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# Chapter 04

Demand
10. The long-run price elasticity of demand for a product is generally _________ the short-run
elasticity for the same product.
A. lower than
B. equal to
C. higher than
D. not comparable to
11. Assume the demand function for skin care products is given by Q = 1,000 20 P + 5I. If
P=\$25 and I=\$1,000 currently, then:
A. skin care products are a normal good.
B. the elasticity of demand is equal to 11.
C. skin care products are inferior.
D. The price is too high
12. If the demand for product A displays high and positive cross-price elasticity with respect
to the price of product B, then:
A. the demand for product A is likely to have a low price elasticity.
B. products A and B are substitutes.
C. products A and B are complements
D. the demand for product B is likely to have a low price elasticity.
13. Assume Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current
price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the
following statements is true?
A. Pyrotex will surely increase its profits by decreasing the price of fireworks.
B. Pyrotex will surely increase its profits by increasing the price of fireworks.
C. Pyrotex cannot increase its profits by changing the price of fireworks.
D. Not enough information is provided to determine whether Pyrotex is currently maximizing
its profits.
14. Sales of shampoo by CleanHair, Inc. have recently decreased from 1,300 to 1,100 units in
response to a price decrease from \$7 to \$5 by its main competitor. Assuming that everything
else is being held constant, we can infer that:
A. the cross-price ARC-elasticity (midpoints formula) between the two products is -2.
B. the cross-price ARC-elasticity (midpoints formula) between the two products is -.
C. the cross-price ARC-elasticity (midpoints formula) between the two products is .
D. the cross-price ARC-elasticity (midpoints formula) between the two products is 2.
15. Fast food is believed to be an inferior good. This means that:
A. the quantity of fast food consumed decreases as income increases.
B. the income elasticity of demand for fast food is positive.
C. the quantity of fast food consumed will always be high
D. fast food is really not quality food

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16. BrightLight Ltd. estimates the demand curve for its table lamps to be Q = 1,000 4 P.
That is, P = 250- .25Q. Which of the following is NOT true?
A. The maximum total revenue BrightlLight can obtain is \$62,500.
B. The Marginal Revenue curve for BrightLight's table lamps is given by MR = 250 Q.
C. The elasticity of demand for BrightLight's table lamps is equal to 7.5 when their price is
\$125.
D. BrightLight maximizes its total revenues when selling 500 lamps.
17. Let EdGIrefer to the income elasticity for gasoline. Suppose EdGI= 2, then this means
that
A. if income increases by 2%, then QdGwill increase by 1%
B. if income decreases by 1%, then QdGwill decrease by 2%
C. if income increases by \$1, then QdGwill decrease by 2%
D. if income decreases by 2%, then QdGwill decrease by 1%
18. Assume that several firms compete in the market for cellular phones, and that the price
elasticity for this industry is equal to 0.75. Based on this information, would you advise a firm
in this industry to increase its price? If so, what is the percentage loss in total sales this firm
should expect to experience?
A. Definitely yes. Total revenues would increase, since
< 1. Sales would decrease by only .
75% for each 1% increase in price.
B. Not enough information is provided to make a sound decision. For the same reason it is not
possible to predict what the loss in sales for one firm would be.
C. Definitely no. Each 1% increase in price would result in 7.5% reduction in total sales,
negatively affecting total revenues.
D. Definitely no. Each 1% increase in price would result in 7.5% reduction in total sales,
affecting total revenues positively.
19. Assume the demand curve for skirts in Europe is P = 100 QE (or Qe=100 - P), while the
U.S demand is P = 100 QUS. (or Qus = 400 - 4P). Over the range of prices which demand
is more price elastic?
A. U.S. demand is more elastic.
B. European demand is more elastic.
C. It depends on the price level.
D. U.S. and European demand have the same elasticity for any price level.
20. A demand function depicts how the consumer demand of a product varies with:
A. available income.
B. cost of raw materials
C. the price of oil
D. amount available in the market
21. Assume D1 represents the current demand curve for skis. Which of the following would
be likely to cause D1 to shift to D2?

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## A. An increase in the price of snowboards.

