Chapters 5-8 Microeconomics Test Review Questions

Principles of Microeconomics, 8e (Case/Fair)
Chapter 5: Elasticity

Elasticity
Multiple Choice
Refer to the information provided in Figure 5.1 below to answer the questions that follow.
Figure 5.

1)
Refer to Figure 5.1. The demand for tickets is
A)
perfectly elastic.
B)
perfectly inelastic.
C)
unitarily elastic.
D)
income elastic.
Anser!
B
Diff! 1
Type! F

")
#rice is determined entirely $y demand hen
A)
demand is donard sloping.
B)
demand is perfectly inelastic.
C)
supply is perfectly inelastic.
D)
1
supply is perfectly elastic.
Anser!
C
Diff! "
Type! D

%)
&hen supply is perfectly inelastic'
A)
price is determined solely $y supply.
B)
price is determined solely $y demand.
C)
only the go(ernment can set the price.
D)
the price may $e set $y either supply or demand.
Anser!
B
Diff! "
Type! D

"
))
A ******** line is a perfectly price elastic demand cur(e.
A)
hori+ontal
B)
(ertical
C)
positi(ely sloped
D)
negati(ely sloped
Anser!
A
Diff! 1
Type! F

5)
A ******** line is a perfectly price inelastic demand cur(e.
A)
hori+ontal
B)
(ertical
C)
positi(ely sloped
D)
negati(ely sloped
Anser!
B
Diff! 1
Type! F

,)
&hen the price of radios increases 5-' .uantity demanded decreases 5-. The price elasticity of demand for radios
is
A)
B)
elastic.
C)
inelastic.
D)
%
unitary elastic.
Anser!
D
Diff! "
Type! D

/)
&hen the price of fresh fish increases 5-' .uantity demanded decreases 10-. The price elasticity of demand for
fresh fish is
A)
B)
elastic.
C)
inelastic.
D)
unitary elastic.
Anser!
B
Diff! "
Type! D

1)
&hen the price of coffee increases 5-' .uantity demanded decreases %-. The elasticity for coffee is
A)
perfectly price inelastic.
B)
price elastic.
C)
price inelastic.
D)
price unitary.
Anser!
C
Diff! "
Type! D

)
2)
The ABC Computer Company ants to increase the .uantity of computers it sells $y 5-. 3f the price elasticity of
demand is 4".5' the company must ******** price $y *******.
A)
increase5 ".0-
B)
decrease5 ".0-
C)
increase5 0.5-
D)
decrease5 0.5-
Anser!
B
Diff! "
Type! A

10)
The go(ernment ants to reduce the consumption of electricity $y 5-. The price elasticity of demand for electricity
is ). The go(ernment should ******* the price of electricity $y ******.
A)
raise5 ".0-
B)
raise5 0.01-
C)
raise5 1."5-
D)
loer5 0.)-
Anser!
C
Diff! "
Type! A

11)
The go(ernment ants to reduce the consumption of electricity $y 10-. The price elasticity of demand for
electricity is 4.). The go(ernment should ******** the price of electricity $y *****.
A)
raise5 ".0-
B)
raise5 "5.0-
C)
5
raise5 0.0)-
D)
loer5 0.)-
Anser!
B
Diff! "
Type! A

1")
The price elasticity of demand for $ottled ater in Te6as is 4"' and the price elasticity of demand for $ottled ater in
7issouri is 40.1. 3n other ords' demand in Te6as is ********** and demand in 7issouri is **********.
A)
elastic5 inelastic
B)
inelastic5 elastic
C)
elastic5 unitarily elastic
D)
inelastic5 unitarily inelastic
Anser!
A
Diff! %
Type! C

,
1%)
An increase in supply caused no change in e.uili$rium .uantity $ought and sold. Thus' demand must $e
A)
B)
inelastic.
C)
elastic.
D)
unitarily elastic.
Anser!
A
Diff! "
Type! D

1))
3f the demand for oranges is unitarily elastic' the price elasticity of demand for oranges is
A)
0.0.
B)
1.0.
C)
41.0.
D)
4100.0.
Anser!
C
Diff! "
Type! A

/
Figure 5.!

15)
Refer to Figure 5.". 8sing the midpoint formula' if the price of a ham$urger is increased from 91 to 910' the price
elasticity of demand e.uals
A)
0.%,.
B)
%%%.
C)
4".5.
D)
4%.0.
Anser!
D
Diff! "
Type! A

1
1,)
Refer to Figure 5.". 8sing the midpoint formula' if the price of a ham$urger is increased from 9, to 91' the price
A)
0.").
B)
/1.0.
C)
41.).
D)
4".0.
Anser!
C
Diff! "
Type! A

1/)
Refer to Figure 5.". 8sing the midpoint formula' if the price of a ham$urger is increased from 9" to 9)' the price
A)
40.%%.
B)
4".0.
C)
4%.0.
D)
45.0.
Anser!
A
Diff! "
Type! A

11)
Refer to Figure 5.". At #oint C the price elasticity of demand is 41. Along line segment BC of the demand cur(e' the
demand is
A)
elastic.
B)
unitarily elastic.
C)
2
inelastic.
D)
either elastic or inelastic' depending on hether price increases or decreases.
Anser!
A
Diff! "
Type! D

Figure 5."

10
12)
Refer to Figure 5.%. 8sing the midpoint formula' if the price of a garden$urger is increased from 91 to 910' the price
A)
40.0%,.
B)
40.5.
C)
4).5.
D)
42.0.
Anser!
C
Diff! "
Type! A

"0)
Refer to Figure 5.%. 8sing the midpoint formula' if the price of a garden$urger is increased from 9, to 91' the price
A)
40.0").
B)
41./5.
C)
41.2.
D)
4".0.
Anser!
B
Diff! "
Type! A

"1)
Refer to Figure 5.%. 8sing the midpoint formula' if the price of a garden$urger is increased from 9, to 9/' the price
A)
4.1%.
B)
4.%%.
C)
11
41.)).
D)
41%.
Anser!
C
Diff! "
Type! A

"")
The oner of a local hot dog stand has estimated that if he loers the price of hot dogs from 9".00 to 91.50' he ill
increase sales from )00 to 500 hot dogs per day. 8sing the midpoint formula' the demand for hot dogs is
A)
elastic.
B)
inelastic.
C)
unitarily elastic.
D)
perfectly elastic.
Anser!
B
Diff! "
Type! D

1"
"%)
At a price of 911' .uantity demanded is 205 and at a price of 92' .uantity demanded is 110. 8sing the midpoint
formula' the price elasticity of demand is
A)
0.0.
B)
1".
C)
41.0.
D)
41."".
Anser!
C
Diff! "
Type! A

"))
At a price of 9"0' a store can sell ") picture frames a day. At a price of 911 the store can sell %% picture frames a
day. 8sing the midpoint formula' the price elasticity of demand is
A)
0.%%.
B)
2.02.
C)
4%.0.
D)
%./5.
Anser!
C
Diff! "
Type! A

"5)
#rice and total re(enue are in(ersely related hen demand is
A)
elastic.
B)
inelastic.
C)
unitarily elastic.
1%
D)
Anser!
A
Diff! 1
Type! F

",)
3f price ******* and demand is ********' total re(enue ill increase.
A)
falls5 inelastic.
B)
falls5 elastic
C)
rises5 elastic
D)
rises5 unitarily elastic
Anser!
B
Diff! 1
Type! F

1)
Figure 5.#

"/)
Refer to Figure 5.). The demand for milkshakes is unitarily elastic at #oint C. 3f the price of a milkshake is reduced
from P
%
to P
)
' total re(enue
A)
ill increase.
B)
ill decrease.
C)
ill remain constant.
D)
could either increase or decrease.
Anser!
B
Diff! 1
Type! F

"1)
Refer to Figure 5.). The demand for milkshakes is unitarily elastic at #oint C. 3f the milkshake price falls from P
1
to
P
"
' total re(enue ill
A)
increase.
B)
decrease.
C)
remain constant.
D)
either increase or decrease.
Anser!
15
A
Diff! 1
Type! F

"2)
A firm is currently producing in the inelastic portion of its demand cur(e. &hat course of action should you
recommend to this firm assuming it ants to raise re(enue:
A)
Continue producing at the current output le(el' $ecause the firm ill ma6imi+e its total re(enue $y producing in the
inelastic portion of its demand cur(e.
B)
Reduce price' $ecause if demand is inelastic and price is reduced' total re(enue ill increase.
C)
3ncrease price' $ecause if demand is inelastic and price is increased' total re(enue ill increase.
D)
Continue selling at the same price' $ut increase the num$er of units it produces.
Anser!
C
Diff! %
Type! C

1,
%0)
Assume you earn 9)0'000 a year and your fa(orite sports maga+ine costs you 9)5 a year. ;our demand for the
sports maga+ine is likely to $e
A)
elastic.
B)
inelastic.
C)
perfectly elastic.
D)
Anser!
B
Diff! 1
Type! F

%1)
Assume you earn 9/5'000 a year and your fa(orite entertainment maga+ine costs you 9"5 a year. ;our demand for
the entertainment maga+ine is likely to $e
A)
inelastic.
B)
elastic.
C)
perfectly elastic.
D)
Anser!
A
Diff! 1
Type! F

%")
The ABC Computer Company spends a lot of money for ad(ertising designed to con(ince you that their personal
computers are superior to all other personal computers. 3f the ABC Company is successful' the demand for ABC
personal computers
A)
and the demand for other firms< personal computers ill $ecome less price elastic.
B)
and the demand for other firms< personal computers ill $ecome more price elastic.
C)
1/
ill $ecome more price elastic $ut the demand for other firms< personal computers ill $ecome less price elastic.
D)
ill $ecome less price elastic $ut the demand for other firms< personal computers ill $ecome more price elastic.
Anser!
D
Diff! %
Type! C

%%)
The go(ernment is considering placing a ta6 on cigarettes to raise re(enue to finance health care $enefits. =ne of the
arguments for this ta6 is that the demand for cigarettes is price inelastic. &hich of the folloing statements is
TR8>:
A)
The ta6 on cigarettes may not raise as much re(enue as anticipated in the years to come $ecause the demand for
cigarettes is likely to $ecome more elastic o(er time.
B)
This is a (ery good ay to raise re(enue $oth in the short term and in the long term $ecause there are no su$stitutes
for cigarettes.
C)
This ta6 ill not raise much re(enue either in the short term or the long term $ecause demand is price inelastic.
D)
?o ta6 re(enue can $e raised in this ay $ecause sellers of cigarettes ill @ust loer their price $y the amount of the
ta6 and therefore the price of cigarettes to consumers ill not change.
Anser!
A
Diff! %
Type! C

%))
The more su$stitutes there are for a product' the
A)
less price elastic the demand for the product is.
B)
more price elastic the demand for the product is.
C)
greater the income elasticity for the product.
D)
smaller the income elasticity for the product.
Anser!
B
Diff! 1
Type! F
11

%5)
The determinants of elasticity include
A)
a(aila$ility of su$stitutes.
B)
price relati(e to income.
C)
time.
D)
All of the a$o(e
Anser!
D
Diff! "
Type! D

%,)
Auppose an increase of 10- in the price of steak reduces the consumption of steak $y %0-. Auch a price rise ill
induce households to spend
A)
less of their income on steak.
B)
more of their income on steak.
C)
the same amount on steak as $efore.
D)
more on products that are complementary ith steak.
Anser!
A
Diff! "
Type! D

%/)
Cross4price elasticity of demand measures the response in the
A)
price of a good to a change in the .uantity of another good demanded.
B)
income of consumers to the change in the price of goods.
C)
.uantity of one good demanded hen the .uantity demanded of another good changes.
D)
12
.uantity of one good demanded to a change in the price of another good.
Anser!
D
Diff! "
Type! D

%1)
3f the .uantity demanded of tea increases $y "- hen the price of coffee increases $y 1-' the cross4price elasticity
of demand $eteen tea and coffee is
A)
4"5.
B)
0."5.
C)
4).
D)
).
Anser!
B
Diff! "
Type! A

"0
%2)
3f the .uantity demanded of tea decreases $y 1- hen the price of coffee decreases $y 1,-' the cross4price
elasticity of demand $eteen tea and coffee is
A)
0.5.
B)
45.
C)
4".
D)
".
Anser!
A
Diff! "
Type! A

