct individuals to productive activities. the stock market to decline during periods of negative economic growth.

C
The invisible hand principal refers to the tendency of market prices to direct individuals to productive activities. Question ID: 12683 Which of the following is NOT one of the components of the invisible hand? Motivating producers to work, use efficient production, and supply desired goods. Helping price products and providing order in the market.

A.

B.

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C. D.

Communicating information to decisions makers. Government coordination of the actions of market participants.

D
The item listed that is not a component of the invisible hand is government coordination of the actions of market participants. The whole idea of the invisible hand is that certain aspects of the economy do not need guidance from a central organization (like the government) to benefit society. Question ID: 12677 Which of the following is most likely to cause a shift in the supply curve to the right?

A. B. C. D.

Consumers' incomes decrease. Producers' manufacturing cost declines. The price of substitute goods increases. The price of the product increases.

B
A decline in manufacturing cost will lead to greater profit at the same production level. Producers will increase production and prices will fall and the supply curve will shift to the right. Question ID: 12639 Which of the following indicates the typical slope of the supply and demand curves? Supply Curve Demand Curve Vertical

A.
Flat

Supply Curve

Demand Curve Upward to the left

B.
Upward to the right

Supply Curve

Demand Curve Upward to the left

C.
Upward to the left

D.

Supply Curve

Demand Curve

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Vertical

Flat

B
Given that price is on the vertical axis and quantity on the horizontal axis, the supply curve slopes upwards to the right indicating that supply increases as price increases. The demand curve slopes downward to the right indicating that demand increases as price decreases. Question ID: 12674 Which of the following will NOT cause the demand curve to shift? A change in:

A. B. C. D.

the price of a substitute good. the relative price of a complimentary good. the price of a product. consumer preferences.

C
A change in the price of a product is movement along the demand curve. Other factors that cause a shift in the demand curve are: changes in consumer income, changes in consumer expectations regarding future prices of products, changes in the number of consumers in the market, demographic changes.

Question ID: 12640 The law of supply states that, given a decrease in:

A. B. C. D.

price, supply will decrease. real output, supply will increase. real output, supply will increase. price, supply will increase.

A
The law of supply states that given a decrease in price supply will decrease. This relationship exists because higher prices induce current producers to produce more units and new
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producers to enter the market and vice versa. Question ID: 14117 Which of the following factors would cause the demand curve for a normal good to increase (shift to the right)?

A. B. C. D.

An increase in the price of a complementary good. A decline in consumer income. A decrease in the price of the good. An increase in the price of a substitute good.

D
Prices of substitute goods influence demand. If two goods are similiar to one another, they are substitutes, if price rises on one of the goods, demand for the other will rise (shift upward to the right). Question ID: 12673 Assuming there will be no shift in the supply or demand curve, what will bring the market into equilibrium if the demand for a product is too low relative to supply? Price will decline, demand will:

A. B. C. D.

rise, and supply will rise. decline, and supply will fall. decline, and supply will rise. rise, and supply will fall.

D
If the demand for a product is too low relative to supply, price will fall. The lower price of the product will increase product demand while simultaneously motivating producers to produce less of the product.

1.B: Preliminary Reading: The Economic Role of Government
Question ID: 12709

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Which of the following best describes economic inefficiency?

A. B. C. D.

Marginal revenue that is less than marginal cost. The lowest possible benefit for a given cost. An accounting loss. An economic loss.

B
An economic action will be efficient if it produces the largest possible benefit for a given cost. Some of these benefits may not be quantifiable so that concepts like profit and marginal revenue are not appropriate. Question ID: 24833 Two government functions that will help create the proper environment for economic efficiency are:

A. B. C. D.

protective and productive functions. productive and legislative functions. protective and legislative functions. legislative and economic functions.

A
The protective and productive functions will help create the proper environment for economic efficiency. The protective function of the government helps to provide an environment in which citizens can interact peacefully with one another. An example of this is the government’s role in national defense. The productive function of government ensures the production of goods and services that a market is unable or unwilling to provide efficiently on its own. Examples of this function are police and fire protection.

Question ID: 24823 Which of the following is NOT an example of a government function that will help create the proper environment for economic efficiency?

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A.

Providing a structure for national defense. Producing goods and services that a market is unable or unwilling to efficiently provide on its own. Creating goods and services to increase domestic competition. Creating and enforcing laws against physical harm, theft, and fraud.

B.

C. D.

C
Two government functions that will help create the proper environment for economic efficiency are the protective function and the productive function. The protective function includes creating and enforcing laws to provide national defense and to protect against physical harm, theft and fraud of its citizens. The productive function of government produces goods and services that a market is unable or unwilling to provide efficiently on its own. These services help provide a stable economic environment as well as providing other services that benefit citizens such as police and fire protection.

Question ID: 24824 Which of the following statements regarding economic efficiency is TRUE? Undertaking an economic action will be efficient if it produces more:

A. B. C. D.

costs than benefits for the individuals in the economy. benefits than costs for the individuals in the economy. costs than benefits for all individuals in the global environment. benefits than costs for all individuals in the global environment.

B
Economic efficiency for the government means that for any given level of effort (cost), we obtain the largest possible benefit. Individuals are best served when the economic pie is as big as possible. Both protective and productive functions of the government are designed to benefit its citizens.

Question ID: 24826

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When externalities related to the cost of production are imposed on other parties it will most likely cause the:

A. B. C. D.

consumer's demand curve to shift to the right. consumer's demand curve to shift to the left. producer's supply curve to shift to the left. producer's supply curve to shift to the right.

C
Producer’s set prices based on the cost of production. If some of the costs of production represent externalities imposed on other parties, the supply curve will be shifted to the left. The demand curve for the product will not necessarily be impacted by externalities from production.

Question ID: 12710 Which of the following is an important factor that can limit the ability of the invisible hand to do its job?

A. B. C. D.

Market participants may change their tastes. New technologies emerge that can put people out of their jobs. Individuals demand public goods like clean air. Interest rates tend to rise during economic expansions.

C
The item listed that is an important factor that can limit the ability of the invisible hand to do its job is that pollution is a negative externality of the production processes. While clean air is a desirable goal for all, private markets cannot enforce penalties for pollution. Question ID: 24832 The principle that provides individuals with the incentive to engage in productive activities by pursuing their own interests is known as the

A.

free market principle.

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B. C. D.

competitive market principle. economic efficiency principle. invisible hand principle.

D
The invisible hand principle provides individuals with the incentive to engage in productive activities by pursuing their own interests. Value is created for the economy when individuals have an incentive to work hard. However, the invisible hand principle for the market pricing system may fail due to lack of competition, externalities, the presence of public goods, or economic instability.

Question ID: 24825 Which of the following is NOT an important factor in describing how the market pricing system may fail to generate ideal economic efficiency?

A.

Unemployment benefits are increased in times of economic slowdowns. Positive externalities may not be identified and thus benefits may be overlooked. The level of competition and threats of new entrants to a market can be manipulated. Police protection for a large community is necessary.

B.

C.

D.

A
There are four important factors that can limit the ability of the invisible hand’s ability to generate ideal economic efficiency: lack of competition, externalities, public goods and potential information problems. Unemployment benefits are not considered to be an important factor limiting the ability of the invisible hand to do its job.

Question ID: 24828 Which of the following is a difference between market and collective actions?

A.

Scarcity imposes the aggregate consumption payment link differently in

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both sectors.

B. C. D.

Competitive behavior is present only in the market sector. Income and power are distributed differently in the two sectors. Total expenditures are known only for the public sector.

C
Income and power are distributed differently in the two sectors. Success in the market place is based on the ability to provide goods and services that add value. Conversely, success in the public sector often depends on whom you know and how much you contribute. Aggregate consumption equals aggregate payment in both sectors. Competitive behavior is present in both sectors. Total expenditures are known for both sectors.

Question ID: 24829 Which of the following is a similarity between market and collective actions? There is a direct link between the size of the payment and the amount of consumption in both sectors. In both sectors, collective decisions are made the same. Income and power are equally distributed in the two sectors. Scarcity imposes the aggregate consumption link in both sectors.

A.

B. C. D.

D
Aggregate consumption equals aggregate payment in both the market and public sectors. Because someone must pay for everything provided by the government, scarcity imposes the aggregate consumption payment link in both sectors.

Question ID: 24827 Which of the following is NOT a difference between market and collective actions? The link between the size of the payment and the amount of consumption is different in the two sectors.

A.

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B.

Aggregate consumption does not equal aggregate payment in the two sectors. Choices are made differently in the two sectors. Income and power are distributed differently in the two sectors.

C. D.

B
Aggregate consumption equals aggregate payment in both sectors. All of the other items are correct differences between the two sectors.

Question ID: 24834 Market and government actions are best defined by which of the following characteristics?

A. B. C.

Choices create winners and losers in both sectors. Competitive behavior is present in both sectors. Income and power are distributed similarly in both sectors. The size of the payment is linked to the amount of consumption in both sectors.

D.

B
The similarities between market and government actions are: 1) competitive behavior is present in both sectors and 2) aggregate consumption equals aggregate payment in both sectors. Differences include the fact that there is no direct link between the size of payment and the amount of consumption with government. Also, income and power are distributed differently, and while the private sector makes decisions based on mutual gain, the majority makes decisions in the public sector which can result in clear winners and losers.

Question ID: 24830 In markets that lack competition, governments will act to maintain competition, most likely through:

A.

consumer protection legislation.

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B. C. D.

production of public goods and services. externality legislation. antitrust legislation.

D
In an attempt to correct the shortcoming of the market, governments will most likely create antitrust legislation to protect new entrants in markets that lack competition. Public goods, externalities, and information related to consumer safety are all issues related to the failure of the market pricing system. However, these are not actions the government would take to increase the level of competition.

Question ID: 12713 What is the expected net result of government imposed price ceilings and price floors on products? Price Ceilings Price Floors Shortages

A.

Surpluses

Price Ceilings

Price Floors Shortages

B.

Shortages

Price Ceilings

Price Floors Surpluses

C.

Shortages

Price Ceilings

Price Floors Surpluses

D.

Surpluses

C
Price ceilings prevent prices from rising to their equilibrium levels. Therefore, producers elect not to produce as many units. This results in shortages. Price floors prevent prices from declining to their equilibrium levels. Therefore, consumers will not demand as many units as they would otherwise. Surpluses result.

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Question ID: 24831 To ensure that the costs of negative externalities are born by those creating the costs, governments can act to:

A.

increase antitrust legislation to maintain competition. shift the producers supply curve to the left, by increasing supplier tax benefits. increase the taxes paid by its citizens to help cover costs resulting from negative externalities. make and enforce rules about pollution and other negative externalities.

B.

C.

D.

D
Examples of negative externalities are pollution that is created in the production of a manufactured good or the operation of automobiles and trucks. To ensure the costs of these externalities are born by those creating the costs, governments can act to make and enforce rules about pollution.

Question ID: 12711 Which of the following is a role of government in attempting to correct the shortcomings of the invisible hand?

A.

Requiring that clean-air standards be met by polluting firms. Controlling the money supply in a manner that provides a stable financial environment. Provide national defense services for the protection of a country's citizens. Enforce laws to control and reduce stealing and theft by people in stores and shops, which result in higher prices for consumers.

B.

C.

D.

A
Governments need to intervene to enforce environmental laws that control negative externalities, which cannot be eliminated by the invisible hand. While governments should control the money supply in a manner that stabilizes the economy, this is not done in an attempt to correct the shortcomings of the invisible hand.
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Question ID: 12707 Which of the following is generally NOT recognized as legitimate functions of government?

A. B. C. D.

Enforcing laws and providing roads and infrastructure. Providing stable economic and monetary environment. Taxing and law-making function. Protective function and productive function.

C
The two government functions that are generally recognized as legitimate are the protective function and the productive function. The protective function includes a framework for security and order while the productive function include things like maintaining a stable monetary and financial environment.

1.A: Demand and Consumer Choice, including addendum Consumer Choice and Indifference Curves
Question ID: 12715 If you are willing to pay $18 for a shirt but you had to pay $20 for the shirt, the $2 difference is:

A. B. C. D.

your consumer surplus. your consumer deficit. the producer's surplus. the producer's deficit.

B
If you are willing to pay $18 for a shirt but you pay $20 for the shirt, the $2 difference is your consumer deficit. The consumer surplus (deficit) plus the market price equals the total value of the product. In this case, -$2 plus $20 equals $18. Question ID: 12714 The law of diminishing marginal utility states that as one consumes less of a good:

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A. B. C. D.

the demand curve will slope down from right to left. one wants less and less of it. the benefit that one gives up by consuming one less unit decreases. the benefit that one gives up by consuming one less unit increases.

D
The law of diminishing marginal utility states that as you consume more of a good the benefit that you get form consuming the next unit decreases and vice versa. This helps explain the shape of an individual’s demand curve. Question ID: 12723 The demand for a product tends to be price inelastic if:

A. B. C. D.

few good complements for the product are available. people spend a large share of their income on the product. few good substitutes for the product are available. the population in the market area is large.

C
If a large price change results in a small change in quantity demanded, demand is inelastic, Cigarettes are an example of an inelastic good. Question ID: 12741 Suppose the price of computers increases from $1,000 to $1,200. Assuming the original demand for computers was 50 million units, and the new demand is 45 million computers, what is the price elasticity of demand, and is the demand for computers elastic or inelastic?

A. B. C. D.

0.58, inelastic. -0.58, inelastic. -1.73, elastic. 1.73, elastic.

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B
% change in quantity = (45-50)/[(50+45)/2] = -5/47.5 = -.105 or -10.5% % change in price = (1200-1000)/[(1000+1200)/2] = 200/1100 = .1818 or 18.2% Price elasticity = -10.5/18.2 = -.58 When the absolute value is <1 the good is inelastic.

Question ID: 12730 If a good has an elastic demand curve a small price decrease will cause:

A. B. C. D.

no change in the quantity demanded. a smaller increase in the quantity demanded. a larger increase in quantity demanded. a larger decrease in the quantity demanded.

C
If a good has an elastic demand curve, a small price decrease will cause a larger increase in the quantity demanded. Elastic demand suggests that the percentage change in demand will be larger than the percentage change in quantity. Question ID: 12732 Income elasticity is defined as the: percentage change in income divided by the percentage change in the quantity demanded. change in income divided by the percentage change in the quantity demanded. percentage change in the quantity demanded divided by the percentage change in income. change in quantity demanded divided by the change in income.

A.

B.

C.

D.

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C
Income elasticity is defined as the percentage change in quantity demanded divided by the percentage change in income. Normal goods have positive values for income elasticity and inferior goods have negative income elasticity. Question ID: 12726 If a 10 percent income increase caused a group of consumers to increase their purchases of television sets from 100 to 110, the group's income elasticity of demand for television sets would be closest to:

A. B. C. D.

0.10. 0.83. 2.00. 1.00.

D

Income Elasticity = % change in quantity demanded / %change in income = (110-100)/((100+110)/2) / .10 = (10/105)/.10 = 0.095/.1 = .95 or 1.00

Question ID: 12738 If the price of World Cup Soccer tickets increases from $40 a ticket to $50 a ticket and demand for the tickets stays the same, what could be said about the price elasticity of demand for the tickets? It is:

A. B. C. D.

inelastic. perfectly elastic. elastic. perfectly inelastic.

24

D
Since the demand for the tickets stayed the same after the price changed the demand curve would have to be vertical which is representative of a perfectly inelastic demand curve.

Question ID: 24838 All of the following are factors that can be considered in estimating how total consumer expenditures on a product change in the long run when the price changes EXCEPT:

A. B.

the combined elasticity of demand for all consumers of the product. the elasticity of demand for all producers of the product. the elasticity of demand for an individual business that produces the product. an individual's elasticity of demand.

C.

D.

B
The authors suggest three ways to estimate how total consumer expenditures on a product change when the price changes: (a) consider an individual’s elasticity of demand, (b) consider the combined elasticity of demand for all consumers of the product, and (c) consider the elasticity of demand for an individual business that produces the product.

Question ID: 24835 Which of the following describes the effect of time on elasticity? The demand for most products will be more inelastic in the long run than in the short run. When the price of a product decreases, consumers will reduce their consumption by a larger amount in the long run than in the short run. When the price of a product decreases, consumers will reduce their consumption by a larger amount in the long run than in the short run.

A.

B.

C.

25

D.

When the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short run.

D
When the price of a product changes, time does not impact the demand elasticity.

Question ID: 24837 A major factor explaining why time affects elasticity is that in the long run:

A. B. C. D.

it is easier to predict consumption patterns. prices do not change very much. inflation has a greater impact on all prices. more consumers find substitute products.

D
The demand for most products is more elastic in the long run than in the short run. One reason for this is that over time consumers can adjust their consumption patterns in response to changes in price. One way of adjusting their consumption pattern would be to find substitute products.

Question ID: 24840 Which of the following is a characteristic of indifference curves?

A. B.

There are an infinite number of indifference curves. Indifference curves slope upward to the right. Lower indifference curves represent greater absolute utility than higher curves. Indifference curves are concave when viewed from below.

C.

D.

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A
There are an infinite number of indifference curves that do not intersect. Higher indifference curves represent greater absolute utility than lower curves, because individuals prefer more to less. Indifference curves slope downward to the right, because goods are substitutable.

Question ID: 12744 Indifference curves slope downward to the right because:

A. B. C. D.

demand for goods declines when prices increase. goods are substitutable. of diminishing marginal utility. demand for luxury goods is more sensitive to income changes.

B
Indifference curves slope downward to the right because goods are substitutable. The curve shows all possible combinations of two goods that give equal utility to the individual.

Question ID: 24839 Higher indifference curves represent greater absolute utility than lower curves because:

A. B. C. D.

the utility of a good declines the more of it you consume. more is always preferred to less. goods are substitutable. indifference curves do not intersect.

B

27

Higher indifference curves represent greater absolute utility than lower curves, because more is always preferred to less. Indifference curves slope downward to the right, because goods are substitutable. Indifference curves are convex from below, because the utility of a good declines the more of it you consume. While it is true that indifference curves do not intersect, this does not explain why higher indifference curves represent greater absolute utility than lower curves.

Question ID: 24843 In the analysis of indifference curves with the budget constraint line, the optimal level of consumer satisfaction will be: the intersection of the budget constraint line and the indifference curve furthest to the left of the line. any point below the line, because all other points are unobtainable. the intersection of the budget constraint line and the indifference curve furthest to the right of the line. the tangency point between the budget constraint line and the highest obtainable indifference curve.

A.

B.

C.

D.

D
The optimal level of consumer satisfaction will be the tangency point between the budget constraint line and the highest obtainable indifference curves. The budget constraint line separates the consumption opportunities that can be obtained from those that cannot be obtained. All points on the line are obtainable based on the consumer’s budget constraints.

Question ID: 24842 Which of the following is NOT a characteristic of the consumption-opportunity constraint line? The line:

A. B. C. D.

indicates different bundles of goods that can be acquired. intersects the optimal consumer indifference curve. indicates the relative price of each good. is used to determine the optimal level of consumption of each good or

28

bundle of goods.

B
The optimal level of consumer satisfaction will be the tangency point between the consumption-opportunity constraint line and the highest obtainable indifference curves. More satisfaction is gained by consumers at the point of tangency than at the intersection of other indifference curves with the consumption-opportunity constraint line.

Question ID: 12746 Regarding indifference curves, the point of tangency between the budget constraint line and the highest obtainable indifference curve is the:

A.

relative price of a good that can be purchased at that point. point at which the substitution of various goods can occur with equal utility to the consumer. optimal level of consumer satisfaction. indifference level given the budget constraint.

B.

C. D.

C
By definition.

Question ID: 24845 Under the substitution effect, if the price of one good relative to another increases, individuals will consume along the:

A. B. C. D.

higher indifference curve. lower indifference curve. same indifference curve. lower budget constraint line.

29

C
Under the substitution effect, individuals will consume along the same indifference curve simply buying more of one product over another product. Under the income effect, individuals will consume along a different indifference curve by purchasing more or less of all products.

Question ID: 24844 According to the substitution effect, consumers will give up some of good x in exchange for more of good y when the

A. B. C. D.

price of good x increases relative to good y. price of good y increases relative to good x. budget constraint line shifts inward. budget constraint line shifts outward.

A
When the price of one good relative to another increases, the substitution effect will occur. If the price of good x increases relative to good y, the consumer will give up some of the good x to obtain more of the good y.

Question ID: 24846 According to the income effect, if there is a reduction in total income and no other changes for two normal goods, then the new budget constraint line will be:

A. B. C. D.

less steep than the original budget constraint line. steeper than the original budget constraint line. higher and parallel to the original budget constraint line. lower and parallel to the original budget constraint line.

30

D
The income effect with no other changes for normal goods will result in a parallel shift of the budget line inward for a reduction of income. The income effect with no other changes for normal goods will result in a parallel shift of the budget line out for an increase of income. The slope of the line would change due to a substitution effect.

Question ID: 12717 To maximize one's satisfaction when buying units of A and B, one should ensure that the marginal utility of the last dollar spent on product A is:

A. B. C. D.

independent of the utility of consuming A. less than the marginal utility of the last dollar spent on B. equal to the marginal utility of the last dollar spent on B. the same as the utility of the first dollar spent on B.

C
To maximize one's satisfaction when buying units of A and B, one should ensure that the marginal utility of the last dollar spent on product A is equal to the marginal utility of the last dollar spent on B. This avoids the situation in which way the consumer has too much of one item and not enough of the other, which ensures maximum utility.

Question ID: 12734 When household incomes go down and the quantity of a product demanded goes up, the product is:

A. B. C. D.

a luxury good. an inferior good. a normal good. a necessity.

31

B
When household incomes go down and the quantity demanded of a product goes up, the product is an inferior good. Inferior goods include things like bus travel and margarine.

Question ID: 12739 If the price of a candy bar decreases from $.55 to $.50 and the demand increases from 235 to 267, the price elasticity of demand is:

A. B. C. D.

-1.34. 1.34. 1.23. -1.23.

A
Price elasticity of demand = % change in quantity demanded /% change in price % change in quantity = (235-267)/[(235+267)/2] = -32/251 = -.127 or -12.7% change in price = (.55 - .50)/[(.55+.50)/2] = .05/.525 = .095 or 9.5% -12.7/9.5 = -1.34

Question ID: 12735 If the price elasticity of demand is -1.5 and you increase the price of the product 2 percent, the quantity demanded will:

A. B. C. D.

increase 2%. decrease 1.5%. decrease 3%. decrease 0.75%.

32

C
If the price elasticity of demand is -1.5, and you increase the price of the product 2%, the quantity demanded will decrease 3%. When the price elasticity is negative, it means that price and demand move in opposite directions. Given a price decrease, demand will increase and vice versa. The absolute value, 1.5, indicates that demand will move one-and-a-half times as much as price.

Question ID: 12727 If the number of widgets demanded changes from 51 to 49 when the price changes from $4 to $6, the price elasticity of demand is:

A. B. C. D.

Elastic. -1/2. -1/10. -2.

C
If the number of widgets demanded changes from 49 to 51 when the price changes from $4 to $6, the price elasticity of demand is calculated as follows: Percentage change in quantity = (51-49)/[(51+49)/2] = 4% Percentage change in price = (4-6)/[(4+6)/2] = -40% Price elasticity = 4%/-40% or -0.1 or -1/10

Question ID: 12724 Price elasticity of demand is determined primarily by the:

A. B. C. D.

availability of substitutes. size of the consumer surplus. availability of complements. incomes of consumers.

33

A
Price elasticity of demand indicates the degree of consumer response to variation in price. When good substitutes for a product are available, a price rise induces many consumers to switch to other products.

Question ID: 12745 Which of the following is NOT a characteristic of indifference curves? As a result of diminishing marginal utility, the shape of the indifference curve is convex. Equilibrium is established by the intersection of the two highest indifference curves. Goods can be substituted. More of a good is preferred to less of that good.

A.

B.

C. D.

B
Question ID: 12745 Which of the following is NOT a characteristic of indifference curves? As a result of diminishing marginal utility, the shape of the indifference curve is convex. Equilibrium is established by the intersection of the two highest indifference curves. Goods can be substituted. More of a good is preferred to less of that good.

A.

B.

C. D.

34

1.B: Costs and the Supply of Goods
Question ID: 24847 Which of the following best describes a principal-agent problem?

A.

Management is working in the best interests of the owners of a corporation. Management increases the number of perks for themselves, due to a record year. The owners increase management compensation for excellent performance. The owners fire management due the corporation’s underperformance of the industry.

B.

C.

D.

B
The principal-agent problem exists when the agent (management) is working for different objectives than those of the principal (owner). There is an incentive for the agent to “shirk” responsibilities or increase their personal satisfaction at the expense of the owners.

