MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is correct? A) Consumers have the ability to buy everything they desire. B) A consumer's budget line shows the goods with the highest marginal utilities. C) A consumer's budget line shows the limits to what a consumer can buy. D) Rich consumers are unaffected by prices. E) A budget line changes only if the person's budget changes. 1) 2) If Sarah gets 40 units of utility from her first piece of toast for breakfast and a total of 70 units from two pieces of toast, then the marginal utility of the first piece is units and the marginal utility of the second piece is units. A) 40; 110 B) 70; 40 C) 40; 35 D) 40; 30 E) 40; 70 2) 3) Suppose a consumer has $100 to spend on two goods, shoes and shirts. If the price of a pair of shoes is $20 per pair and the price of a shirt is $15 each, which of the following combinations is unaffordable to the consumer? A) 2 pairs of shoes and 4 shirts B) 2 pairs of shoes and 3 shirts C) 5 pairs of shoes and 0 shirts D) 0 pairs of shoes and 0 shirts E) 0 pairs of shoes and 7 shirts 3) 4) Bobby buys cat food for his cat, Pearl. If the price of cat food falls, then Bobby's budget line will A) shift outward and its slope will not change. B) shift inward and its slope will not change. C) rotate inward and its slope will change. D) rotate outward and its slope will change. E) either rotate or shift outward depending on whether cat food has positive or negative marginal utility. 4) 5) Sheryl is maximizing her utility. She notices that her marginal utility from the last package of bubble gum consumed is greater than her marginal utility from the last package of mints consumed. This result means that the A) total utility of mints must be falling as more mints are consumed. B) price of a package of gum is greater than the price of a package of mints. C) price of a package of mints is greater than the price of a package of gum. D) total utility of gum must be falling as more gum is consumed. E) More information is needed which, if any, of the above answers is correct. 5) 1

2 6) In order to maximize his or her utility, a consumer must A) allocate his or her entire available budget in order to buy the combination of goods that equalizes the total utility per dollar from all goods. B) allocate his or her entire available budget and do nothing else because when the entire budget is allocated, utility is maximized. C) not allocate his or her entire available budget. D) allocate his or her entire available budget in order to buy the combination of goods that equalizes the marginal utility per dollar from all goods. E) allocate his or her entire available budget in order to buy the combination of goods that makes the marginal utility per dollar from all goods as large as possible. 6) 7) Jen consumes 5 CDs and 2 tacos. She receives 500 units of utility from her 5th CD and 200 units of utility from her 2nd taco. The price of a CD is $10, the price of a taco is $4, and she is spending her entire budget. Which of the following is true regarding Jen's choices? A) Jen is maximizing utility. B) Jen is operating on her demand curve for CDs. C) Jen is operating on her demand curve for tacos. D) Only answers A and B are correct E) Answers A, B, and C are correct. 7) 8) At all points on a demand curve, the i. consumer's budget has been allocated to maximize total utility. ii. quantity is the quantity demanded at each price when total utility is maximized. iii. price represents the marginal benefit the consumer gets from an extra unit of a good. A) i, ii, and iii B) i and ii C) i and iii D) ii only E) i only 9) Suppose that Hank consumes only Mountain Dew and pizza. If Hank's total utility from all amounts of both Mountain Dew and pizza double from what they were before, then Hank's demand for A) both goods must decrease by one-half. B) neither good changes. C) one of the goods must double. D) both goods must double. E) one of the goods must decrease by one-half. 8) 9) 10) Lauren runs a chili restaurant in San Francisco. Her total revenue last year equaled $111,000. The rent on her restaurant totaled $48,000. Her labor costs totaled $43,000. Her materials, food and other variable costs totaled $19,000. To Lauren's accountant, Lauren A) earned a profit of $111,000. B) had a total cost equal to $91,000. C) incurred a loss of $1,000. D) earned a profit of $1,000. E) incurred a loss of $111, ) 2