)0)
3f the cross4price elasticity of demand $eteen fish and chicken is "' then a "- increase in the price of fish ill
result in a ******** in the .uantity of chicken demanded.
A)
1- increase
B)
)- increase
C)
10- increase
D)
"0- decrease
Anser!
B
Diff! "
Type! A

"1
Figure 5.5

)1)
Refer to Figure 5.5. As the price of W increased' the demand for Y shifted from D
1
to D
"
. The cross4price elasticity
of demand $eteen W and Y is
A)
positi(e.
B)
negati(e.
C)
+ero.
D)
indeterminate from this information.
Anser!
A
Diff! "
Type! D

""
)")
3n output markets' the elasticity of supply tends to $e
A)
negati(e.
B)
+ero.
C)
positi(e.
D)
decreasing at an increasing rate.
Anser!
C
Diff! 1
Type! F

)%)
3f the elasticity of la$or supply is positi(e' the la$or4supply cur(e ould $e
A)
hori+ontal.
B)
(ertical.
C)
donard sloping.
D)
upard sloping.
Anser!
D
Diff! 1
Type! F

"%
Figure 5.$

)))
Refer to Figure 5.,. The market is initially in e.uili$rium at #oint A Bhere price C 9/ and .uantity C 1" thousand
pi++as) and supply shifts from S
1
to S
"
. &hich of the folloing statements is TR8>:
A)
#rice ill still ser(e as a rationing de(ice causing .uantity supplied to rise from 10 to 1) thousand pi++as.
B)
There is no need for price to ser(e as a rationing de(ice in this case $ecause the ne e.uili$rium .uantity is higher
than the original e.uili$rium .uantity.
C)
#rice ill still ser(e as a rationing de(ice causing .uantity demanded to fall from 1" to 10 thousand pi++as.
D)
The market cannot mo(e to a ne e.uili$rium until there is also a change in supply.
Anser!
C
Diff! 1
Type! F

")
)5)
A mass transit authority charges $us fares of 91."5 during morning rush hours $ut only 91.00 during late morning
non4rush hours. >conomists e6plain the fare difference $y the fact that the demand for $us rides during the morning
rush hours is ********** $ut during the late morning it is **********.
A)
more elastic5 more inelastic
B)
perfectly elastic5 perfectly inelastic
C)
more inelastic5 more elastic
D)
unitarily elastic5 relati(ely inelastic
Anser!
C
Diff! %
Type! C

%rue/False
1)
&hen the slope of a demand cur(e is constant' price elasticity of demand is constant as ell.
Anser!
FADA>
Diff! 1
Type! F

")
A demand cur(e ith continuously changing slope o(er all .uantity (alues can ha(e a constant price elasticity of
demand.
Anser!
TR8>
Diff! "
Type! F

%)
A demand cur(e ith constant slope o(er all .uantity (alues can ha(e a continuously changing price elasticity of
demand.
Anser!
TR8>
Diff! "
Type! F

))
"5
#rice elasticity of demand is calculated using the change in .uantity demanded and the change in price.
Anser!
FADA>
Diff! "
Type! D

5)
#erfectly inelastic demand is graphed as a hori+ontal line.
Anser!
FADA>
Diff! 1
Type! F

,)
#erfectly elastic demand is graphed as a hori+ontal line.
Anser!
TR8>
Diff! 1
Type! F

",
/)
Eo total re(enue changes hen a price changes can $e predicted using price elasticity of demand.
Anser!
TR8>
Diff! "
Type! D

1)
&hen demand is elastic' an increase in price ill result in an increase in total re(enue.
Anser!
FADA>
Diff! 1
Type! F

2)
&hen demand is elastic' a decrease in price ill result in an increase in total re(enue.
Anser!
TR8>
Diff! 1
Type! F

10)
&hen demand is inelastic' an increase in price ill result in an increase in total re(enue.
Anser!
TR8>
Diff! 1
Type! F

11)
&hen demand is inelastic' a decrease in price ill result in an increase in total re(enue.
Anser!
FADA>
Diff! 1
Type! F

1")
&hen demand is unit elastic' an increase in price ill result in an increase in total re(enue.
Anser!
FADA>
Diff! 1
Type! F
"/

1%)
&hen demand is unit elastic' a decrease in price ill result in an increase in total re(enue.
Anser!
FADA>
Diff! 1
Type! F

1))
A positi(e cross4price elasticity $eteen to goods implies that the to goods are su$stitutes.
Anser!
TR8>
Diff! "
Type! D

15)
A positi(e cross4price elasticity $eteen to goods implies that the to goods are compliments.
Anser!
FADA>
Diff! "
Type! D
"1
Chapter $: &ousehol' (eha)ior an' Consumer Choice

&ousehol' Choice in *utput Mar+ets
Multiple Choice
1)
Fane has 9500 a eek to spend on clothing and food. The price of clothing is 9"5 and the price of food is 910. The
pairs of clothing and food that are in the Fane<s choice set include ***** units of clothing and ******* units of food.
A)
"05 50
B)
505 50
C)
105 "5
D)
05 500
Anser!
C
Diff! "
Type! A

")
Ted has 9,00 a eek to spend on clothing and food. The price of clothing is 9%0 and the price of food is 95. The
pairs of clothing and food that are in the Ted<s choice set include ***** units of clothing and ******* units of food.
A)
"05 50
B)
105 ,0
C)
105 1"5
D)
05 "00
Anser!
B
Diff! "
Type! A

%)
Fane has 9500 a eek to spend on food Bf) and clothing Bc). The price of food is 910 and the price of clothing is 9"5.
&hat is the e.uation for Fane<s $udget constraint:
A)
11/
Food G Clothing H 9500
B)
$10 I Food G $25 I Clothing J 9500
C)
$10 I FoodK$25 I Clothing C 9500
D)
$10 I Food G $25 I Clothing C 9500
Anser!
D
Diff! "
Type! A

))
Ted has 9,00 a eek to spend on food Bf) and clothing Bc). The price of food is 95 and the price of clothing is 9%0.
&hat is the e.uation for Ted<s $udget constraint:
A)
Food G Clothing H 9,00
B)
$5 I Food G $30 I Clothing L 9,00
C)
$5 I Food G $30 I Clothing M 9,00
D)
$5 I Food G $30 I Clothing C 9,00
Anser!
D
Diff! "
Type! A

111
Figure $.

5)
Refer to Figure ,.1. Assume Tom is on $udget constraint AC. 3f the price of a ham$urger is 95' Tom<s monthly
income is
A)
9"0.
B)
9,0.
C)
9100.
D)
9%00.
Anser!
C
Diff! "
Type! A

,)
Refer to Figure ,.1. Assume Tom is on $udget constraint AC. 3f the price of a hot dog is 9".50' Tom<s monthly
income is
A)
9)0.
B)
9,0.
C)
910.
D)
9100.
Anser!
112
D
Diff! "
Type! A

/)
Refer to Figure ,.1. The slope of $udget constraint AC is
A)
45.0.
B)
4".0.
C)
40.5.
D)
indeterminate from this information $ecause prices are not gi(en.
Anser!
B
Diff! "
Type! A

1"0
1)
Refer to Figure ,.1. Assume Tom<s $udget constraint is AC. Ee does not spend his entire income at point
A)
A.
B)
B.
C)
D.
D)
E.
Anser!
D
Diff! "
Type! A

2)
Refer to Figure ,.1. Assume Tom<s $udget is AC. Ni(en his current monthly income he cannot purchase the $undle
of goods at point
A)
A.
B)
B.
C)
E.
D)
D.
Anser!
D
Diff! "
Type! A

10)
Refer to Figure ,.1. Along $udget constraint AC' the opportunity cost of one ham$urger
A)
is 1K) of a hot dog.
B)
is 1K" of a hot dog.
C)
is " hot dogs.
D)
1"1
changes as you mo(e don the $udget constraint.
Anser!
C
Diff! "
Type! A

11)
Refer to Figure ,.1. Tom<s $udget constraint is AC. Eis choice set includes all points
A)
along $udget constraint AC.
B)
$ounded $y the area OAC.
C)
to the right of $udget constraint AC.
D)
along the (ertical and hori+ontal a6es.
Anser!
B
Diff! "
Type! A

1")
Refer to Figure ,.1. AC represents Tom<s $udget constraint. #oint D then represents a point that is
A)
an a(aila$le option' as Tom is @ust spending all of his income.
B)
a(aila$le' $ut at hich he does not spend all his income.
C)
not a(aila$le $ecause it represents a com$ination of ham$urgers and hot dogs that he cannot purchase ith his
income.
D)
in his opportunity set $ut not on his $udget constraint.
Anser!
C
Diff! "
Type! A

1""
Figure $.!

1%)
Refer to Figure ,.". Assume 7r. Dingle is on $udget constraint AC. 3f the price of a garden$urger is 95' 7r. Dingle<s
monthly income is
A)
9"0.
B)
9,0.
C)
9100.
D)
9"00.
Anser!
D
Diff! "
Type! A

1))
Refer to Figure ,.". Assume 7r. Dingle is on $udget constraint AC. 3f the price of a $eer is 95' 7r. Dingle<s monthly
income is
A)
9)0.
B)
910.
C)
9100.
D)
9"00.
Anser!
1"%
D
Diff! "
Type! A

15)
Refer to Figure ,.". The slope of $udget constraint AC is
A)
41.
B)
4".
C)
45.
D)
indeterminate from this information $ecause prices are not gi(en.
Anser!
A
Diff! "
Type! A

1")
1,)
Refer to Figure ,.". Assume 7r. Dingle<s $udget constraint is AC. Ee ill not spend his entire income at point
*****.
A)
A
B)
B
C)
D
D)
>
Anser!
D
Diff! "
Type! A

1/)
Refer to Figure ,.". Assume 7r. Dingle<s $udget is AC. Ni(en his current monthly income he cannot purchase the
.uantities of the to goods at point *****.
A)
A
B)
B
C)
D
D)
E
Anser!
C
Diff! "
Type! A

11)
Refer to Figure ,.". Along $udget constraint AC' the opportunity cost of one garden$urger is
A)
1K) of a $eer.
B)
a $eer.
C)
" $eers.
1"5
D)
changing as 7r. Dingle mo(es don his $udget constraint.
Anser!
B
Diff! "
Type! A

12)
Refer to Figure ,.". 7r. Dingle<s $udget constraint is AC. Eis choice set is all points
A)
in the area $ounded $y OAC.
B)
along $udget constraint AC.
C)
to the right of $udget constraint AC.
D)
along the (ertical and hori+ontal a6es.
Anser!
A
Diff! "
Type! A

"0)
Refer to Figure ,.". 7r. Dingle<s $udget constraint is AC. #oint E is
A)
an a(aila$le option and 7r. Dingle e6actly spends all of his income.
B)
an a(aila$le option and 7r. Dingle does not spend all of his income.
C)
not in 7r. DingleOs opportunity set $ut is on his $udget constraint.
D)
not a(aila$le $ecause it represents a com$ination of garden$urgers and $eer that 7r. Dingle cannot purchase ith
his current income.
Anser!
B
Diff! %
Type! C

1",
Refer to the information provided in the Figure below to answer the questions that follow.
Figure $."

"1)
Refer to Figure ,.%. 7olly<s $udget constraint is AC. 3t ould si(el to AD if the price of
A)
cassette tapes increased.
B)
cassette tapes decreased.
C)
CDs increased.
D)
CDs decreased.
Anser!
B
Diff! "
Type! A

"")
Refer to Figure ,.%. 7olly<s $udget constraint is AC. 3t ould si(el to AB if the price of
A)
cassette tapes increased.
B)
cassette tapes decreased.
C)
CDs increased.
D)
CDs decreased.
Anser!
A
Diff! "
1"/
Type! A

1"1
Figure $.#

"%)
Refer to Figure ,.). Bill<s $udget constraint is AC. 3f the price of $lack $eans decreases' Bill<s $udget constraint ill
$e
A)
AO.
B)
AB.
C)
AC.
D)
AD.
Anser!
D
Diff! "
Type! A

"))
Refer to Figure ,.). Bill<s $udget constraint is AC. Eis $udget constraint ould shift to AB if the price of
A)
$lack $eans increased.
B)
$lack $eans decreased.
C)
$ell peppers increased.
D)
$ell peppers decreased.
Anser!
A
1"2
Diff! "
Type! A

"5)
3f a household<s income is dou$led' its $udget constraint ill
A)
shift out parallel to the old one.
B)
pi(ot at the ;4intercept.
C)
shift in parallel to the old one.
D)
not $e affected.
Anser!
A
Diff! "
Type! D

1%0
Figure $.5

",)
Refer to Figure ,.5. 7olly<s $udget constraint is BD. 3f the price of CDs decreases' her ne $udget constraint
$ecomes
A)
AD.
B)
AO.
C)
CD.
D)
EF.
Anser!
C
Diff! "
Type! A

"/)
Refer to Figure ,.5. 7olly<s $udget constraint is CD. 3f her income increases' her ne $udget constraint is
A)
AD
B)
BD
C)
>F
D)
not shon on this graph.
Anser!
C
1%1
Diff! "
Type! A

"1)
Refer to Figure ,.5. 7olly<s $udget constraint is BD. 7olly<s income is 9,00' the price of a cassette tape is 915 and
the price of a CD is 9"0. At #oint B the consumer is $uying ********** cassette tapes and ********** CDs.
A)
05 %0
B)
%05 0
C)
"05 15
D)
)05 %0
Anser!
A
Diff! "
Type! A

1%"
Figure $.$

"2)
Refer to Figure ,.,. Bill<s $udget constraint as originally CD. 3f his ne $udget constraint is EF' then his income
A)
increased.
B)
decreased.
C)
increased and the price of $lack $eans decreased.
D)
decreased and the price of $lack $eans increased.
Anser!
A
Diff! %
Type! C

%0)
Refer to Figure ,.,. Bill<s $udget constraint is BD. 3f the price of $ell peppers increases' Bill<s ne $udget constraint
is
A)
AD.
B)
AO.
C)
CD.
D)
EF.
Anser!
A
1%%
Diff! "
Type! A

%1)
Refer to Figure ,.,. Bill<s $udget constraint is BD. Bill<s income is 9100' the price of a $ell pepper is 91' and the
price of a $ag of $lack $eans is 91. At #oint B Bill is $uying ********** $ell peppers and ********** $ags of
$lack $eans.
A)
1005 0
B)
05 100
C)
)005 )00
D)
,005 "00
Anser!
A
Diff! "
Type! A

1%)
%")
7ichael can $uy either pi++as or su$marine sandiches. 3f the prices of pi++a and su$marine sandiches dou$le and
so does 7ichael<s money income' e can deduce that 7ichael<s $udget constraint ill
A)
shift in $ut remain parallel to the old one.
B)
shift out $ut remain parallel to the old one.
C)
si(el in so that the slope of the $udget constraint is dou$led.
D)
remain unchanged.
Anser!
D
Diff! %
Type! C

%%)
#rice decreases ill ******** a householdOs choice set.
A)
increase
B)
decrease
C)
not change
D)
sometimes increase and other times decrease
Anser!
A
Diff! 1
Type! F

%))
The real cost of a car is its opportunity cost. =pportunity cost is determined $y
A)
the price of the car.
B)
relati(e prices.
C)
ealth.
D)
1%5
the prices of the goods that are compliments to a car.
Anser!
B
Diff! %
Type! C

Figure $.,

1%,
%5)
Refer to Figure ,./. Along $udget constraint AB' the price of good X is 910 and the price of good Y is 91". 3f the
price of P increases to 915' the $udget constraint ill
A)
pi(ot in at #oint B.
B)
pi(ot out at #oint A.
C)
shift in parallel to AB.
D)
pi(ot in at #oint A.
Anser!
A
Diff! "
Type! A

%,)
Refer to Figure ,./. Along $udget constraint AB' the price of good X is 91" and the price of good Y is 910. 3f the
price of Y decreases to 91' the $udget constraint ill
A)
pi(ot in at #oint B.
B)
pi(ot out at #oint A.
C)
shift in parallel to AB.
D)
pi(ot in at #oint A.
Anser!
B
Diff! "
Type! A

%rue/False
1)
&hen the price of a good increases' the $udget constraint does not change.
Anser!
FADA>
Diff! 1
Type! F

")
1%/
Assuming a perfectly competiti(e market implies that households ha(e perfect knoledge of .ualities and prices of
e(erything a(aila$le in the market.
Anser!
TR8>
Diff! 1
Type! F

%)
Eomogeneous products are distinguisha$le from each other.
Anser!
FADA>
Diff! "
Type! D

))
#rice increases cause a decrease in a householdOs choice set.
Anser!
TR8>
Diff! "
Type! F

1%1

%he (asis of Choice: -tility
Multiple Choice
1)
7arginal utility is the
A)
total satisfaction gained $y consuming all units of a good.
B)
total satisfaction gained $y consuming the last unit of the good.
C)
additional satisfaction gained $y the consumption of one more unit of a good.
D)
additional consumption di(ided $y the additional satisfaction gained $y the additional consumption.
Anser!
C
Diff! "
Type! D

")
Qathy eats fi(e slices of pi++a on a Aaturday night $ut admits each slice of pi++a doesn<t taste as good as the pre(ious
one. This suggests that for Qathy the
A)
marginal utility of a slice of pi++a is positi(e $ut decreasing.
B)
marginal utility of a slice of pi++a is negati(e.
C)
total utility of slices of pi++a is declining.
D)
total utility of slices of pi++a is increasing $y larger and larger increments.
Anser!
A
Diff! %
Type! C

Refer to the information provided in Figure 6. below to answer the questions that follow.
1%2
Figure $.8

%)
Refer to Figure ,.1. The marginal utility of the second mo(ie rental is
A)
10.
B)
1".5.
C)
"5.
D)
)0.
Anser!
A
Diff! "
Type! A

1)0
))
Refer to Figure ,.1. The marginal utility of the third mo(ie rental is
A)
1.
B)
%.
C)
2.%%.
D)
"1.
Anser!
B
Diff! "
Type! A

5)
Refer to Figure ,.1. The ********** mo(ie rental has a marginal utility of +ero.
A)
first
B)
second
C)
third
D)
fourth
Anser!
D
Diff! "
Type! A

,)
The la of diminishing marginal utility is effecti(e hen marginal utility is **********.
A)
positi(e and increasing
B)
positi(e and decreasing
C)
initially +ero and then increasing
D)
1)1
initially +ero and then decreasing
Anser!
B
Diff! %
Type! A

Refer to the information provided in Figure 6.! below to answer the questions that follow.
Figure $..

1)"
/)
Refer to Figure ,.2. The marginal utility of the second (ideo game rental is
A)
10.
B)
1.
C)
"5.
D)
)0.
Anser!
B
Diff! "
Type! A

1)
Refer to Figure ,.2. The marginal utility of the third (ideo game rental is
A)
1.
B)
%.
C)
).
D)
"".
Anser!
C
Diff! "
Type! A

2)
Refer to Figure ,.2. The ********** (ideo game rental has a marginal utility of +ero.
A)
first
B)
second
C)
third
D)
1)%
fourth
Anser!
D
Diff! "
Type! A

Refer to the information provided in "able 6.1 below to answer the questions that follow.
%a/le $.
0um/er of
&am/urgers per 1ay
%otal -tility Marginal -tility
1
"
%
)
5
%0
5"
,/
/,
)
0um/er of
2o'as per 1ay
1
"
%
)
5
"0
%5
)/
5/
/
1))
10)
Refer to Ta$le ,.1. The marginal utility of the second soda per day is
A)
10.
B)
15.
C)
%5.
D)
55.
Anser!
B
Diff! "
Type! A

11)
Refer to Ta$le ,.1. The marginal utility of the third ham$urger per day is
A)
5.
B)
15.
C)
"".%%.
D)
112.
Anser!
B
Diff! "
Type! A

1")
Refer to Ta$le ,.1. Diminishing marginal utility sets in after the ********** soda per day.
A)
first
B)
second
C)
third
D)
1)5
fourth
Anser!
A
Diff! "
Type! A

1%)
Refer to Ta$le ,.1. The total utility of fi(e ham$urgers per day is
A)
10.
B)
11.
C)
2,.
D)
Anser!
A
Diff! "
Type! A

1))
Refer to Ta$le ,.1. The total utility of fi(e sodas per day is
A)
%5.
B)
,).
C)
2".
D)
Anser!
B
Diff! "
Type! A

1),
15)
Refer to Ta$le ,.1. 3f the price of a soda is 9"' the price of a ham$urger is 9,' and Neorge has 91) of income'
Neorge<s utility ma6imi+ing com$ination of sodas and ham$urgers per day is
A)
1 soda and " ham$urgers.
B)
) sodas and 1 ham$urger.
C)
% sodas and 1.5 ham$urgers.
D)
Anser!
B
Diff! %
Type! A

1,)
Refer to Ta$le ,.1. Assume that a store is gi(ing ham$urgers and sodas aay for free. Consumers can ha(e as many
sodas and ham$urgers as they ant' $ut the food has to $e consumed one unit at a time. 3f Neorge has already had
one soda and to ham$urgers' then Neorge
A)
should ne6t consume a soda to ma6imi+e his utility.
B)
should ne6t consume a ham$urger to ma6imi+e his utility.
C)
is indifferent $eteen consuming the second soda or the third ham$urger.
D)
should consume neither another soda nor another ham$urger to ma6imi+e his utility.
Anser!
C
Diff! %
Type! C

Refer to the information provided in "able 6.2 below to answer the questions that follow.
%a/le $.!
0um/er of
Can'y (ars per 1ay
1
"
%
)
5
)0
/5
100
115
5
1)/
0um/er of
&ot 1ogs per 1ay
1
"
%
)
5
%0
5)
/"
1)
,
1/)
Refer to Ta$le ,.". The marginal utility of the second candy $ar per day is
A)
10.
B)
15.
C)
%5.
D)
55.
Anser!
C
Diff! "
Type! A

1)1
11)
Refer to Ta$le ,.". Diminishing marginal utility sets in after the ********** candy $ar per day.
A)
first
B)
second
C)
third
D)
fourth
Anser!
A
Diff! "
Type! A

12)
Refer to Ta$le ,.". The total utility of fi(e candy $ars per day is
A)
115.
B)
1"0.
C)
1%0.
D)
Anser!
B
Diff! "
Type! A

"0)
Refer to Ta$le ,.". 3f the price of a candy $ar is 91' the price of a hot dog is 9"' and Aaron has 9, of income'
Aaron<s utility ma6imi+ing com$ination of sodas and ham$urgers per day is
A)
1 candy $ar and " hot dogs.
B)
) candy $ars and 1 hot dog.
C)
" candy $ars and 1.5 hot dogs.
D)
1)2
Anser!
B
Diff! %
Type! A

"1)
Richard is consuming X and Y so that MU
6
KP
6
C , and MU
y
KP
y
C 10. To ma6imi+e utility' Richard should
A)
continue to consume the same amount of X and Y' as the consumer is already ma6imi+ing utility.
B)
consume less of $oth X and Y.
C)
consume more X and less Y.
D)
consume less X and more Y.
Anser!
D
Diff! "
Type! A

"")
Fon is consuming X and Y so that MU
6
KP
6
C 1 and MU
y
KP
y
C ). To ma6imi+e utility' he should consume
A)
the same amount of X and Y since he is already ma6imi+ing utility.
B)
less of $oth X and Y.
C)
more X and less Y.
D)
less X and more Y.
Anser!
C
Diff! "
Type! A

"%)
3f MU
6
KP
6
H MU
y
KP
y
' then
A)
150
spending a dollar less on Y and spending a dollar more on X increases utility.
B)
spending a dollar less on X' and spending a dollar more on Y increases utility.
C)
X is more e6pensi(e than Y.
D)
Y is more e6pensi(e than X.
Anser!
B
Diff! "
Type! D

Refer to the information provided in Figure 6.1# below to answer the questions that follow.
Figure $.3

"))
Refer to Figure ,.10. The current price of a turkey sandich is 9,. 3f Qyle is currently $uying fi(e turkey
sandiches a eek' he ***** ma6imi+ing utility $ecause the marginal utility ********than its price.
A)
is5 from the fifth sandich is greater
B)
is5 from the fifth sandich is less
C)
is not5 gained from the fifth sandich is less
D)
is not5 gained from the fifth sandich is greater
Anser!
D
Diff! %
Type! C

151
15"
"5)
Refer to Figure ,.10. The current price of a turkey sandich is 9,. 3f Qyle is currently $uying nine turkey
sandiches a eek' hich of the folloing statements is TR8>:
A)
Qyle is ma6imi+ing utility $ecause the marginal utility from the ninth sandich is greater than its price.
B)
Qyle is ma6imi+ing utility $ecause the marginal utility from the ninth sandich is less than its price.
C)
Qyle is not ma6imi+ing utility $ecause the marginal utility gained from the ninth sandich is less than its price.
D)
Qyle is not ma6imi+ing utility $ecause the marginal utility gained from the ninth sandich is greater than its price.
Anser!
C
Diff! %
Type! C

",)
Refer to Figure ,.10. Qyle ould increase his consumption of turkey sandiches from / to 2 per eek if their price
fell from 9, to 9). This illustrates the idea of
A)
consumer surplus.
B)
technical efficiency.
C)
cross4price elasticity of demand.
D)
the la of diminishing marginal utility.
Anser!
D
Diff! %
Type! C

"/)
The marginal utility of the first cup of coffee that Tom drinks in the morning is orth 9".00. The marginal utility of
the 2th cup of coffee he drinks is positi(e hile the marginal utility of the 10th cup of coffee he drinks in the
morning is orth 90. This implies that at a price of 90' Tom ould drink
A)
an infinite num$er of cups of coffee each morning.
B)
at most 10 cups of coffee per morning.
C)
15%
more than 10 cups of coffee per morning' $ut the actual num$er is indeterminate from this information.
D)
+ero cups of coffee per morning.
Anser!
B
Diff! %
Type! C

"1)
For 7atthe' the marginal utility of the 2th soda in a day is positi(e and the marginal utility of the 10th soda in a
day is +ero. This
A)
implies that 7atthe<s demand cur(e for sodas per day ill $ecome upard sloping at 10 sodas per day.
B)
is impossi$le $ecause each additional unit of consumption of any good must pro(ide positi(e marginal utility.
C)
implies that at a +ero price 7atthe<s demand cur(e ill intersect the .uantity a6is at 10.
D)
7atthe must ma6imi+e utility $y consuming 10 sodas per day.
Anser!
C
Diff! "
Type! D

"2)
8tility
A)
is the satisfaction yielded $y the consumption of a good or ser(ice.
B)
can $e measured.
C)
can $e used to compare different people<s likes and dislikes.
D)
All of the a$o(e
Anser!
A
Diff! "
Type! D

%0)
15)
The la of diminishing marginal utility
A)
refers to the decrease in total satisfaction as more units of a good are consumed.
B)
refers to the decrease in additional satisfaction created $y consumption of more and more units of a good.
C)
refers to the idea that total utility is negati(e.
D)
All of the a$o(e
Anser!
B
Diff! "
Type! D

%1)
The utility4ma6imi+ing rule can $e stated in ords in the folloing ay! A person ill ma6imi+e utility hen the
********* is e.uali+ed across products.
A)
total utility per dollar spent
B)
marginal utility
C)
total utility
D)
marginal utility per dollar spent
Anser!
D
Diff! %
Type! C

%")
A utility4ma6imi+ing consumer com$ines purchases in a ay that makes
A)
P
6
BMU
6
) C P
y
BMU
(
) for all pairs of goods.
B)
TU
6
KP
6
C TU
y
KP
y
for all pairs of goods.
C)
MU
6
KMU
y
C P
6
KP
y
D)
155
MU
6
C MU
y
Anser!
C
Diff! "
Type! A

%%)
For a utility ma6imi+ing indi(idual the ratio of the marginal utility of coffee to the marginal utility of donuts is four.
This implies that
A)
a donut is four times more (alua$le than a cup of coffee.
B)
a cup of coffee is four times less (alua$le than a donut.
C)
this person alays eats donuts ith coffee.
D)
the coffee to donuts price ratio is four to one.
Anser!
D
Diff! %
Type! C

%))
Qathleen likes a(ocado and cra$ dip. After eating four crackers ith a(ocado and cra$ dip' she sitches to cheese
and crackers. &e can conclude that
A)
the a(ocado and cra$ dip cannot ha(e tasted that good.
B)
the a(ocado and cra$ dip no has a marginal utility of +ero.
C)
at this point cheese and crackers ha(e a higher marginal utility per dollar spent than a(ocado and cra$ dip.
D)
Qathleen is no longer ma6imi+ing her utility.
Anser!
C
Diff! %
Type! C

%5)
The la of diminishing marginal utility implies
A)
15,
supply cur(es alays slope upard.
B)
total utility ill alays increase $y an increasing amount as consumption increases.
C)
a consumer ill alays $uy positi(e amounts of all goods.
D)
demand cur(es alays slope donard and to the right.
Anser!
D
Diff! "
Type! D

%rue/False
1)
The la of diminishing marginal utility implies that as a household consumes more of a product' its total utility ill
increase $y smaller amounts 4 assuming marginal utility remains positi(e.
Anser!
TR8>
Diff! 1
Type! F

")
&hen consumers ma6imi+e utility' they are e.uating the ratio of marginal utility to price across all goods consumed.
Anser!
TR8>
Diff! 1
Type! F

%)
A negati(e marginal utility implies negati(e total utility.
Anser!
FADA>
Diff! 1
Type! F

))
3f MU
6
KP
6
e6ceeds MU
y
KP
y
' then a household can increase its utility $y spending more on X and less on Y.
Anser!
TR8>
Diff! 1
Type! F

15/
5)
&hen marginal utility is +ero' total utility is at a ma6imum.
Anser!
TR8>
Diff! "
Type! F

4ncome an' 2u/stitution Effects
Multiple Choice
1)
A fall in the price of #epsi that causes a household to shift its purchasing pattern aay from su$stitutes and toard
#epsi is the
A)
income effect of a price change.
B)
su$stitution effect of a price change.
C)
complementary effect of a price change.
D)
diminishing marginal utility effect of a price change.
Anser!
B
Diff! 1
Type! F

")
=n hich of the folloing goods ould a price change ha(e the largest income effect:
A)
A maga+ine
B)
A desktop computer
C)
Clothing
D)
A car
Anser!
D
Diff! %
Type! C

151
%)
Assuming that charita$le gi(ing is a normal good' the income effect of a decrease in personal ta6 rates should lead to
A)
less gi(ing $ecause gi(ing to charity ould $ecome more e6pensi(e relati(e to other goods.
B)
more gi(ing $ecause gi(ing to charity ould $ecome less e6pensi(e relati(e to other goods.
C)
more gi(ing $ecause households ould ha(e more disposa$le income.
D)
less gi(ing $ecause households ould spend that money on lu6ury goods.
Anser!
C
Diff! %
Type! C

%rue/False
1)
3gnoring income effects' an increase in the age rate ill cause an increase in la$or supply.
Anser!
TR8>
Diff! 1
Type! F

152
Consumer 2urplus
Multiple Choice
1)
The loer the market price of ater' the ******** the ********* surplus.
A)
higher5 consumer
B)
loer5 consumer
C)
higher5 producer
D)
loer5 go(ernment
Anser!
A
Diff! "
Type! F

")
The diamondKater parado6 states that the things ith the ****** (alue in use fre.uently ha(e ******* (alue in
e6change.
A)
least5 the least
B)
least5 little or no
C)
greatest5 little or no
D)
greatest5 the greatest
Anser!
C
Diff! 1
Type! D

%rue/False
1)
The diamondKater parado6 helps to illustrate the concept of marginal (alue.
Anser!
TR8>
Diff! 1
Type! F
1,0

&ousehol' Choice in 4nput Mar+ets
Multiple Choice
Figure $.

1,1
1)
Refer to Figure ,.11. Nordon<s opportunity cost of one hour of leisure is
A)
910.
B)
9").
C)
9")0.
D)
Anser!
A
Diff! "
Type! A

Figure $.!

")
Refer to Figure ,.1". Art<s opportunity cost of one hour of leisure is
A)
9".
B)
9%.
C)
9100.
D)
Anser!
B
Diff! "
1,"
Type! A

%)
Assume leisure is a normal good. The su$stitution effect of a age decrease implies a ********** demand for
leisure and a ********** la$or supply.
A)
loer5 higher
B)
higher5 loer
C)
higher5 higher
D)
loer5 loer
Anser!
B
Diff! %
Type! C

1,%
))
3f the su$stitution effect of a age change outeighs the income effect of a age change' the la$or4supply cur(e is
A)
upard sloping.
B)
hori+ontal.
C)
(ertical.
D)
$ackard $ending.
Anser!
A
Diff! %
Type! C

5)
Assume leisure is an inferior good instead of a normal good. The income effect of a age increase ill lead to a
********** demand for leisure and a ********** la$or supply.
A)
higher5 higher
B)
higher5 loer
C)
loer5 higher
D)
loer5 loer
Anser!
C
Diff! %
Type! C

,)
Assuming that leisure is a normal good' if an indi(idual<s la$or supply cur(e is $ackard $ending' then the
A)
income effect outeighs the su$stitution effect at higher ages.
B)
su$stitution effect outeighs the income effect at higher ages.
C)
income effect and the su$stitution effects are e.ual.
D)
1,)
income effect is +ero.
Anser!
A
Diff! "
Type! F

5ppen'i6
Multiple Choice
1)
Earry tells you that he prefers #epsi to Coke' Coke to /48#' and /48# to #epsi. This (iolates hat assumption made
hen analy+ing consumer preferences:
A)
That more is $etter.
B)
That there is a diminishing marginal rate of su$stitution.
C)
That consumers are rational.
D)
That consumers are a$le to choose among all the com$inations of goods and ser(ices a(aila$le.
Anser!
C
Diff! %
Type! C

1,5
")
&hen the consumer<s indifference cur(e is @ust tangent to the $udget constraint hich of the folloing conditions is
satisfied:
A)
MU
6
C MU
y
B)
TU
6
C TU
y
C)
MU
6
KP
6
C MU
y
KP
y
D)
TU
6
KP
6
C TU
y
KP
y
Anser!
C
Diff! 1
Type! F

%)
Assume Aally is initially in e.uili$rium and that P and ; are normal goods for her. Then the price of X falls. For
Aally to mo(e to a ne e.uili$rium point her consumption of
A)
X must remain constant' $ut her consumption of Y must increase.
B)
X must decrease.
C)
X must increase.
D)
$oth X and Y must increase.
Anser!
C
Diff! "
Type! A

))
An assumption underlying indifference cur(e analysis is that MU
6
KMU
y
A)
increases as more of X and less of Y is consumed.
B)
decreases as more of X and less of Y is consumed.
C)
1,,
remains constant as more of X and less of Y is consumed.
D)
alays e.uals one.
Anser!
B
Diff! "
Type! A

Refer to the information provided in the Figure 6.13 below to answer the questions that follow.
Figure $."

1,/
5)
Refer to Figure ,.1%. 3f Arthur mo(es from indifference cur(e 1 to indifference cur(e "' then Arthur<s
A)
marginal utility increases.
B)
total utility increases.
C)
total income decreases.
D)
prices of the goods increase.
Anser!
B
Diff! "
Type! D

Refer to the information provided in the Figure below to answer the questions that follow.
Figure $.#

,)
Refer to Figure ,.1). Assume >llen has to products a(aila$le' pi++a and ham$urgers. >llen is alays illing to
trade one pi++a for one ham$urger regardless of ho many pi++as and ham$urgers she has. >llen<s indifference
cur(e ill $e represented $y the indifference cur(e in #anel
A)
A.
B)
1,1
B.
C)
C.
D)
D.
Anser!
A
Diff! %
Type! C

1,2
/)
Refer to Figure ,.1). Assume >llen has to products a(aila$le' pi++a and ham$urgers. >llen must $e compensated
ith more pi++as as she gi(es up more $urgers. >llen<s indifference cur(e ill $e represented $y the indifference
cur(e in #anel
A)
A.
B)
B.
C)
C.
D)
D.
Anser!
B
Diff! %
Type! C

1)
As you mo(e don an indifference cur(e' the a$solute (alue of the slope
A)
increases.
B)
decreases.
C)
remains constant.
D)
initially increases and then decreases.
Anser!
B
Diff! 1
Type! F

1/0
Figure $.5

2)
Refer to Figure ,.15. 3f the price of an ice cream cone is 9"' Fason<s income is
A)
9/5.
B)
9"50.
C)
9%00.
D)
indeterminate $ecause the price of ice cream sandiches is not gi(en.
Anser!
C
Diff! "
Type! A

1/1
10)
Refer to Figure ,.15. Fason ma6imi+es utility at #oint
A)
A.
B)
B.
C)
C.
D)
D.
Anser!
A
Diff! "
Type! A

11)
Refer to Figure ,.15. The slope of the indifference cur(e is the ratio of the
A)
marginal utility of ice cream cones to the marginal utility of ice cream sandiches.
B)
marginal utility of ice cream sandiches to the marginal utility of ice cream cones.
C)
total utility of ice cream cones to the total utility of ice cream sandiches.
D)
total utility of ice cream sandiches to the total utility of ice cream cones.
Anser!
A
Diff! "
Type! D

1")
Refer to Figure ,.15. At #oint A' the slope of the indifference cur(e is
A)
40.,/.
B)
41.5.
C)
4%.0.
D)
1/"
indeterminate $ecause the marginal utilities are unknon.
Anser!
A
Diff! "
Type! A

1%)
Refer to Figure ,.15. 3f the price of an ice cream cone is 9"' the price of ice cream sandiches is
A)
9".
B)
9%.
C)
950.
D)
9100.
Anser!
B
Diff! "
Type! A

1/%
Refer to the information provided in the Figure 6.16 below to answer the questions that follow.
Figure $.$

1))
Refer to Figure ,.1,. 3f the price of a hot dog is 9"' Fason<s income is
A)
9"00.
B)
9"5.
C)
9%00.
D)
indeterminate $ecause the price of sandiches is not gi(en.
Anser!
A
Diff! "
Type! A
15)
The demand cur(e for X is deri(ed from indifference cur(es and a $udget constraint $y changing
A)
the le(el of income.
B)
the price of X.
C)
the price of Y.
D)
consumers< preferences.
Anser!
1/)
B
Diff! %
Type! C

%rue/False
1)
Assuming the properties of normal indifference cur(es' a consumer ill ma6imi+e his utility here his indifference
cur(e is @ust tangent to his $udget constraint.
Anser!
TR8>
Diff! 1
Type! F

1/5
Chapter ,: %he Pro'uction Process: %he (eha)ior of Profit7Ma6imi8ing Firms

. %otal re)enue minus total cost is e9ual to
A) the rate of return.
B) marginal re(enue.
C) profit.
D) net cost.
5ns:er: C
!. 4f economic profit is 8ero, a firm
A) earns a negati(e rate of return.
B) ill lea(e the industry.
C) earns a positi(e $ut $elo normal rate of return.
D) earns e6actly a normal rate of return.
5ns:er: 1
Refer to the information provided in Figure 7.2 below to answer the following questions.

Figure ,.!
". ;efer to Figure ,.!. %his corn pro'ucer pro'uces 33 /ushels of corn an' sells each /ushel at <5. %he cost
of pro'ucing each unit /ushel is <!. %his corn pro'ucer=s total re)enue is
A) 9"0.
B) 9"00.
C) 9%00.
D) 9500.
5ns:er: 1
#. >ou o:n a /uil'ing that has four possi/le uses: a cafe, a craft store, a har':are store,
an' a /oo+store. %he )alue of the /uil'ing in each use is <!,333? <",333? <#,333? an' <5,333,
respecti)ely. >ou 'eci'e to open a har':are store. %he opportunity cost of using this
/uil'ing for a har':are store is
A) 9"'000' the (alue if the $uilding is used as a cafe.
B) 9%'000' the (alue if the $uilding is used as a craft store.
C) 910'000' the sum of the (alues if the $uilding is used for a cafe' a craft store' or a $ookstore.
D) 95'000' the (alue if the $uilding is used for a $ookstore.
5ns:er: 1
110
2CE05;4* : >ou are the o:ner an' only employee of a company that :rites computer
soft:are that is use' /y gam/lers to collect sports 'ata. @ast year you earne' a total
re)enue of <.3,333. >our costs for e9uipment, rent, an' supplies :ere <$3,333. %o start this
/usiness you in)este' an amount of your o:n capital that coul' pay you a return of <#3,333
a year.
5. ;efer to 2cenario . 1uring the year your economic costs :ere
A) 9)0'000.
B) 9,0'000.
C) 9100'000.
D) 91%0'000.
5ns:er: C
$. ;efer to 2cenario . 5 yearly normal rate of return for your computer soft:are firm
:oul' /e
A) 9"0'000.
B) 9)0'000.
C) 9,0'000.
D) 9100'000.
5ns:er: (
,. ;efer to 2cenario . >our accounting profit last year :as
A) 910'000.
B) 9%0'000.
C) 950'000.
D) 9,0'000.
5ns:er: (
8. ;efer to 2cenario . >our economic profit last year :as
A) 49)0'000.
B) 4910'000.
C) 910'000.
D) 9%0'000.
5ns:er: (
.. %here are 33 'og +ennels in 5tlanta. 5n economist stu'ying the pricing /eha)ior of 'og
+ennels tells you that she is limiting her analysis to a time perio' that 'oes not allo: for
any ne: 'og +ennels to enter the in'ustry or for any esta/lishe' 'og +ennels to lea)e the
in'ustry. %he time perio' this economist referre' to is the
A) market period.
B) industry run.
C) long run.
D) short run.
5ns:er: 1
3. 5ssume the :ool in'ustry is perfectly competiti)e. Ahy is it 'ifficult for a :ool
pro'ucer to ma+e e6cess profitsB
A) The fact that ool producers are Rprice takers.R
111
B) The assumption that ool producers in the industry do not RdifferentiateR their products.
C) The fact that the demand cur(e facing each ool producer is perfectly elastic.
D) There is free entry into the ool industry.
5ns:er: 1
. 5ssume the :ool in'ustry is perfectly competiti)e. %he mar+et 'eman' cur)e for :ool
is CCCCCCCCCC an' each in'i)i'ual :ool pro'ucer=s 'eman' cur)e is CCCCCCCCCC.
A) donard sloping5 hori+ontal
B) hori+ontal5 donard sloping
C) hori+ontal5 hori+ontal
D) donard sloping5 donard sloping
5ns:er: 5
!. %he fast7foo' in'ustry is not consi'ere' perfectly competiti)e /ecause:
A) entry and e6it are strictly regulated $y the go(ernment.
B) the firm<s products are not homogeneous.
C) firms spend a large amount of money on ad(ertising.
D) there are a (ery large num$er of firms.
5ns:er: (
%he Pro'uction Process
". %he optimal metho' of pro'uction is the one that
A) ma6imi+es output regardless of cost.
B) ma6imi+es inputs.
C) minimi+es cost.
D) minimi+es the normal rate of return.
5ns:er: C
$se the information provided in "able 7.1 below to answer the questions that follow.
%a/le ,.
4nputs ;e9uire' to Pro'uce a Pro'uct -sing 5lternati)e %echnologies
#. ;efer to %a/le ,. a/o)e. Ahich technology is the most la/or intensi)eB
A) A
B) B
C) C
D) D
5ns:er: 5
5. ;efer to %a/le ,.. 4f the hourly :age rate is <, an' the hourly price of capital is <3,
:hich pro'uction technology shoul' /e selecte'B
A) A
B) B
11"
C) C
D) D
5ns:er: C
$. %he )ersion of the la: of 'iminishing returns that applies to pro'uction
A) implies that as e add more orkers our output decreases.
B) applies only in the short run.
C) is true only hen all inputs are (aria$le.
D) applies in the short and long run.
5ns:er: (
,. 2uppose output )aries, ceteris pari/us, :ith la/or input in the follo:ing manner:
5fter ho: many units of la/or 'o 'iminishing returns set inB
A) %
B) )
C) 5
D) They do not set in
5ns:er: 1
8. Ahen total pro'uct is ma6imi8e', marginal pro'uct
A) and a(erage product are +ero.
B) is positi(e $ut a(erage product is +ero.
C) is +ero $ut a(erage product is positi(e.
D) and a(erage product are positi(e.
5ns:er: C
.. Firms ha)e an incenti)e to su/stitute la/or for capital as the
A) price of capital increases.
B) price of capital decreases.
C) price of la$or increases.
D) marginal product of la$or decreases.
5ns:er: 5
!3. 5t the Pampere' Pet 2alon the marginal pro'ucts of the first, secon', an' thir'
:or+ers are !3, $, an' 3 'ogs :ashe', respecti)ely. %he total pro'uct (num/er of 'ogs
:ashe') of the three :or+er is
A) 15.%%.
B) %0.
C) ),.
D) 1%1.
5ns:er: C
!. 4f the pro'uct 'eri)e' from the last 'ollar spent on la/or is greater than the pro'uct
'eri)e' from the last 'ollar spent on capital, then the firm
A) is minimi+ing costs.
B) should use more la$or and less capital to minimi+e costs.
C) should use less la$or and more capital to minimi+e costs.
11%
D) should increase the price paid to la$or and decrease the price paid to capital to minimi+e
costs.
5ns:er: (
!!. 5 graph sho:ing all the com/inations of capital an' la/or that can /e use' to pro'uce
a gi)en amount of output is a(n)
A) indifference cur(e.
B) iso.uant.
C) isocost line.
D) production function.
5ns:er: (
!". 5 graph sho:ing all the com/inations of capital an' la/or a)aila/le for a gi)en total
cost is the
A) isocost line.
B) iso.uant.
C) $udget constraint.
D) e6penditure set.
5ns:er: 5
!#. %he point of tangency /et:een an isocost line an' an iso9uant is necessarily
A) the profit4ma6imi+ing com$ination of inputs that should $e hired to produce that output le(el.
B) the least costly com$ination of inputs that can $e hired to produce the output le(el.
C) $oth the profit4ma6imi+ing and least costly com$ination of inputs that can $e used to produce
the output le(el.
D) the minimum amount of output that can $e attained for that le(el of e6penditure.
5ns:er: (
!5. %he total cost cur)e for a firm can /e 'eri)e' from iso9uants an' isocost lines /y
A) (arying the prices of capital and la$or and keeping total e6penditure constant.
B) (arying production technologies' $ut keeping input prices and e6penditure le(els constant.
C) (arying total e6penditures hile keeping input prices and production technology constant.
D) (arying the price of either capital or la$or hile keeping total e6penditures and production
technology constant.
5ns:er: C
11)
Chapter 8: 2hort7;un Costs an' *utput 1ecisions

Costs in the 2hort ;un
Multiple Choice
1)
3n the short run
A)
e6isting firms do ?=T face limits imposed $y a fi6ed factor of production.
B)
all firms ha(e costs that they must $ear regardless of their output.
C)
ne firms can enter an industry.
D)
e6isting firms can e6it an industry.
Anser!
B
Diff! 1
Type! F

")
&hich statement is TR8>: Fi6ed costs
115
A)
do ?=T e6ist in the long run.
B)
depend on the firm<s le(el of output.
C)
are +ero if the firm is producing nothing.
D)
are the difference $eteen total costs and a(erage (aria$le costs.
Anser!
A
Diff! 1
Type! F

%)
>conomists usually assume that ******** is a fi6ed input in the ******* run.
A)
la$or5 short
B)
capital5 short
C)
la$or5 long
D)
capital5 long
Anser!
B
Diff! 1
Type! F

))
>conomists usually assume that la$or is ******* input in the ******* run.
A)
a fi6ed5 short
B)
a fi6ed5 long
C)
a (aria$le5 short
D)
part fi6ed and part (aria$le5 long
Anser!
C
11,
Diff! 1
Type! F

11/
5)
The formula for total fi6ed cost is
A)
TFC C TC G TVC.
B)
TFC C TVC 4 TC.
C)
TFC C TCKTVC.
D)
TFC C TC 4 TVC.
Anser!
D
Diff! 1
Type! F

,)
The Dan Ranger' a landscaping company' has total costs of 9)'000 and total (aria$le costs of 91'000. The Dan
Ranger<s total fi6ed costs are
A)
90.
B)
9%'000.
C)
95'000.
D)
indeterminate $ecause the firm<s output le(el is not knon.
Anser!
B
Diff! "
Type! A

/)
The Farley Farm' a dairy company' has total costs of 915'000 and total (aria$le costs of 9"'000. The Farley Farm<s
total fi6ed costs are
A)
90.
B)
91%'000.
C)
91/'000.
111
D)
indeterminate $ecause the firm<s output le(el is not knon.
Anser!
B
Diff! "
Type! A

1)
Amy spends 95'000 on remodeling a storefront that she then opens as a take4out deli. Business has not $een (ery
successful' and she needs an additional 91'000 to keep the deli open. &hich of the folloing is TR8>:
A)
The 95'000 Amy spent on remodeling represents a part of the total (aria$le cost of her $usiness.
B)
The 95'000 Amy spent is a fi6ed cost of her $usiness.
C)
The 91'000 represents her marginal costs of production.
D)
The 91'000 Amy needs to keep the deli open represents her total fi6ed costs.
Anser!
B
Diff! "
Type! A

112
2)
Dana spends 910'000 on remodeling a storefront that she then opens as a shoe store. The $usiness has not $een (ery
successful' and she needs an additional 9%'000 to keep the shoe store open. &hich of the folloing is TR8>:
A)
The 910'000 Dana spent on remodeling represents a part of the total (aria$le cost of her $usiness.
B)
The 9%'000 represents her marginal costs of production.
C)
The 910'000 Dana spent on remodeling is a fi6ed cost of her $usiness.
D)
The 9%'000 Dana needs to keep the deli open represents her total fi6ed costs.
Anser!
C
Diff! "
Type! A

10)
Firms ha(e ******* o(er their ******* costs in the short run.
A)
control5 fi6ed
B)
no control5 fi6ed
C)
control5 o(erhead
D)
no control5 (aria$le
Anser!
B
Diff! 1
Type! F

11)
The formula for a(erage fi6ed costs is
A)
TFC 4 q.
B)
TFCKq.
C)
qKTFC.
D)
120
SqKSTFC.
Anser!
B
Diff! 1
Type! F

Refer to the information provided in Figure .1 below to answer the questions that follow.
Figure 8.

121
1")
Refer to Figure 1.1 a$o(e. The total fi6ed costs for Cyndy<s Floral Arrangements are 91'000. 3f Cyndy<s Floral
Arrangements produces "00 silk floer arrangements' the a(erage fi6ed costs are
A)
9."0.
B)
95.
C)
9"0.
D)
9"00.
Anser!
B
Diff! "
Type! A

Figure 8.!

1%)
Refer to Figure 1." a$o(e. The total fi6ed costs for The Bar$er Ahop are 9%'000. 3f The Bar$er Ahop produces %00
hair cuts' the a(erage fi6ed costs are
A)
9."0.
B)
95.
C)
910.
D)
9100.
Anser!
12"
C
Diff! "
Type! A

1))
As output increases' a(erage fi6ed costs
A)
decrease.
B)
initially decrease and then increase.
C)
remain constant.
D)
increase.
Anser!
A
Diff! 1
Type! F

12%
15)
Both Qate and Qyle on saltater taffy factories. Qate<s factory has lo fi6ed costs and high (aria$le costs. Qyle<s
factory has high fi6ed costs and lo (aria$le costs. Currently' each factory is producing 1'000 $o6es of taffy at the
same total cost. Complete the folloing statement ith the correct anser. 3f each produces
A)
less' their costs ill $e e.ual.
B)
more' their costs ill $e e.ual.
C)
more' the costs of Qate<s factory ill e6ceed those of Qyle<s factory.
D)
less' the costs of Qate<s factory ill e6ceed those of Qyle<s factory.
Anser!
C
Diff! %
Type! C

1,)
Ahort4run costs that depend on the le(el of output are
A)
total fi6ed cost only.
B)
total (aria$le costs only.
C)
total costs only.
D)
$oth total (aria$le costs and total costs.
Anser!
D
Diff! 1
Type! F

1/)
The total (aria$le cost cur(e
A)
increases as output increases.
B)
shos the (aria$le cost of production gi(en current factor prices.
C)
starts at the origin.
12)
D)
All of the a$o(e
Anser!
D
Diff! 1
Type! F

11)
A point on a total (aria$le cost cur(e shos the ******** (aria$le cost a firm ill $ear to produce a certain output.
A)
highest
B)
loest
C)
change in
D)
a(erage
Anser!
B
Diff! 1
Type! F

12)
&hich of the folloing is most likely to $e a (aria$le cost for a firm:
A)
The interest payments made on loans
B)
The franchiser<s fee that a restaurant must pay to the national restaurant chain
C)
The monthly rent on office space that it leased for a year
D)
The payroll ta6es that are paid on employee ages
Anser!
D
Diff! %
Type! C

125
Refer to the information provided in "able .1 below to answer the questions that follow.
%a/le 8.

"0)
Refer to Ta$le 1.1. Assuming the price of la$or BL) is 95 per unit and the price of capital BK) is 910 per unit' hat
production techni.ue should this firm use to produce " units of output:
A)
#roduction techni.ue A
B)
#roduction techni.ue B
C)
The firm is indifferent $eteen production techni.ue A and production techni.ue B.
D)
3t is impossi$le to determine if the firm should select production techni.ue A or B $ecause total fi6ed costs are not
gi(en.
Anser!
B
Diff! "
Type! A

"1)
Refer to Ta$le 1.1. Assuming the price of la$or BL) is 95 per unit and the price of capital BK) is 910 per unit' the total
(aria$le cost of producing one unit of output is
A)
91,.
B)
9100.
C)
91"0.
D)
9""0.
Anser!
B
12,
Diff! "
Type! A

"")
Refer to Ta$le 1.1. Assume that the rele(ant time period is the short run. Assuming the price of la$or BL) is 95 per
unit and the price of capital BK) is 910 per unit' this firm<s total cost of producing one unit of output is
A)
9100.
B)
91"0.
C)
9""0.
D)
Anser!
D
Diff! "
Type! A

12/
"%)
Refer to Ta$le 1.1. Assuming the price of la$or BL) is 95 per unit and the price of capital BK) is 910 per unit' the
marginal cost of producing the third unit of output is
A)
9%0.
B)
9)0.
C)
950.
D)
Anser!
B
Diff! "
Type! A

"))
Refer to Ta$le 1.1. Assuming the price of la$or BL) is 95 per unit and the price of capital BK) is 910 per unit' hich
of the folloing statements is TR8>:
A)
The firm ill use production techni.ue A to produce all three units of output.
B)
The firm ill use production techni.ue B to produce all three units of output.
C)
The firm ill use production techni.ue B to produce the first to units of output and production techni.ue A to
produce the third unit of output.
D)
The firm ill use production techni.ue A to produce the first unit and production techni.ue B to produce the second
and third units of output.
Anser!
C
Diff! "
Type! A

"5)
7arginal cost
A)
is the increase in total cost resulting from producing one more unit.
B)
is the a(erage cost of production di(ided $y output.
C)
121
e.uals the increase in AVC resulting from producing one more unit.
D)
alays e.uals a(erage cost.
Anser!
A
Diff! "
Type! D

",)
A firm ill $egin to e6perience diminishing returns at the point here
A)
marginal cost increases.
B)
marginal cost decreases.
C)
marginal product increases.
D)
Both B and C
Anser!
A
Diff! "
Type! D

"/)
Diminishing marginal returns implies
A)
decreasing a(erage (aria$le costs.
B)
decreasing marginal costs.
C)
increasing marginal costs.
D)
decreasing a(erage fi6ed costs.
Anser!
C
Diff! "
Type! D

"1)
The e6planation for hy marginal cost is positi(e and rising in the short run is ******* marginal product of la$or in
122
the production process.
A)
a +ero
B)
a constant
C)
an increasing
D)
a diminishing
Anser!
D
Diff! 1
Type! F

"2)
3n the short run hen the marginal product of la$or ********' the marginal cost of an additional unit of output
*********.
A)
rises5 rises
B)
falls5 falls
C)
rises5 falls
D)
falls5 doesnOt change
Anser!
C
Diff! "
Type! F

%0)
Total (aria$le costs
A)
initially increase as output increases and then decrease.
B)
alays decrease ith output.
C)
alays increase ith output.
D)
initially decrease and then increase ith output.
"00
C
Diff! 1
Type! F

%1)
The formula for MC is
A)
TVCKq.
B)
qKTVC.
C)
STVCKq.
D)
STVCKSq.
Anser!
D
Diff! 1
Type! F

%")
The formula for AVC is
A)
qKTVC.
B)
TVCKq.
C)
STVCKSq.
D)
SqKSTVC.
Anser!
B
Diff! 1
Type! F

"01
%%)
Because marginal cost is alays ******** in the short run' total (aria$le cost alays ******** hen output
increases.
A)
positi(e5 increases
B)
positi(e5 decreases
C)
negati(e5 increases
D)
negati(e5 decreases
Anser!
A
Diff! "
Type! C

%))
3n the short run here total (aria$le cost is ********* at aBn) ********* rate' marginal cost is positi(e and
decreasing.
A)
increasing5 increasing
B)
increasing5 decreasing
C)
decreasing5 increasing
D)
decreasing5 decreasing
Anser!
B
Diff! %
Type! C

"0"
Figure 8."

%5)
Refer to Figure 1.%. The marginal cost of the 10th $asket$all is
A)
9".
B)
9%.
C)
9%.05.
D)
95.10.
Anser!
A
Diff! "
Type! A

"0%
%,)
Refer to Figure 1.%. The marginal cost of the ninth $asket$all is
A)
less than 9".
B)
9".
C)
9%.
D)
greater than 9%.
Anser!
A
Diff! %
Type! A

%/)
For >lliot<s dog4alking ser(ice' the only (aria$le input is la$or. >lliot<s la$or costs are 9%00 a day and his ser(ice
alks %0 dogs per day. To alk %1 dogs per day' his la$or costs increase to 9%05 a day. The marginal cost of
alking that %1st dog is
A)
95.
B)
92.1%.
C)
912.5".
D)
indeterminate from the information gi(en.
Anser!
A
Diff! "
Type! A

Refer to the information provided in "able .2 below to answer the questions that follow.
%a/le 8.!
"0)

%1)
Refer to Ta$le 1.". 3f Aherry produces +ero earrings' her total fi6ed costs are
A)
90.
B)
950.
C)
9100.
D)
Anser!
C
Diff! "
Type! A

%2)
Refer to Ta$le 1.". 3f Aherry produces one pair of earrings' her total (aria$le costs are
A)
950.
B)
9100.
C)
9150.
D)
Anser!
A
Diff! "
Type! A

)0)
Refer to Ta$le 1.". 3f Aherry produces to pairs of earrings' her marginal cost is
A)
9)0.
B)
9)5.
C)
9/".50.
D)
"05
91"".50.
Anser!
A
Diff! "
Type! A

)1)
Refer to Ta$le 1.". 3f Aherry produces three pairs of earrings' her total (aria$le costs are
A)
9",.,/.
B)
91)0.
C)
91/5.
D)
9""5.
Anser!
B
Diff! "
Type! A

)")
Refer to Ta$le 1.". 3f Aherry produces fi(e pairs of earrings' her total costs are
A)
9%"0.
B)
9%,0.
C)
9%/0.
D)
9)00.
Anser!
C
Diff! "
Type! A

)%)
Refer to Ta$le 1.". 3f Aherry produces four pairs of earrings' her a(erage fi6ed costs are
A)
9).
"0,
B)
9"0.
C)
9"5.
D)
9100.
Anser!
C
Diff! "
Type! A

)))
Refer to Ta$le 1.". Assume that Aherry<s >arrings is producing in a perfectly competiti(e market and the market
price for earrings is 9,0. To ma6imi+e profits Aherry should produce ********** pairs of earrings.
A)
to
B)
three
C)
four
D)
fi(e
Anser!
C
Diff! "
Type! A

"0/
)5)
3f e kno a(erage total cost and the amount of output' then e can alays calculate total cost $y
A)
adding a(erage total cost and the amount of output.
B)
su$tracting the amount of output from a(erage total cost.
C)
multiplying a(erage total cost $y the amount of output.
D)
di(iding a(erage total cost $y the amount of output.
Anser!
C
Diff! "
Type! A