Question ID: 12684 The agency problem refers to: buying insurance to protect a firm's assets through an agent who charges sales commission. hiring independent agents to sell a firm's products in the wholesale market. managers engaging in self seeking behavior at the expense of stockholders. selling products through an agent who has final control over the selling price and not the manufacturer.

A.

B.

C.

D.

C
Managers act as agents for stockholders. When managers make decisions that benefit themselves at the cost of stockholders the problem is referred to as an agency problem.

35

Question ID: 24848 Situations in which managers act in their own best interests at the cost of corporate common stock holders is an example of the:

A. B. C. D.

cost inefficiency problem. owner diagnoses problem. absolute priority problem. principal-agent problem.

D
The principal-agent problem is created when the agent (management) has an incentive to act in their own best interest at the cost of the principal (owner). Common shareholders are not able to monitor all of the actions of management.

Question ID: 12692 Which of the following statements is FALSE? Economic profit is a satisfactory performance measure from an economic point of view because it considers explicit as well as implicit costs. Accounting profit is often an unsatisfactory performance measure from an

A.

B.

economic point of view because it only considers accounting depreciation and not true economic depreciation. Economic profit is a satisfactory performance measure from an economic

C.

point of view because it considers marginal costs rather than average costs. Accounting profit is often an unsatisfactory performance measure from an economic point of view because it only takes into account period costs.

D.

C
Economic profit is a satisfactory measure of performance because it considers total explicit and implicit costs. Question ID: 12685

36

Accounting costs are often unsatisfactory from the economists viewpoint because:

A.

accounting procedures tend to inflate the value of capital assets. accounting costs fail to make an allowance for depreciation-the wearing out of capital assets during a period. accounting costs fail to include the firm's opportunity costs. accountants attempt to minimize costs to maximize reported profits.

B.

C. D.

C

Question ID: 12688 Accounting profits measure explicit revenues minus explicit costs minus:

A. B. C. D.

dividends. nothing else. the opportunity cost of equity. depreciation expense.

B
Accounting profit is calculated as explicit revenues minus explicit costs. Economic profit subtracts the opportunity cost of equity (an implicit cost) from accounting profit. Depreciation is already reflected in the explicit costs. Question ID: 12697 Marginal cost is defined as the:

A. B. C. D.

cost of making an additional sale. average manufacturing cost. sum of total fixed and variable cost. total cost of producing an additional unit of output.
37

D
Marginal cost is defined as the cost of producing an additional unit of output. Question ID: 12700 In the short run when marginal cost (MC) equals average total cost (ATC):

A. B. C. D.

MR will be at its minimum. ATC will be at its minimum. MC will be at its maximum. AVC will be at its maximum.

B
In the short-run when MC equals ATC, ATC will be at its minimum. Before this point, MC is below ATC. As additional units are produced, the lower cost of producing another unit reduces ATC. However, when MC begins to increase (due to the law of diminishing returns) beyond the point of intersection of the MC line and ATC line, MC is higher than ATC. Here, the addition of another unit will increase the ATC. Question ID: 24850 According to the law of diminishing returns, doubling the number of salespeople for a firm will most likely result in: more than doubling the total sales of the firm as a result of economies of scale. decreasing the total sales of the firm as a result of competition amongst salespeople. increasing the total sales of the firm and reducing the average sales per salesperson. doubling the total sales of the firm.

A.

B.

C.

D.

C
The law of diminishing returns states that as more resources are devoted to a production process, output will increase at a decreasing rate. Therefore, as more salespeople are added
38

they will generate more sales at a decreasing rate. Total sales will increase and the average sales per salesperson will decrease.

Question ID: 24849 Based on the concept of diminishing returns, as the quantity of output increases, the costs of production:

A. B. C. D.

fall at a decreasing rate. rise at an increasing rate. rise at a decreasing rate. fall at an increasing rate.

B
The law of diminishing returns states that as more resources are devoted to a production process, output will increase at a decreasing rate. Further, as the quantity produced rises, costs rise at an increasing rate.

Question ID: 12703 The law of diminishing returns states that for a given production process, as more and more resources (such as labor) are added, output:

A. B. C. D.

increases at a decreasing rate. cost declines at a decreasing rate. cost declines at an increasing rate. increases at an increasing rate.

A
The law of diminishing returns states that for a given production process, as more and more resources (such as labor) are added, output increases at a decreasing rate. This occurs because, at some point, adding more workers results in inefficiencies. Question ID: 12705

39

Economies of scale imply:

A. B. C. D.

unit variable costs decline as output increases. a firm's long-run average total cost curve is falling. a firm's marginal cost curve is rising. a firm's long-run average total cost curve is rising.

B
If a firm's long-run average total cost curve is falling, economies of scale exist. By definition, a firm experiences economies of scale when its per unit cost falls as output increases. This will also cause a decline in the long-run average total cost curve. Diseconomies would cause an increase in the long-run average total cost curve. Question ID: 24853 An upward sloping long run average-total-cost (LRATC) curve indicates: economies of scale are present, and the firm has exceeded its optimal level of output. economies of scale are present, and the firm is approaching its optimal level of output. diseconomies of scale are present, and the firm has exceeded its optimal level of output. diseconomies of scale are present, and the firm is approaching its optimal level of output.

A.

B.

C.

D.

C
Economies of scale exist when unit, and total costs fall as output is increased. The long run average-total-cost (LRATC) curve is downward sloping to the right until the firm reaches its optimal level of output. At this point diseconomies of scale are present and the LRATC curve begins to slope upward.

Question ID: 24851 All of the following are reasons why unit cost declines as output increases due to the

40

existence of economies of scale EXCEPT:

A. B. C. D.

experience. mass production. scarcity of resources. specialization of labor and machinery.

C
The total cost per unit declines as output or firm size increases when economies of scale are realized based on mass production, specialization of labor and machinery, or experience. Scarcity of resources would cause the unit cost to increase.

Question ID: 24854 The average variable cost (AVC) curve, and the average total cost (ATC) curve will shift downward when there is:

A. B. C. D.

an increased shortage of a major required input for production. a decrease in taxes for the firm. no change in technological improvements for an extended period of time. a new employee safety requirement.

B
The marginal cost for the firm will be lowered when taxes are reduced, the price of resources used in production is reduced, regulatory costs are reduced or technological advances reduce production costs. A reduction in the marginal cost for the firm will result in lower average variable costs (AVC) and lower average total costs (ATC).

Question ID: 24857 When technological advances related to the firm’s manufacturing equipment are discovered the firm will have:

41

A. B. C. D.

lower marginal costs and lower average variable costs. lower marginal costs and higher average total costs. higher marginal costs and higher average total costs. higher marginal costs and lower average variable costs.

A
The marginal cost for the firm will be reduced as a result of lower production costs due to technological advances. This will lead to a reduction in the marginal cost for the firm that will result in lower average variable costs (AVC) and lower average total costs (ATC).

Question ID: 12706 Which of the following will cause the firm's cost curves to shift downward?

A. B. C. D.

A new government regulation requires enhanced pollution control. A technological discovery reduces production costs. Taxes increase. Resource prices increase.

B
The only item listed that will cause a firm's cost curve to shift downward is if the technological discovery increases productivity. All of the others listed answers would shift the firm's cost curve upward. Question ID: 12701 Which of the following must be true if average total costs are rising? Marginal cost is:

A. B. C. D.

less than average variable cost. greater than average total cost. equal to average total cost. less than average total cost.

42

B
When average total costs are rising, marginal cost is greater than average total cost. This relationship is easy to understand if you think about your average grade in a class. If your average grade in a class increased after the last exam, the grade you earned on the last exam (similar to marginal cost) must have been greater than the previous average grade (similar to average total cost). Question ID: 12689 The opportunity cost of a firm's equity capital is:

A. B. C. D.

an historical cost. an implicit cost. a fixed cost. an explicit cost.

B
The opportunity of using a firm's equity capital is an implicit cost. It is an implicit cost because it does not appear on the firm’s income statement or balance sheet. Another implicit cost is owner-provided services. Question ID: 12686 The major difference between accounting profit and economic profits is that: explicit and implicit costs are included in accounting profit, but only explicit costs are included in economic profit. accounting profit is based on opportunity costs, whereas economic profit is based on market transactions. accounting profit does not consider the opportunity cost of the firm's equity capital and therefore, it generally overstates economic profit. accounting profit generally underestimates the level of economic profit because it includes interest expense.

