Sample Multiple Choice Questions (the books web site contains many more) 1.

a) b) c) d) If A and B are complements, an increase in the price of good A would: have no effect on the quantity demanded of B. lead to an increase in demand for B. lead to a decrease in demand for B. none of the above.

Answer: C Difficulty: Med . a) b) c) d) If a shortage e!ists in a mar"et, the natural tendency is for: demand to increase. price to increase. quantity supplied to decrease. no change in the mar"et. Difficulty: Med

Answer:

#. If stea" is a normal good, what do you suppose would happen to price and quantity during an economic recession$ a) price would increase and quantity decrease. b) price and quantity would both increase. c) price and quantity would both decrease. d) price would decrease and quantity increase. Answer: C Difficulty: Med %. &uppose you produce wooden des"s, and government legislation protecting the spotted owl has made it more e!pensive for you to purchase wood. 'hat do you e!pect to happen to the equilibrium price and quantity of wooden des"s$ a) price and quantity will increase. b) price will increase but quantity will decrease. c) price and quantity will decrease. d) price will decrease but quantity will increase. Answer: Difficulty: Med

(. &uppose that supply increases and demand decreases. 'hat effect will this have on price and quantity$ a) price will increase and quantity may rise or fall. b) price will decrease and quantity will increase. c) price will decrease and quantity will decrease. d) none of the above. Answer: D Difficulty: !ard

). a) b) c) d)

&uppose both supply and demand decrease. 'hat effect will this have on price$ it will fall. it will rise. it may rise or fall. it will remain the same.

Answer: C Difficulty: !ard *. &uppose that good + is a substitute for good ,. -hen an increase in the price of good , leads to a) an increase in the demand of good +. b) a decrease in the demand of good +. c) a decrease in the supply of good +. d) an increase in the supply of good +. Answer: A Difficulty: Med .. a) b) c) d) If consumers e!pect future prices to be higher they substitute current purchases for future purchases of perishable products. stoc"piling will happen when products are durable in nature. the position of the demand will not change. the demand for automobiles today will not change. Difficulty: Med

Answer:

/. -he demand function a) describes how much of good + will be purchased at the alternative price of good +, given all the other variables being constant. b) recogni0es that the quantity of a good consumed depends on its price and demand shifters. c) shows the relationship between the quantity demanded of + and variables other than its price. d) does not include e!pectations. Answer: Difficulty: !ard

11. All else held constant, as additional firms enter an industry a) more output is available at each given price. b) less output is available at each given price. c) the same output is available at each given price. d) output could increase or decrease at each given price. Answer: A Difficulty: Med

11. &uppose there is a simultaneous increase in demand and decrease in supply, what effect will this have on the equilibrium price$ a) it will rise. b) it will fall. c) it may rise or fall. d) it will remain the same. Answer: A Difficulty: Med 1 . -he difference between a price decrease and an increase in income is that a) A price decrease does not affect the consumption of other goods while an increase in income does. b) An increase in income does not affect the slope of the budget line while a decrease in price does change the slope. c) A price decrease decreases real income while an increase in income increases real income. d) A price decrease leaves real income unchanged while an increase in income increases real income. e) 2one of the above. Answer: Difficulty: Med

1#. 3oe prefers a three pac" of soda to a si!4pac". 'hat properties does this preference violate$ a) 5ompleteness. b) -ransitivity. c) 6ore is better. d) 7iminishing 68&. e) All of the above. Answer: C Difficulty: "asy 1%. A situation where a consumer says he does not "now his preference ordering for bundles + and , would violate the property of: a) more is be better. b) completeness. c) substitutability. d) complementarity. Answer: Difficulty: Med

1(. 9iven that income is : 11 and the price of good , is :%1. 'hat is the vertical intercept of the budget line$ a) .,111. b) 1. c) 1;(. d) (. Answer: D Difficulty: "asy 1). <ow does a decrease in the price of good + affect the mar"et rate of substitution between goods + and ,$ a) it increases. b) it decreases. c) remains unchanged. d) indeterminable without more information. Answer: Difficulty: Med

1*. Along the same indifference curve, 68& is a) constant as more of one good is obtained. b) increasing as more of one good is obtained. c) decreasing as more of one good is obtained. d) varying irregularly as more of one good is obtained. Answer: C Difficulty: Med 1.. If income increases, then a) the budget line rotates counter4cloc"wise. b) the budget line rotates cloc"wise. c) the budget line shifts to the right. d) the opportunity set contracts. Answer: C Difficulty: "asy 1/. -he substitution effect reflects how a consumer will react to a) a different marginal rate of substitution. b) a different mar"et rate of substitution. c) a different level of real income. d) a different level of nominal income. Answer: Difficulty: Med

1. If an increase in income causes a decrease in the consumption of good , we "now that good , is: a) a normal good. b) a substitute. c) a complement. d) an inferior good. Answer: D Difficulty: "asy 1. 'hich combination of the properties given below rules out indifference curves that intersect one another$ a) 5ompleteness and diminishing marginal rate of substitution. b) -ransitivity and more4is4better. c) 6ore4is4better and diminishing marginal rate of substitution. d) 5ompleteness and more4is4better. Answer: Difficulty: Med

. If a firm=s production function is >eontief and the wage rate goes up a) the firm must use more labor in order to minimi0e the cost of producing a given level of output. b) the firm must use more capital in order to minimi0e the cost of producing a given level of output. c) the firm must use less labor in order to minimi0e the cost of producing a given level of output. d) the cost minimi0ing combination of capital and labor does not change. Answer: D Difficulty: !ard #. 'hich of the following statements is incorrect: a) ?i!ed costs do not vary with output. b) &un" costs are those costs that are forever lost after they have been paid. c) ?i!ed costs are always greater than sun" costs. d) ?i!ed costs could be positive when sun" costs are 0ero. Answer: C Difficulty: !ard %. 'hich of the following conditions is true when a producer minimi0es the cost of producing a given level of output$ a) -he 68-& is equal to the ratio of input prices. b) -he marginal product per dollar spent on all inputs are equal. c) -he marginal products of all inputs are equal. d) a and b. Answer: D Difficulty: "asy

(. If the last unit of input increases total product we "now that the marginal product is: a) positive. b) negative. c) 0ero. d) indeterminate. Answer: A Difficulty: Med ). -he absolute value of the slope of the isoquant is the: a) 6arginal rate of technical substitution. b) 6arginal product of capital. c) 6arginal rate of substitution. d) @alue marginal product of labor. Answer: A Difficulty: "asy *. 5hanges in the price of an input cause: a) Isoquants to become steeper. b) &lope changes in the isocost line. c) Aarallel shifts of the isocost lines. d) 5hanges in both the isoquants and isocosts of equal magnitude. Answer: Difficulty: "asy

.. A production function a) defines the minimum amount of output that can be produced with inputs such as capital and labor. b) defines the average amount of output that can be produced with inputs such as capital and labor. c) represents the technology available for turning inputs into output. d) is determined only by the e!penditures on 8B7. Answer: C Difficulty: Med /. -he short4run is defined as the time4frame a) in which there are no fi!ed factors of production. b) in which there are fi!ed factors of production. c) less than one year. d) less than three years. Answer: Difficulty: "asy

#1. -he long4run is defined as a) the hori0on in which the manager can adCust all factors of production. b) the hori0on in which there are only fi!ed factors of production. c) the hori0on in which there are both fi!ed and variable factors of production. d) greater than one year. Answer: A Difficulty: "asy #1. -he marginal rate of technical substitution a) determines the rate at which a producer can substitute between two inputs in order to increase one additional unit of output. b) is the absolute value of the slope of the isoquant. c) is the absolute value of marginal revenue. d) is constant along the isoquant curve. Answer: Difficulty: Med

# . -he marginal product of an input is defined as a) change in average output attributable to the last unit of an input. b) change in total output attributable to the last unit of an input. c) change in total input attributable to the last unit of an output. d) change in average output attributable to the last unit of an output. Answer: Difficulty: Med

##. If the marginal product per dollar spent on capital is less than the marginal product per dollar spent on labor, then in order to minimi0e costs a) the firm should use less capital and more labor. b) the firm should use less labor and more capital. c) the firm should use less labor and less capital. d) the firm should use more labor and more capital. Answer: A Difficulty: Med #%. In a competitive industry with identical firms, long run equilibrium is characteri0ed by a) A D A5. b) A D 65. c) 68 D 65. d) All of the above. Answer: D Difficulty: "asy

#(. In the long4run, monopolistically competitive firms: a) charge prices equal to marginal cost. b) have e!cess capacity. c) produce at the minimum of average total cost. d) b. and c. Answer: Difficulty: "asy

#). 'hich of the following mar"et structures would you e!pect to yield the greatest product variety$ a) 6onopoly. b) 6onopolistic 5ompetition. c) Bertrand Eligopoly. d) Aerfect 5ompetition. Answer: Difficulty: "asy

#*. -he primary difference between 6onopolistic 5ompetition and Aerfect 5ompetition is a) the ease of entry and e!it into the industry. b) the number of firms in the mar"et. c) all of the above. d) none of the above. Answer: D Difficulty: "asy #.. 'hich of the following statements concerning monopoly is 2E- true$ a) A mar"et may be monopolistic because there are some legal barriers. b) A monopoly has mar"et power. c) A monopoly is always undesirable. d) -here is some deadweight loss in a monopolistic mar"et. Answer: C Difficulty: Med #/. &uppose that initially the price is :(1 in a perfectly competitive mar"et. ?irms are ma"ing 0ero economic profits. -hen the mar"et demand shrin"s permanently and some firms leave the industry and the industry returns bac" to a long run equilibrium. 'hat will be the new equilibrium price, assuming cost conditions in the industry remain constant$ a) :(1. b) :%(. c) >ower than :(1 but e!act value cannot be "nown without more information. d) >arger than :%( but e!act value cannot be "nown without more information. Answer: A Difficulty: !ard

%1. 'hich of the following features is common to both perfectly competitive mar"ets and monopolistically competitive mar"ets$ a) ?irms produce homogeneous goods. b) -here is free entry. c) >ong run profits are 0ero. d) both b and c. Answer: D Difficulty: Med %1. -he sourceFs) of monopoly power for a monopoly may be: a) economies of scale. b) economies of scope. c) patents. d) all of the above. Answer: D Difficulty: Med % . Gconomies of scale e!ist whenever: a) average total costs decline as output increases. b) average total costs increase as output increases. c) average total costs are stationary as output increases. d) both b and c. Answer: A Difficulty: "asy %#. ,ou are a manager for a monopolistically competitive firm. ?rom e!perience, the profit4ma!imi0ing level of output of your firm is 111 units. <owever, it is e!pected that prices of other close substitutes will fall in the near future. <ow should you adCust your level of production in response to this change$ a) Aroduce more than 111 units. b) Aroduce less than 111 units. c) Aroduce 111 units. d) Insufficient information to decide. Answer: Difficulty: Med

%%. A linear demand function e!hibits: a) constant demand elasticity. b) more elastic demand as output increases. c) less elastic demand as output increases. d) insufficient information to determine. Answer: C Difficulty: "asy

%(. 'hich of the following is not a basic feature of a monopolistically competitive industry$ a) -here are many buyers and sellers in the industry. b) Gach firm in the industry produces a differentiated product. c) -here is free entry and e!it into the industry. d) Gach firm owns a patent on its product. Answer: D Difficulty: Med %). 'hich of the following statements is not correct about monopoly$ a) A monopolist generally faces a downward sloping demand curve. b) 6onopolists always ma"e positive profits in the long4run. c) A monopoly may ma"e negative profits in the short4run. d) -here is no close substitute for a monopoly=s product. Answer: Difficulty: "asy

%*. 'hich of the following features is common to both perfectly competitive mar"ets and monopolistically competitive mar"ets$ a) ?irms produce homogeneous goods. b) Arices are equal to marginal costs in the long4run. c) >ong run profits are 0ero. d) Arices are above marginal costs in the long4run. Answer: C Difficulty: !ard