),)
3f marginal cost is a$o(e a(erage (aria$le cost' then
A)
a(erage (aria$le cost is increasing.
B)
marginal cost must $e decreasing.
C)
a(erage (aria$le cost is constant.
D)
a(erage (aria$le cost is decreasing.
Anser!
A
Diff! 1
Type! F

)/)
3f the marginal cost cur(e is $elo the a(erage (aria$le cost cur(e' then
A)
a(erage (aria$le costs are increasing.
B)
a(erage (aria$le costs are decreasing.
C)
marginal cost must $e decreasing.
D)
"01
a(erage (aria$le costs could either $e increasing or decreasing.
Anser!
B
Diff! 1
Type! F

)1)
3f the a(erage (aria$le cost cur(e is a$o(e the marginal cost cur(e' then
A)
marginal costs must $e decreasing.
B)
a(erage (aria$le costs must $e increasing.
C)
marginal costs must $e increasing.
D)
marginal costs can $e either increasing or decreasing.
Anser!
D
Diff! 1
Type! F

)2)
The marginal cost cur(e intersects the a(erage (aria$le cost cur(e at the ******* (alue of the a(erage (aria$le cost
cur(e.
A)
ma6imum
B)
minimum
C)
+ero
D)
a(erage
Anser!
B
Diff! 1
Type! C

"02
50)
Tenty4fi(e students in a class take a test for hich the a(erage grade is /5. Then a tenty4si6th student enters the
class' takes the test' and scores 10. The test a(erage calculated ith ", students ill *******.
A)
rise a$o(e /5
B)
fall $elo /5
C)
change from /5 $ut the direction is unclear
D)
still e.ual /5
Anser!
A
Diff! 1
Type! C

51)
3f a firm<s total costs are 910 hen 10 units of output are produced and 920 hen 11 units of output are produced'
the marginal cost of the 11th unit is
A)
91.
B)
95.
C)
91.02.
D)
910.
Anser!
D
Diff! "
Type! A

5")
3f a firm<s total costs are 9100 hen 10 units of output are produced and 910% hen 11 units of output are produced'
the marginal cost of the 11th unit is
A)
91.
B)
9%.
C)
"10
95.
D)
92.%,.
Anser!
B
Diff! "
Type! A

5%)
3f the a(erage (aria$le cost of the fifth hat is 9%0' then the total (aria$le cost of fi(e hats is
A)
9,.
B)
9150.
C)
91100.
D)
Anser!
B
Diff! "
Type! A

"11
%ost %urves for &i'ro (ven
Figure 8.#

5))
Refer to Figure 1.). 7icro =(en<s total fi6ed costs are
A)
90.
B)
9"00.
C)
9500.
D)
Anser!
C
Diff! "
Type! A

55)
Refer to Figure 1.). 3f to microa(e o(ens are produced' 7icro =(en<s total (aria$le costs are
A)
9%50.
B)
9)"5.
C)
9500.
D)
Anser!
A
"1"
Diff! "
Type! A

5,)
Refer to Figure 1.). 3f three microa(e o(ens are produced' a(erage (aria$le costs are
A)
91,,.,/.
B)
9%%%.%%.
C)
9500.
D)
91'500.
Anser!
A
Diff! "
Type! A

"1%
5/)
Refer to Figure 1). The marginal cost of the third microa(e o(en is
A)
91%%.%%.
B)
9150.
C)
9%50.
D)
Anser!
B
Diff! "
Type! A

51)
Refer to Figure 1.). 8p to #oint A
A)
marginal costs are decreasing.
B)
marginal costs are increasing.
C)
D)
Anser!
C
Diff! "
Type! A

52)
Refer to Figure 1.). After #oint A
A)
a(erage total costs are increasing.
B)
marginal costs are decreasing.
C)
D)
"1)
Anser!
D
Diff! "
Type! A

,0)
Refer to Figure 1.). 7arginal costs ill e.ual a(erage (aria$le costs at
A)
to microa(e o(ens.
B)
three microa(e o(ens.
C)
si6 microa(e o(ens.
D)
an indeterminate le(el of output from this information.
Anser!
C
Diff! "
Type! A

,1)
Refer to Figure 1.). 3f si6 microa(e o(ens are produced' 7icro =(en<s a(erage total costs are
A)
9%%.%%.
B)
91%.%%.
C)
911,.,/.
D)
9"00.00.
Anser!
D
Diff! "
Type! A

"15
,")
Refer to Figure 1.). The marginal cost of the si6th microa(e o(en is
A)
91%.%%.
B)
911,.,/.
C)
9"00.
D)
91"00.
Anser!
B
Diff! %
Type! A

,%)
Refer to Figure 1). A(erage (aria$le costs are minimi+ed at an output le(el
A)
of ".
B)
of %.
C)
of ,.
D)
that is indeterminate from this information.
Anser!
C
Diff! "
Type! A

,))
Refer to Figure 1.). 3f si6 microa(e o(ens are produced' 7icro =(en<s a(erage fi6ed costs are
A)
9%%.%%.
B)
91%.%%.
C)
911,.,/.
D)
"1,
Anser!
B
Diff! "
Type! A

,5)
Refer to Figure 1.). A(erage total costs ill $e minimi+ed at
A)
si6 microa(e o(ens.
B)
an output le(el $eteen three and si6 microa(e o(ens.
C)
to microa(e o(ens.
D)
an output le(el greater than si6 microa(e o(ens.
Anser!
D
Diff! "
Type! A

,,)
Refer to Figure 1.). The (ertical distance AB represents
A)
total fi6ed costs.
B)
marginal costs.
C)
a(erage fi6ed costs.
D)
a(erage total costs.
Anser!
A
Diff! "
Type! A

"1/
Figure 8.5

,/)
Refer to Figure 1.5. The total fi6ed costs for =llie<s =(ens are
A)
90.
B)
9"50.
C)
9%00.
D)
Anser!
B
Diff! "
Type! A

,1)
Refer to Figure 1.5. 3f three o(ens are produced' a(erage (aria$le costs are
A)
91,,.,/.
B)
91%.%%.
C)
9500.
"11
D)
91'500.
Anser!
B
Diff! "
Type! A

,2)
Refer to Figure 1.5. The marginal cost of the third o(en is
A)
950.
B)
9100.
C)
9150.
D)
Anser!
A
Diff! "
Type! A

"12
/0)
A short run total cost schedule is a ********* cost schedule shifted upard $y the amount of ******** cost.
A)
total fi6ed5 marginal
B)
marginal5 total (aria$le
C)
total (aria$le5 total fi6ed
D)
total (aria$le5 marginal
Anser!
C
Diff! 1
Type! F

/1)
There are outputs for hich ******** costs e6ceed ******** costs in the short run.
A)
total fi6ed5 total
B)
a(erage (aria$le5 a(erage total
C)
total (aria$le5 total
D)
a(erage total5 a(erage (aria$le
Anser!
D
Diff! 1
Type! C

/")
Total cost is
A)
TFC 4 TVC.
B)
TFCKTVC.
C)
TFC G TVC.
D)
""0
AFC G AVC.
Anser!
C
Diff! 1
Type! F

/%)
ATC is
A)
TCKq.
B)
qKTC.
C)
AFC 4 AVC.
D)
STC 4 Sq.
Anser!
A
Diff! 1
Type! F

/))
The Framing Nallery frames posters. The Framing Nallery has total fi6ed costs of 9500. The Framing Nallery<s
a(erage (aria$le cost is 9"0 and its a(erage total cost is 9"5. The Framing Nallery is currently framing
A)
5 posters.
B)
"5 posters.
C)
100 posters.
D)
a num$er of posters that is indeterminate from this information.
Anser!
C
Diff! "
Type! A

""1
/5)
A(erage (aria$le cost and a(erage total costs get closer together as output increases $ecause
A)
diminishing returns set in.
B)
a(erage fi6ed costs decrease as output increases.
C)
marginal costs decrease as output increases.
D)
economies of scale $ecome apparent.
Anser!
B
Diff! "
Type! A

Figure 8.$

/,)
Refer to Figure 1.,. Cur(e 1 is =utdoor >.uipment<s
A)
marginal cost cur(e.
B)
a(erage (aria$le cost cur(e.
C)
a(erage total cost cur(e.
D)
a(erage fi6ed cost cur(e.
Anser!
A
Diff! "
Type! A
"""

//)
Refer to Figure 1.,. Cur(e " is =utdoor >.uipment<s
A)
B)
C)
D)
Anser!
B
Diff! "
Type! A

/1)
Refer to Figure 1.,. Cur(e % is =utdoor >.uipment<s
A)
B)
C)
D)
Anser!
C
Diff! "
Type! A

/2)
Refer to Figure 1.,. The (ertical distance AB is =utdoor >.uipment<s
A)
marginal cost.
B)
a(erage fi6ed cost.
C)
total fi6ed cost.
D)
""%
total cost.
Anser!
B
Diff! "
Type! D

10)
3f marginal cost is $elo a(erage total cost' a(erage total cost ill
A)
$e ma6imi+ed.
B)
$e decreasing.
C)
$e increasing.
D)
remain constant.
Anser!
B
Diff! "
Type! A

11)
3f marginal cost e.uals a(erage total cost' a(erage total cost ill
A)
$e ma6imi+ed.
B)
decrease.
C)
increase.
D)
$e minimi+ed.
Anser!
D
Diff! "
Type! A

1")
The short4run a(erage total cost cur(e e(entually $egins to increase at an increasing rate $ecause of
A)
economies of scale.
B)
"")
the constraint that the firm cannot change production technologies.
C)
diminishing returns phenomena.
D)
increasing returns to scale.
Anser!
C
Diff! 1
Type! F

1%)
The la of diminishing marginal returns
A)
results in a(erage total cost BATC) and marginal cost BMC) cur(es e(entually increasing at an increasing rate.
B)
results in MC $ut not ATC cur(es e(entually increasing at an increasing rate.
C)
causes a(erage fi6ed costs to decline continuously as output increases.
D)
causes the difference $eteen a(erage total cost and a(erage (aria$le cost to shrink as output increases.
Anser!
A
Diff! "
Type! D

""5
1))
3n the short run a firmOs loest cost le(el of output is the minimum point on its ********* cost cur(e.
A)
a(erage total
B)
total (aria$le
C)
a(erage fi6ed
D)
marginal
Anser!
A
Diff! "
Type! F

15)
A firm is producing output less than the output associated ith the minimum point on the firmOs short run a(erage
(aria$le cost cur(e. At this le(el of output the firm uses its fi6ed capital input ******** and its (aria$le la$or input
*********.
A)
at the loest a(erage cost5 at the loest a(erage cost
B)
at the loest a(erage cost5 at a higher than the loest a(erage cost
C)
at a higher than the loest a(erage cost5 at the loest a(erage cost
D)
at a higher than the loest a(erage cost5 at a higher than the loest a(erage cost
Anser!
D
Diff! %
Type! C

1,)
Consider an output $eyond the minimum point of a firmOs short run a(erage total cost cur(e. At this le(el of output
the firm can use its ******* input at a loer a(erage cost $ut only $y using its ******* input at a higher a(erage
cost.
A)
fi6ed capital5 (aria$le la$or
B)
(aria$le la$or5 fi6ed capital
C)
"",
(aria$le capital5 fi6ed la$or
D)
fi6ed la$or5 (aria$le capital
Anser!
A
Diff! %
Type! A

%rue/False
1)
A(erage fi6ed costs rise continuously as .uantity of output rises.
Anser!
FADA>
Diff! 1
Type! F

")
The increase in total cost that results from producing one more unit of output is the marginal cost.
Anser!
TR8>
Diff! "
Type! D

%)
The $est com$ination of inputs at one le(el of production may not $e $est at other le(els.
Anser!
TR8>
Diff! 1
Type! F

))
3f marginal cost is increasing' then a(erage (aria$le cost must $e increasing simultaneously.
Anser!
FADA>
Diff! 1
Type! F

*utput 1ecisions: ;e)enues, Costs, an' Profit Ma6imi8ation
Multiple Choice
1)
The main decision for a profit ma6imi+ing perfectly competiti(e firm is not hat ********** $ut hat
""/
***********.
A)
le(el of output to produce5 price to charge
B)
price to charge5 le(el of output to produce
C)
le(el of output to produce5 total re(enue to achie(e
D)
price to charge5 total cost to achie(e
Anser!
B
Diff! 1
Type! F