B. An increase in the price of ski boots and clothing.
C. A decrease in the price of skis.
D. An increase in the price of skis.
22. Assume SeatComfy Inc. estimates the demand for its table chairs to be Q = 5,000 25P +
4I +10PA 15 PT, where P = the price of SeatComfy's chairs; PA = average price of
competitors' chairs; PT = price of tables; and I = average income of SeatComfy's customers.
Which of the following is true?
A. SeatComfy's chairs are inferior goods; SeatComfy's chairs and tables are complements,
while SeatComfy's and competitors' chairs are substitutes. SeatComfy's sales decrease by 250
units for each \$10 increase in their own price.
B. SeatComfy's chairs are normal goods; SeatComfy's and competitors' chairs are substitutes,
while SeatComfy's sales are not affected by the pricing decisions of tables' producers.
SeatComfy's sales increase by 50% if the price decreases by \$2.
C. SeatComfy's chairs are a normal good; SeatComfy's chairs and tables are complements,
while SeatComfy's and competitors' chairs are substitutes. SeatComfy's sales decrease by 25
units for each dollar increase in price.
D. SeatComfy's chairs are a normal good; SeatComfy's chairs and tables are complements,
while SeatComfy's and competitors' chairs are substitutes. SeatComfy's sales decrease by 250
units for each dollar increase in price.
23. Assume the demand function for SeatComfy's table chairs is as given in the previous
question (Q = 5,000 25P + 4I +10PA 15PT). Moreover, assume that currently P = 10, PA =
15, I = 500, PT = 100. Which of the following is true?
A. If SeatComfy increases its price by 1%, sales will increase as well as total revenues.
B. If SeatComfy decreases its price by 1%, sales will increase, while total revenues will
decrease.
C. If SeatComfy increases its price by 1%, sales will decrease, while total revenues will
increase.
D. If SeatComfy increases its price by 1%, sales will decrease as well as total revenues.

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24. Which of the demand curves depicted below has constant price elasticity?

A. All of them.
B. None of them.
C. (1) and (3).
D. (2) and (3).
25. FarAwayDrive Inc. has recently increased the price of its golf balls from \$4.00 to \$6.00.
In response to this increase in price, sales decreased from 2,200 to 1,800 units. If no other
information concerning the demand is available, which of the following is true about the
sensitivity of demand (using the ARC or mid-points formula) for FarAwayDrive's golf balls?
A. The ARC-elasticity (midpoints formula) of demand is 2.0.
B. The ARC-elasticity (midpoints formula) of demand is or .50.
C. The ARC-elasticity (midpoints formula) of demand is 2/3 or .667.
D. The ARC-elasticity (midpoints formula) of demand is 4/11 or .364.
26. Assume the demand curve for t-shirts is Q = 180 15P or P = 12 - .0667 Q. When are
total revenues maximized?
A. When the price is \$3.00.
B. When the price is \$6.00.
C. When the price is \$8.00.
D. When the price is \$6.66
27. The identification problem in using regression analysis to estimate a demand curve
emerges when:
A. factors affecting the demand for the product are highly correlated.
B. the demand for the product has not been stable over time.
C. the demand for the product has been relatively stable over time.
D. the supply of the product has been relatively unstable over time
28. Assume Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current
price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the
following statements is true?
A. Pyrotex will increase its revenues by decreasing the price of fireworks.
B. Pyrotex will increase its revenues by increasing the price of fireworks.
C. Pyrotex cannot increase its revenues by changing the price of fireworks.
D. Not enough information is provided to determine whether or not Pyrotex is currently
maximizing its profits.

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## 29. Computer equipment is believed to be a normal good. This means that:

A. the quantity of computer equipment consumed decreases as income increases.
B. the income elasticity of demand for computer equipment is negative.
C. the quantity of computer equipment increases as income increases.
D. the quantity of computer equipment increases as income decreases.
30. Price elasticity is defined as the change in quantity demanded relative to a change in:
A. the price of substitute products.
B. consumer income.
C. the price of complementary products.
D. the price of the product.
31. Edt = - 5. This means that if
A. Pt increases by 5%, then Qdt will decrease by 1%
B. Qdt increases by 5%, Pt will decrease by 1%
C. Pt increases by 1%, Qdt will decrease by 5%
D. Pt decreases by \$1.00, Qdt will decrease by 5 units
32. Which ONE of the following statements correctly expresses the elasticity formula for
Edt?
A.
B.
C.
D.
33. The shape of a perfectly elastic demand curve is
A. Horizontal, Ed = infinity
B. Horizontal, Ed = 0
C. Horizontal, Ed = -1
D. Vertical, Ed = 0
34. The shape of a perfectly inelastic demand curve is
A. Horizontal, Ed =
B. Horizontal, Ed = 0
C. Horizontal, Ed = -1
D. Vertical, Ed = 0
35. If the demand for movie tickets is elastic, then
A. Ed > 1
B. Ed < 1
C. Ed = 1
D. Ed = 0
36. Let Edt = -2. This implies that the demand for movie tickets is
A. Inelastic, because a 1% change in Pt changes Qdt by 2 units
B. Inelastic, because a 1% change in Pt changes Qdt by 1%

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## C. Elastic, because a 1% change in Pt changes Qdt by 1%