A.

B.

C.

D.

C

43

Question ID: 12694 Which of the following is an example of an implicit cost?

A. B. C. D.

The opportunity cost of a firm’s equity capital. Rent. Treating the firm’s customers to a round of golf. Labor salaries.

A
Implicit costs include the opportunity cost of a firm's equity. Explicit costs are measurable cash flows for operating expenses.

Question ID: 12704 The law of diminishing returns states that: as more resources are devoted to production, at some point output will begin to decrease. as less resources are devoted to production, the output will decrease, but at an increasing rate. as more resources are devoted to production, the output will increase, but at a decreasing rate. costs will rise substantially due to added fixed costs.

A.

B.

C.

D.

C
At low levels of output, increasing marginal returns will exist corresponding to the downward sloping portion of the marginal cost curve. As marginal costs begin to increase diminishing marginal returns will occur.

Question ID: 12698 Which of the following statements is TRUE?

44

A.

Fixed costs can be changed in the short run but variable costs can only be changed in the long run. Fixed costs cannot be changed because they are always fixed. Variable costs can be changed in the short run but fixed costs can only be changed in the long run. Variable costs and fixed costs can only be changed in the long run.

B.

C.

D.

C
Fixed costs cannot be changed in the short run but only in the long run. Variable costs can be changed in the short as well as the long run.

1.C: Price Takers and the Competitive Process
Question ID: 12750 Under pure competition, the individual firms are:

A. B. C. D.

price takers. price searchers. producing a highly differentiated product. large relative to the total market.

A
Individual firms under pure competition produce a homogeneous product, there are a large number of firms, there are no barriers to entry or exit and each seller is small relative to the total market. Question ID: 12747 Which of the following accurately describes a major difference between a purely competitive firm and a monopolistic firm? The monopolistic firm:

A. B.

maximizes profit, and the competitive firm minimizes costs. will maximize profits, and the competitive firm cannot because profits are
45

driven down to zero in the long run.

C. D.

maximizes price charged, and the competitive firm maximizes profit. is a price searcher, and the competitive firm is a price taker.

D
Price takers are firms that take the market price as given; they face a perfectly elastic demand curve. Price searchers are firms that have price setting power; they face a downward sloping demand curve. Question ID: 12756 Which of the following is NOT a condition of a purely competitive market?

A. B. C. D.

Elastic demand curve. Indistinguishable products. Sellers make economic profits. Individual sellers have a small share of the market.

C
The only item listed that is NOT a condition of a purely competitive market is that sellers make economic profits. In fact, sellers do not make economic profit after taking into account their opportunity costs. Question ID: 12759 Which of the following is NOT a characteristic of pure competition?

A. B. C. D.

Zero barriers to entry and exit exist. The products produced within a given market are homogenous. The demand curve for an individual firm is a straight vertical line. The size of each firm is small relative to the size of the overall market.

C

46

Under pure competition individual firms have no control over price resulting in a demand schedule that is perfectly elastic or horizontal.

Question ID: 12753 Which of the following statements regarding how competition creates prosperity is FALSE? Competition:

A. B. C. D.

permits an equal distribution of income, which reduces poverty. causes firms to provide products that consumers prefer. encourages firms to operate at the optimal production scale. causes firms to develop new more efficient production techniques.

A
The item listed that is not a way in which competition creates prosperity is the one that states, “competition permits an equal distribution of income, which reduces poverty.” To our knowledge, this argument has never been made and should not be made because competition results in the healthy unequal distribution of income. Question ID: 12765 Under pure competition, a firm will experience zero long term economic gains when:

A. B. C. D.

MC = ATC = MR = price. MC is less than ATC. price is less than average total cost. MR is greater than ATC.

A
Under pure competition, a firm will experience zero long term profits when p=MC=MR=ATC. It recovers all costs including opportunity costs and earns zero economic profits. Question ID: 12761 The short-run supply curve for a firm in a purely competitive market is equal to the firm's:

47

A. B. C. D.

MC curve. AVC curve.</FONT< td> ATC curve. FC curve.

A
The short-run supply curve for a firm in a purely competitive market is equal to the firm's MC curve. A price taker will maximize profits when it produces the output level where P = MC. As P rises, its point of intersection with the MC curve indicates optimal production. Question ID: 12762 In perfectly competitive markets, at what point will producers maximize profits in the long run? Marginal Revenue (MR) = Marginal Cost (MC) = Price(P) = Average Total Costs (ATC). Marginal Revenue (MR) = Marginal Costs (MC) = Price (P). Marginal Revenue (MR) = Marginal Costs (MC). Where the supply and demand curves intersect each other.

A.

B. C. D.

A
For a purely competitive firm P = MR and to earn a normal return, zero economic profit, their price would need to be where the MC and ATC lines intersect each other.

Question ID: 12773 In the long run, if price is below average total cost (ATC) the firm will:

A. B. C.

keep running. produce more. shut down.

48

D.

cover its variable costs.

C
If the price is below ATC then the firm is losing money. If the firm believes the price will never exceed ATC the only way to eliminate fixed costs is to go out of business.

Question ID: 24861 The short-run market supply curve in a competitive market is: the horizontal sum of the marginal cost (MC) curves for the firms in the industry. the vertical sum of the marginal cost (MC) curves for the firms in the industry. horizontal and downward sloping to the right. vertical and downward sloping to the right.

A.

B.

C. D.

A
The short-run market supply curve in a competitive market is the horizontal sum of the MC curves for the firms in the industry. The short-run market supply curve slopes upward to the right, because firms will supply more units at higher prices.

Question ID: 24859 The short-run supply curve for a price taker firm is the portion of the marginal:

A. B. C. D.

cost (MC) curve below the average variable cost (AVC) curve. cost (MC) curve above the average variable cost (AVC) curve. cost (MC) curve above the average total cost (ATC) curve. revenue (MR) curve above the average total cost (ATC) curve.

B

49

The short-run supply curve for a firm is its MC curve above the AVC curve. Price takers will produce where price (P) equals MC. At prices below the AVC curve the firm will not be able to remain in operation. The firm is earning a normal return where P is equal to the ATC curve. Above the ATC curve the firm is making economic profits and will continue to expand production along the MC curve.

Question ID: 12778 The short-run supply curve for a purely competitive market:

A. B. C. D.

is a horizontal line. is a vertical line. slopes upward to the right. slopes downward to the right.

C
The short-run supply curve for a purely competitive market slopes upward to the right. This reflects the fact that firms in the industry will produce more when the price rises. Question ID: 24868 The long-run market supply curve slopes downward to the right for:

A. B. C. D.

marginal cost industries. constant cost industries. decreasing cost industries. increasing cost industries.

C
The long-run supply curve indicates the minimum price at which firms will supply various output levels. The supply curve slopes downward to the right for decreasing cost industries, because production costs decline as production increases thereby increasing supply. Also occurring at the same time is an increase in demand as price declines.

50

Question ID: 24863 The long-run market supply curve is perfectly elastic for:

A. B. C. D.

increasing cost industries. constant cost industries. marginal cost industries. decreasing cost industries.

B
The long-run supply curve indicates the minimum price at which firms will supply various output levels. The supply curve will be perfectly elastic (horizontal) for constant cost industries, because production costs remain constant as output expands.

Question ID: 12780 In an increasing cost industry, if the demand for a product declines as the market adjusts, in the long run:

A. B. C. D.

the firm's per unit cost will increase. prices will rise. the firm's per unit cost will fall. total costs will rise.

C
In an increasing cost industry, if the demand for a product declines, output will decline as well. Increasing cost industries have lower costs at lower levels of output. Therefore, reduced production leads to lower per unit costs. Question ID: 24873 Which of the following is NOT a characteristic of the long-run supply curve? In the long run, there will be a greater change of quantity supplied for a given price change, than in the short run.

A.

51

B.

In the long run, firms in an industry can adjust the fixed nature of their costs. The long-run supply curve is flatter than the short-run supply curve. The market supply curve is more elastic in the short run than in the long run.

C.

D.

D
The long-run supply curve is more elastic and flatter than the short-run supply curve. All of the other items in this question are true for the long-run supply curve.

Question ID: 24875 The fact that firms can make more adjustments to production costs in the long run gives the firm:

A. B. C. D.

a long-run supply curve that is more elastic than its short-run supply curve. a steeper long-run supply curve than the short-run supply curve. the ability to quickly adjust output. the ability to adjust prices more given a small change in output.

A
Firms can adjust the fixed nature of their production costs in the long run through the purchase or sale of fixed assets. Therefore, it costs less to adjust output slowly in response to a change in demand. In the long run, there will be a greater change in the quantity supplied for a given change in price. This is because in the long run firms can change their production capacity.

Question ID: 24887 Compared to the short-run supply curve, the long-run supply curve is:

A. B.

steeper sloping downward to the right. flatter.

52

C. D.

steeper sloping upward to the right. more inelastic.

B
The long-run supply curve is more elastic and flatter than the short-run supply curve. In the long run, firms in an industry can adjust the fixed nature of their costs.

Question ID: 12754 In a purely competitive market, zero economic profits indicate that:

A. B. C. D.

firms are overproducing. the industry is operating normally and production is at its proper level. fierce advertising is occurring in the market place. firms need to expand output to reduce costs.

B
In a purely competitive market, zero economic profits indicate that firms are producing at the proper level. Zero economic profits is not bad since the firm is able to recover its production and operating costs as well as earn a fair return on the invested capital. Question ID: 12763 A competitive firm will tend to expand its output so long as marginal:

A. B. C. D.

revenue is positive. revenue is greater than marginal cost. revenue is greater than the average cost. cost is less than average cost.

B
All firms will continue to expand production until marginal revenue = marginal cost.

53

Question ID: 12774 In the short run, if price is below average total cost (ATC) the firm will:

A. B. C. D.

create new market participants. produce more. raise prices. keep running as long as it is covering its variable costs.

D
In the short run, if the firm is covering its average variable costs and some of it's fixed costs it will continue to operate as long as the situation is temporary.

Question ID: 12768 Which of the following is TRUE for a competitive firm in long-run equilibrium?

A. B. C. D.

AVC = TR = TC P = MC = ATC = MR P = AVC = MR TC = TR = MC

B
For a competitive firm, long-run equilibrium is where P = MC = ATC. For price taking firms, P = MC. Competition eliminates economic profits in the long run so that P = ATC. Question ID: 12771 Suppose a purely competitive firm produces baseball bats that sell at a price of $100 each. This firm’s average total cost at the current level of production is $150 per bat, and the average fixed cost is $40 per bat. Which of the following statements is TRUE regarding this firm? They should: shut down in the short run because their average total cost is greater than their price.

A.

54

B.

shut down in the short run because their average variable cost is greater than their price. continue producing baseball bats because they are operating at an economic profit. continue producing baseball bats because they are covering their fixed costs.

C.

D.

B
Variable costs = $150 (ATC) - $40 (AFC) = $110 (AVC). At a selling price of $100 the firm is not covering its variable costs and is losing more than its fixed costs.

Question ID: 12781 Which of the following will have a supply curve that slopes upward to the right?

A. B. C. D.

All industries have supply curves that slope upward to the right. Increasing cost industries. Decreasing cost industries. Constant cost industries.

B
With increasing cost industries, production costs rise as output increases. Supply will be directly related to price and will sweep upward to the right.

Question ID: 12755 Which of the following is TRUE under pure competition?

A. B. C.

The products of different firms are sold at different prices. There are no barriers to entry into the market. There are a few sellers.

55

D.

The competitors earn economic profits in the long run.

B
The only true statement listed in the question is that, under pure competition there are no barriers to entry into the market. Each of the other possible answers is incorrect. While the competitors can earn positive economic profits in the short-run, they cannot earn long term economic profits due to ease of entry and exit. Question ID: 12749 Which of the following CORRECTLY indicates the shape of the demand curve for price takers and price searchers? Price Takers Price Searchers slopes upward to the left Price Searchers slopes upward to the left Price Searchers slopes downward to the right Price Searchers slopes upward to the right

A.

horizontal line Price Takers

B.

slopes upward to the right Price Takers

C.

vertical line Price Takers

D.

vertical line

A
The demand curve for price takers is a horizontal line because price takers have no control over price (the market determines price). For price searchers, the demand curve slopes downward to the right (same as sloping upward to the left) indicating that, when price declines, more units will be demanded (or vice versa). Question ID: 12779 In the short run, if a firm is operating at a level where marginal revenue (MR) is less than average total costs (ATC) but greater than average variable costs (AVC) the firm will:

A. B. C.

continue producing. raise prices. stop producing.

56

D.

increase production.

A
In the short run if a firm is operating where its MR is above its AVC it is losing money, but it is covering its AVC and part of its fixed costs. If the firm feels this is a temporary situation it will continue to operate.

1.D: Price-Searcher Markets with Low Entry Barriers
Question ID: 12785 The demand for products from monopolistic competitors is:

A. B. C. D.

not sensitive to price due to availability of close substitutes. flat due to the allocative efficiency of price searcher markets. inelastic due to the availability of many complementary goods. elastic due to the availability of many close substitutes.

D
The demand for products from monopolistic competitors is elastic due to the availability of many close substitutes. If a firm increases its product price, it will lose customers to firms selling substitute products. Question ID: 12783 Which one of the following structures is characterized by free entry and exit, a differentiated product, and price searcher behavior?

A. B. C. D.

Oligopoly. Pure competition. Pure monopoly. Monopolistic competition.

D
57

Another name for monopolistic competition is another name for competitive price searcher markets. The are a large number of independent sellers, each produces a differentiated product, each market has a low barrier to entry, and each producer faces a downward sloping demand curve.
Question ID: 12790 Characteristics of monopolistic competition include all of the following EXCEPT:

A. B. C. D.

high barriers to entry. a downward sloping demand curve. large numbers of independent sellers. a differentiated product.

A
Monopolistic competition has low barriers to entry.

Question ID: 24892 Which of the following statements best describes the demand curve for price searchers? Demand curves for price searchers are:

A. B. C. D.

elastic and downward sloping. inelastic and downward sloping. inelastic and upward sloping. elastic and upward sloping.

A
Due to the availability of close substitutes, demand curves for price searchers are highly elastic and downward sloping.

Question ID: 24895 In the short run, price searchers maximize profits by producing the goods at the point where

58

marginal revenue (MR): equals marginal costs (MC) and charging a price based on the demand curve. equals marginal costs (MC) and charging a price based on the average total cost (ATC) curve. is greater than marginal costs (MC) and charging a price based on the average total cost (ATC) curve. is greater than marginal costs (MC) and charging a price based on the demand curve.

A.

B.

C.

D.

A
Price searchers maximize profits by producing an amount of output where MR equals MC and charging a price based on the demand curve. In the short run, profits or losses occur depending upon where the individual firm’s ATC curve is in relationship to the demand curve. In the long run, economic profits are zero due to the low barriers to entry. Important note for the test: regardless of whether a firm is a price taker, price searcher, monopoly, or oligopoly, all firms will seek to maximize profits and want to produce where marginal revenue equals marginal cost.

Question ID: 12792 Given the price and output schedule below, how many units should the monopolistic competitive firm produce to maximize profits? Output 10 25 35 40 3.60 2.90 96 Price $5.00 4.70 Total Cost

$40
94

105

A. B. C. D.

35. 25. 10. 40.

59

B
Given the price and output schedule, we can calculate total revenue and compare it with total cost. The level of output that provides the highest profit is 25. Total Revenue 10 x 5.00 = $50 25 x 4.70 = 117.50 35 x 3.60 = 126 40 x 2.90 = 116 Total Cost $40 94 105 96 Revenue less Cost $10 24 21 20

Question ID: 12794 The strongest argument that price-searchers with low entry barriers do not achieve allocative efficiency is because they:

A. B. C. D.

generate excess economic profits in the long-run. do not produce at a level where MR = MC. waste resources preventing competitors from entering the market. produce at a level that does not minimize average total cost in the long run.

D
There is a strong argument that price-searchers with low entry barriers do not achieve allocative efficiency because they produce at a level that fails to minimize the long-run average total cost. Other arguments are that price searchers use advertising, which is wasteful, and that fewer producers could operate more efficiently. Question ID: 24898 Contestable markets lead to efficient production and zero economic profits:

A. B. C. D.

only in markets with deregulation. only with a large number of firms in the market. only when the threat of entry for new competitors is low. even with a small number of firms in the market.

60

D
Contestable markets have low costs of entry and exit. Even with a small number of firms in the market, efficient production and zero economic profits exist due to the threat of potential competitors entering the market. Deregulation can sometimes make markets more contestable and improve efficiency. However, deregulation is not necessary to make a market contestable.