3 11) A cost paid in money is A) not an opportunity cost. B) not an accounting cost. C) an explicit cost and an opportunity cost. D) an explicit cost but not an opportunity cost. E) an implicit cost and an opportunity cost. 11) 12) The short run is a time period that is A) too short to change the amount of labor hired. B) too short to change the size of the firm's plant. C) too short to change the amount of any resource the firm employs. D) long enough to change the size of the firm's plant. E) equal to a day. 12) 13) Which of the following statements correctly describes a total product curve? A) The curve first falls, reaches a minimum, and then rises. B) The curve shows that output always increases as labor employed increases. C) Points above the total produce curve are efficient. D) The curve separates attainable outputs from unattainable outputs. E) The curve shows minimum levels of output. 13) 14) Jill runs a factory that makes lie detectors in Little Rock, Arkansas. This month, Jill's 34 workers produced 690 machines. Suppose Jill adds one more worker and, as a result, her factory's output increases to 700. Jill's marginal product of labor from the last worker hired equals. A) 20 B) 690 C) 700 D) 10 E) None of the above answers is correct. 14) 15) Chuck owns a factory that produces leather footballs. His total fixed cost equaled $86,000 last year. His total cost equaled $286,000 last year. Hence Chuck's A) incurred an economic loss. B) total variable cost equaled $372,000. C) total variable cost equaled $200,000. D) total variable cost was zero. E) None of the above answers is correct. 15) 16) Which of the following is correct about marginal and average products? A) When the marginal product is increasing, the average product must be increasing. B) When the marginal product is decreasing, the average product must be decreasing. C) When the average product is increasing, the marginal product must be decreasing. D) When the marginal product exceeds the average product, the average product must be increasing. E) When the marginal product is increasing, the average product must be decreasing. 16) 3

4 17) The total variable cost curve because as output increases. A) slopes upward; variable cost increases B) slopes downward; variable cost increases C) is horizontal; fixed cost does not change D) slopes upward; marginal cost increases E) slopes downward; marginal cost increases 17) 18) If average variable costs increase as output increases, then A) output must be zero. B) total fixed cost must be increasing also. C) average total cost must be increasing also. D) marginal cost must be greater than average variable cost. E) total cost must be constant. 18) 19) Which of the following statements is true? A) In the long run, all costs are variable costs. B) In the long run, the total variable cost equals the total fixed cost. C) In the long run, the quantities of all inputs are fixed. D) In the long run, the average cost curve is always downward sloping. E) In the long run, the firms' fixed costs are greater than its variable costs. 19) 20) A firm decreases its scale of operation and discovers that its long-run average costs decrease. Which of the following does this indicate? A) Labor's marginal product has increased. B) Its long-run marginal cost was smaller with the larger plant than with the smaller plant. C) The firm's scale initially was too small to experience economies of scale. D) Diseconomies of scale were absent in the larger plant. E) The firm's scale initially was so large that it experienced diseconomies of scale. 20) 21) For a perfectly competitive firm, the price of its good is equal to the firm's marginal revenue because A) price and marginal revenue are the same economic concepts. B) the firm's total revenue cannot be changed by anything the firms can do. C) information about price changes is hard to come by for small sellers. D) there are only a small number of firms in the market. E) individual perfectly competitive firms cannot influence the market price by changing their output. 21) 22) A monopoly occurs when A) a few firms control the market. B) each of many firms produces a product that is slightly different from that of the other firms. C) one firm is larger than the many other firms that make an identical product. D) one firm sells a good that has no close substitutes and a barrier blocks entry for other firms. E) there are many firms producing the same product. 22) 4

5 23) For a perfectly competitive firm, marginal revenue is A) less than the price. B) undefined because the firm's demand curve is horizontal. C) equal to the price. D) equal to the change in profit from selling one more unit. E) greater than the price. 23) 24) Perfect competition is characterized by all of the following EXCEPT A) no restrictions on entry into or exit from the industry. B) firms produce an identical product. C) buyers and sellers are well informed about prices. D) considerable advertising by individual firms. E) a large number of buyers and sellers. 24) 25) In perfect competition, marginal revenue A) decreases as more is sold. B) is equal to the market price. C) is zero. D) increases as more is sold. E) is always greater than marginal cost. 25) 26) In a perfectly competitive industry, when a firm is producing so that its total revenue equals its total cost, the firm is A) earning zero economic profit, that is, earning a normal profit. B) incurring an economic loss. C) definitely not maximizing its profit. D) earning an economic profit. E) None of the above answers is correct because the relationship between total revenue and total cost has nothing to do with the firm's profit or loss. 26) 27) A firm maximizes its profit by producing the amount of output such that A) marginal revenue exceeds marginal cost by some amount. B) marginal revenue equals marginal cost. C) marginal revenue is maximized. D) marginal revenue exceeds marginal cost by the maximum amount possible. E) marginal cost is minimized. 27) 28) Peter's Pencils is a perfectly competitive company producing pencils. Suppose Peter is producing 1,000 pencils an hour. If the total cost of 1,000 pencils is $500, the market price per pencil is $2, and the marginal cost is $2, then Peter A) is maximizing his profit and is earning an economic profit. B) is not maximizing his profit but is earning a normal profit anyway. C) should decrease his output to increase his profit. D) has an economic profit because marginal revenue is equal to marginal cost at this output level. E) should increase his output to increase his profit. 28) 5