D. Elastic, because a 1% change in Pt changes Qdt by 2%
37. Let Edt = -0.5. This implies that the demand for t is
A. Elastic, because if Pt increases by 1%, Qdt will decrease by 0.5%
B. Elastic, because if Pt decreases by 1%, Qdt will decrease by 0.5%
C. Inelastic, because if Pt decreases by \$1, Qdt will increase by 0.5 units
D. Inelastic, because if Pt decreases by 1%, Qdt will increase by 0.5%
38. As we move down a linear demand curve, demand becomes
A. More elastic
B. More inelastic
C. Unitary elastic
D. Perfectly elastic
39. Price elasticity of demand tells us the responsiveness of
A. Quantity demanded, to a \$1 change in price
B. Quantity demanded, to a 5% change in price
C. Price, to a 1% change in quantity demanded
D. Quantity demanded, to a 1% change in price
40. "Inelastic demand" means that
A. Quantity demanded is very sensitive to price
B. Quantity demanded is not very sensitive to price
C. Price is very sensitive to quantity demanded
D. Price is not very sensitive to quantity demanded

Chapter 05
Production and Cost
11. Assume your company produces good X using only two inputs, capital (K) and labor (L).
Also, assume L is measured on the vertical axis and K on the horizontal one. If the prices of
inputs are PK=\$30 and PL=15, and your company is behaving efficiently, what is the slope of
the isoquant at the current input mix?
A. -2
B. -1/2
C. 2
D.
12. Assume SeatComfy Inc. produces table and chairs with the following total cost function,
TC=10,000+10Q+0.1Q2, where Q=quantity of chairs produced. If SeatComfy can sell as
many chairs it wishes at the current market price of \$45, how many chairs should it produce
to maximize its short-run profits?
A. 350

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B. 700
C. 175
D. 45
13. Assume the generic production function Q=f(K,L) displays both decreasing returns to
capital (K), and decreasing returns to labor (L). Then:
A. this production function will certainly display decreasing returns to scale.
B. this production function will certainly display constant returns to scale.
C. this production function will certainly display increasing returns to scale.
D. this production function may display increasing returns to scale
14. In general, which of the following implies that a marginal cost curve will eventually
increase as a firm produces more output?
A. Profit maximizing behavior by the firm.
B. A production function displaying increasing returns to scale.
C. The law of diminishing returns.
D. The law of equi-marginal returns.

15. Refer to Figure 5.1. Observe the three isoquants depicted and determine which of the
following statements is true.
A. K and L are substitutes in each of the three cases.
B. K and L are substitutes in cases (1) and (2).
C. K and L are substitutes in cases (2) and (3).
D. K and L are substitutes in cases (1) and (3).
16. The curve showing all the combinations of inputs that can be purchased with a given
outlay of funds is called a(n):
A. total cost curve.
B. isocost.
C. isoquant.
D. production function

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17. Refer to Figure 5.2 and determine which of the following answers is correct.
A. The missing values are MPL(L=2)=45, MPL(L=3)=29, APL(L=2)=35, and APL(L=4)=28.
B. The missing values are MPL(L=2)=35, MPL(L=3)=33, APL(L=2)=35, and APL(L=4)=28.
C. The missing values are MPL(L=2)=45, MPL(L=3)=29, APL(L=2)=45, and APL(L=4)=13.
D. The missing values are MPL(L=2)=45, MPL(L=3)=29, APL(L=2)=35, and APL(L=4)=13.
18. The Marginal Product curve of input Y shows:
A. how the quantity of output produced changes for each amount of input Y, whether or not all
other inputs are held constant.
B. how the quantity of output produced changes for each amount of input Y, holding all other
inputs constant.
C. how the average quantity of output produced varies with input Y, whether or not all other
inputs are held constant.
D. how the average quantity of output produced varies with input Y, holding all other inputs
constant.
19. If the generic production function Q=f(K,L) displays increasing returns to scale, the value
of K is fixed in the short-run, and the prices of all inputs are held constant, then:
A. the Short-Run Average Cost curve must be strictly decreasing.
B. the Long-Run Average Cost curve must be strictly decreasing .
C. the Short-Run and the Long-Run Average Cost curves will coincide.
D. the Long-Run Average Cost curve must be strictly increasing .
20. If the price of a variable input increases, then:
A. the total cost curve will shift up.
B. the average total cost curve will shift down.
C. the marginal cost curve will shift down.
D. the fixed cost curve will shit up.
21. A production with the form Q = 150L.75 K.50 will have __________ in the long run.
A. increasing returns to scale
B. decreasing returns to scale
C. constant returns to scale
D. diminishing returns to the variable input
22. A production with the form Q = 40 L.75 K.20 will have __________ in the long run.
A. increasing returns to scale
B. decreasing returns to scale

