1. Plastic and steel are substitutes in the production of body panels for certain automobiles.

If
the price of plastic increases, with other things remaining the same, we would expect:
A) the price of steel to fall.
B) the demand curve for steel to shift to the right.
C) the demand curve for steel to shift to the left.
D) nothing to happen to steel because it is only a substitute for plastic.

2. You are analyzing the demand for good X. Which of the following will result in a shift to
the right of the demand curve for X?
A) A decrease in the price of X
B) An increase in the price of a good that is a complement to good X
C) An increase in the price of a good that is a substitute for X
D) all of the above

3. For U.S. consumers, the income elasticity of demand for fruit juice is 1.1. If the economy
enters a recession next year and consumer income declines by 2.5%, what is the expected
change in the quantity of fruit juice demanded next year?
A) -2.75%
B) +2.75%
C) -27.5%
D) +27.5%

4. Which of the following pairs of goods are most likely to have a negative cross-price
elasticity of demand?
A) Hotdogs and hotdog buns
B) Coke and Pepsi
C) Rail tickets and plane tickets
D) A Luciano Pavarotti compact disc and a Placido Domingo compact disc (Both Pavarotti
and Domingo are opera stars.)

5. Which of the following statements about the diagram below is true?

A) Demand is infinitely elastic.

B) Demand is completely inelastic.
C) Demand becomes more inelastic the lower the price.
D) Demand becomes more elastic the lower the price.

6. Suppose the supply of textbooks is upward sloping and shifts leftward due to higher ink
and paper costs. Which of the following events would leave the equilibrium price of
textbooks at the same level observed before the supply shift?
A) Demand is perfectly elastic
B) Demand is perfectly inelastic
C) Both A and B
D) none of the above

7. The demand for books is: Qd = 120 - P

The supply of books is: Qs = 5P
If P = $15, which of the following is true?
A) There is a surplus equal to 30.
B) There is a shortage equal to 30.
C) There is a surplus, but it is impossible to determine how large.
D) There is a shortage, but it is impossible to determine how large.

Calculate Qd and Qs with given P.

8. Overall, the sick will always gain from a price ceiling on prescription drugs. True or False

False. When price ceiling is above the equilibrium price, it doesn’t impact market
equilibrium. But, when price ceiling lies below the equilibrium, quantity demanded exceeds
supply and there is a shortage.

9. A minimum wage policy induces an:

A) excess demand for labor.
B) excess supply of labor.
C) efficient market outcome.
D) elastic labor supply response.

When price floor is below the equilibrium price, it doesn’t impact labour market equilibrium.
But, when price floor above below the equilibrium, quantity demanded of labour exceeds
supply of labour and there is a labor surplus.

10. The price elasticity of demand is -1.5. The price elasticity of supply is 1.5. The burden
of tax is:
A) Higher on producers
B) Higher on buyers
C) Equal on buyers and sellers
D) Can’t Say

11. A production function assumes a given

A) technology.
B) set of input prices.
C) ratio of input prices.
D) amount of capital and labor.
12. Which of the following production functions exhibits constant returns to scale?
A) q = KL
B) q = KL0.5
C) q = K + L
D) None of the above

13. You operate a car detailing business with a fixed amount of machinery (capital), but you
have recently altered the number of workers that you employ per hour. As you increased the
number of employees hired per hour from three to five, your total output increased by 5 cars
to 15 cars per hour. What is the average product of labor at the new levels of labor?
A) AP = 3 cars per worker
B) AP = 5 cars per worker
C) AP = 4 cars per worker
D) We do not have enough information to answer this question.

14. When labor usage is at 12 units, output is 36 units. From this we may infer that
A) the marginal product of labor is 3.
B) the total product of labor is 1/3.
C) the average product of labor is 3.
D) none of the above

15. Which of the following statements is true regarding the differences between economic
and accounting costs?
A) Accounting costs include all implicit and explicit costs.
B) Economic costs include explicit costs only.
C) Accountants consider only implicit costs when calculating costs.
D) Accounting costs include only explicit costs.

16. Fixed costs are fixed with respect to changes in

A) output.
B) capital expenditure.
C) wages.
D) time.

17. Carolyn knows average total cost and average variable cost for a given level of output.
Which of the following costs can she not determine given this information?
A) total cost
B) average fixed cost
C) fixed cost
D) variable cost
E) Carolyn can determine all of the above costs given the information provided.