6 29) A perfectly competitive firm is producing 50 units of output and selling at the market price of $23. The firm's average total cost is $20. What is the firm's economic profit? A) $1,150 B) $50 C) $23 D) $1,000 E) $150 29) 30) Bill owns a lawn-care company in Windermere, Florida, whose cost curves are illustrated in the above figure. The market equilibrium price in this perfectly competitive market equals $32 per lawn mowed. At this price, how many lawns will Bill mow per week? A) more than 10 and less than 30 B) 40 C) 50 D) 0 E) 30 30) 31) In the short run, a perfectly competitive firm A) might make an economic profit, an economic loss, or a normal profit. B) must incur an economic loss. C) must make an economic profit. D) None of the above answers is correct. E) must make zero economic profit. 31) 32) A perfectly competitive firm definitely earns an economic profit in the short run if price is A) equal to marginal cost. B) equal to average total cost. C) greater than marginal cost. D) greater than average variable cost. E) greater than average total cost. 32) 6

7 33) The corn market is perfectly competitive, with thousands of corn farmers. In the 2000s, the price of corn soared so that new farmers entered the corn market. Initially, entry the economic profit of the initial corn farmers and in the long run the initial corn farmers. A) increased; earned an even greater economic profit than initially B) increased; earned an economic profit C) decreased; incurred an economic loss D) decreased; earned zero economic profit E) increased; earned zero economic profit 33) 34) Juan's Software Service Company is in a perfectly competitive market. Juan has total fixed cost of $25,000, average variable cost for 1,000 service calls is $45, and marginal revenue is $75. Juan's makes 1,000 service calls a month. What is his economic profit? A) $25,000 B) $45,000 C) $75,000 D) $50,000 E) $5,000 34) 35) When firms in a perfectly competitive market incur economic losses, exit by some firms means the market supply will A) become the same as the individual producers' supplies. B) decrease. C) become vertical. D) increase. E) not change. 35) 36) In the long run, perfectly competitive firms will exit the market if the price is A) equal to average fixed cost. B) higher than average variable cost. C) equal to marginal revenue. D) equal to average total cost. E) less than average total cost. 36) 37) In the long run, perfectly competitive firms produce at the output level that has the minimum A) average variable cost. B) marginal cost. C) total revenue. D) average total cost. E) average fixed cost. 37) 38) In the long run, a perfectly competitive firm earns A) zero accounting profit. B) a positive economic profit. C) either a positive economic profit or a normal profit. D) zero economic profit. E) negative economic profit, that is, an economic loss. 38) 7

8 39) If a single firm can meet the entire market demand at a lower average total cost than a larger number of smaller firms, the single firm is A) efficient when profit maximizing. B) a natural monopoly. C) an ownership-of-the-market monopoly. D) price discriminating. E) a legal monopoly. 39) 40) If a monopoly wants to sell a greater quantity of output, it must A) tell consumers to buy more because it's a monopolist. B) change its fixed costs. C) raise its price. D) lower its price. E) raise its marginal cost. 40) 41) For a single-price monopoly, price is A) greater than marginal revenue. B) equal to zero because the firm is not a price taker. C) less than marginal revenue because the firm must lower its price in order to sell another unit of output. D) less than marginal revenue because the firm cannot increase its total revenue when the demand curve is downward sloping. E) equal to marginal revenue. 41) Quantity (units) Price (dollars per unit) ) The table above gives the demand for a monopolist's output. Between which two quantities is demand elastic? A) 4 and 3 B) 5 and 4 C) 6 and 5 D) 3 and 2 42) 43) The table above gives the demand for a monopolist's output. What is the total revenue in when 3 units of output are produced? A) $6 B) $18 C) $20 D) $21 43) 8