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## C. constant returns to scale

D. diminishing returns to the variable input
23. If a company has significant economies of scale in the long run assuming a large market
-- the company will tend to:
A. grow larger and have a declining average cost curve.
B. become smaller and have a declining average cost curve.
C. grow larger and have raising average cost curve.
D. become smaller and have a rising average cost curve.
24. If a company has a cost curve of TC = 300 + 2Q + Q2 and it produces 300 units per day,
then its marginal cost is:
A. \$1.00.
B. \$600.
C. \$602.
D. \$2.02.
25. If a company has a cost curve of TC = 300 + 2Q + Q2 and it produces 300 units per day,
then its average (total) cost is:
A. \$1.00.
B. \$303.
C. \$300.
D. \$602.
26. The general rule for profit maximization in a firm is to:
A. set average cost at its minimum.
B. reduce fixed costs by expanding output.
C. maximize sales revenue.
D. set marginal revenue to marginal cost.
27. The opportunity cost of any business decision is:
A. accounting cost divided by the level of output.
B. cost per unit.
C. the cost of the next best alternative.
D. the cost of doing business in the future.
28. Over time, learning costs per unit tend to:
A. rise as volume accumulates.
B. stay constant as volume accumulates.
C. fall as volume accumulates.
D. first falls and then rises as volume accumulates
29. As output expands from 199 to 200 units and total costs rise from \$2985 to \$3000, the
marginal cost and average cost of production are:
A. \$1.00, and \$200.
B. \$15 and \$15.

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## C. \$29.85 and \$15.

D. \$1.
An independent trucker has the following options. If he buys expensive machinery, then he
can hire fewer drivers to deliver the same output. Over the course of this month, he has to
deliver to 50 spots. To do this job, he has 3 possible combinations of output that he can use:
Method 1: 20 drivers, 10 machines
Method 2: 50 drivers, 2 machines
Method 3: 100 drivers, 0 machines
30. The following table gives cost information for the production of widgets. Some values are
missing, however. Which of the following statements is true?
Method 4: 10 drivers, 12 machines
Hiring a driver costs \$10. Each machine costs \$100. Which method should he use?
A. Method 1
B. Method 2
C. Method 3
D. Method 4

31. Refer to Figure 5.3, which gives cost information for the production of widgets. Some
values are missing, however. Which of the following statements is true?
A. A=45, E=40
B. A=45, E=10
C. A=75, E=40
D. A=75, E=10

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32. A firm that produces widgets must pay fixed costs of \$150. It costs an additional \$30 for
every widget that they produce. If the market price is \$40, how many widgets does the firm
have to sell so that they do not make a loss?
A. 1
B. 5
C. 10
D. 15
33. A firm produces 10 widgets that they sell for \$15 each. The average variable cost for the
production of 10 widgets is \$13/unit. The fixed costs for this firm equal \$20. What is the
value of this firm's profits?
A. -\$20
B. -\$2
C. 0
D. \$20
34. A firm's average total cost is minimized when it produces 10 units. When it produces 10
units, the average total cost is \$5/unit. What is the marginal cost when the firm produces 10
units?
A. less than \$5/unit
B. greater than \$5/unit
C. \$5/unit
D. \$10/unit
35. Which of the following statements about the average total cost curve is false?
A. it is initially downward sloping because increases in quantity make the average fixed cost
smaller
B. it eventually becomes upward sloping because the law of diminishing returns sets in
C. it is always downward sloping because the average fixed costs will always decrease as
quantity increases
D. the marginal cost curve crosses the average total cost curve at the point at which average
total cost is minimized

36.
Refer to Figure 5.4. On the graph that shows total costs, what is the level of variable
costs when 6 units are produced?

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A. \$50
B. \$100
C. \$400
D. \$500
37. Bob owns an auto parts firm. He uses a combination of steel and aluminum to produce his
auto parts. All of the following combinations will finish the task on time. Steel costs \$15 per
unit and the aluminum costs \$50 per unit. What combination of steel and aluminum should he
use?
A. 10 units of steel and 10 units of aluminum
B. 12 units of steel and 8 units of aluminum
C. 15 units of steel and 7 units of aluminum
D. 20 units of steel and 6 units of aluminum
38. Diminishing marginal returns occur when
A. one input is increasing and the others are held constant
B. all inputs increase
C. one input is decreasing while the other increases
D. output is decreasing
39. Economies of scale arise when
A. all inputs increase by the same amount
B. one input increases and the others are held constant
C. one input increases and the others decrease
D. all inputs increase at the same rate

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