18. Two firms, each producing different goods, can achieve a greater output than one firm
producing both goods with the same inputs. We can conclude that the production process
involves
A) diseconomies of scope.
B) economies of scale.
C) decreasing returns to scale.
D) increasing returns to scale.
19. Your firm owns an old truck that is used to make local deliveries. The truck is fully
depreciated and only costs $1.20 per hour to operate, but you could rent it to another firm for
$15.00 per hour. What is the opportunity cost of operating this truck in your business?
A) $1.20 per hour
B) $15.00 per hour
C) $16.20 per hour
D) Less than $1.20 per hour

20. Which of the following business combinations likely exhibit economies of scope?
A) Banking services for individuals and banking services for other business
B) Retail clothing stores and electronic (internet) clothing sales
C) Hospitals that perform heart surgery and hospitals that perform cosmetic surgery
D) all of the above

21. A price taker is

A) a firm that accepts different prices from different customers.
B) a consumer who accepts different prices from different firms.
C) a perfectly competitive firm.
D) a firm that cannot influence the market price.
E) both C and D

22. Which of following is an example of a homogeneous product?

A) Gasoline
B) Copper
C) Personal computers
D) Winter parkas
E) both A and B

23. Firms often use patent rights as a:

A) barrier to exit.
B) barrier to entry.
C) way to achieve perfect competition.
D) none of the above

24. A few sellers may behave as if they operate in a perfectly competitive market if the
market demand is:
A) highly inelastic.
B) very elastic.
C) unitary elastic.
D) composed of many small buyers.

25. The following table contains information for a price taking competitive firm. Complete
the table and determine the profit maximizing level of output (round your answer to the
nearest whole number).
 Total Marginal Fixed Average Total Average Marginal
Output Cost Cost Cost Cost Revenue Revenue Revenue
0 25
1 35
2 30
3 45
4 185
5 57
6 120 240

26. In long-run competitive equilibrium, a firm will have an

A) economic profit = $0 and accounting profit > $0.
B) economic profit > $0 and accounting profit = $0.
C) economic and accounting profit = $0.
D) economic and accounting profit > $0.

27. Which of the following is NOT true regarding monopoly?

A) Monopoly is the sole producer in the market.
B) Monopoly price is determined from the demand curve.
C) Monopolist can charge as high a price as it likes.
D) Monopoly demand curve is downward sloping.

28. Compared to the equilibrium price and quantity sold in a competitive market, a
monopolist will charge a ________ price and sell a ________ quantity.
A) higher; larger
B) lower; larger
C) higher; smaller
D) lower; smaller

29. Assume that a firm's marginal cost is $10 and the elasticity of demand is -2. We can
conclude that the firm's profit maximizing price is ____ approximately
A) $20.
B) $5.
C) $10.
D) The answer cannot be determined without additional information.

Use the formula for Lerner’s Index.

30. A monopolist maximizes profit by choosing an output level and price such that:
A) Average Revenue equals Average Cost
B) Marginal revenue equals Marginal Cost equals Price
C) Total Cost is Minimized
D) Marginal revenue equals Marginal Cost

31. In India, different prices are charged for electricity for commercial use versus personal
use. This is the examples of:
A) first degree price discrimination
B) second degree price discrimination
C) third degree price discrimination
D) two part tariff

32. The maximum price that a consumer is willing to pay for each unit bought is the
________ price.
A) market
B) reservation
C) consumer surplus
D) auction

33. When a firm charges each customer the maximum price that the customer is willing to
pay, the firm
A) engages in a discrete pricing strategy.
B) charges the average reservation price.
C) engages in second-degree price discrimination.
D) engages in first-degree price discrimination.

34. In 1994, the Walt Disney Corporation ran a special promotion on tickets to Disneyland.
Residents of southern California who lived near the amusement park were offered admission
at the special price of $22. Other visitors to Disneyland were charged about $30. This
practice is an example of:
A) predatory pricing
B) price discrimination.
C) two-part tariff.
D) None of the above

35. For which of the following market structures is it assumed that there are barriers to entry?
A) Perfect competition
B) Monopolistic competition
C) Monopoly
D) all of the above

36. The market structure in which strategic considerations are most important is
A) monopolistic competition.
B) oligopoly.
C) pure competition.
D) pure monopoly.

37. Which of the following can be thought of as a barrier to entry?

A) scale economies.
B) patents.
C) strategic actions by incumbent firms.
D) all of the above

38. The market structure in which there is interdependence among firms is

A) monopolistic competition.
B) oligopoly.
C) perfect competition.
D) monopoly.
39. When a company introduces new Bluetooth headphones, it often initially sets the price
high and lowers the price about a year later. This is an example of
A) a two-part tariff.
B) second-degree price discrimination.
C) intertemporal price discrimination.
D) first-degree price discrimination

40. Several years ago, Coppernica was effectively the sole seller of copper because the firm
owned nearly all of the copper ore reserves in the world. This market was not perfectly
competitive because this situation violated the:
A) price-taking assumption.
B) free entry assumption.
C) Both A and B are correct.
D) None of the above