")
3f an indi(idual perfectly competiti(e firm charges a price a$o(e the industry e.uili$rium price' it ill
A)
sell all that it can produce and gain e.ual re(enue ith competitors.
B)
sell all that it can produce and gain more re(enue than competitors.
C)
sell part of hat it can produce and gain less re(enue than competitors ill.
D)
not sell any of hat it produces.
Anser!
D
Diff! 1
Type! F

%)
3f an indi(idual perfectly competiti(e firm charges a price $elo the industry e.uili$rium price' it ill
A)
not sell anything.
B)
sell part of hat it produces.
C)
sell all that it produces and gain more re(enue than competing firms ill.
D)
sell all that it produces $ut gain less re(enue than competing firms ill.
Anser!
""1
D
Diff! 1
Type! F

))
Any firm<s total re(enue e.uals
A)
MR I q.
B)
P I q.
C)
PKq.
D)
MRKq.
Anser!
B
Diff! 1
Type! F

""2
5)
The added re(enue that a firm takes in hen it increases output $y one additional unit is ******* re(enue.
A)
total
B)
marginal
C)
(aria$le
D)
fi6ed
Anser!
B
Diff! "
Type! A

,)
7arginal re(enue is the
A)
ratio of total re(enue to .uantity.
B)
difference $eteen total re(enue and total costs.
C)
added re(enue that a firm takes in hen it increases output $y one additional unit.
D)
additional profit the firm earns hen it sells an additional unit of output.
Anser!
C
Diff! "
Type! D

/)
3n perfect competition' the marginal re(enue cur(e
A)
and the demand cur(e facing the firm are identical.
B)
is alays a$o(e the demand cur(e facing the firm.
C)
is alays $elo the demand cur(e facing the firm.
D)
"%0
intersects the demand cur(e hen marginal re(enue is minimi+ed.
Anser!
A
Diff! 1
Type! F

1)
The relationship $eteen the price that a perfectly competiti(e firm can charge $uyers and the firmOs marginal
re(enue is that the price is ********* marginal re(enue o(er all output.
A)
a$o(e
B)
$elo
C)
e.ual to
D)
sometimes a$o(e and sometimes $elo
Anser!
C
Diff! 1
Type! F

2)
#rofit4ma6imi+ing firms ant to ma6imi+e the difference $eteen
A)
total re(enue and marginal cost.
B)
total re(enue and total cost.
C)
marginal re(enue and marginal cost.
D)
marginal re(enue and a(erage cost.
Anser!
B
Diff! 1
Type! F

"%1
10)
Assume Dell Computer Company
T7
operates in a perfectly competiti(e market producing 5'000 computers per day.
At this output le(el' price e6ceeds this firm<s marginal cost. 3t follos that producing one more computer ill cause
this firm<s
A)
total cost to decrease.
B)
profits to increase.
C)
profits to decrease.
D)
profits to remain unchanged.
Anser!
B
Diff! "
Type! A

Refer to the information provided in "able .5 below to answer the following questions.
%a/le 8.5

11)
Refer to Ta$le 1.5. Assume that fruit $askets are sold in a perfectly competiti(e market. The market price of a fruit
$asket is 9"". To ma6imi+e profits' >6otic Fruit should sell ********** fruit $asketBs).
A)
three
B)
four
C)
fi(e
D)
si6
Anser!
D
Diff! "
"%"
Type! A

1")
Refer to Ta$le 1.5. Assume that fruit $askets are sold in a perfectly competiti(e market. The market price of a fruit
$asket is 915. To ma6imi+e profits' >6otic Fruit should sell ********** fruit $asketBs).
A)
+ero
B)
to
C)
three
D)
fi(e
Anser!
D
Diff! "
Type! A

"%%
1%)
3f a firm<s demand cur(e is perfectly elastic' then at the profit ma6imi+ing le(el of output
A)
P C MR C MC.
B)
P M MR M MC.
C)
P H MR H MC.
D)
P M 0 and MR C 0.
Anser!
A
Diff! %
Type! C

1))
3f a profit ma6imi+ing firm is currently producing here MR C MC' it should
A)
increase output so that marginal re(enue is less than marginal cost.
B)
decrease output so that marginal re(enue ill $e greater than marginal cost and the firm<s profit ill increase.
C)
not change $ecause it is already ma6imi+ing profit.
D)
e6it the industry.
Anser!
C
Diff! "
Type! C

15)
3f a firm is producing here MR M MC'
A)
the re(enue gained $y producing one more unit of output e6ceeds the cost incurred $y doing so.
B)
the re(enue gained $y producing one more unit of output e.uals the cost incurred $y doing so.
C)
the re(enue gained $y producing one more unit of output is less than the cost incurred $y doing so.
D)
"%)
the firm is already ma6imi+ing profits $ecause re(enue is $eing increased $y more than costs.
Anser!
A
Diff! "
Type! A

1,)
Foe<s Butcher Ahop is producing here MR C MC' Foe<s Butcher Ahop must $e
A)
earning a +ero economic profit.
B)
incurring a loss.
C)
ma6imi+ing profits.
D)
ma6imi+ing re(enue $ut not ma6imi+ing profits.
Anser!
C
Diff! "
Type! A

"%5
1/)
The profit4ma6imi+ing le(el for all firms' regardless of industry structure' is the output le(el here
A)
TR C MC.
B)
P C MC.
C)
ATC C P.
D)
MC C MR.
Anser!
D
Diff! 1
Type! F

Figure 8.,

11)
Refer to Figure 1./. 3f Buffy gi(es 1/ perms per day' her daily profit is
A)
9%.
B)
910.
C)
9)5.
D)
951.
Anser!
D
Diff! "
"%,
Type! A

12)
A firm in a perfectly competiti(e industry is producing 50 units' its profit4ma6imi+ing .uantity. 3ndustry price is 9"'
total fi6ed costs are 9"5' and total (aria$le costs are 9)0. The firm<s economic profit is
A)
915.
B)
9%0.
C)
9%5.
D)
9,0.
Anser!
C
Diff! "
Type! A

"%/
"0)
&heat is produced in a perfectly competiti(e market. 7arket demand for heat increases. This ill cause the
indi(idual heat farmer<s marginal re(enue to ********** and their profit ma6imi+ing le(el of output to
**********.
A)
increase5 increase
B)
increase5 decrease
C)
decrease5 increase
D)
decrease5 decrease
Anser!
A
Diff! %
Type! C

"1)
Assume soy$eans are produced in a perfectly competiti(e industry. A soy$ean farmer is currently ma6imi+ing his
profits. 3f the market price of soy$eans falls' after the farmer ad@usts to the ne price' he ill $e producing
********** $ushels of soy$eans and his profit ill $e **********.
A)
feer5 the same
B)
feer5 loer
C)
more5 the same
D)
the same num$er of5 the same
Anser!
B
Diff! %
Type! C

Refer to the information provided in Figure . below to answer the questions that follow.
"%1
Figure 8.8

"")
Refer to Figure 1.1. This farmer<s profit4ma6imi+ing le(el of output is ********** units of output.
A)
"00
B)
/00
C)
1'000
D)
1')00
Anser!
C
Diff! "
Type! A

"%2
"%)
Refer to Figure 1.1. 3f this farmer is producing the profit4ma6imi+ing le(el of output' her profit is
A)
90.
B)
9"'100.
C)
9%'000.
D)
91"'000.
Anser!
C
Diff! "
Type! A

"))
Refer to Figure 1.1. 3f the market price of soy$eans falls to 91' then to ma6imi+e profits this farmer should produce
A)
"00 $ushels of soy$eans.
B)
/00 $ushels of soy$eans.
C)
1'000 $ushels of soy$eans.
D)
a le(el of output that is indeterminate from this information.
Anser!
B
Diff! "
Type! A

"5)
Refer to Figure 1.1. At the market price of 91 per $ushel' if this farmer produces /00 $ushels of soy$eans' the total
re(enue ould $e
A)
91'"00.
B)
9"'100.
C)
95',00.
D)
")0
91')00.
Anser!
C
Diff! "
Type! A

Refer to the information provided in Figure .! below to answer the questions that follow.
Figure 8..

")1
",)
Refer to Figure 1.2. This farmer<s profit4ma6imi+ing le(el of output is ********** units of output.
A)
100
B)
%50
C)
500
D)
/00
Anser!
C
Diff! "
Type! A

"/)
Refer to Figure 1.2. 3f this farmer is producing the profit ma6imi+ing le(el of output' her profit is
A)
90.
B)
91'000.
C)
9"'000.
D)
9%'000.
Anser!
C
Diff! "
Type! A

"1)
Refer to Figure 1.2. 3f the market price of hay falls to 911' then to ma6imi+e profits this farmer should produce
A)
%50 $ales of hay.
B)
500 $ales of hay.
C)
/50 $ales of hay.
D)
")"
a le(el of output that is indeterminate from this information.
Anser!
A
Diff! "
Type! A

"2)
Refer to Figure 1.2. At the market price of 911 per $ushel' if this farmer produces %50 $ales of hay' the total re(enue
ould $e
A)
91'"00.
B)
9"'100.
C)
95',00.
D)
9,'%00.
Anser!
D
Diff! "
Type! A

%0)
Refer to Figure 1.2. At the market price of 911' if this farmer produces the profit ma6imi+ing .uantity' hat profit
ill he make:
A)
90
B)
9"'000
C)
9/00
D)
indeterminant from this information
Anser!
A
Diff! "
Type! A
%1)
A perfectly competiti(e firm ill earn positi(e economic profits in the range of output for hich the firmOs price is
********* its minimum a(erage total cost.
A)
")%
$elo
B)
a$o(e
C)
e.ual to
D)
$elo its marginal cost and
Anser!
B
Diff! %
Type! A
%")
3f a perfectly competiti(e firmOs a(erage total cost cur(e is a$o(e its demand schedule at e(ery le(el of output' then
the firm ill earn ******* profits.
A)
positi(e
B)
$reake(en
C)
negati(e
D)
+ero
Anser!
C
Diff! "
Type! A

%%)
A perfectly competiti(e firm $reaks e(en at the le(el of output here
A)
# M ATC
B)
# H ATC
C)
# C ATC
D)
# C 7C
Anser!
C
"))
Diff! %
Type! A

%))
3f # C 7C and 7C M ATC' then a perfectly competiti(e firm ill earn ****** profits.
A)
positi(e
B)
+ero
C)
negati(e
D)
$reake(en
Anser!
A
Diff! %
Type! A

%5)
3f a perfectly competiti(e firm is currently producing here # C 7C and 7C C ATC' then the firm ill earn
******** profits.
A)
positi(e
B)
+ero
C)
negati(e
D)
a$o(e normal
Anser!
B
Diff! "
Type! A

")5
%,)
3f an industry supply cur(e increases hile the industry demand cur(e remains the same' then an indi(idual firm in a
perfectly competiti(e industry currently earning positi(e profits ill see its profits *********.
A)
increase
B)
not change
C)
decrease
D)
impossi$le to determine
Anser!
C
Diff! %
Type! A

%/)
The rising part of a perfectly competiti(e firmOs ******** cost cur(e is the firmOs short run ********* cur(e.
A)
a(erage total5 supply
B)
a(erage (aria$le5 demand
C)
a(erage fi6ed5 demand
D)
marginal5 supply
Anser!
D
Diff! "
Type! C

%1)
The la of supply holds for perfectly competiti(e firms assuming that each firm tries to
A)
ma6imi+e profits.
B)
minimi+e total costs
C)
ma6imi+e re(enue
D)
"),
minimi+e (aria$le costs
Anser!
A
Diff! 1
Type! F

%rue/False
1)
The total re(enue cur(e for a perfectly competiti(e firm ill $e a straight line ith positi(e slope.
Anser!
TR8>
Diff! 1
Type! F

")
The marginal re(enue cur(e for a perfectly competiti(e firm ill $e donard sloping.
Anser!
FADA>
Diff! 1
Type! F

")/
))
7arginal costs reflect changes in (aria$le costs.
Anser!
TR8>
Diff! 1
Type! F

5)
The short4run is a period of less than one year.
Anser!
FADA>
Diff! "
Type! D

,)
The production decision is a short4run decision.
Anser!
TR8>
Diff! "
Type! D

")1

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Principles of Microeconomics, 8e (Case/Fair)

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