Question ID: 24900 Economic models often leave entrepreneurship out of the model because entrepreneurs:

A. B. C. D.

fail to gather relevant information in some situations. use subjective judgment to determine the best course of action. use historical information alone in predicting future markets. fail to add significantly to economic progress.

B
Entrepreneurs gather all relevant information (historical and forward looking) in analyzing complex situations and often use subjective judgment in the final analysis. The use of subjective judgment makes it difficult to create an economic model of the process. However, this does not imply that entrepreneurs who discover and introduce more efficient production processes and innovative products do not add significantly to economic progress.

Question ID: 24906 Price discrimination reduces allocative inefficiencies by increasing:

A. B. C. D.

the barriers to entry for potential competitors. the elasticity of demand for its customers. sales to customers with inelastic demand curves. total revenues while decreasing total costs.

C
61

Price discrimination reduces allocative inefficiencies by increasing sales to customers with inelastic demand curves. A major benefit from price discrimination is that the firm gains sales from customers with inelastic demand curves while still providing goods to customers with more elastic demand curves.

Question ID: 24903 For price discrimination to work, the seller must have all of the following characteristics EXCEPT: a way of preventing customers from purchasing the product at a lower price and reselling it to customers at a higher price. a market with high barriers to entry. a downward sloping demand curve. two or more identifiable groups of customers with different price elasticities of demand for the product.

A.

B. C.

D.

B
Price discrimination is the practice of charging different consumers different prices for the same product or service. For price discrimination to work the seller must: a) have a downward sloping demand curve, b) have at least two identifiable groups of customers with different price elasticities of demand, c) must be able to prevent customers paying the lower price from reselling the product to higher paying customers.

Question ID: 12795 Price discrimination can reduce allocative inefficiency by:

A. B. C. D.

lowering the average price paid by the consumers. allocating more of their production to be sold at a lower price. encouraging competition to enter the market. attracting more consumers into the market and allowing more trades.

D
Price discrimination can increase allocative inefficiency by increasing total output and allowing
62

more trades. Without the second price at the lower level, some potential customers would not buy the product resulting in lower output and fewer trades. Question ID: 24909 All of the following are reasons why competition is an important disciplinary force in a market with low barriers to entry EXCEPT competition:

A. B.

promotes efficient production and consumer satisfaction. allows firms to collaborate in price reductions. provides incentives for firms to find new and more efficient production technologies. encourages firms to find the optimal scale of production.

C.

D.

B
The collaboration of price reductions is known as collusion and is the opposite of competition. Competition is an important disciplinary force in markets with low barriers to entry because competition: a) promotes efficient production and consumer satisfaction, b) provides incentives for firms to find new and more efficient production technologies, and c) encourages firms to find the optimal scale of production.

Question ID: 12798 Oligopolists trying to decide what to do without knowing what the competition will do is:

A. B. C. D.

an example of why oligopolies are economically inefficient. an example of why collusion should be allowed. an example of the prisoner's dilemma in game theory. why collusion is optimal.

C
In an oligopoly, few firms compete in the same market. Since the firms sell similar products to the same customers, if one firm tries to gain market share by cutting price, the other firms will respond by cutting price to recoup their customers. In the end, all firms will lose because they have the same net customer base, but the price level has been reduced. This situation represents the "prisoner's dilemma."
63

Question ID: 24913 Competition in markets with low barriers to entry helps to ensure that firms:

A. B. C.

create products irregardless of consumer needs. determine levels of production independent of the market. look for new and more efficient production technologies. cater to both individual and groups of customers regardless of the size of the firm.

D.

C
Competition in a market with low barriers to entry encourages firms to look for new and more efficient production technologies. Firms can only survive if they are efficient in production. Customer needs determine the types of products that firms produce. Firm size will be determined in part by the ability of firms to find a niche in the market to meet customer needs most efficiently through the production of custom products or economies of scale.

Question ID: 12796 In order for effective price discrimination to occur the seller must:

A.

have a demand curve with a negative slope. have more than one identifiable group of customers with the same price elasticities of demand for the product. maximize revenue by selling at the highest price possible. be able to advertise the product among customers.

B.

C. D.

A
In order for effective price discrimination to occur, the seller must have a downward sloping demand curve. The seller must also have at least two identifiable groups of customers with <>price elasticities of demand for the product, and the seller must be able to prevent customers from reselling the product. Question ID: 12784

64

Which one of the following is NOT a characteristic of monopolistic competition?

A. B. C. D.

Low barriers to entry and exit. Elastic demand curves. A single seller. Differentiated products.

C
All are characteristics of monopolistic competition except "single seller." There are many sellers or producers who face demand curves that slope downward to the right and are elastic; they sell differentiated products that permits firms to attract customers without reducing price; and, there are low barriers to entry. Question ID: 12787 Monopolistic competition differs from pure monopoly in that:

A. B.

monopolists maximize profit; monopolistic competitors do not. monopolistic competitors are price takers, monopolists are not. monopolistic competitors face a downward sloping demand curve, monopolists do not. barriers to entry are high under monopoly, but low under monopolistic competition.

C.

D.

D
By definition. Question ID: 12793 When a firm is earning positive economic profits, what will happen in this market?

A. B. C.

Accounting profit will be zero in the short run. Price takers will be over run by price searchers. New firms will enter driving down the economic profits to zero.

65

D.

Losses will occur in the short run.

C

Question ID: 12786 Price takers and price searchers have several things in common. Which of the following is NOT one of them?

A. B. C. D.

Both produce where MR = MC. Both have low or no barriers to entry. Both maximize economic profit. Both face a perfectly elastic demand curve.

D
The only item listed in the question that monopolistic competition and pure competition do NOT have in common is perfectly elastic demand curve. Under pure competition, producers face a perfectly elastic demand curve whereas price searchers face a downward sloping demand curve.

1.E: Price-Searcher Markets with High Entry Barriers
Question ID: 12601 Which of the following is NOT a barrier to entry?

A. B. C. D.

Government licensing and legal barriers. Patents or exclusive rights of production. Price discrimination. Economies of scale.

C
Resource control is also a barrier to entry where a single firm has control over a resource essential for entry into an industry.
66

Question ID: 12599 Barriers to a monopoly may exist when:

A. B. C. D.

natural resources are spread among many firms. governmental licensing and regulations are present. patents and exclusive production rights are granted to firms. economies of scale are present.

A
All cases except wide distribution of a natural resource facilitate a monopoly. If a natural resource is concentrated in one firm a monopoly would result. Question ID: 12597 Which of the following is most likely to be a positive result of the total elimination of all barriers to entry?</FONT< td>

A. B.

Elimination of inefficient producers. Increased incentive to spend money on research and development. More efficient production of products that are subject to economies of scale. Increased rent seeking.

C.

D.

A
The existence of barriers to entry is likely to result in inefficient firms continuing to produce their product because of an artificially high product price. Elimination of those barriers is likely to result in the inefficient firms going out of business. Question ID: 12616 Which of the following statements about monopoly is FALSE? The monopolist will produce at a level where marginal cost equals marginal revenue.

A.

67

B.

The monopolist will go out of business if the average total cost curve lies above the demand curve everywhere. Economies of scale exist. The demand curve is highly elastic.

C. D.

D
The only statement about monopoly that is false is that the demand curve facing the monopolist is highly elastic. The demand curve facing a monopolist is highly inelastic. All other statements support a monopoly. Question ID: 12618 Which of the following is NOT a characteristic of an oligopoly?

A. B. C. D.

There are few sellers. Products can either be similar or differentiated. Relatively small economies of scale. High barriers to entry.

C
Oligopolies have large economies of scale and interdependence among competitors.

Question ID: 12619 An oligopoly consists of all of the following EXCEPT:

A. B. C. D.

interdependence among competitors. a large number of sellers. large economies of scale. significant barriers to entry.

B
68

Other characteristics of oligopolies are: they consist of a small number of sellers and their products may be either similar or differentiated.

Question ID: 12608 While monopolistically competitive firms have competition on the basis of quality, they still do not achieve:

A. B. C. D.

economic profits. allocative efficiency. accounting profits. economies of scale.