9 44) The relationship between marginal revenue and elasticity is A) whenever the elasticity is positive, marginal revenue is positive. B) when demand is elastic, marginal revenue is positive and when demand is inelastic, marginal revenue is negative. C) whenever the elasticity is negative, marginal revenue is positive. D) when demand is elastic, marginal revenue is negative and when demand is inelastic, marginal revenue is positive. E) that total revenue equals zero at the quantity for which the demand is unit elastic. 44) 45) When compared to a perfectly competitive market, a single-price monopoly with the same costs produces output and charges price. A) a smaller; a lower B) a larger; a lower C) a smaller; the same D) a smaller; a higher E) the same; a higher 45) 46) Assume someone organizes all farms in the nation into a monopoly. As a result, consumer surplus will A) not change. B) decrease. C) increase. D) either increase, decrease, or not change depending if the monopoly's marginal revenue curve lies below, above, or is the same as its demand curve. E) None of the above answers is correct because the effect on consumer surplus depends on whether the monopoly is a single-price or a price-discriminating monopoly. 46) 9

10 47) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the price of a pound of steak is A) $4. B) $20. C) $8. D) $12. E) $2. 47) 48) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is a monopoly, the price of a pound of steak is A) $12. B) $20. C) $2. D) $4. E) $8. 48) 10

11 49) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve. The amount of consumer surplus when the market has a monopoly producer is A) acd. B) ace. C) bcd. D) bcef. E) abf. 49) 50) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve. The deadweight loss when the market has a monopoly producer is A) abf. B) ace. C) bcd. D) bcef. E) acd. 50) 51) A price-discriminating monopoly A) makes a smaller economic profit than it would if it were a single-price monopoly. B) is illegal. C) cannot offer discounts. D) cannot control the price of its product. E) sells a larger quantity than it would if it were a single-price monopoly. 51) 52) Arnie's Airlines decides to offer different fares to different customers for the same trip. Arnie's price discriminates because Arnie A) wants to convert producer surplus to consumer surplus. B) wants to convert consumer surplus to deadweight loss. C) wants to convert consumer surplus to economic profit. D) has different costs for the same flight. E) wants to help some buyers with lower fares. 52) 53) The deadweight loss with perfect price discrimination is A) more than the deadweight loss of a single-price monopoly. B) sometimes less than and sometimes more than the deadweight loss of a single-price monopoly. C) equal to the deadweight loss of a single-price monopoly. D) larger than the deadweight loss with perfect competition. E) zero. 53) 11

12 54) Under a marginal cost pricing rule, a natural monopoly A) incurs an economic loss. B) earns a reasonable profit. C) earns large economic profits. D) earns accounting profits, but breaks even in economic terms. E) earns a normal profit but it cannot be determined whether or not it earns an accounting profit. 54) 55) With a natural monopoly A) regulation can take the form of average cost pricing to allow coverage of costs. B) regulation takes the form of forcing competition from new firms. C) no regulation is necessary because it is a natural monopoly. D) regulation takes the form of forcing the company out of business. E) regulation takes the form of breaking the company into several competing firms. 55) 56) One characteristic of monopolistic competition is that it has A) large barriers to entry. B) many firms producing a slightly differentiated product. C) a few firms producing a slightly differentiated product. D) many firms producing identical goods. E) one firm producing a unique good. 56) 57) In monopolistic competition, each firm supplies a small part of the market. This occurs because A) there are a large number of buyers. B) there are barriers to entry. C) there are a large number of firms. D) there are no barriers to exit. E) firms produce differentiated products. 57) 58) Because of product differentiation, firms A) can compete on the basis of quality. B) do not have to compete because their products are unique. C) are unable to compete by using advertising. D) must compete on only price. E) cannot compete on price. 58) 59) In monopolistic competition, the presence of a large number of firms making a differentiated product means that A) firms cannot compete with each other on the basis of price. B) each firm must produce the same quantity. C) each firm must charge the same price. D) the price is established by collusive behavior. E) each firm can set the price of its particular product. 59) 12

13 60) The marginal revenue curve facing a monopolistically competitive firm A) is equal to its price curve. B) lies on its demand curve. C) lies above its demand curve. D) lies below its demand curve. E) is parallel to its demand curve. 60) 61) When a firm maximizes its profit, which of the following is correct for firms in monopolistic competition and perfect competition? A) P = ATC always for firms in both perfect competition and monopolistic competition. B) P = MR = MC for firms in perfect competition and P > MR = MC for firms in monopolistic competition. C) P = MC for both types of firms. D) P > MR = MC for firms in both perfect competition and monopolistic competition. E) MR = MC for firms in perfect competition and MR > MC for firms in monopolistic competition. 61) 62) In monopolistic competition, profit is maximized by producing so that marginal revenue A) is negative. B) equals marginal cost and equals price. C) equals marginal cost and which are less than price. D) equals average total cost but not marginal cost. E) equals price. 62) 63) The above figure shows a restaurant engaged in monopolistic competition with other restaurants. The equilibrium price at this restaurant is per meal. A) $50 B) $20 C) less than $20 D) $30 E) more than $50 63) 13

14 64) The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium price at this motel is per room. A) $20 B) $10 C) $40 D) $50 E) $30 64) 65) For a firm in monopolistic competition, innovation and product development are A) senseless because economic profit is always zero in the long run. B) uncommon because other firms already produce similar products. C) necessary in order to have a chance of earning at least a short-run economic profit. D) inconsequential because each firm produces a different product. E) necessary to allow new firms to enter. 65) 66) For a firm in monopolistic competition to undertake product development, the marginal cost of the development must be the marginal benefit of the development to consumers. A) not comparable to B) equal to or less than C) less than D) greater than E) None of the above because a monopolistically competitive firm undertakes product development if the marginal cost of the development is less than or equal to the marginal revenue to the firm from the development. 66) 67) A firm in monopolistic competition A) might be selling a brand name product. B) has no control over the price of the product it is selling. C) does not advertise nor market its product. D) Both answers A and B are correct. E) Answers A, B, and C are correct. 67) 14

15 68) Firms attempt to create a consumer perception of product differentiation through i. packaging. ii. marketing. iii. advertising. A) ii only B) i and iii C) ii and iii D) i only E) i, ii, and iii 69) Which of the following is found ONLY in oligopoly? A) entry into the industry is blocked B) sellers face a downward sloping demand curve for their product C) one firm's actions affect another firm's profit D) the firm's demand curve is horizontal E) producers who sell identical products 68) 69) 70) There are two bookstores in a college town. If another bookstore opened, each of the stores would incur an economic loss. This bookstore market is A) a natural oligopoly. B) a natural monopoly. C) monopolistic competition. D) a legal oligopoly. E) a monopoly. 70) 71) When oligopolies seek to operate as a single-price monopoly, the firms produce at the point where: A) P = MR. B) P < ATC. C) MR = MC. D) P = MC. E) MC = ATC. 71) 72) When firms in an oligopoly successfully collude and do not cheat on a cartel agreement, they can achieve long-run economic profit similar to A) monopoly. B) the firms in regulated industries. C) non-colluding oligopolies. D) perfect competition. E) monopolistic competition. 72) 73) When oligopolies operate like firms in perfect competition, the firms produce at the point where the A) marginal cost equals the average total cost. B) price is less than the marginal cost. C) marginal cost equals the price. D) price exceeds the average total cost by the greatest amount. E) price exceeds the marginal cost by the greatest amount. 73) 15

16 74) Which of the following statements is correct? A) Because many producers join to form a cartel, the market becomes monopolistic competition. B) If firms in oligopoly look only at their own self-interest in deciding the output they should produce, the total market output will exceed that of a monopoly. C) It is in the self-interest of each firm in an oligopoly to take the actions that maximize all the firms' joint profit. D) A firm in oligopoly will charge a price that is lower than the price charged in perfect competition. E) If one oligopolist reduces the price of its product, its demand curve shifts leftward. 74) 16