Examination 2
Microeconomics

These multiple choice questions are from the exam bank. If you believe one or more answers are not correct, then speak with the instructor. He is human and makes mistakes.

Lesson 6 - Elasticities and Welfare

1. The demand for a product is inelastic with respect to price if:

A. consumers are largely unresponsive to a per unit price change.
B. the elasticity coefficient is greater than 1.
C. a drop in price is accompanied by a decrease in the quantity demanded.
D. a drop in price is accompanied by an increase in the quantity demanded.

2. If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then:

A. the price elasticity of demand is 0.44.
B. A is a complementary good.
C. the price elasticity of demand is 2.25.
D. A is an inferior good.

3. In which of the following instances will total revenue decline?

A. price rises and supply is elastic
B. price falls and demand is elastic
C. price rises and demand is inelastic
D. price rises and demand is elastic

4. Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is:

A. decreasing.
B. relatively elastic.
C. perfectly elastic.
D. relatively inelastic.

5. For a linear demand curve:

A. elasticity is constant along the curve.
B. elasticity is unity at every point on the curve.
C. demand is elastic at low prices.
D. demand is elastic at high prices.

6. If a demand for a product is elastic, the value of the price elasticity coefficient is:

A. zero.
B. greater than one.
C. equal to one.
D. less than one.

7. Price elasticity of demand is generally:

A. greater in the long run than in the short run.
B. greater in the short run than in the long run.
C. the same in both the short run and the long run.
D. greater for "necessities" than it is for "luxuries."

8. Suppose that a 20 percent increase in the price of normal good Y causes a 10 percent decline in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is:

A. negative and therefore these goods are substitutes.
B. negative and therefore these goods are complements.
C. positive and therefore these goods are substitutes.
D. positive and therefore these goods are complements.

9. Consumers' surplus:

A. is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.
B. the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.
C. the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price.
D. rises as equilibrium price rises.

10. We would expect the cross elasticity of demand between dress shirts and ties to be:

A. positive, indicating normal goods.
B. positive, indicating inferior goods.
C. negative, indicating substitute goods.
D. negative, indicating complementary goods.

11. We would expect the cross elasticity of demand between Pepsi and Coke to be:

A. positive, indicating normal goods.
B. positive, indicating inferior goods.
C. positive, indicating substitute goods.
D. negative, indicating substitute goods.

12. 45. If a 1% increase in fees for legal services leads to a 5% increase in total revenue for lawyers, the price elasticity of demand for legal services must be:

A. elastic.
B. of unitary elasticity.
C. inelastic.
D. perfectly inelastic.

13. The “incidence of a tax” is the term used to indicate:

A. Responsibility for collecting the tax.
B. Who actually bears the economic tax burden.
C. Who the tax is initially levied on.
D. The regressive rate structure of the tax.

14. Approximately 40 luxury boats (price $100,000 or more) are produced each year. How much revenue could the government expect to raise from a $1,000 excise tax on luxury boats?

A. Exactly equaled to $40,000.
B. Less than $40,000.
C. More than $40,000.
D. Approximately $400,000.

15. Sally recently got a raise from $500 per week to $550 per week. As a result, she now purchases six steaks per week rather than five. This indicates that:

A. Steak is an inferior good for Sally.
B. Steak is a normal good for Sally.
C. Sally has an inelastic demand for steak.
D. Sally has an elastic demand for steak.

Answers:

Lesson 7 - The Theory of Consumer Behavior

1. Utility:

A. is synonymous with usefulness.
B. is want-satisfying power.
C. is easy to quantify.
D. rarely varies from person to person.

2. The ability of a good or service to satisfy wants is called:

A. utility maximization.
B. opportunity cost.
C. revenue potential.
D. utility.

3. The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three Pepsis is 38 units of utility. The marginal utility of the third Pepsi is:

A. 26 units of utility.
B. 6 units of utility.
C. 8 units of utility.
D. 38 units of utility.

4. Total utility may be determined by:

A. multiplying the marginal utility of the last unit consumed by the number of units consumed.
B. summing the marginal utilities of each unit consumed.
C. multiplying the marginal utility of the last unit consumed by product price.
D. multiplying the marginal utility of the first unit consumed by the number of units consumed.

5. To maximize utility a consumer should allocate money income so that the:

A. elasticity of demand on all products purchased is the same.
B. marginal utility divided by its market price is the same for all products.
C. total utility derived from each product consumed is the same.
D. marginal utility of the last unit of each product consumed is the same.

6. Suppose that MUx/Px exceeds MUy/Py. To maximize utility the consumer who is spending all her money income should buy:

A. less of X only if its price rises.
B. more of Y only if its price rises.
C. more of Y and less of X.
D. more of X and less of Y.

7. Suppose you have a limited money income and you are purchasing products A and B whose prices happen to be the same. To maximize your utility you should purchase A and B in such amounts that:

A. their marginal utilities divided by its market price are the same.
B. their total utilities are the same.
C. their marginal and total utilities are proportionate.
D. the income and substitution effects associated with each are equal.

8. A consumer is maximizing her utility with a particular money income when:

A. the total utility derived from each product consumed is the same.
B. MUa/Pa = MUb/Pb = MUc/Pc = ... = MUn/Pn.
C. MUa = MUb = MUc = ... = MUn.
D. Pa = Pb = Pc = ... = Pn.