B
While monopolistically competitive firms have competition on the basis of quality, they still do not achieve allocative efficiency for the reasons discussed in the answer to the previous question. Question ID: 12622 If a monopolist is concerned about the development of substitute products eroding its monopoly power, which of the following actions is the monopolist most likely to take? Produce more and charge less than the short-run profit maximization rule implies. Produce less and charge more than the short-run profit maximization rule implies. Maintain the current price, but increase production to build a surplus of the product. Raise prices to maximize profits before the substitute product is introduced.

A.

B.

C.

D.

A
If a monopolist is concerned about the development of substitute products eroding its monopoly power, the action the monopolist is most likely to take is to produce more and charge less than the short-run profit maximization rule implies. This will eliminate economic profits and discourage new competitors from entering the market with substitute goods.

69

Question ID: 12623 If a profit maximizing firm finds that its marginal revenue exceeds its marginal cost, it should: decrease output, regardless of whether it is a price taker or a price searcher. increase output if it is a price searcher, but this may not be proper if it is a price taker. increase output if it is a price taker, but this may not be proper if it is a price searcher. increase output, regardless of whether it is a price taker or a price searcher.

A.

B.

C.

D.

D
This is known as allocative inefficiency, or the output levels are below the price = MC point. In other words, there is not enough production. Question ID: 12632 Something that oligopolists will try to engage in with another firm in setting a higher price is called:

A. B. C. D.

collusion. prisoner’s dilemma. resource control. high economic profits.

A

Question ID: 12630 Which of the following would be most beneficial to firms engaged in collusive behavior?

A. B.

Demand is stable (rather than unstable). Entry barriers are low (rather than high).

70

C. D.

The number of oligopolists is large (rather than small). Demand is inelastic (rather than elastic).

A
Of the items listed, the one that would be most beneficial to firms engaged in collusive behavior is stable demand. All of the other things listed make collusive behavior more difficult. Question ID: 24917 In markets with high barriers to entry, collusion would be least likely when:

A. B. C. D.

it is easier to detect and eliminate price cut the demand for products is very stable. vigorous antitrust action is present. there are very few oligopolists.

C
Collusion would be least likely when vigorous antitrust action increases the cost of collusion. Collusive behavior is limited when: a) the number of oligopolists is large, b) it is difficult to detect and eliminate price cuts, c) low entry barriers are present, and d) there are unstable demand conditions.

Question ID: 24915 In oligopolistic markets collusive behavior is most likely if there:

A. B. C. D.

is vigorous antitrust action. is difficulty to detecting and eliminating price cuts. are many oligopolists. are high barriers to entry.

D

71

With low entry barriers collusion is less likely because more new entrants will try to take advantage of the price premiums in a competitive market. Collusion is less likely when there are a large number of oligopolists, it is difficult to detect and eliminate price cuts, there is vigorous antitrust action, or unstable demand conditions.

Question ID: 24919 In oligopolistic markets with high barriers to entry, firms that cut prices without detection are most likely to:

A. B. C. D.

gain a larger share of the market. lose profits. lose customers. be in violation of antitrust laws.

A
Firms that can successfully cut prices undetected by their competitors will most likely increase their market share. This will in turn lead to more customers and profits. The firm would not be in violation of antitrust laws unless the firm participated in collusive behavior.

Question ID: 12635 Which of the following statements regarding monopolies is FALSE? Monopolists will try to get favorable treatment from the government called rent seeking. Due to the law of diminishing returns, natural monopolies exhibit an upward sloping average total cost curve. Supply to consumers is limited. Inefficient producers are able to survive.

A.

B.

C. D.

B
Natural monopolies have economies of scale that are so pronounced their average total cost curve is downward sloping.
72

Question ID: 12633 When a regulatory agency requires a monopolist to use average cost pricing, the intent is to produce the quantity where the:

A. B. C. D.

marginal revenue curve intersects the marginal cost curve. marginal revenue curve intersects the demand curve. average total cost curve intersects the marginal revenue curve. the market demand curve intersects the average total cost curve.

D
When a regulatory agency requires a monopolist to use average cost pricing, the intent is to price the product where the average total cost curve intersects the market demand curve. There are problems in using this method, e.g., determining exactly what the average total cost really is. Question ID: 12600 In a natural monopoly: the average total cost of production continually declines with increased output. the price charged by a monopolist is determined by the intersection of the demand curve with the marginal cost curve. one firm controls all natural resources. the government reserves the industry sector dealing with natural resources for a few firms only.

A.

B.

C.

D.

A
A monopoly situation in which the average total cost of production continually declines with increased output is called a natural monopoly. Question ID: 12607 An important difference between a monopolist and an oligopolist is that only one:

73

A. B. C. D.

is likely to benefit from economies of scale. has interdependence between sellers. has high barriers to entry. is a price searcher.

B
An important difference between a monopolist and an oligopolist is that only one has interdependence between sellers (price changes made by one firm affects the demand realized by the other firms in the industry). Monopolists and oligopolists have all of the other things listed in the question in common. Question ID: 12610 In an oligopolistic market:

A.

minimum-cost output is only a small portion of the market output. a firm will consider the potential response of its rivals when making business decisions. a firm will seldom use product quality as a competitive weapon. barriers to entry are low.

B.

C. D.

B
Oligopolists are highly dependent upon the actions of their rivals when making business decisions. Price determination in the auto industry is a good example. Automakers tend to play "follow the leader" and announce price increases in close synchronization. They are not working explicitly together, but the actions of one producer have a large impact on the others. Question ID: 12614 Given fierce competition, oligopolists will produce output at the point where:

A. B. C.

marginal revenue equals demand. long-run average total cost equals price. price equals variable cost.

74

D.

long-run average total cost equals marginal revenue.

B
Given fierce competition, oligopolists will produce output at the point where long-run average total cost equals demand. At this point, economic profit is zero. Question ID: 12603 All of the following are barriers to entry EXCEPT:

A. B. C. D.

patents. price controls. resource controls. economies of scale.

B
Another barrier to entry is government licensing and legal barriers.

Question ID: 12631 Which of the following most likely describes how firms in an oligopolist market will increase profits?

A. B. C. D.

Form a cartel. Decrease prices. Increase production. Increase prices.

A
Oligopolies can maximize profits by colluding with one another, which reduces competition and increases the price of their product. Collusion can take the form of an association or cartel to set prices and output.

75

Question ID: 12609 An oligopolistic firm: will consider the potential response of its rivals when making business decisions. will seldom use product quality as a competitive weapon. is likely to be formed when the minimum-cost output is only a small portion of the market output. is likely to be formed when barriers to entry are low.

A.

B.

C.

D.

A
Oligopolists are highly dependent upon the actions of their rivals when making business decisions. Price determination in the auto industry is a good example. Automakers tend to play "follow the leader" and announce price increases in close synchronization. They are not working explicitly together, but the actions of one producer have a large impact on the others. Question ID: 12598 Which one of the following is most likely to contribute to the presence of monopoly in an industry?

A. B. C.

Legal barriers to entry into the industry. An elastic market demand for the product produced by the industry. Diseconomies of scale. Inefficiency attributable to bureaucratic decision-making procedures in the industry.

D.

A
An example of an industry with leagal barriers is utility firms, who are granted exclusive rights to supply electricity in certain areas. Question ID: 12626 If the average total cost curve is always above the demand curve of a monopolist, then the monopolist:

76

A. B. C. D.

will go out of business unless the situation is temporary. must be producing at an efficient level of production. will be just breaking even. will be generating positive economic profit.

A
If the average total cost curve is always above the demand curve of a monopolist, then the monopolist will be generating negative economic profit. This is a situation in which a monopolist should go out of business unless the situation is temporary. Question ID: 12634 When a regulatory agency imposes a price ceiling in order to limit monopoly profits to a fair rate of return, the monopolist must sell at a price determined by the intersection of the:

A. B. C. D.

demand curve and the average total cost curve. demand curve and the average variable cost curve. marginal revenue curve and the marginal cost curve. demand curve and the marginal revenue curve.

A
When a regulatory agency imposes a price ceiling in order to limit monopoly profits to a fair rate of return, the monopolist must sell at a price equal to average total cost. Question ID: 12624 A monopolist will expand production until:

A. B.

MR = MC and the price of the product will be determined by the MR curve. p = MC and the price of the product will be determined by the MC curve. MR = MC and the price of the product will be determined by the demand curve. p = MR and the price of the product will be determined by the ATC curve.

C.

D.

77

C
A monopolist will expand production until MR = MC and the price of the product will be determined by the demand curve. The demand curve lies above the intersection of the MR and MC curve and the higher price generates economic profit for the firm.

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