9. The theory of consumer behavior assumes that consumers attempt to maximize:

A. the difference between total and marginal utility.
B. total utility.
C. average utility.
D. marginal utility.

A. X falls and the marginal utility of Y rises.
B. X rises and the marginal utility of Y falls.
C. both X and Y rises.
D. both X and Y falls.

11. Which of the following has been a significant factor in DVDs replacing video cassettes (VCs) in the retail home video market?

A. DVDs are now less than one-half the price of VCs.
B. A scarcity of production capacity has curtailed the manufacture of VCs.
C. Most consumers perceive DVD sound and video reproduction to be of higher quality.
D. The price of DVD players has increased dramatically.

12. The diamond-water paradox arises because:

A. essential goods may be cheap while nonessential goods may be expensive.
B. the marginal utility of certain products increases, rather than diminishes.
C. essential goods are always higher priced than nonessential goods.
D. we sometimes fail to use money as a standard of value.

13. All of the following would reduce property crime by increasing its "price," except:

A. imposing greater penalties for those who are caught and convicted.
B. using more sophisticated security systems.
C. enhancing the legitimate earnings of potential criminals.
D. cutting out the middlemen ("fences") by selling stolen goods via Internet auction sites.

14. High-wage consumers are over-represented among airline and taxi passengers because:

A. They pay lower money prices for these services than do low-wage consumers.
B. These commodities have income elasticities less than zero.
C. The opportunity cost of spending more time on time-consuming transportation is higher for high-wage consumers.
D. The price elasticity of demand for airline and taxi services is quite high.

15. If you receive a gift whose market price is $20, but you consider it to be worth only $10, then:

A. there is a $10 or 50 percent value gain.
B. there may or may not be a value loss.
C. there is a $10 or 50 percent value loss.
D. you can be relatively certain the giver was a sibling or other close relative.

Answers:

Lesson 8 - Costs and Supply of Goods

1. Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?

A. payments of wages to its office workers
B. rent paid for the use of equipment owned by the Schultz Machinery Company
C. depreciation charges on company-owned equipment
D. economic profits resulting from current production

2. Implicit costs are:

A. regarded as costs by accountants but not by economists.
B. payments that a firm makes to other firms or individuals who supply resources to it.
C. nonexpenditure costs.
D. costs that vary proportionately with output.

3. Accounting profits are typically:

A. greater than economic profits because the former do not take explicit costs into account.
B. equal to economic profits because accounting costs include all opportunity costs.
C. smaller than economic profits because the former do not take implicit costs into account.
D. greater than economic profits because the former do not take implicit costs into account.

4. Normal profit is:

A. determined by subtracting implicit costs from total revenue.
B. determined by subtracting explicit costs from total revenue.
C. the return to the entrepreneur when economic profits are zero.
D. the average profitability of an industry over the preceding 10 years.

5. Which of the following is a short-run adjustment?

A. A local bakery hires two additional bakers.
B. Six new firms enter the plastics industry.
C. The number of farms in the United States declines by 5 percent.
D. BMW constructs a new assembly plant in South Carolina.

6. Average fixed cost:

A. equals marginal cost when average total cost is at its minimum.
B. may be found for any output by adding average variable cost and average total cost.
C. graphs as a U-shaped curve.
D. declines continually as output increases.

7. Marginal cost:

A. equals both average variable cost and average total cost at their respective minimums.
B. is the difference between total cost and total variable cost.
C. rises for a time, but then begins to decline when diminishing returns set in.
D. declines continuously as output increases.

8. If a technological advance increases a firm's labor productivity, we would expect its:

A. average total cost curve to rise.
B. average total cost curve to fall.
C. total cost curve to rise.
D. average total cost curve to be unaffected.

9. Economies and diseconomies of scale explain:

A. the profit-maximizing level of production.
B. why the firm's long-run average total cost curve is U-shaped.
C. why the firm's short-run marginal cost curve cuts the short-run average variable cost curve at its minimum point.
D. the distinction between fixed and variable costs.

10. In the long run:

A. all costs are variable costs.
B. all costs are fixed costs.
C. variable costs equal fixed costs.
D. fixed costs are greater than variable costs.

11. (Last Word) A cost that cannot be partly or fully recovered through any subsequent action is known as a:

A. variable cost.
B. fixed cost.
C. marginal cost.
D. sunk cost.

12. Other things equal, if the prices of a firm's variable inputs were to fall:

A. one could not predict how unit costs of production would be affected.
B. marginal cost, average variable cost, and average fixed cost would all fall.
C. marginal cost, average variable cost, and average total cost would all fall.
D. average variable cost would fall, but marginal cost would be unchanged.

13. In the diagram below, curves 1, 2, and 3 represent:

A. average variable cost, marginal cost, and average fixed cost respectively.
B. total variable cost, total fixed cost, and total cost respectively.
C. total fixed cost, total variable cost, and total cost respectively.
D. marginal product, average variable cost, and average total cost respectively.

14. In the figure below, curves 1, 2, 3, and 4 represent the:

A. ATC, MC, AFC, and AVC curves respectively.
B. AFC, MC, AVC, and ATC curves respectively.
C. MC, ATC, AVC, and AFC curves respectively.
D. ATC, AVC, AFC, and MC curves respectively.

15. Refer to the diagram below. The vertical distance between ATC and AVC reflects:

A. the law of diminishing returns.
B. the average fixed cost at each level of output.
C. marginal cost at each level of output.
D. the presence of economies of scale.

Answers: