Exam

Name___________________________________

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

1) Suppose the demand for milk is relatively inelastic. What happens to sales revenue if the 1)
government imposes a price floor above the free market equilibrium price in the market for milk?
A) Sales revenue remains unchanged.
B) Sales revenue falls.
C) Sales revenue rises.
D) It cannot be determined without information on prices.
Answer: C
Diff: 3 Type: MC

2) Suppose that the price of a money clip increases from US$0.75 to US$0.90 and quantity supplied 2)
rises from 8,000 units to 10,000 units. Use the midpoint formula to calculate the price elasticity of
supply.
A) 0.82 B) 1 C) 0.07 D) 1.22
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

3) Technology lovers have low income and price elasticities of demand. 3)

Answer: True False
Diff: 2 Type: TF

4) Firms estimate the price elasticity of demand for new products by conducting market experiments 4)
in which firms try different prices and observe the resulting change in quantity demanded.
Answer: True False
Diff: 2 Type: TF

5) The demand for heating oil in the short run is more elastic than demand for heating oil in the long 5)
run.
Answer: True False
Diff: 1 Type: TF

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

6) Bringing oil to the market is a relatively long and costly process. The whole process from 6)
exploration to pumping significant amounts of oil can take years. What does this indicate about the
price elasticity of the supply of oil?
A) The elasticity coefficient is likely to be low and supply is highly price inelastic.
B) The elasticity coefficient is likely to be close to zero and supply is perfectly elastic.
C) The elasticity coefficient is likely to be very high and supply is price inelastic.
D) The elasticity coefficient is likely to be low and supply is highly price elastic.
Answer: A
Diff: 2 Type: MC

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TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

7) Demand for staples such as dairy products and bread is likely to be both income and price inelastic. 7)
Answer: True False
Diff: 2 Type: TF

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

8) Which of the following statements about elasticity of demand is false? 8)

A) The value of the price elasticity of demand along a downward-sloping demand curve is
always negative.
B) The value of the price elasticity of demand is the reciprocal of the value of the demand curve's
slope.
C) If quantity demanded changes by a larger percentage than the percentage change in price,
demand is elastic.
D) A linear downward-sloping demand curve has a varying price elasticity coefficient.
Answer: B
Diff: 3 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

9) If a firm's goal is to maximize revenue, it will price its product to correspond to the unit elastic 9)
segment of its demand curve.
Answer: True False
Diff: 2 Type: TF

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

10) The price elasticity of supply for market umbrellas is 2. Suppose you're told that following a price 10)
increase, quantity supplied increased by 30 percent. What was the percentage change in price that
brought this about?
A) 60 percent
B) 15 percent
C) It is impossible to determine without additional information.
D) 6.7 percent
Answer: B
Diff: 2 Type: MC

11) Suppose when Al-Hallab's Bakery raised the price of its breads by 10 percent, the quantity 11)
demanded fell by 15 percent. What is the effect on sales revenue?
A) The effect cannot be determined without information on prices.
B) Sales revenue remained unchanged.
C) Sales revenue decreased.
D) Sales revenue increased.
Answer: C
Diff: 2 Type: MC

12) The demand for broccoli is likely to be ________ the demand for green vegetables in general. 12)
A) more elastic than B) perfectly inelastic compared to
C) perfectly elastic compared to D) less elastic than
Answer: A
Diff: 2 Type: MC

2
13) Suppose the value of the price elasticity of demand is -3. What does this mean? 13)
A) A 1 percent increase in the price of the product causes demanded quantity to increase by 3
percent.
B) A 1 percent increase in the price of the product causes demanded quantity to decrease by 3
percent.
C) A 3 percent increase in the price of the product causes demanded quantity to decrease by 1
percent.
D) A US$1 increase in price causes demanded quantity to fall by 3 units.
Answer: B
Diff: 1 Type: MC

14) When demand is price elastic, a fall in price causes total revenue to rise because 14)
A) when price falls, quantity sold increases so total revenue automatically rises.
B) the demand curve shifts.
C) percentage increase in quantity demanded is less than the percentage fall in price.
D) the increase in quantity sold is large enough to offset the lower price.
Answer: D
Diff: 2 Type: MC

15) Suppose a decrease in the supply of bottled water resulted in a decrease in revenue. This indicates 15)
that
A) the demand for bottled water is price inelastic in the price range considered.
B) the supply of bottled water is price elastic in the price range considered.
C) the supply of bottled water is price inelastic in the price range considered.
D) the demand for bottled water is price elastic in the price range considered.
Answer: D
Diff: 3 Type: MC

16) Which of the following items is likely to have the highest income elasticity of demand? 16)
A) a tank of gasoline B) a bus ride
C) a meal at Taco Bell D) a vacation home in the Swiss Alps
Answer: D
Diff: 1 Type: MC

17) If the market for a product is broadly defined, then 17)

A) there are few substitutes for the product and the demand for the product is relatively
inelastic.
B) the expenditure on the product is likely to make up a large share of one's budget.
C) the product has many complements.
D) there are many substitutes for the product and the demand for the product is relatively
elastic.
Answer: A
Diff: 2 Type: MC

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 18) If demand is perfectly price elastic, the absolute value of the price elasticity of demand is 18)
A) infinity.
B) more than one.
C) less than one.
D) equal to the absolute value of the slope of the demand curve.
Answer: A
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

19) The elasticity coefficient is constant along a vertical demand curve. 19)
Answer: True False
Diff: 2 Type: TF

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

20) If demand is perfectly price inelastic, the absolute value of the price elasticity coefficient is 20)
A) zero.
B) infinity.
C) more than one.
D) equal to the absolute value of the slope of the demand curve.
Answer: A
Diff: 1 Type: MC

21) According to a study of the price elasticities of products sold in supermarkets, the price elasticity of 21)
demand for toothpaste is estimated at -0.45. Which of the following statements could explain why
the price elasticity of demand for toothpaste is so low?
A) The toothpaste industry is highly competitive.
B) There are few close substitutes for toothpaste.
C) Toothpaste is a necessity.
D) Toothpaste is heavily endorsed by dentists.
Answer: B
Diff: 2 Type: MC

22) If the demand for a lifesaving drug were perfectly price inelastic and the price doubled, the 22)
quantity demanded would
A) also double. B) decrease by 50%.
C) be cut in half. D) remain constant.
Answer: D
Diff: 2 Type: MC

23) If demand is price elastic, the absolute value of the price elasticity of demand is 23)
A) less than one.
B) greater than the absolute value of the slope of the demand curve.
C) greater than one.
D) one.
Answer: C
Diff: 1 Type: MC

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TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

24) If the market for a product is narrowly defined, then there is likely to be many substitutes for the 24)
product and the demand for the product is relatively elastic.
Answer: True False
Diff: 2 Type: TF

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

25) Which of the following is a determinant of the price elasticity of supply? 25)
A) the price of inputs
B) the time it takes for a firm's product strategy to kick in
C) the production technology available to the firm
D) the time it takes for a firm to change its output when market prices change
Answer: D
Diff: 2 Type: MC

26) If a 20 percent decrease in price of yoga mats led to an 8 percent increase in quantity demanded, 26)
then the demand for yoga mats is
A) relatively price elastic. B) unit price elastic.
C) relatively price inelastic. D) perfectly price elastic.
Answer: C
Diff: 2 Type: MC

27) Over longer periods of time, increases in oil prices provide firms with incentives to explore and 27)
recover oil. What does this indicate about the long run price elasticity of the supply of oil?
A) The elasticity coefficient is likely to be higher in the long run than in the short run.
B) The elasticity coefficient is likely to be lower in the long run than in the short run.
C) The elasticity coefficient approaches 0 in the long run as supplies are depleted.
D) The elasticity coefficient is unstable in the long run because oil supplies may be depleted.
Answer: A
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

28) The demand for Microsoft® Windows® products is relatively inelastic. Damage that reduces the 28)
supply of Microsoft® Windows® products will also cause Microsoft® revenues to fall.
Answer: True False
Diff: 2 Type: TF

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

29) Facing stiff competition, Hendrix College, a small liberal arts institution in the U.S., decided two 29)
years ago to bolster its academic offerings, promising students at least three hands-on experiences
outside the classroom, including research, internships and service projects. Although it raised
tuition and fees by 29 percent, enrollment in the freshman class rose by 37 percent.
Source: Jonathan D. Glater and Alan Finder, "In New Twist on Tuition Game, Popularity Rises With the
Price," New York Times, December 12, 2006
Based on the information above, the demand for Hendrix College education
A) cannot be defined without further information.
B) is unit price elastic.
C) is relatively price inelastic.
D) is perfectly price elastic.
Answer: C
Diff: 2 Type: MC

30) At a price of US$100, Beachside Canoe Rentals rented 11 canoes. When it increased its rental price 30)
to US$125, 9 canoes were rented. Calculate the absolute value of the price elasticity of demand for
canoe rentals, using the midpoint formula.
A) 1.25 B) 0.75 C) 2 D) 0.9
Answer: D
Diff: 3 Type: MC

31) Suppose that studies show that the income elasticity of demand for cigarettes is approximately five. 31)
What does this mean?
A) A one percent decrease in the price of cigarettes leads to a five percent increase in cigarette
consumption.
B) A five percent increase in income leads to a one percent increase in cigarette consumption.
C) Cigarettes are a relatively elastic product.
D) A one percent increase in income leads to a five percent increase in cigarette consumption.
Answer: D
Diff: 2 Type: MC

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 Figure 5-4

32) Refer to Figure 5-4. The inelastic segment of the demand curve 32)
A) is coincident with the horizontal axis. B) lies above the midpoint of the curve.
C) is coincident with the vertical axis. D) lies below the midpoint of the curve.
Answer: B
Diff: 1 Type: MC

33) When a firm changes its price, the change in total revenue 33)
A) is positive.
B) is zero.
C) depends on the value of the price elasticity of demand and the direction of the price change.
D) is negative.
Answer: C
Diff: 2 Type: MC

7
 34) Table 5-2 34)

The publisher of a magazine gives his staff the following information:

Current price US$2 per issue

Current sales 150,000 copies per month
Current revenue US$300,000 per month
Current total costs US$450,000 per month

He tells the staff, "Our costs are currently US$150,000 more than our revenues each month. I
propose to eliminate this problem by raising the price of the magazine to US$3 per issue. This will
result in our revenue being exactly equal to our cost."
Which of the following statements is correct?
A) The publisher's analysis is correct only if the demand is unit elastic.
B) The publisher's analysis is correct only if the demand is perfectly elastic.
C) The publisher's analysis is correct only if the demand is perfectly inelastic.
D) The publisher's analysis is correct only if the demand is elastic.
Answer: C
Diff: 2 Type: MC

35) A 5 percent increase in income leads to a 5 percent decrease in quantity demanded for a product. 35)
This product is a(n) ________ product and demand is ________.
A) normal; income inelastic B) inferior; unit income elastic
C) inferior; income inelastic D) normal; unit income elastic
Answer: C
Diff: 2 Type: MC

36) If, for a given percentage decrease in price, quantity supplied decreases by a proportionately 36)
smaller percentage, then supply is
A) relatively price inelastic. B) perfectly price elastic.
C) unit price elastic. D) price elastic.
Answer: A
Diff: 2 Type: MC

37) Price elasticity of supply is used to gauge 37)

A) how responsive suppliers are to price changes.
B) how responsive sales are to a change in input prices.
C) how responsive suppliers are to changes in future prices.
D) how responsive suppliers are to a change in demand.
Answer: A
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

38) If the absolute value of the price elasticity of demand for gasoline is 0.5, then a 10 percent increase 38)
in the price of gasoline leads to a 0.5 percent decrease in the quantity demanded.
Answer: True False
Diff: 2 Type: TF

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 39) If demand is price inelastic, the absolute value of the price elasticity coefficient is greater than one. 39)
Answer: True False
Diff: 1 Type: TF

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

40) Suppose the demand curve for a product is represented by a typical downward-sloping curve. 40)
Now suppose the demand for this product decreases. Which of the following statements accurately
predicts the resulting decrease in price?
A) The decrease in price will always be proportional to the magnitude of the demand shift.
B) The increase in price is not affected by the elasticity of the supply curve.
C) The more elastic the supply curve, the smaller the price decrease.
D) The more elastic the supply curve, the greater the price increase.
Answer: C
Diff: 3 Type: MC

41) Rank these three items in terms of the elasticity of the demand for them at any given price, from 41)
most elastic to least elastic: hot beverages, coffee, drinks.
A) coffee, drinks, hot beverages B) drinks, coffee, hot beverages
C) hot beverages, coffee, drinks D) coffee, hot beverages, drinks
Answer: B
Diff: 2 Type: MC

Table 5-1

Quantity
Price per kilo
demanded of
(US dollars)
cheese (kilos)
16 3
14 4
12 5
10 6
8 7
6 8
4 9
2 10

42) Refer to Table 5-1. Over what range of prices is the demand price elastic? 42)
A) over the entire range of prices B) between US$8 and US$16
C) between US$12 and US$16 D) between US$2 and US$8
Answer: C
Diff: 2 Type: MC

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43) Cross-price elasticity of demand is calculated as the 43)
A) percentage change in quantity demanded of one product divided by percentage change in
price of a different product.
B) percentage change in quantity demanded divided by percentage change in price of a product.
C) percentage change in quantity sold divided by percentage change in buyers' incomes.
D) percentage change in quantity supplied divided by percentage change in price of a product.
Answer: A
Diff: 1 Type: MC

44) Which of the following scenarios would result in a lower absolute value of the price elasticity of 44)
demand for a product?
A) When a short time period is considered.
B) When the product is a luxury item.
C) When the expenditure on the product is large relative to one's budget.
D) When there is a wide variety of substitutes available for the product.
Answer: A
Diff: 2 Type: MC

45) Which of the following products comes closest to having a perfectly price inelastic demand? 45)
A) iPhones B) gasoline
C) bus rides D) cholesterol medication in general
Answer: D
Diff: 1 Type: MC

46) The internet has made it easy for consumers to buy books online. As a result, many traditional 46)
booksellers like Barnes & Noble and Borders (starting in 2008) along with Amazon sell books on
their websites. What effect will the internet have on the demand curve that any bookstore faces?
A) The demand facing a bookstore will become horizontal.
B) The price elasticity of demand will remain unchanged; only the cross-price elasticity will
change.
C) The demand facing a bookstore will become more inelastic.
D) The demand facing a bookstore will become more elastic.
Answer: D
Diff: 2 Type: MC

47) If you expect the economy is going to boom and average income in the economy will rise in the 47)
foreseeable future, the type of firm that would be able to increase its sales, if your expectations are
met, is
A) one that sells a luxury product. B) one that sells an inferior product.
C) one that sells a necessity product. D) one that sells a price inelastic product.
Answer: A
Diff: 2 Type: MC

48) The demand for gasoline in the short run is 48)

A) unit elastic because people tend to consume a stable amount of gasoline per period.
B) inelastic because there are no good substitutes for gasoline.
C) elastic because people can easily switch to public transportation.
D) perfectly inelastic because people have no choice but to buy gasoline.
Answer: B
Diff: 2 Type: MC

10
 49) Consider a demand curve that has a constant elasticity value of 0. What happens to quantity 49)
demanded and total revenue when price increases?
A) The quantity demanded does not change but total revenue decreases.
B) The quantity demanded does not change but total revenue increases.
C) The quantity demanded and total revenue remain the same.
D) The quantity demanded and total revenue fall to zero.
Answer: B
Diff: 2 Type: MC

50) If the cross-price elasticity of demand for goods X and Y is negative, this means the two goods are 50)
A) inferior. B) normal.
C) substitutes. D) complements.
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

51) When there are fewer substitutes available for a product, demand tends to be relatively inelastic. 51)
Answer: True False
Diff: 1 Type: TF

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

52) Suppose the cross price elasticity of demand between grapefruit fruit and orange juice is 52)
approximately 6. What does this mean?
A) A 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in orange
juice consumption.
B) A 6 percent increase in the price of grapefruit juice leads to a 1 percent increase in orange
juice consumption.
C) If the price of grapefruit juice rises by US$1, six more cartons of orange juice will be
purchased.
D) The demand for orange juice is six times more than the demand for grapefruit juice.
Answer: A
Diff: 2 Type: MC

11
 Figure 5-6

53) Refer to Figure 5-6. Identify the two goods which are complements. 53)
A) Good X and Good Z
B) Good X and Good Y
C) It is not possible to distinguish any relationship among the goods.
D) Good Y and Good Z
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

54) If at a price of US$10, a vendor sells five units of a product and at a price of US$8, six units are sold, 54)
then, using the midpoint formula, the demand for this product is price inelastic.
Answer: True False
Diff: 2 Type: TF

55) Price elastic supply occurs whenever the elasticity of supply value is positive and greater than 1. 55)
Answer: True False
Diff: 1 Type: TF

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

56) For the discounted price of iPhones in Emirates to succeed in increasing the total revenue of 56)
Etisalat,
A) Etisalat should be operating at the unit elastic region of the demand curve.
B) demand for iPhones should be perfectly elastic.
C) Etisalat should be operating at the inelastic region of the demand curve.
D) Etisalat should be operating at the elastic region of the demand curve.
Answer: D
Diff: 2 Type: MC

12
 57) The cross-price elasticity between Gillette razors and a related product is -3.4. What happens to 57)
the demand for the related product if the price of Gillette razors falls by 10 percent?
A) The quantity demanded of the related product rises by 34 percent.
B) The quantity demanded of the related product rises by 3.4 percent.
C) The quantity demanded of the related product falls by 34 percent.
D) The quantity demanded of the related product falls by 3.4 percent.
Answer: A
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

58) Necessities tend to have more elastic demands than luxuries. 58)
Answer: True False
Diff: 1 Type: TF

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

Figure 5-8

59) Refer to Figure 5-8. What is the value of the price elasticity of supply between g and h? 59)
A) 0.5 B) 2 C) 0.02 D) 20 percent
Answer: B
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

60) If, when price changes by 50 percent, the quantity demanded changes by 15 percent, then the 60)
absolute value of the price elasticity of demand is 0.3.
Answer: True False
Diff: 2 Type: TF

13
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

61) If a firm is in an anti-trust court case accused of monopolizing a product, the firm would hire an 61)
economist to show that
A) the cross-price elasticity of demand between the firm's product and another is positive.
B) the income elasticity of the firm's product is inferior.
C) the cross-price elasticity of demand between the firm's product and another is negative.
D) the price elasticity of demand for the firm's product is highly inelastic.
Answer: A
Diff: 3 Type: MC

62) Suppose the absolute value of the price elasticity of demand for meals at Abou Shakra restaurant is 62)
. What happens to sales revenue if the restaurant increases its price by 5 percent?
A) Sales revenue remains unchanged.
B) Sales revenue falls by 100 percent.
C) Sales revenue falls by less than 5 percent.
D) It cannot be determined without information on prices.
Answer: B
Diff: 3 Type: MC

63) If the cross-price elasticity of demand between Breeze Detergent and Faber Detergent is a relatively 63)
large positive number, then it indicates that
A) the two brands are probably made by the same company.
B) detergents are necessities.
C) the two brands of detergent are close substitutes.
D) consumers have a distinct preference for one brand versus the other.
Answer: C
Diff: 2 Type: MC

64) Suppose the demand curve for hybrid cars shifts to the right. This will cause a relatively small 64)
increase in the price of hybrid cars if
A) demand is inelastic and supply is elastic. B) both demand and supply are inelastic.
C) demand is elastic and supply is inelastic. D) both demand and supply are elastic.
Answer: D
Diff: 3 Type: MC

65) Suppose a decrease in the supply of paper resulted in an increase in revenue. This indicates that 65)
A) the demand for paper is price elastic. B) the supply of paper is price elastic.
C) the supply of paper is price inelastic. D) the demand for paper is price inelastic.
Answer: D
Diff: 3 Type: MC

66) The elasticity of demand is always a negative value because 66)

A) of the law of supply.
B) of the law of demand.
C) it depends on whether or not demand shifts or not when price changes.
D) it depends on percentages.
Answer: B
Diff: 1 Type: MC

14
 67) If firms do not increase their quantity supplied when price changes, then supply is 67)
A) perfectly price inelastic. B) perfectly price elastic.
C) relatively price inelastic. D) price elastic.
Answer: A
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

68) If the demand for a product is price inelastic, the quantity demanded changes by a smaller 68)
percentage than the percentage change in price.
Answer: True False
Diff: 2 Type: TF

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

69) Suppose Sharm City Videos lowers the price of its movie club membership by 10 percent and as a 69)
result, CineArts Videos experienced a 16 percent decline in its movie club membership. What is the
value of the cross-price elasticity between the two movie club memberships?
A) -1.6 B) 1.6 C) 0.625 D) -0.625
Answer: B
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

70) If the cross-price elasticity of demand for goods A and B is zero, this means the two goods are 70)
unrelated.
Answer: True False
Diff: 1 Type: TF

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

71) Demand for a luxury item, such as a yacht, is likely to be 71)

A) both income inelastic and price inelastic. B) income elastic and price inelastic.
C) both income elastic and price elastic. D) income inelastic and price elastic.
Answer: C
Diff: 2 Type: MC

72) Last year, Housam purchased 60 kilos of potatoes to feed his family of five when his household 72)
income was US$30,000. This year, his household income fell to US$20,000 and Housam purchased
80 kilos of potatoes. With all else constant, Housam's income elasticity of demand for potatoes is
A) negative, so Housam considers potatoes to be an inferior good.
B) positive, so Housam considers potatoes to be an inferior good.
C) positive, so Housam considers potatoes to be a normal good and a necessity.
D) negative, so Housam considers potatoes to be a normal good.
Answer: A
Diff: 2 Type: MC

15
73) Consider the following pairs of items: 73)
a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and chicken
e. air-travel and weed killer
Which of the pairs listed will have a negative cross-price elasticity?
A) a and b only B) a, b, and c only
C) c and d only D) e only
Answer: A
Diff: 1 Type: MC

74) Price inelastic supply occurs whenever the elasticity of supply value is 74)
A) positive and >1. B) any positive number.
C) positive and <1. D) negative and < -1.
Answer: C
Diff: 1 Type: MC

75) Suppose you have surveyed a few industries and obtained information about the income elasticity 75)
of demand for their products. If you expect that the economy is headed for a long recession, you
would advise people to look for jobs in an industry with
A) a high negative income elasticity coefficient such as -4.
B) a high positive income elasticity coefficient such as 5.
C) a low positive income elasticity coefficient such as 0.8.
D) a low negative income elasticity coefficient such as -0.2.
Answer: A
Diff: 3 Type: MC

76) If a firm wanted to know whether the demand for its product was elastic, unit elastic, or inelastic, 76)
then the firm could
A) change price a little bit and observe what happens to total revenue.
B) talk to its customers.
C) survey competitors and ask them what they think demand elasticity for the product is.
D) not do anything as there is no way to find an elasticity value.
Answer: A
Diff: 2 Type: MC

77) Salma, a college student working part-time, receives a wage increase. A keen movie goer, she has 77)
since increased her purchases of DVDs and reduced her purchases of video cassettes. Based on this
information,
A) the cross-price elasticity between DVDs and video cassettes is negative.
B) DVDs and video cassettes are substitutes.
C) DVDs and video cassettes are normal goods.
D) DVDs are normal goods and video cassettes are inferior goods.
Answer: D
Diff: 2 Type: MC

16
78) Consider the following pairs of items: 78)
a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and chicken
e. air-travel and weed killer
Which of the pairs listed will have a positive cross-price elasticity?
A) c and d only B) e only
C) a and b only D) a, b, and c only
Answer: A
Diff: 1 Type: MC

79) If the percentage change in price is 20 percent and the value of the price elasticity of demand is -5, 79)
then quantity demanded
A) will decrease by 100 percent.
B) will increase by 5 percent.
C) will increase by 100 percent.
D) is impossible to determine without additional information.
Answer: A
Diff: 2 Type: MC

80) Income elasticity measures 80)

A) how a product's demanded quantity responds to producers' incomes.
B) how a product's demanded quantity responds to a change in the product's price.
C) how a product's demanded quantity responds to a change in buyers' incomes.
D) how a product's demanded quantity responds to a change in the price of another product.
Answer: C
Diff: 1 Type: MC

81) According to an article in the Wall Street Journal, unlike airlines, even elite hotels don't have 81)
sophisticated systems that can react quickly to changes in demand. Even if they could, many
hoteliers say people don't respond that much to lower rates. "We've tested this, cutting our rates by
US$50 [per night], and we didn't see an appreciable response in occupancy," says Jim Schultenover,
a vice president for Ritz-Carlton.
Source: Jesse Drucker, "In Times of Belt-Tightening, We Seek Reasonable Rates," Wall Street Journal, April
6, 2001.
Based on the information above, the demand for hotel rooms
A) is price elastic. B) is price inelastic.
C) is income elastic. D) is income inelastic.
Answer: B
Diff: 2 Type: MC

82) Hala, an expert in making desserts, made the following statement: "A cup of tea with mint is often 82)
the perfect end to a meal, sipped with a piece of my delicious chocolate cake." Evidently, Hala
views
A) tea with mint and chocolate cake as substitutes to other desserts.
B) tea with mint and chocolate cake as luxury items.
C) tea with mint and chocolate cake as complementary goods.
D) tea with mint and chocolate cake as necessities.
Answer: C
Diff: 2 Type: MC

17
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

83) The price elasticity of demand measures how much the demand shifts when the price changes. 83)
Answer: True False
Diff: 1 Type: TF

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

84) Hala runs a small boutique in Manama. She tells one of her suppliers that she is willing to pay no 84)
more than US$6 for a silk scarf. On the basis of this information, what can you conclude about her
price elasticity of demand for silk scarves?
A) The price elasticity coefficient is 0. B) It is perfectly inelastic.
C) It is perfectly elastic. D) It is elastic.
Answer: C
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

85) When demand is price inelastic, a fall in price causes total revenue to fall, because the increase in 85)
quantity sold is not large enough to offset the drop in price.
Answer: True False
Diff: 2 Type: TF

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

86) Total revenue equals 86)

A) change in price per unit times quantity sold.
B) price per unit times quantity supplied.
C) price per unit times change in quantity sold.
D) price per unit times quantity sold.
Answer: D
Diff: 2 Type: MC

87) If a product has a negative income elasticity of demand, this indicates that the product is 87)
A) inferior. B) a substitute for another product.
C) normal. D) a complement with another product.
Answer: A
Diff: 1 Type: MC

18
 Figure 5-7

88) Refer to Figure 5-7. A perfectly elastic supply curve is shown in 88)
A) Panel A. B) Panel B. C) Panel C. D) Panel D.
Answer: B
Diff: 1 Type: MC

89) Refer to Figure 5-7. The supply curve on which price elasticity changes at every point is shown in 89)
A) Panel A. B) Panel B. C) Panel C. D) Panel D.
Answer: D
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

90) In recent years, the prices of new domestically produced cars have been falling. Suppose 90)
consumers respond by reducing their demand for used cars and mass transport services such as
bus travel. This information suggests that the cross price elasticity between new cars and used cars,
and the cross price elasticity between new cars and bus travel are negative.
Answer: True False
Diff: 2 Type: TF

19
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

91) Which of the following goods would have the most inelastic demand? 91)
A) big screen TVs B) luxury cars
C) bread D) ski vacations
Answer: C
Diff: 2 Type: MC

92) Khaled lives in a small town where there is only one Mexican restaurant. Which of the following 92)
statements is likely to be true about the price elasticity of demand for meals at the Mexican
restaurant?
A) Demand is likely to be perfectly elastic. B) Demand is likely to be relatively elastic.
C) Demand is likely to be perfectly inelastic. D) Demand is likely to be relatively inelastic.
Answer: D
Diff: 1 Type: MC

93) If the price of steel increases drastically, the quantity of steel demanded by the building industry 93)
will fall significantly over the long run because
A) buyers of steel are less sensitive to a price change if they have more time to adjust to the price
change.
B) buyers of steel are more sensitive to a price change if they have more time to adjust to the
price change.
C) sales revenue in the building industry will fall sharply.
D) profits will fall by a greater amount in the long run than in the short run.
Answer: B
Diff: 2 Type: MC

94) Suppose at the current price, the demand for copper is estimated at -3.14. What happens to sales 94)
revenue if the government imposes a price ceiling below the free market equilibrium price in the
copper market?
A) It cannot be determined without information on prices.
B) Sales revenue rises.
C) Sales revenue remains unchanged because copper is a necessity for most industries.
D) Sales revenue falls.
Answer: B
Diff: 3 Type: MC

95) Suppose a decrease in the supply of wheat resulted in an increase in revenue. This indicates that 95)
A) the demand for wheat curve must be vertical.
B) the decrease in quantity sold is proportionately larger than the resulting change in price.
C) the supply of wheat curve must be vertical.
D) the resulting increase in price is proportionately greater than the decrease in quantity sold.
Answer: D
Diff: 3 Type: MC

20
96) The price elasticity of supply is equal to 96)
A) the change in quantity supplied divided by the change in price.
B) the percentage change in price divided by the percentage change in quantity supplied.
C) the value of the slope of the supply curve.
D) the percentage change in quantity supplied divided by the percentage change in price.
Answer: D
Diff: 1 Type: MC

97) At a price of US$50, Ashraf sells 20 hand-made leather cell-phone covers but at a price of US$60, 0 97)
units are sold. Based on this information, the demand for his cell-phone covers is
A) price elastic or perfectly price inelastic. B) perfectly price inelastic.
C) unit price elastic. D) price elastic or perfectly price elastic.
Answer: D
Diff: 2 Type: MC

98) Suppose a frost destroys the tomato crop in Lebanon but farmers see an increase in their revenues. 98)
Which of the following best explains this?
A) The demand for tomatoes is price inelastic.
B) The demand for tomatoes is very low.
C) Tomatoes are necessities.
D) The decrease in supply led to huge price increases.
Answer: A
Diff: 3 Type: MC

99) The price elasticity of an upward-sloping supply curve is always 99)

A) greater than one. B) positive.
C) impossible to determine. D) negative.
Answer: B
Diff: 1 Type: MC

21
 Figure 5-5

100) Refer to Figure 5-5. The data in the diagram indicates that DVDs 100)
A) are both necessities and price inelastic goods.
B) are both luxury goods and price inelastic goods.
C) are necessities.
D) are luxury goods.
E) are price inelastic goods.
Answer: D
Diff: 3 Type: MC

101) Suppose favorable weather increased the supply of tomatoes so that the price of tomatoes fell from 101)
US$45 a ton to US$35 a ton and quantity sold increased from 300 tons to 420 tons. What is the
absolute value of the price elasticity of demand?
A) 0.08
B) 0.75
C) 1.33
D) More information is needed to answer the question.
Answer: C
Diff: 2 Type: MC

102) If a firm raised its price and discovered that its total revenue fell, then the demand for its product is 102)
A) relatively inelastic. B) perfectly inelastic.
C) perfectly elastic. D) relatively elastic.
Answer: D
Diff: 2 Type: MC

22
 103) Which of the following does not affect the price elasticity of demand for a product? 103)
A) expenditures on the product relative to buyers' incomes
B) how long buyers have to respond to any price change
C) the number of close substitutes available for the product
D) how much demand shifts when buyers' incomes change
Answer: D
Diff: 2 Type: MC

104) Which of the following is one reason why, in early 2008, Microsoft® announced a price cut on 104)
boxed copies of its operating systems Windows Vista® Home Basic, Windows Vista® Home
Premium, and Windows Vista® Ultimate in the Gulf region?
A) The demand for stand-alone Windows® software is price elastic for less
technology-enthusiastic consumers.
B) Consumption of Microsoft® products is decreasing.
C) Technology lovers have elastic demand on new software.
D) The demand for stand-alone Windows® software is income inelastic.
Answer: A
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

105) The demand for seafood in general is likely to be less elastic than the demand for shrimps. 105)
Answer: True False
Diff: 1 Type: TF

106) If the demand for a product is price elastic, the quantity demanded changes by a smaller 106)
percentage than the percentage change in price.
Answer: True False
Diff: 2 Type: TF

23
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 5-6

107) Refer to Figure 5-6. Identify the two goods which are substitutes. 107)
A) Good Y and Good Z
B) It is not possible to distinguish any relationship among the goods.
C) Good X and Good Y
D) Good X and Good Z
Answer: D
Diff: 2 Type: MC

108) Suppose a 4 percent increase in price results in a 2 percent increase in the quantity supplied of a 108)
product. Calculate the price elasticity of supply and characterize the product.
A) 0.5; the product is price inelastic B) 50%; the product is price inelastic
C) 2; the product is price elastic D) 0.2; the product is price inelastic
Answer: A
Diff: 2 Type: MC

109) Cross-price elasticity of demand measures 109)

A) the rate at which firms can adjust the price of their goods when competitors adjust the price of
their goods.
B) the percentage change in the quantity demanded of a product due to a change in the price of a
related product.
C) the responsiveness of quantity supplied to changes in quantity demanded.
D) the percentage change in the price of a product due to a change in the quantity demanded of a
related product.
Answer: B
Diff: 1 Type: MC

24
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

110) When Aliaa raised the price of her home-made cookies, her total revenue increased. This suggests 110)
that the demand for Aliaa's cookies is elastic.
Answer: True False
Diff: 2 Type: TF

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

Figure 5-1

111) Refer to Figure 5-1. A perfectly elastic demand curve is shown in 111)
A) Panel C. B) Panel B. C) Panel A. D) Panel D.
Answer: B
Diff: 1 Type: MC

112) When priced at US$15, Elham sells 20 boxes of her special organic soap and at US$20 she sells 10 112)
boxes. This shows that the demand for her organic soaps is
A) perfectly price elastic. B) unit price elastic.
C) price inelastic. D) price elastic.
Answer: D
Diff: 3 Type: MC

25
 113) An increase in the demand for green tea raises the price of apples from US$16 a kilo to US$20 a 113)
kilo. As a result, quantity supplied increases by 30 percent. Using the midpoint formula, calculate
the value of the price elasticity of supply.
A) 2.22 B) 1.875 C) 1.35 D) 7.5
Answer: C
Diff: 3 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

114) If a product's income elasticity of demand is positive, this means sales of the product are responsive 114)
to changes in price.
Answer: True False
Diff: 2 Type: TF

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

115) Suppose that Jarir bookstores have a special membership program that gives customers a 20 115)
percent discount on most hardcover books. But on Harry Potter and the Deathly Hallows, the
bookstore offered a 40 percent discount with the hope of selling a very large quantity. The
bookstore must believe that the demand for this book is
A) elastic. B) perfectly inelastic.
C) perfectly elastic. D) inelastic.
Answer: A
Diff: 1 Type: MC

116) Consider the following types of demand curves: 116)

a. a vertical demand curve
b. a horizontal demand curve
c. a linear downward-sloping demand curve

Which of the demand curves listed exhibits a price elasticity of demand coefficient that remains
constant along the demand curve?
A) a and b only B) a only
C) a, b, and c D) b only
Answer: A
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

117) Suppose the supply curve for cell phones shifts to the right. This will cause a relatively large 117)
decrease in the price of cell phones if both demand and supply are inelastic.
Answer: True False
Diff: 3 Type: TF

26
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

118) When priced at US$10, Yasmin sells five packages of her home-made Mediterranean flat-bread per 118)
day. When she raised her price to US$15, she still sold five packages per day. Based on this
information, the demand for her flat-bread is
A) perfectly price inelastic. B) unit price elastic.
C) perfectly price elastic. D) price inelastic.
Answer: A
Diff: 2 Type: MC

119) The price elasticity of the supply of teenage labor services is approximately 1.36. Suppose the 119)
minimum wage rises from US$6.60 per hour to US$7.00. Using the midpoint formula, calculate the
approximate change in the will the quantity supplied of teenage labor.
A) 5.9 percent
B) 13.6 percent
C) 8 percent
D) There is insufficient information to answer the question.
Answer: C
Diff: 3 Type: MC

Figure 5-1

120) Refer to Figure 5-1. The demand curve on which elasticity changes at every point is given in 120)
A) Panel C. B) Panel A. C) Panel B. D) Panel D.
Answer: A
Diff: 1 Type: MC

27
121) Using cross-sectional data from the two Housing Assistance Supply Experiment (HASE) sites in 121)
the U.S., John Mulford of Rand Research, estimates that the long-run "permanent" income elasticity
of housing expenditures is 0.45 for owners. Using this information, what is likely to happen to
housing expenditures if the government increases income transfers to recipients in HASE sites?
A) Housing expenditures will increase, but not significantly.
B) Housing expenditures in HASE sites will fall significantly as recipients move out of these
areas to higher-income areas.
C) Housing expenditures will increase significantly.
D) Housing expenditures will decrease by a small amount.
Answer: A
Diff: 3 Type: MC

Figure 5-7

122) Refer to Figure 5-7. A perfectly inelastic supply curve is shown in 122)
A) Panel A. B) Panel B. C) Panel C. D) Panel D.
Answer: A
Diff: 1 Type: MC

28
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

123) The value of the price elasticity of supply depends primarily on how quickly firms can acquire 123)
inputs to increase quantity supplied when price increases.
Answer: True False
Diff: 1 Type: TF

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

124) The demand for most farm products is relatively inelastic. With all else constant, what is the effect 124)
on farm revenues as a result of the introduction of new and better farm equipment which increases
productivity?
A) Farm revenues increase.
B) Farm revenues decrease.
C) Farm revenues could increase or decrease depending on the cost of this new equipment.
D) Farm revenues remain constant because consumers will not increase their consumption of
farm products by much.
Answer: B
Diff: 3 Type: MC

125) Jaycee Jeans sold 40 pairs of jeans at a price of US$40. When it lowered its price to US$20, quantity 125)
sold increased to 60 pairs. Calculate the absolute value of the price elasticity of demand. Use the
midpoint formula.
A) 1 B) 1.67 C) 0.6 D) 0.53
Answer: C
Diff: 3 Type: MC

126) The price elasticity of demand for Baskin Robbins ice cream is - 4. Suppose you're told that 126)
following a price increase, quantity demanded fell by 10 percent. What was the percentage change
in price that caused this?
A) 0.4 percent B) 2.5 percent C) 40 percent D) 25 percent
Answer: B
Diff: 2 Type: MC

29
 Figure 5-7

127) Refer to Figure 5-7. A unit elastic supply curve is shown in 127)
A) Panel A. B) Panel B. C) Panel C. D) Panel D.
Answer: C
Diff: 1 Type: MC

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

128) Suppose that at a price of US$55, 100 units were sold while at a price of US$33, 153 units were sold. Without
calculating the price elasticity value, can you determine whether it is elastic, unit elastic, or inelastic? Explain
your answer.
Answer: The first total revenue is (US$55) × (100) = US$5,500 while the second total revenue is (US$33) × (153) =
US$5,049. Because total revenue decreased when price fell, demand must be price inelastic.
Diff: 3 Type: ES

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

129) Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in 129)
quantity demanded for organic produce.
A) 0.5 B) -0.66 C) 1.5 D) 2
Answer: A
Diff: 2 Type: MC

30
130) Suppose that a Jarir bookstore manager, believes that there is no difference between charging 130)
US$22 and US$23 for the English version of Naguib Mahfouz's novel The Cairo Triology. He is
convinced that the number of copies sold would be the same under both prices. The Jarir bookstore
manager's argument suggests that
A) price is no object for English versions of Arabic books.
B) the price elasticity of demand for books is highly inelastic.
C) publishers can set any price they like for books.
D) the price elasticity of demand for books is highly elastic.
Answer: B
Diff: 2 Type: MC

131) When demand is unit price elastic, a change in price causes total revenue to stay the same because 131)
A) buyers are buying the same quantity.
B) the change in profit is offset by the change in production cost.
C) total revenue never changes with price changes.
D) the percentage change in quantity demanded exactly offsets the percentage change in price.
Answer: D
Diff: 2 Type: MC

132) Some observers have been predicting for years that the printed book will be replaced with the 132)
electronic book. What does this imply about the cross-price elasticity between printed books and
electronic books?
A) It is zero.
B) It is negative.
C) It is positive.
D) It is not possible to determine this without more information.
Answer: C
Diff: 2 Type: MC

133) Suppose at the going wage rate of US$20 per hour, firms can hire as many hours of janitorial 133)
services as it desires. If any firm tries to lower the wage rate to US$19, it will not be able to hire any
janitor. What does this indicate about the supply of janitorial services curve?
A) Supply is perfectly price inelastic. B) Supply is perfectly price elastic.
C) Supply is relatively price inelastic. D) Supply is unit price elastic.
Answer: B
Diff: 2 Type: MC

31
 Figure 5-1

134) Refer to Figure 5-1. A perfectly inelastic demand curve is shown in 134)
A) Panel A. B) Panel C. C) Panel B. D) Panel D.
Answer: A
Diff: 1 Type: MC

135) With the increased usage of cell-phone services, what has happened to the price elasticity of 135)
demand for land-line telephone services?
A) It has become more income elastic.
B) The absolute value of the price elasticity coefficient has probably gone down.
C) It has become more price inelastic.
D) It has become more price elastic.
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

136) The demand for gasoline is perfectly inelastic because most people need gasoline to drive their cars. 136)
Answer: True False
Diff: 1 Type: TF

32
ESSAY. Write your answer in the space provided or on a separate sheet of paper.

137) Suppose the price of gasoline in July 2004 averaged US$1.35 a gallon and 15 million gallons a day were sold. In
October 2004, the price averaged US$2.15 a gallon and 14 million gallons were sold. If the demand for gasoline
did not shift between these two months, use the midpoint formula to calculate the price elasticity of demand.
Indicate whether demand was elastic or inelastic.
Answer: Price elastic demand equals 0.15 indicating that demand was inelastic.
Diff: 3 Type: ES

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

138) At a price of US$50, a Jazz club sells 20 tickets to its nightly jazz performance, whereas at a price of 138)
US$40, it sells 25 tickets. Based on this information, the demand for the jazz performance is price
elastic.
Answer: True False
Diff: 2 Type: TF

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

139) If the price elasticity of demand for canned soup is estimated at -1.62, what happens to sales 139)
revenue if the price of canned soup rises?
A) It rises by 1.62 percent. B) It falls by 162 percent.
C) It rises. D) It falls.
Answer: D
Diff: 2 Type: MC

140) If a firm lowered the price of the product it sells and found that total revenue did not change, then 140)
the demand for its product is
A) perfectly inelastic. B) unit-elastic.
C) perfectly elastic. D) relatively elastic.
Answer: B
Diff: 2 Type: MC

33
 Figure 5-4

141) Refer to Figure 5-4. Which of the following statements is true about the price elasticity of demand? 141)
A) The inelastic portion of the demand curve corresponds to the segment above the midpoint.
B) The elastic portion of a straight-line downward sloping demand curve corresponds to the
segment above the midpoint.
C) The elasticity coefficient is constant along the demand curve.
D) At the midpoint of the demand curve, the elasticity coefficient is zero.
Answer: B
Diff: 1 Type: MC

34
 Figure 5-3

142) Refer to Figure 5-3. Using the midpoint formula, calculate the absolute value of the price elasticity 142)
of demand between e and f.
A) 0.32 B) 0.4 C) 3.125 D) 2.5
Answer: C
Diff: 2 Type: MC

35
 Table 5-1

Quantity
Price per kilo
demanded of
(US dollars)
cheese (kilos)
16 3
14 4
12 5
10 6
8 7
6 8
4 9
2 10

143) Refer to Table 5-1. Over what range of prices is the demand price inelastic? 143)
A) between US$8 and US$16 B) between US$2 and US$8
C) between US$12 and US$16 D) over the entire range of prices
Answer: B
Diff: 2 Type: MC

144) Suppose the value of the price elasticity of supply is 4. What does this mean? 144)
A) A 1 percent increase in the price of the product causes quantity supplied to increase by 4
percent.
B) A 4 percent increase in the price of the product causes quantity supplied to increase by 1
percent.
C) For every US$1 increase in price, quantity supplied increases by 4 units.
D) A 1 percent increase in the price of the product causes the supply curve to shift upward by 4
percent.
Answer: A
Diff: 1 Type: MC

145) The price elasticity of demand is equal to 145)

A) the percentage change in price divided by the percentage change in quantity demanded.
B) the change in quantity demanded divided by the change in price.
C) the percentage change in quantity demanded divided by the percentage change in price.
D) the value of the slope of the demand curve.
Answer: C
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

146) If demand is perfectly elastic, the demand curve is vertical. 146)

Answer: True False
Diff: 1 Type: TF

36
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 5-4

147) Refer to Figure 5-4. At the midpoint of the demand curve, in absolute value, 147)
A) the price elasticity coefficient is at a minimum.
B) the price elasticity coefficient is zero.
C) the price elasticity coefficient is one.
D) the price elasticity coefficient is at a maximum.
Answer: B
Diff: 1 Type: MC

148) Which of the following statements about the price elasticity of demand is correct? 148)
A) The absolute value of the elasticity of demand ranges from zero to one.
B) The elasticity of demand for a product in general is equal to the elasticity of demand for a
specific brand of the product.
C) Demand is more elastic in the long run than it is in the short run.
D) Demand is more elastic when the item takes up a smaller percentage of the consumer's
budget.
Answer: C
Diff: 2 Type: MC

149) Suppose a Nurses Union successfully secured a 12 percent increase in the wages of registered 149)
nurses. If a hospital responds by reducing the quantity of registered nurses hired and increasing the
quantity of physician's assistants hired, what conclusion can you draw?
A) The cross-price elasticity of demand between registered nurses and physician's assistants is
positive.
B) The cross-price elasticity of demand between registered nurses and physician's assistants is
negative.
C) Physician's assistants are more valuable in terms of their productivity.
D) The price elasticity of demand for registered nurses is negative while the price elasticity of
demand for physician's assistants is positive.
Answer: A
Diff: 3 Type: MC

37
150) Suppose that the short run price elasticity of demand for oil is -0.26. Which of the following could 150)
explain why the price elasticity of demand for oil is low?
A) Oil is an inferior product. B) There are only a few suppliers of oil.
C) Firms consume less energy than before. D) There are few alternatives to oil.
Answer: D
Diff: 2 Type: MC

151) If, for a given percentage increase in price, quantity demanded falls by a proportionately larger 151)
percentage, then demand is
A) perfectly price elastic. B) unit price elastic.
C) relatively price elastic. D) relatively price inelastic.
Answer: C
Diff: 2 Type: MC

152) Zeyad is a competitive body builder. He says he has to have his 12-oz package of protein powder 152)
to "feed his muscles" every day. On the basis of this information, what can you conclude about his
price elasticity of demand for protein powder?
A) It is elastic. B) It is perfectly elastic.
C) The price elasticity coefficient is 0. D) It is perfectly inelastic.
Answer: D
Diff: 1 Type: MC

153) A demand curve that is horizontal indicates that the commodity 153)
A) has a large number of substitutes. B) has few substitutes.
C) is a necessity. D) must be very cheap.
Answer: A
Diff: 2 Type: MC

154) If, for a given percentage increase in price, quantity supplied increases by a proportionately larger 154)
percentage, then supply is
A) unit price elastic. B) relatively price inelastic.
C) perfectly price elastic. D) price elastic.
Answer: D
Diff: 2 Type: MC

155) Consider the following pairs of items: 155)

a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and chicken
e. air-travel and weed killer
Which of the pairs listed will have cross-price elasticity of zero?
A) d only
B) a and b only
C) c only since most people cannot do without computers
D) none of the pairs listed
Answer: A
Diff: 1 Type: MC

38
156) In September 2006, the Food and Drug Administration recommended that Americans avoid eating 156)
bagged raw spinach in the wake of an outbreak of E. coli bacteria. Following this recommendation,
the food industry looked at alternatives and many turned to arugula. One Chicago distributor
claims, "The sale of the stuff has gone through the roof." Based on this information,
A) arugula is a normal food item while raw spinach is an inferior food item.
B) the cross price elasticity between arugula and spinach is negative.
C) the cross price elasticity between arugula and spinach is positive.
D) the price elasticity of arugula is positive while the price elasticity of spinach falls to zero.
Answer: C
Diff: 2 Type: MC

Figure 5-1

157) If 20 units are sold at a price of US$50 and 30 units are sold at a price of US$40, what is the absolute 157)
value of the price elasticity of demand? Use the midpoint formula.
A) 1.8 B) 1 C) 2.5 D) 0.56
Answer: A
Diff: 3 Type: MC

158) Along a downward sloping, linear demand curve, total revenue is the greatest 158)
A) where demand is the most elastic. B) where demand is the most inelastic.
C) where demand is normal. D) where demand is unit elastic.
Answer: D
Diff: 2 Type: MC

39
 159) Which of the following statements is true about the price elasticity of demand along a downward 159)
sloping linear demand curve?
A) It is unit elastic throughout the demand curve.
B) It is inelastic at high prices and elastic at low prices.
C) It is perfectly elastic at very high prices and perfectly inelastic at very low prices.
D) It is elastic at high prices and inelastic at low prices.
Answer: D
Diff: 2 Type: MC

160) When there many good substitutes available for a product, demand tends to be 160)
A) perfectly inelastic. B) relatively inelastic.
C) perfectly elastic. D) relatively elastic.
Answer: D
Diff: 2 Type: MC

161) Price elasticity of demand measures 161)

A) how responsive suppliers are to price changes.
B) how responsive sales are to changes in the price of a related product.
C) how responsive demanded quantity is to a change in price.
D) how responsive sales are to a change in buyers' incomes.
Answer: C
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

162) The price elasticity of supply is calculated as the change in supply divided by the change in price. 162)
Answer: True False
Diff: 1 Type: TF

40
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 5-2

163) Refer to Figure 5-2. The absolute value of the price elasticity of demand at points a and b is 1. What 163)
is the value of Pb?
A) US$30 B) US$20 C) US$50 D) US$40
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

164) If the income elasticity for canned food is 0.8, then canned food is an inferior product. 164)
Answer: True False
Diff: 1 Type: TF

41
Chapter 6: Elasticity Multiple Choice Questions

1. The price elasticity of demand measures how responsive

a. buyers are to a change in income.

b. sellers are to a change in price.
c. buyers are to a change in price.
d. sellers are to a change in buyers’ incomes.

2. Demand for a good would tend to be more inelastic the

a. fewer the available substitutes.

b. longer the time period considered.
c. more the good is considered a luxury good.
d. more narrowly defined the market is.

3. Demand is said to be elastic if

a. the price of the good responds substantially to changes in demand.

b. demand shifts substantially when the price of the good changes.
c. the percentage change in quantity demanded is smaller than the percentage change in the price of
the good
d. the percentage change in quantity demanded is larger than the percentage change in the price of
the good

4. If a good is a necessity, demand for the good would tend to be

a. elastic.
b. horizontal.
c. unit elastic.
d. inelastic.

5. If a good is a luxury, demand for the good would tend to be

a. inelastic.
b. elastic.
c. unit elastic.
d. horizontal.

6. If a person only occasionally enjoys a cup of coffee, his demand for coffee would be

a. horizontal.
b. inelastic.
c. unit elastic.
d. elastic.

7. A person who has high cholesterol and must exercise an hour every day has what type of demand for
exercise equipment ?

a. elastic
b. unit elastic
c. inelastic
d. weak

8. Demand for a good would tend to be more inelastic the

a. fewer the available substitutes.

b. longer the time period considered.
c. more the good is considered a luxury good.
d. more narrowly defined the market is.
9. Chocolate Chip Cookie Dough ice cream would tend to have very elastic demand because

a. it must be eaten quickly.

b. the market is broadly defined.
c. there are few substitutes.
d. other flavors of ice cream are almost perfect substitutes.

10. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline
demanded would fall substantially over a ten-year period because

a. buyers tend to be much less sensitive to a change in price when given more time to react.
b. buyers will have substantially more income over a ten-year period.
c. buyers tend to be much more sensitive to a change in price when given more time to react.
d. None of these answers are correct.

11. Economists compute the price elasticity of demand as the

a. percentage change in the price divided by the percentage change in quantity demanded.
b. change in quantity demanded divided by the change in the price.
c. percentage change in the quantity demanded divided by the percentage change in price.
d. percentage change in the quantity demanded divided by the percentage change in income.

12. The price elasticity of demand for a good measures how willing

a. consumers are to move away from the good as price rises.

b. firms are to produce more of a good as price rises.
c. consumers are to buy more of a good as price rises.
d. firms are to produce more of a good as price falls.

13. The greater the price elasticity of demand the

a. more likely the product is a necessity.

b. smaller the responsiveness of quantity demanded to price.
c. greater the percentage change in price over the percentage change in quantity demanded.
d. greater the responsiveness of quantity demanded to price.

14. When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price
falls to $0.40, the quantity demanded increases to 600. Given this information, you know that the demand
for bubble gum is

a. inelastic.
b. elastic.
c. unit elastic.
d. perfectly inelastic.

15. Consider the information given in question 14. Which of the following is the price elasticity of bubble
gum?

a. -1.0
b. -1.5
c. -0.4
d. -2.5
16. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the
quantity of X demanded. Price elasticity of demand for X is

a. -1.
b. -6.
c. 0.
d. infinite.

17. Suppose the price of Twinkies is reduced from $2.00 to $1.75 and, as a result, the quantity of Twinkies
demanded increases from 2,000 to 2,200. The price elasticity of demand for Twinkies is

a. -1.25
b. -0.8
c. -1.00
d. -0.4

18. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price would result in a

a. 4.0 percent decrease in the quantity demanded.

b. 10 percent decrease in the quantity demanded.
c. 40 percent decrease in the quantity demanded.
d. 400 percent decrease in the quantity demanded.

19. Demand is elastic if (the absolute value of) elasticity is

a. less than 1.
b. equal to 1.
c. equal to 0.
d. greater than 1.

20. Demand is inelastic if (the absolute value of) elasticity is

a. less than 1.
b. equal to 1.
c. greater than 1.
d. equal to 0.

21. Demand is unit elastic if (the absolute value of) elasticity is

a. less than 1.
b. greater than 1.
c. equal to 1.
d. equal to 0.

22. A perfectly elastic demand implies that

a. buyers will not respond to any change in price.

b. any rise in price above that represented by the demand curve will result in no output demanded.
c. price and quantity demanded respond proportionally.
d. price will rise by an infinite amount when there is a change in quantity demanded.

23. A perfectly elastic demand curve will be

a. vertical.
b. horizontal.
c. downward sloping to the right.
d. upward sloping to the right.
24. In the case of perfectly inelastic demand,

a. quantity demanded stays the same regardless of price changes.

b. huge changes in quantity demanded result from very small changes in the price.
c. the change in quantity demanded exactly equals the change in price.
d. the change in quantity demanded will be twice the change in price.

25. When demand is inelastic, a decrease in price will cause

a. an increase in total revenue.

b. a decrease in total revenue.
c. no change in total revenue.
d. There is insufficient information to answer this question.

26. According to the graph, total revenue at a price of $30 would be

a. $9,000.
b. $7,000.
c. $5,000.
d. $3,000.

27. According to the graph, when price falls from point $40 to $30 we know that
demand must be

a. elastic, since total revenue increases from $8000 to $9000.

b. inelastic, since total revenue increases from $8000 to $9000.
c. inelastic, since total revenue decreases from $9000 to $8000.
d. unit elastic, since total revenue decreases from $9000 to $8000.

28. According to the graph, lowering price from $30 to $20 would

a. increase total revenue by $2,000.

b. decrease total revenue by $2,000.
c. increase total revenue by $1,000.
d. decrease total revenue by $1,000.

29. According to the graph, the total revenue at P1 is represented by area(s)

a. B + D.
b. A + B.
c. C + D.
d. D.

30. If the demand for donuts is elastic, a decrease in the price of donuts will

a. increase total revenue of donut sellers.

b. decrease total revenue of donut sellers.
c. not change total revenue of donut sellers.
d. There is not enough information to answer this question.
31. The local pizza restaurant makes such great bread sticks that price elastic of demand for bread sticks
is inelastic. If the owner is only interested in increasing revenue, he should

a. lower the price of the bread sticks.

b. leave the price of the bread sticks alone.
c. raise the price of the bread sticks.
d. reduce costs.

Figure 6-1

10) Refer to Figure 6-1. The demand curve on which elasticity changes at every point is given in
A) Panel A. B) Panel B.
C) Panel C. D) none of the above graphs.

11) Refer to Figure 6-1. A perfectly elastic demand curve is shown in

A) Panel A. B) Panel B. C) Panel C. D) Panel D.
Answer: B

12) Refer to Figure 6-1. A perfectly inelastic demand curve is shown in

A) Panel A. B) Panel B. C) Panel C. D) Panel D.
Figure 6-2

15) Refer to Figure 6-2. The absolute value of the price elasticity of demand at points a and b is 1.
What is the value of Pb?
A) $50 B) $40 C) $30 D) $20
Answer: B

Figure 6-3

17) Refer to Figure 6-3. Using the midpoint formula, calculate the absolute value of the price elasticity
of demand between e and f.
A) 0.32 B) 0.4 C) 2.5 D) 3.125
Answer: D
Figure 6-4

20) Refer to Figure 6-4. Which of the following statements is true about the price elasticity of
demand?
A) The elasticity coefficient is constant along the demand curve.
B) The elastic portion of a straight-line downward-sloping demand curve corresponds to the segment
above the midpoint.
C) The inelastic portion of the demand curve corresponds to the segment above the midpoint.
D) At the midpoint of the demand curve, the elasticity coefficient is zero.
Answer: B

21) Refer to Figure 6-4. The inelastic segment of the demand curve
A) is coincident with the horizontal axis. B) is coincident with the vertical axis.
C) lies below the midpoint of the curve. D) lies above the midpoint of the curve.
Answer: C

22) Refer to Figure 6-4. At the midpoint of the demand curve, in absolute value, A) the
price elasticity coefficient is at a maximum.
B) the price elasticity coefficient is at a minimum. C) the price
elasticity coefficient is zero.
D) the price elasticity coefficient is one. Answer: D
Figure 6-5

47) Refer to Figure 6-5. The section of the demand curve labeled ʺAʺ represents
A) the inelastic section of the demand curve.
B) the unit-elastic section of the demand curve. C) the elastic
section of the demand curve.
D) the perfectly elastic section of the demand curve. Answer: C

Figure 6-6

51) Refer to Figure 6-6. As price falls from PA to PB, the quantity demanded increases most along
D1; therefore,
A) D1 is unit elastic. B) D1 is more inelastic than D2 or D3 .
C) D1 is more elastic than D2 or D3 D) D1 is elastic at PA but inelastic at PB.
Answer: C
Table 6-1
Price Quantity
$35 40
25 50

58) Refer to Table 6-1. Suppose you own a bookstore. You believe that you can sell 40 copies per day of the
latest John Grisham novel when the price is $35. You consider lowering the price to
$25 and believe this will increase the quantity sold to 50 books per day. Compute the price elasticity of
demand using the mid-point formula and these data. Select the correct implication from your work.
A) The demand for the John Grisham book is inelastic. Revenue will fall if the price is
lowered.
B) The demand for the John Grisham book is elastic. Revenue will rise if the price is lowered.
C) The demand for the John Grisham book is inelastic. Revenue will rise if the price is lowered.
D) The demand for the John Grisham book is elastic. Revenue will fall if the price is lowered.
Answer: A
Table 6-2
Estimated Price Elasticity of Demand
Coca-Cola -3.0
All carbonated soft drinks -1.5
All soft drinks -0.8

27) Refer to Table 6-2. Assume that an economist has estimated the price elasticity of demand values in
the table above. Use the data in the table to select the correct statement.
A) The demand for Coca-Cola is inelastic.
B) The elasticity for ʺAll soft drinksʺ is less than the elasticity for Coca-Cola because
Coca-Cola is more of a luxury than a necessity; ʺAll soft drinksʺ represents goods that are more necessity
than luxury.
C) The difference in elasticity values is explained by the fact that the more narrowly we
define a market, the more elastic the demand will be.
D) There are fewer substitutes for ʺAll carbonated soft drinksʺ than there are for ʺAll soft
drinks.ʺ
Answer: C

39) The estimated price elasticities of demand for the products listed in the table as ʺProduct Aʺ are from Table
6-2 in the text. Indicate whether the products listed as ʺProduct Bʺ will have a more elastic or less elastic
demand than the corresponding Product A.

Is Estimated
Elasticity for
Product B More
Estimated Elastic or Less
Elasticity for Elastic than for
Product A Product A Product B Product A?
Samuel Adams
Beer -0.29 Boston Lager More elastic
Organically raised
Chicken -0.37 chicken More elastic
Cocaine -0.28 Illegal narcotics Less elastic
Cigarettes -0.25 Marlboro Lights More elastic
Restaurant Dennyʹs Grand
meals -0.67 Slam breakfast More elastic
Chapter 6 Elasticity: The Responsiveness of Demand and Supply 569

Table 6-3
Price per Pound Quantity of Cheese
(dollars) Demanded (pounds)
$16 3
14 4
12 5
10 6
8 7
6 8
4 9
2 10

7) Refer to Table 6-3. Over what range of prices is the demand elastic?
A) over the entire range of prices B) between $14 and $16
C) between $8 and $16 D) between $2 and $8
Answer: B
Diff: 2 Page Ref: 183-184/183-184
Topic: Price Elasticity of Demand and Total Revenue
Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of
both
AACSB: Analytic thinking

8) Refer to Table 6-3. Over what range of prices is the demand inelastic?
A) over the entire range of prices B) between $12 and $16
C) between $8 and $16 D) between $2 and $8
Answer: D

Table 6-4
The publisher of a magazine gives his staff the following information:

Current price $2.00 per issue

Current sales 150,000 copies per month
Current revenue $300,000 per month
Current total costs $450,000 per month

He tells the staff, ʺOur costs are currently $150,000 more than our revenues each month. I propose to eliminate
this problem by raising the price of the magazine to $3.00 per issue. This will result in our revenue being
exactly equal to our cost.ʺ

15) Refer to Table 6-4. Which of the following statements is correct?

A) The publisherʹs analysis is correct only if the demand is perfectly elastic.
B) The publisherʹs analysis is correct only if the demand is elastic.
C) The publisherʹs analysis is correct only if the demand is perfectly inelastic.
D) The publisherʹs analysis is correct only if the demand is unit -elastic. Answer: C
Table 6-5
Quantity
Hourly Rental
Demanded
Rate (dollars)
(hours)
$60 40
75 32
80 30
100 24

21) Refer to Table 6-5. Katie Graham owns a kayak rental service in Santa Barbara. Table 6.3 below shows
her estimated demand schedule for kayak rentals per week. She would like to increase her sales revenue by
changing the price she charges for rentals. At present she charges $75. Based on the information in the table,
Katie
A) is not able to increase her revenue by changing her price because the demand for kayak
rentals is unit-elastic.
B) should lower her price to $60 to increase her revenue because the demand for kayak
rentals is price elastic.
C) should raise her price to $80 to increase her revenue because the demand for kayak rentals is price
inelastic.
D) should raise her price to earn the most revenue.
Answer: A

Figure 6-7

25) Refer to Figure 6-7. Between points a and b on the demand curve, demand is
A) perfectly inelastic. B) unit-elastic. C) perfectly
elastic. D) elastic.
Answer: B
Figure 6-8

17) Refer to Figure 6-8. Identify the two goods which are substitutes.
A) Good X and Good Y
B) Good Y and Good Z
C) Good X and Good Z
D) It is not possible to distinguish any relationship among the goods.
Answer: C

18) Refer to Figure 6-8. Identify the two goods which are complements.
A) Good X and Good Y
B) Good Y and Good Z
C) Good X and Good Z
D) It is not possible to distinguish any relationship among the goods.
Answer: B
Figure 6-9

32) Refer to Figure 6-9. The data in the diagram indicates that DVDs are
A) luxury goods.
B) inelastic goods. C)
necessities.
D) both luxury goods and inelastic goods. E) both
necessities and inelastic goods.
Answer: A
Table 6-6
Quantities Quantities
Purchased Purchased
Income Prices Good X Good Y
$30,000 Px = $6, Py = $3 2 20
50,000 Px = $6, Py = $4 5 10

62) Refer to Table 6-6.

a. Using the information in the table, calculate the income elasticity of demand for good X and
characterize the good. Use the midpoint formula.
b. Can you calculate the income elasticity of demand for good Y? If you can, show your calculation
and characterize the good. If you cannot, explain why.

Answer: a. The income elasticity of demand for good X = (3 / 3.5) / (20,000 / 40,000) = (0.8571 /
0.5) = 1.71. X is both a normal good and a luxury.
b. Since both income and P y change, you cannot calculate the income elasticity for good
Y. The income elasticity can be measured if a change in income causes the quantity of Y
purchased to change, holding everything else constant.

Figure 6-11

13) Refer to Figure 6-11. What is the value of the price elasticity of supply between g and h?
A) 20 percent B) 0.5 C) 2 D) 0.02
Answer: C
Table 6-7
Quantity Quantity
Price
Demanded Supplied
$6 5,000 2,000
7 4,000 2,000
8 3,000 2,000
9 2,000 2,000
10 1,000 2,000

The town of Bloomfield is well known for its basketball team. The price of basketball game tickets is
determined by market forces. Table 6-7 above shows the demand and supply schedules for basketball games
tickets.

31) Refer to Table 6-7. What is the most distinctive feature of the supply curve?
A) The supply curve is perfectly inelastic. B) The supply curve is horizontal.
C) The supply curve is upward sloping. D) The supply curve is perfectly elastic.
Answer: A

Table 6-7
Quantity Quantity
Price
Demanded Supplied
$6 5,000 2,000
7 4,000 2,000
8 3,000 2,000
9 2,000 2,000
10 1,000 2,000

The town of Bloomfield is well known for its basketball team. The price of basketball game tickets is
determined by market forces. Table 6-7 above shows the demand and supply schedules for basketball games
tickets.

31) Refer to Table 6-7. What is the most distinctive feature of the supply curve?
A) The supply curve is perfectly inelastic. B) The supply curve is horizontal.
C) The supply curve is upward sloping. D) The supply curve is perfectly elastic.
Answer: A
32) Refer to Table 6-7. What is the numerical value of the price elasticity of supply?
A) 1 B) greater than 0 but less than 1
C) 0 D) greater than 1
Answer: C

Figure 6-12

36) Refer to Figure 6-12. Suppose the diagram shows the supply curves for a product in the short run
and in the long run. Which supply curve represents supply in the short run and which curve represents
supply in the long run?
A) SB represents supply in the short run, and SA represents supply in the long run.
B) Either SA or SB could represent supply in the short run; in the long run the supply curve
must be a vertical line.
C) Either SA or SB could represent supply in the long run; in the short run the supply curve
must be a horizontal line.
D) SA represents supply in the short run, and SB represents supply in the long run.
Answer: D

37) Refer to Figure 6-12. The diagram shows two supply curves, SA and SB. As price rises from P0 to
P1 , which supply curve is more elastic?
A) SA B) SB
C) They are equally inelastic. D) They are equally elastic.
Answer: B
Exam

Name___________________________________

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

Figure 7-7

1) Refer to Figure 7-7. The lines shown in the diagram are isocost lines. Which of the following shows 1)
an increase in the price of labor while the price of capital remains unchanged?
A) the movement from BF to BD B) the movement from BF to CE
C) the movement from AF to BD D) the movement from AF to CE
Answer: A
Diff: 3 Type: MC

2) Economic costs of production differ from accounting costs in that 2)

A) accounting costs include expenditures for hired resources while economic costs do not.
B) economic costs include expenditures for hired resources while accounting costs do not.
C) economic costs add the opportunity cost of a firm using its own resources while accounting
costs do not.
D) accounting costs are always larger than economic costs.
Answer: C
Diff: 2 Type: MC

3) If a firm decreases its plant size and finds that its long-run average costs have decreased, then its 3)
A) plant size should be reduced even more.
B) business is now profitable.
C) labor is more productive in a smaller plant.
D) diseconomies of scale are less.
Answer: D
Diff: 2 Type: MC

1
 4) The marginal rate of technical substitution is measured by 4)
A) the relative input prices.
B) the ratio of the product's price to its cost of production.
C) the slope of the isocost line.
D) the slope of the isoquant.
Answer: D
Diff: 2 Type: MC

5) On an isoquant/isocost graph, the least cost input combination of producing a given output is 5)
A) one of the intercept values on the graph.
B) any point on the isoquant curve.
C) any point on the isocost curve.
D) given by the tangency between the isoquant curve and the isocost line.
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

6) If marginal cost is above the average variable cost, then average variable cost is decreasing. 6)
Answer: True False
Diff: 1 Type: TF

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

7) If the total cost of producing 20 units of output is US$1,000 and the average variable cost is US$35, 7)
what is the firm's average fixed cost at that level of output?
A) US$15
B) US$65
C) US$50
D) It is impossible to determine without additional information.
Answer: A
Diff: 2 Type: MC

8) If a firm produces 20 units of output and incurs a total cost of US$1,000 and the variable cost is 8)
US$700, calculate the firm's average fixed cost of production if it expands output to 25 units.
A) US$15
B) US$12
C) US$300
D) It is impossible to determine without additional information.
Answer: B
Diff: 2 Type: MC

9) Which of the following is an example of market "production", as used by economists? 9)

A) Gamal takes out a low-cost government loan to start his pet-sitting business.
B) Heidi makes a pizza for her family's dinner.
C) Amina works as a cashier at the local produce stand.
D) The theater and film studies department in Fine Art's College stages a play at the local
theater.
Answer: D
Diff: 1 Type: MC

2
10) If production displays economies of scale, the long run average cost curve is 10)
A) above the short run average total cost curve.
B) downward sloping.
C) below the long run marginal cost curve.
D) upward sloping.
Answer: B
Diff: 2 Type: MC

11) Adam spent US$10,000 on new equipment for his small business, "Adam's Fitness Studio". 11)
Membership at his fitness center is very low and at this rate, Adam needs an additional US$12,000
per year to keep his studio open. Which of the following is true?
A) The fixed cost of running the studio is US$22,000.
B) The variable cost of running the studio is US$22,000.
C) The US$10,000 Adam spent on equipment is a fixed cost of business and the US$12,000 he'll
need to continue operations is a variable cost.
D) The US$10,000 Adam spent on equipment is the total cost of starting the business and the
US$12,000 he'll need to continue operations is a marginal cost.
Answer: C
Diff: 2 Type: MC

12) If marginal product is greater than average product, then 12)

A) marginal product could either be increasing or decreasing.
B) marginal product must be increasing.
C) marginal product must be decreasing.
D) average product must be decreasing.
Answer: A
Diff: 2 Type: MC

13) If production displays diseconomies of scale, the long run average cost curve is 13)
A) downward sloping.
B) upward sloping.
C) above the long run marginal cost curve.
D) above the short run average total cost curve.
Answer: B
Diff: 2 Type: MC

3
 Figure 7-2

14) Refer to Figure 7-2. The curve labeled "E" is 14)

A) the average product curve. B) the output supply curve.
C) the marginal product curve. D) the total product curve.
Answer: C
Diff: 1 Type: MC

15) An expansion path shows 15)

A) the least cost combination of inputs for each level of output.
B) the level of sales that a firm should experience if it wants to expand.
C) the level of long run average cost at different scales of operation.
D) the returns to scale at each level of output.
Answer: A
Diff: 2 Type: MC

16) A characteristic of the long run is 16)

A) plant capacity cannot be increased or decreased.
B) there are both fixed and variable inputs.
C) there are fixed inputs.
D) all inputs can be varied.
Answer: D
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

17) Costs that change as output changes are called incremental costs. 17)
Answer: True False
Diff: 1 Type: TF

4
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

18) The law of diminishing marginal returns states 18)

A) that in the presence of a fixed factor, at some point the average product of labor starts to fall
as more and more variable inputs are added.
B) that average total costs of production initially fall and at a later point starts to rise at a
decreasing rate as output increases.
C) that at some point, adding more of a fixed input to a given amount of variable inputs will
cause the marginal product of the variable input to decline.
D) that at some point, adding more of a variable input to a given amount of a fixed input will
cause the marginal product of the variable input to decline.
Answer: D
Diff: 2 Type: MC

19) Implicit costs can be defined as 19)

A) total cost minus fixed costs.
B) the deferred cost of production.
C) accounting profit minus explicit cost.
D) the non-monetary opportunity cost of using the firm's own resources.
Answer: D
Diff: 1 Type: MC

Figure 7-1

20) Refer to Figure 7-1. Diminishing marginal productivity sets in after 20)
A) the fourth worker is hired. B) the second worker is hired.
C) the fifth worker is hired. D) the third worker is hired.
Answer: B
Diff: 2 Type: MC

5
 Figure 7-5

21) Refer to Figure 7-5. Identify the minimum efficient scale of production. 21)
A) Qa B) Qc C) Qd D) Qb
Answer: D
Diff: 2 Type: MC

22) All of the following statements are true of the minimum efficient scale except one. Which one? 22)
A) Any increase in the scale of operation will encounter diseconomies of scale.
B) An increase in the output level will reduce profit.
C) All possible economies of scale have been exhausted.
D) The short run average total cost curve's minimum point is equal to the long run average cost
curve's minimum point.
Answer: B
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

23) In the short run, if marginal product is below average product, then average variable cost is 23)
increasing.
Answer: True False
Diff: 2 Type: TF

24) An important reason why diseconomies of scale arise is because firms may have to hire lower 24)
skilled workers as they expand.
Answer: True False
Diff: 1 Type: TF

6
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 7-2

25) Refer to Figure 7-2. The curve labeled "F" is 25)

A) the marginal product curve. B) the average product curve.
C) the total product curve. D) the output supply curve.
Answer: B
Diff: 1 Type: MC

Table 7-1

Number of Mushrooms per

Workers day (kilos)
1 12
2 30
3 45
4 50
5 54
6 56

Table 7-1 shows the technology of production at the Mostafa's Mushroom Farm for the month of May 2007.

26) Refer to Table 7-1. What is the marginal product of the fourth worker? 26)
A) 137 kilos B) 5 kilos C) 50 kilos D) 12.5 kilos
Answer: B
Diff: 1 Type: MC

27) In the short run, if marginal product is at its maximum, then 27)
A) average cost is at its minimum. B) average variable cost is at its minimum.
C) marginal cost is at its minimum. D) total cost is at its maximum.
Answer: C
Diff: 2 Type: MC

7
 28) Marginal cost is the 28)
A) change in average cost when an additional unit of output is produced.
B) additional cost of producing an additional unit of output.
C) additional output when total cost is increased by one dollar.
D) change in the price of inputs if a firm buys more inputs to produce an additional unit of
output.
Answer: B
Diff: 2 Type: MC

29) If 11 workers can produce 53 units of output while 12 workers can produce 56 units of output, what 29)
is the marginal product of the twelfth worker?
A) 4.67 B) 36 C) 0.16 D) 3
Answer: D
Diff: 2 Type: MC

30) If another worker adds nine units of output to a group of workers who had an average product of 30)
seven units, then the average product of labor
A) will decrease. B) will remain the same.
C) will increase. D) cannot be determined.
Answer: C
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

31) The marginal cost curve is U-shaped because of the law of increasing opportunity costs. 31)
Answer: True False
Diff: 2 Type: TF

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

32) Suppose a firm uses labor and capital to produce output. The last unit of labor hired has a marginal 32)
product of 12 units of output, and the last unit of capital employed has a marginal product of 20
units. Use the optimal combination of inputs rule to calculate the price of capital if the price of labor
is US$6 per unit. The price of capital is
A) US$10.
B) US$20.
C) US$2.
D) impossible to determine with the information given.
Answer: A
Diff: 3 Type: MC

33) Economies of scale exist as a firm increases its size in the long run because of all of the following 33)
except
A) the firm can afford more sophisticated technology in production.
B) as a larger input buyer, the firm can purchase inputs at a lower per unit cost.
C) as a firm expands its production, its profit margin per unit of output increases.
D) labor and management can specialize even further in their tasks.
Answer: C
Diff: 2 Type: MC

8
 Figure 7-4

34) Refer to Figure 7-4. The vertical difference between curves F and G measures 34)
A) sunk costs. B) fixed costs.
C) marginal costs. D) average fixed costs.
Answer: D
Diff: 2 Type: MC

35) The absolute value of the slope of an isocost line equals the ratio of 35)
A) the marginal utilities of the two inputs.
B) the marginal productivities of the two inputs.
C) the quantities of the two inputs.
D) the prices of the two inputs.
Answer: D
Diff: 2 Type: MC

36) Higher isocost lines correspond to higher 36)

A) sales revenues. B) profits.
C) total costs of production. D) input prices.
Answer: C
Diff: 1 Type: MC

9
 Figure 7-1

37) Refer to Figure 7-1. The marginal product of the third worker is 37)
A) 57. B) 11. C) 15. D) 19.
Answer: C
Diff: 2 Type: MC

38) The long run average cost curve shows 38)

A) where the most profitable level of output occurs.
B) the lowest average cost of producing every level of output in the long run.
C) the plant size or scale that the firm should build.
D) the average cost of productionwhere diminishing returns are not present.
Answer: B
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

39) The short run is the time period during which a firm has at least one input constraint. 39)
Answer: True False
Diff: 1 Type: TF

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

40) As a firm hires more labor, in the short run, the 40)
A) output per worker rises.
B) level of total product stays constant.
C) costs of production are increasing at a fixed rate per unit of output.
D) extra output of another worker may rise at first, but eventually must fall.
Answer: D
Diff: 2 Type: MC

10
 Figure 7-5

41) Refer to Figure 7-5. Suppose for the past 8 years the firm has been producing Qd units per period 41)
using plant size ATC4 . Now, following a permanent change in demand, it plans to cut production
to Qc units. What will happen to its average cost of production?
A) In the short run, its average cost falls from US$47 to US$41, and in the long run, average cost
falls even further to US$37.
B) In the short run, its average cost falls from US$47 to US$37, and in the long run, average cost
rises to US$41.
C) In the short run, its average cost rises from US$47 to US$55, and in the long run, average cost
falls to US$37.
D) In the short run, its average cost rises from US$47 to US$55, and in the long run, average cost
falls to US$41.
Answer: D
Diff: 2 Type: MC

11
 Table 7-2

Quantity of Fixed cost Variable cost Total cost Average total

lanterns (US$) (US$) (US$) cost (US$)
75 200 170 370 4.93
80 200 230 430 5.36
90 200 7.67
100 200 810
115 200 11.8
117 200 1264 1464 12.5
120 200 1480

Table 7-2 shows cost data for Lotus Lanterns, a producer of whimsical night lights.

42) Refer to Table 7-2. What is the variable cost of production when the firm produces 115 lanterns? 42)
A) US$956 B) US$10.05 C) US$1,156 D) US$1,556
Answer: C
Diff: 2 Type: MC

Figure 7-7

43) Refer to Figure 7-7. The lines shown in the diagram are isocost lines. If the price of labor is US$50 43)
per unit, what is the price of capital along the isocost CE?
A) US$25 per unit
B) US$400 per unit
C) US$100 per unit
D) insufficient information to answer question
Answer: A
Diff: 3 Type: MC

12
44) In the short run, marginal product of labor increases at first and then falls because 44)
A) there are fewer opportunities for division of labor and specialization when fewer workers are
hired.
B) as more labor is hired, they are not as skilled as the first ones hired.
C) the new workers do not have as much experience as those who have been with the firm for a
long time and therefore are not as productive.
D) managerial inefficiency sets in when a firm gets too large.
Answer: A
Diff: 2 Type: MC

45) Average fixed cost can be calculated using any of the formulas below except 45)
A) (TC-VC)/Q. B) (TC-VC)/ Q. C) TFC/Q. D) (TC/Q)-AVC.
Answer: B
Diff: 2 Type: MC

46) Which of the following is a fixed cost? 46)

A) payment to hire a security worker to guard the gate to the factory around the clock
B) costs of raw materials
C) payments to an electric utility
D) wages of assembly line workers
Answer: A
Diff: 2 Type: MC

47) If 11 workers can produce a total of 54 units of a product and a twelfth worker has a marginal 47)
product of six units, then the average product of 12 workers is
A) 60 units. B) 5 units. C) 48 units. D) 54 units.
Answer: B
Diff: 2 Type: MC

48) Suppose two countries use different combinations of inputs, such as labor and capital, to produce 48)
the same product. This implies all of the following except that
A) the prices of the inputs are not the same in the two countries.
B) the two countries use different technologies to produce the product.
C) one country is more efficient in the production of the product than the other.
D) the inputs are not equally productive in the two countries.
Answer: C
Diff: 3 Type: MC

49) In 2004, the Egyptian government implemented an economic reform program that led to a sharp 49)
reduction in tariffs on imported cars. This helped GB Auto Ghabbour to
A) attract skilled workers.
B) save on transport costs.
C) locate its production centers closer to its customers.
D) increase production and generate economies of scale.
Answer: D
Diff: 1 Type: MC

13
 Figure 7-4

50) Refer to Figure 7-4. Identify the curves in the diagram. 50)
A) E = marginal cost curve; F = total cost curve; G = variable cost curve; H = average fixed cost
curve.
B) E = marginal cost curve; F = average total cost curve; G = average variable cost curve; H =
average fixed cost curve.
C) E = average fixed cost curve; F = variable cost curve; G = total cost curve; H = marginal cost
curve.
D) E = average fixed cost curve; F = average total cost curve; G = average variable cost curve; H =
marginal cost curve.
Answer: B
Diff: 1 Type: MC

51) Marginal cost is equal to the 51)

A) change in total cost divided by the change in output.
B) change in total product divided by the change in output.
C) change in average product divided by the change in output.
D) change in average total costs divided by the change in output.
Answer: A
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

52) Accounting costs exclude implicit costs. 52)

Answer: True False
Diff: 1 Type: TF

53) If marginal product is equal to average product, then total product is at a maximum. 53)
Answer: True False
Diff: 2 Type: TF

14
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

54) Long run costs are U-shaped because 54)

A) of the law of supply. B) of the law of demand.
C) of the law of diminishing returns. D) of economies and diseconomies of scale.
Answer: D
Diff: 2 Type: MC

55) The president of Toyota's Georgetown plant was quoted as saying, "Demand for high volumes saps 55)
your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and
knowledge we painstakingly built up over the years." This quote suggests that
A) high demand for Toyota's cars prevented the company from focusing on its strength: auto
design.
B) Toyota was experiencing an excess demand for its automobiles which it had difficulty
keeping up with.
C) Toyota was so focused on "churning" out cars that it did not invest sufficiently in training its
workers.
D) as Toyota expanded its capacity, it experienced diseconomies of scale.
Answer: D
Diff: 2 Type: MC

Figure 7-4

56) Refer to Figure 7-4. Curve G approaches curve F because 56)

A) average fixed costs fall as output rises.
B) fixed costs fall as capacity rises.
C) marginal costs are above average variable costs.
D) total costs fall as more and more is produced.
Answer: A
Diff: 2 Type: MC

15
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

57) If production displays constant returns to scale, then all economies of scale have been exhausted. 57)
Answer: True False
Diff: 2 Type: TF

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

58) Which of the following is not a source of technological advancement for a producer? 58)
A) more efficient physical capital. B) higher skill level of managers.
C) outsourcing an aspect of production. D) better trained workers.
Answer: C
Diff: 2 Type: MC

59) One reason why, in the short run, the marginal product of labor might increase initially as more 59)
workers are hired is that
A) beyond some point, a firm has hired too many workers.
B) the best workers are hired first and those hired after are not as skillful.
C) the first set of workers hired get to use the best equipment.
D) specialization allows a worker to focus on one task, thereby increasing their proficiency at
that task.
Answer: D
Diff: 2 Type: MC

60) Which of the following is the best example of a short run adjustment? 60)
A) Toyota builds a new assembly plant in Texas.
B) A local bakery purchases another commercial oven as part of its capacity expansion.
C) Cairo University completes negotiations to acquire a large piece of land to build its new
library.
D) Your local Carrefour hires two more associates.
Answer: D
Diff: 2 Type: MC

61) Rola quit her job as a buyer for Center Point to start her own hair dressing salon, Goldilocks. She 61)
gave up a salary of US$40,000 per year, invested her savings of US$30,000 (which was earning 5
percent interest) and borrowed US$10,000 from a close friend, agreeing to pay 5 percent interest per
year. In her first year, Rola spent US$18,000 to rent a salon, hired a part-time assistant for
US$12,000 and incurred another US$15,000 on equipment and hairdressing material. Based on this
information, what is the amount of her explicit costs?
A) US$45,500 B) US$87,000 C) US$45,000 D) US$47,000
Answer: A
Diff: 2 Type: MC

16
 62) Suppose you have just opened a store to sell espresso machines. Both you and a competing store 62)
buy this machine from a manufacturer for US$130 each. Your competitor, who has a store the same
size as yours, is currently selling about 10 machines a month at a price of US$200 per machine. You
expect to sell about six machines a month at a price of US$220 per machine. If you lower your price,
you expect to make a loss. Which of the following could explain why your competitor is able to sell
the machine at a lower price profitably although the cost of purchasing the machine is the same for
the both of you?
A) The competing store probably has a lower average variable cost of production.
B) The competing store's goal is to maximize revenue and not profit.
C) The competing store probably has a lower average cost because average fixed costs falls as
output increases.
D) The competing store probably has a lower marginal cost of production.
Answer: C
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

63) If the long run average total cost curve is downward sloping, then the firm is experiencing 63)
decreasing returns to scale.
Answer: True False
Diff: 2 Type: TF

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

64) Suppose the price of capital and labor remain constant but that the average educational level of 64)
workers has increased and, therefore, the productivity of labor increases. This would lead a firm
A) use only labor to produce the product.
B) to adopt a more labor-intensive technology.
C) to adopt a more capital-intensive production technology.
D) to keep its output and production technology unchanged, but to use fewer units of labor.
Answer: B
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

65) If the marginal product of labor is decreasing, then marginal cost of production must be rising. 65)
Answer: True False
Diff: 2 Type: TF

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

66) The marginal rate of technical substitution is 66)

A) the rate at which a firm is able to substitute one input for another while keeping the level of
output constant.
B) the rate at which a firm is able to institute positive technological changes to its production
process.
C) the rate at which a firm is able to substitute one input for another while keeping total cost
constant.
D) the rate at which a firm is able to increase its output by replacing labor with technology.
Answer: A
Diff: 2 Type: MC

17
67) Which of the following would be categorized as an opportunity cost? 67)
a. Not being able to spend your US$10,000 savings if you sink the money in your business.
b. The cost of purchasing supplies for your house-cleaning business.
c. The cost of purchasing auto insurance for your dry-cleaning delivery business.
A) b and c only B) a and c only C) a only D) all of the above
Answer: D
Diff: 2 Type: MC

Figure 7-1

68) Refer to Figure 7-1. In a diagram that shows the marginal product of labor on the vertical axis and 68)
labor on the horizontal axis, the marginal product curve
A) intersects the horizontal axis at a point corresponding to the eighth worker.
B) intersects the horizontal axis at a point corresponding to the sixth worker.
C) intersects the horizontal axis at a point corresponding to the fifth worker.
D) never intersects the horizontal axis.
Answer: C
Diff: 2 Type: MC

18
 Table 7-2

Quantity of Fixed cost Variable cost Total cost Average total

lanterns (US$) (US$) (US$) cost (US$)
75 200 170 370 4.93
80 200 230 430 5.36
90 200 7.67
100 200 810
115 200 11.8
117 200 1264 1464 12.5
120 200 1480

Table 7-2 shows cost data for Lotus Lanterns, a producer of whimsical night lights.

69) Refer to Table 7-2. What is the average total cost of production when the firm produces 120 69)
lanterns?
A) US$72 B) US$1,680 C) US$12.3 D) US$14
Answer: D
Diff: 2 Type: MC

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

70) State the law of diminishing marginal returns.

Answer: As more units of a variable input are used in conjunction with a fixed input, the extra output of the
variable input will eventually begin to decrease and continue to decrease as more units are used.
Diff: 2 Type: ES

19
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 7-1

71) Refer to Figure 7-1. The average product of the fourth worker 71)
A) is 68. B) is 17.
C) is 11. D) cannot be determined.
Answer: B
Diff: 2 Type: MC

72) Which of the following is an implicit cost of production? 72)

A) Wages paid to labor plus the cost of carrying benefits for workers.
B) The utility bill paid to water, electricity, and natural gas companies.
C) Rent that could have been earned on a building owned and used by the firm.
D) Interest paid on a loan to a bank.
Answer: C
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

73) If the firm is producing no output in the short run, then its total costs are zero. 73)
Answer: True False
Diff: 2 Type: TF

20
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Table 7-2

Quantity of Fixed cost Variable cost Total cost Average total

lanterns (US$) (US$) (US$) cost (US$)
75 200 170 370 4.93
80 200 230 430 5.36
90 200 7.67
100 200 810
115 200 11.8
117 200 1264 1464 12.5
120 200 1480

Table 7-2 shows cost data for Lotus Lanterns, a producer of whimsical night lights.

74) Refer to Table 7-2. What is the marginal cost per unit of production when the firm produces 100 74)
lanterns?
A) US$420 B) US$11.1 C) US$42 D) US$8.1
Answer: C
Diff: 2 Type: MC

75) Refer to Table 7-2. What is the average variable cost per unit of production when the firm produces 75)
90 lanterns?
A) US$5.40 B) US$33.67 C) US$490 D) US$7.67
Answer: A
Diff: 2 Type: MC

76) Maximizing the level of output for a given total cost of production 76)
A) necessitates using only relatively low priced inputs.
B) is equivalent to producing the profit maximizing output level.
C) will maximize total revenue.
D) is equivalent to minimizing the cost for a given level of output.
Answer: D
Diff: 2 Type: MC

77) Red Stone Creamery currently hires five workers. When it added a sixth worker, its output actually 77)
fell. Which of the following statements is true?
A) The sixth worker is not as skilled as the fifth worker.
B) The marginal product of the sixth worker must be negative.
C) The average product of the sixth worker is negative.
D) The total product becomes negative.
Answer: B
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

78) The total cost schedule shows the relationship between different amounts of inputs and the 78)
resulting level of output.
Answer: True False
Diff: 1 Type: TF

21
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

79) The marginal product of labor is defined as 79)

A) the additional sales revenue that results when one more worker is hired.
B) the cost of hiring one more worker.
C) the additional output that results when one more worker is hired, holding all other resources
constant.
D) the additional number of workers required to produce one more unit of output.
Answer: C
Diff: 1 Type: MC

80) If production displays increasing marginal returns, then 80)

A) total product reaches a maximum sooner than if production displayed decreasing returns.
B) total product rises by a constant amount throughout.
C) each new worker hired adds more to output than previous workers that were hired.
D) the firm must be adding new capital to k boosting productivity.
Answer: C
Diff: 2 Type: MC

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

81) If the marginal product of labor is 45 units of output and the marginal product of capital is 56 units of output,
while the wage rate is US$20 per worker and the cost of capital is US$28 per machine, are these two inputs
being used in the least cost combination, and what should be done if they are not?
Answer: The marginal product per dollar spent on labor is 2.25 units and the marginal product per dollar spent on
capital is 2 units. Therefore, the firm is not using the least cost combination of inputs in production. To
reduce costs the firm should use more labor and less capital.
Diff: 3 Type: ES

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

82) The law of diminishing marginal returns 82)

A) sets in because not all workers are equally productive.
B) explains ultimately that production displays diseconomies of scale.
C) holds even when there are no fixed factors.
D) applies only in the short run.
Answer: D
Diff: 2 Type: MC

83) Engy sells Lebanese sandwiches. The cost of ingredients (bread, meat, spices, etc.) to make a 83)
sandwich is US$2. Engy pays her employees US$60 per day. She also incurs a fixed cost of US$120
per day. What is Engy's total cost per day when she does not produce any sandwiches and does not
hire any workers?
A) US$120 B) US$0 C) US$60 D) US$2
Answer: A
Diff: 2 Type: MC

22
 Figure 7-3

84) Refer to Figure 7-3. What happens to the average fixed cost of production when the firm increases 84)
output from 150 to 200?
A) It remains constant.
B) It rises.
C) It falls.
D) It could rise or fall depending on what happens to total cost.
Answer: C
Diff: 2 Type: MC

85) If, when a firm doubles all its inputs, its average cost of production increases, then production 85)
displays
A) diseconomies of scale. B) diminishing returns.
C) economies of scale. D) declining fixed costs.
Answer: A
Diff: 1 Type: MC

86) If, when a firm doubles all its inputs, its average cost of production decreases, then production 86)
displays
A) declining fixed costs. B) economies of scale.
C) diminishing returns. D) diseconomies of scale.
Answer: B
Diff: 1 Type: MC

87) In a diagram showing the average total cost and average variable cost curves, the minimum point 87)
of the average total cost is
A) at a larger level of output than the minimum point of the average variable cost.
B) at the same level of output as the maximum of the total product curve.
C) below the level of output as the minimum point of the average variable cost.
D) at the same level of output as the minimum point of the average variable cost.
Answer: A
Diff: 2 Type: MC

23
88) If diminishing marginal returns have already set in for a furniture company, and the marginal 88)
product of the sixth carpenter is eight chairs, then the marginal product of the seventh carpenter is
A) negative. B) more than eight chairs.
C) zero. D) less than eight chairs.
Answer: D
Diff: 2 Type: MC

Figure 7-7

89) Refer to Figure 7-7. The lines shown in the diagram are isocost lines. If the price of labor is US$50 89)
per unit, then along the isocost AF, the total cost
A) is US$500.
B) is US$1,250.
C) is US$750.
D) cannot be determined without the price of capital.
Answer: A
Diff: 3 Type: MC

24
 Figure 7-9

90) Refer to Figure 7-9. What is the combination of inputs that produces 200 gooseberry pies at the 90)
lowest cost?
A) combination h: 60 hours of labor and 9 units of capital
B) combination g: 60 hours of labor and 14 units of capital
C) combination f: 40 hours of labor and 24 units of capital
D) combination e: 10 hours of labor and 48 units of capital
Answer: C
Diff: 2 Type: MC

91) A firm's cost of production is determined by all of the following except 91)
A) the cost of raw material used in production.
B) the productivity of its workers.
C) the amount of corporate taxes it must pay on its profit.
D) the technology used to produce its output.
Answer: C
Diff: 2 Type: MC

92) Average fixed costs of production 92)

A) appear as a U-shaped curve on graphs.
B) fall as long as output is increased.
C) will rise at a fixed rate as more is produced.
D) remain constant.
Answer: B
Diff: 2 Type: MC

25
 93) The law of diminishing marginal returns 93)
A) explains why the average total cost, average fixed cost and the marginal cost curves are
U-shaped in the short run.
B) causes average total costs to rise at a decreasing rate as output increases.
C) explains why the average total cost and marginal cost curves are U-shaped in the short run.
D) causes the difference between average total cost and average variable cost to get smaller as
output increases.
Answer: C
Diff: 2 Type: MC

94) The average total cost of production 94)

A) is the extra cost required to produce one more unit.
B) equals the explicit cost of production.
C) equals total cost of production multiplied by the level of output.
D) equals total cost of production divided by the level of output.
Answer: D
Diff: 1 Type: MC

95) The typical shape of an isoquant is that it is 95)

A) linear and downward sloping. B) linear and upward sloping.
C) convex towards the origin. D) concave towards the origin.
Answer: C
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

96) In the long run the relevant cost is total cost. 96)
Answer: True False
Diff: 2 Type: TF

97) Consider a manufacturing operation that uses specialized machinery and labor to produce its 97)
output. In this case, the input that is not fixed in the short run is labor.
Answer: True False
Diff: 1 Type: TF

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

98) Engy sells Lebanese sandwiches. The cost of ingredients (bread, meat, spices, etc.) to make a 98)
sandwich is US$2. Engy pays her employees US$60 per day. She also incurs a fixed cost of US$120
per day. Calculate Engy's variable cost per day when she produces 50 sandwiches using two
workers?
A) US$220 B) US$100 C) US$240 D) US$124.40
Answer: A
Diff: 2 Type: MC

99) Average variable cost can be calculated using any of the formulas below except 99)
A) (TC-FC)/Q. B) (TC-FC)/ Q. C) (TC/Q)-AFC. D) TVC/Q.
Answer: B
Diff: 2 Type: MC

26
 100) If a producer is not able to expand its plant capacity immediately, it is 100)
A) operating in the short run. B) bankrupt.
C) losing money. D) operating in the long run.
Answer: A
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

101) A downward sloping marginal product of labor curve demonstrates the law of diminishing 101)
marginal returns.
Answer: True False
Diff: 2 Type: TF

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

102) Which of the following cost will not change as output changes? 102)
A) total variable cost
B) marginal cost
C) total fixed cost
D) average variable cost
E) average fixed cost
Answer: C
Diff: 2 Type: MC

103) Suppose the price of capital and labor remain constant. As a firm's expenditure for capital and 103)
labor increases, its isocost line
A) shifts in parallel to the original isocost line.
B) rotates outward on the X-intercept.
C) rotates outward on the Y-intercept.
D) shifts out parallel to the original isocost line.
Answer: D
Diff: 2 Type: MC

104) The president of Toyota's Georgetown plant was quoted as saying, "Demand for high volumes saps 104)
your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and
knowledge we painstakingly built up over the years." Based on this quote, what must be true of the
plant's average cost of production curve?
A) It is U-shaped. B) It is a ray from the origin.
C) It is downward sloping. D) It is upward sloping.
Answer: D
Diff: 2 Type: MC

105) When the average total cost is US$16 and the level of total cost is US$800, then the number of units 105)
the firm is producing is
A) impossible to determine with the information given.
B) 784.
C) 12,800.
D) 50.
Answer: D
Diff: 2 Type: MC

27
 Figure 7-2

106) Refer to Figure 7-2. The average product of labor declines after L2 because 106)
A) the marginal product of labor is positive.
B) the marginal product of labor is negative.
C) the marginal product of labor is below the average product of labor.
D) the marginal product of labor is falling.
Answer: C
Diff: 2 Type: MC

107) If the fifteenth unit of output has a marginal cost of US$29.50 and the average cost of producing 14 107)
units of output is US$30.23, what will happen to the average cost of production if the fifteenth unit
is produced?
A) The average cost increases as more is produced.
B) The average cost will fall.
C) The average cost could increase or decrease depending on what happens to the fixed cost.
D) The average cost could increase or decrease depending on what happens to the variable cost.
Answer: B
Diff: 1 Type: MC

108) You own a business that answers telephone calls for physicians after their offices close. You have 108)
an incentive to substitute capital for labor if the
A) marginal product of labor increases. B) price of labor decreases.
C) price of labor increases. D) price of capital increases.
Answer: C
Diff: 2 Type: MC

28
 Figure 7-7

109) Refer to Figure 7-7. The lines shown in the diagram are isocost lines. Which of the following shows 109)
a decrease in the price of capital while the price of labor remains unchanged?
A) the movement from BF to BD B) the movement from BF to CE
C) the movement from BF to AF D) the movement from AF to BF
Answer: C
Diff: 3 Type: MC

110) The production function shows 110)

A) the incremental output gained by improving the production process.
B) the maximum output that can be produced from each possible quantity of inputs.
C) the total cost of producing a given quantity of output.
D) the technology used to produce output.
Answer: B
Diff: 1 Type: MC

111) If fixed costs do not change, then marginal cost 111)

A) equals the change in average variable cost divided by the change in output.
B) equals the change in average fixed cost divided by the change in output.
C) also remains constant.
D) equals the change in variable cost divided by the change in output.
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

112) The sum of explicit and implicit costs of production is also called opportunity costs. 112)
Answer: True False
Diff: 1 Type: TF

29
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

113) Noha moves her yoga studio from her home to a space she rents in Amman. Holding everything 113)
else constant, as a result of this move,
A) her economic cost rises.
B) her explicit cost falls and her implicit cost rises.
C) her implicit cost falls and her explicit cost rises.
D) her opportunity cost rises.
Answer: C
Diff: 2 Type: MC

114) The minimum efficient scale is 114)

A) the level of output where diminishing returns have not set in yet.
B) the smallest output level where the firm finally reaches productive efficiency.
C) the level of operation where long run average costs are lowest.
D) the plant size that yields the most profit.
Answer: C
Diff: 1 Type: MC

115) If we have information about workers' marginal products, then total and average product can be 115)
found by
A) multiplying the average marginal product by the number of workers.
B) summing up the marginal values to find the total, and multiplying it by the number of
workers to get the average.
C) dividing marginal costs by the number of workers.
D) summing up the marginal values to find the total, and dividing it by the number of workers
to get the average.
Answer: D
Diff: 2 Type: MC

116) If average total cost is US$50 and average fixed cost is US$15 when output is 20 units, then the 116)
firm's total variable cost at that level of output is
A) US$300.
B) US$1,000.
C) US$700.
D) impossible to determine without additional information.
Answer: C
Diff: 3 Type: MC

117) If four workers can produce 18 chairs a day and five can produce 20 chairs a day, the marginal 117)
product of the fifth worker is
A) 2 chairs. B) 4 chairs. C) 38 chairs. D) 3 chairs.
Answer: A
Diff: 1 Type: MC

30
118) If the average variable cost curve is above the marginal cost curve, then 118)
A) the marginal costs must be increasing.
B) the marginal costs can be either increasing or decreasing.
C) the average variable costs must be increasing.
D) the marginal costs must be decreasing.
Answer: B
Diff: 1 Type: MC

Figure 7-6

119) Refer to Figure 7-6. The movement from isoquant T to isoquant U depicts 119)
A) a change in preferences with regards to input usage.
B) an increase in the cost of production.
C) an increase in output.
D) an increase in labor usage holding capital and output constant.
Answer: C
Diff: 2 Type: MC

120) Which of the following is a factor of production that is generally fixed in the short run? 120)
A) water B) a factory building
C) raw materials D) labor
Answer: B
Diff: 1 Type: MC

31
121) Manufacturers of flat-panel televisions expect continued rapid increases in the demand for their 121)
products. In response to this forecast, manufacturers are building increasingly larger plants. At the
same time, they expect to sell flat-panel televisions at lower prices. Which of the following must be
true if manufacturers plan to lower prices and yet expect to cover the average cost of production in
their larger plants?
A) The cost of building a larger plant must be lower than the cost of building smaller plants.
B) They expect that economies of scale will make the cost of production in the larger plants
lower than the cost of production in the smaller plants.
C) They expect that the demand for flat-panel televisions is relatively elastic and therefore
lowering the price will lead to an increase in total revenue which will comfortably cover the
average cost of production.
D) Larger plants are more efficient than smaller plants because the bulk of the cost of production
is a fixed cost.
Answer: B
Diff: 2 Type: MC

32
 Figure 7-8

Figure 7-8 shows the optimal input combinations for the production of a given quantity of cotton in the United Arab
Emirates and in Egypt.

122) Refer to Figure 7-8. Consider the following statements: 122)

a. For each country, the marginal product per dollar spent on labor is equal to the marginal product
per dollar spent on capital.
b. The price of labor is relatively higher in the United Arab Emirates than in Egypt and the price of
capital is relatively lower in the United Arab Emirates than in Egypt.
c. The price of labor and the price of capital are relatively higher in the United Arab Emirates than
in Egypt.
Based on Figure 7-8, which of the above statementsare true?
A) Statements a and b only. B) Statements b and c only.
C) Statements a and c only. D) All of the statements are true.
Answer: A
Diff: 3 Type: MC

123) The explicit cost of production is also called 123)

A) accounting cost. B) variable cost.
C) direct cost. D) overhead cost.
Answer: A
Diff: 1 Type: MC

33
124) If the marginal cost curve is below the average variable cost curve, then 124)
A) the average variable cost is increasing.
B) the average variable cost could either be increasing or decreasing.
C) the average variable cost is decreasing.
D) the marginal cost must be decreasing.
Answer: C
Diff: 1 Type: MC

125) Which of the following is an implicit cost of production? 125)

A) The salary you pay yourself for running your business.
B) The interest you pay your mother for the money she loaned you to start your business.
C) The utility bill paid to water, electricity, and natural gas companies.
D) The loss in the value of capital equipment due to wear and tear.
Answer: D
Diff: 2 Type: MC

Figure 7-2

126) Refer to Figure 7-2. Short run output is maximized at 126)

A) L3 .
B) L2 .
C) L1 .
D) There is insufficient information to determine this.
Answer: A
Diff: 2 Type: MC

34
 127) An isocost line shows 127)
A) all the possible combinations of two inputs a firm can use that have the same marginal cost.
B) all the possible combinations of two inputs that a firm can use to produce its output.
C) all the possible combinations of two inputs with constant returns to scale.
D) all the possible combinations of two inputs a firm can use that have the same total cost.
Answer: D
Diff: 2 Type: MC

Figure 7-9

128) Refer to Figure 7-9. Suppose Hilda hires labor at US$8 per hour and capital costs US$10 per unit. 128)
What is the minimum cost of producing 200 gooseberry pies?
A) US$592 B) US$1,120 C) US$3,600 D) US$560
Answer: D
Diff: 3 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

129) A characteristic of the long run that is not available in the short run is that a firm is free to 129)
vary its output.
Answer: True False
Diff: 1 Type: TF

35
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

130) Suppose a chain of convenience stores reorganized its system of supplying its stores with food. This 130)
led to a sharp reduction in the number of trucks that the company had to use and increased the
amount of fresh food on store shelves. Which of the following statements best describes the chain
stores' actions?
A) The change implemented is not an example of technological change because it did not require
the use of new machinery or equipment.
B) The firm is able to produce more output (increase its sales) using fewer inputs (less trucks).
Therefore, the chain of convenience stores has implemented a positive technological change.
C) The scenario described is an example of management efficiency and not technological change.
Essentially, the chain changes the way it operates its business..
D) Technological change refers only to the introduction of new products or improvements to
existing products. As such, the scenario described in the question is not technological change.
Answer: B
Diff: 2 Type: MC

131) The slope of a typical isoquant is negative because, to produce a given output, a producer 131)
A) will use more of one input only if the price of that input falls.
B) can use less of one input only if it uses more of another.
C) will use more of one input only if it uses more of another.
D) can use less of one input only if the productivity of that input increases.
Answer: B
Diff: 2 Type: MC

132) Academic book publishers hire editors, designers, and production and marketing managers who 132)
help prepare books for publication. As these employees work on several books simultaneously, the
number of people the company hires will not go up or down with the quantity of books the
company publishes during any particular year. The salaries and benefits of people in these job
categories will be included in
A) marginal cost and total cost but not fixed cost.
B) fixed cost and marginal cost but not variable cost.
C) fixed cost but not variable cost and total cost.
D) fixed cost and total cost but not variable cost.
Answer: D
Diff: 2 Type: MC

133) Average total cost is equal to 133)

A) total costs divided by the number of workers.
B) total costs divided by the level of output.
C) average fixed costs minus average variable costs.
D) marginal costs plus variable costs.
Answer: B
Diff: 2 Type: MC

36
 Figure 7-6

134) Refer to Figure 7-6. Which of the following statements is false about the input combinations shown 134)
in the diagram?
A) The firm produces a lower output level when it uses input combination a compared to input
combination d.
B) The firm incurs the same total cost when it uses input combination a or c to produce a given
quantity of output.
C) The firm produces a higher output level when it uses input combination b compared to input
combination a.
D) The firm produces the same output level when it uses input combination a or c.
Answer: B
Diff: 2 Type: MC

135) The formula for total fixed cost is 135)

A) TFC = TC/TVC. B) TFC = TVC - TC.
C) TFC = TC - TVC. D) TFC = TC + TVC.
Answer: C
Diff: 1 Type: MC

37
 Table 7-1

Number of Mushrooms per

Workers day (kilos)
1 12
2 30
3 45
4 50
5 54
6 56

Table 7-1 shows the technology of production at the Mostafa's Mushroom Farm for the month of May 2007.

136) Refer to Table 7-1. What is the average product of labor when the farm hires five workers? 136)
A) 38.2 kilos B) 10.8 kilos C) 4 kilos D) 54 kilos
Answer: B
Diff: 1 Type: MC

137) The marginal product of labor is calculated using the formula 137)
A) Q/L. B) L/ Q. C) L/Q. D) Q/ L.
Answer: D
Diff: 1 Type: MC

Figure 7-7

138) Refer to Figure 7-7. The lines shown in the diagram are isocost lines. A movement from CE to BD 138)
occurs when
A) the price of capital decreases while the price of labor increases.
B) the price of capital increases while the price of labor decreases.
C) the price of capital increases while the price of labor remains unchanged.
D) the price of labor decreases while the price of capital remains unchanged.
Answer: A
Diff: 3 Type: MC

38
 139) When a firm's long run average cost curve is horizontal for a range of output, then in that range, 139)
production displays
A) constant returns to scale. B) increasing returns to scale.
C) decreasing returns to scale. D) constant average fixed costs.
Answer: A
Diff: 1 Type: MC

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

140) Describe the relationship between marginal cost and average cost.
Answer: If marginal cost for a given output is below average cost, average cost will decrease as output increases,
but if marginal cost is above average cost, average cost will increase as output increases. If marginal cost
equals average cost, average cost is at its minimum value.
Diff: 2 Type: ES

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

141) An isoquant shows 141)

A) the combinations of two inputs that yield the same total product.
B) the combinations of two inputs that cost the same total amount of money.
C) the combinations of two goods that cost the same amount of money.
D) the combinations of two goods that yield the same total satisfaction.
Answer: A
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

142) If, after hiring the sixth worker, a firm's output falls, then the marginal product of the sixth worker 142)
is negative.
Answer: True False
Diff: 2 Type: TF

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

143) The difference between technology and technological change is that 143)
A) technology is carried out by firms producing physical goods while technological change is an
intellectual exercise into seeking ways to improve production.
B) technology is product-centered, that is, developing new products with our limited resources,
while technological change is process-centered in that it focuses on developing new
production techniques.
C) technology refers to the processes used by a firm to transform inputs into output while
technological change is a change in a firm's ability to produce a given level of output with a
given quantity of inputs.
D) technology involves the use of capital equipment while technological change requires the use
of brain power.
Answer: C
Diff: 2 Type: MC

39
 144) Which of the following is an example of a long run adjustment? 144)
A) Ford Motor Company lays off 2,000 assembly line workers.
B) Carrefour builds another Supercenter.
C) Your university offers Saturday morning classes next fall.
D) A soybean farmer turns on the irrigation system after a month long dry spell.
Answer: B
Diff: 2 Type: MC

Figure 7-2

145) Refer to Figure 7-2. Diminishing returns to labor set in 145)

A) after L1 . B) after L3 . C) after L2 . D) immediately.
Answer: A
Diff: 2 Type: MC

146) Engy sells Lebanese sandwiches. The cost of ingredients (bread, meat, spices, etc.) to make a 146)
sandwich is US$2.00. Engy pays her employees US$60 per day. She also incurs a fixed cost of
US$120 per day. Calculate Engy's total cost per day when she produces 50 sandwiches using two
workers?
A) US$220 B) US$100 C) US$340 D) US$124.40
Answer: C
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

147) In the short run, if average product is at its maximum, then average variable cost is at its minimum. 147)
Answer: True False
Diff: 2 Type: TF

40
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

148) The slope of an isoquant measures 148)

A) the average product of labor.
B) the rate at which inputs can be substituted for each other while keeping total output constant.
C) the ratio of the marginal utility of the two inputs.
D) the price ratio of the two inputs.
Answer: B
Diff: 2 Type: MC

149) At the minimum efficient scale, 149)

A) all possible economies of scale have not been exhausted.
B) marginal cost is at its minimum.
C) any increases in the scale of operation will encounter further economies of scale.
D) the firm has achieved the lowest possible average cost of production.
Answer: D
Diff: 2 Type: MC

150) Rola quit her job as a buyer for Center Point to start her own hair dressing salon, Goldilocks. She 150)
gave up a salary of US$40,000 per year, invested her savings of US$30,000 (which was earning 5
percent interest) and borrowed US$10,000 from a close friend, agreeing to pay 5 percent interest per
year. In her first year, Rola spent US$18,000 to rent a salon, hired a part-time assistant for
US$12,000 and incurred another US$15,000 on equipment and hairdressing material. Based on this
information, what is the amount of her implicit costs?
A) US$41,500 B) US$70,000 C) US$42,000 D) US$80,000
Answer: A
Diff: 2 Type: MC

41
 Figure 7-7

151) Refer to Figure 7-7. The lines shown in the diagram are isocost lines. Which of the following shows 151)
an increase in the firm's total cost budget while the price of labor and capital remain unchanged?
A) the movement from CE to AF B) the movement from BD to CE
C) the movement from CE to BF D) the movement from BD to AF
Answer: C
Diff: 3 Type: MC

152) A firm has successfully adopted a positive technological change when 152)
A) it can produce more output using the same inputs.
B) it sees an increase in worker productivity.
C) it produces less pollution in its production process.
D) it can pay its workers less yet increase its output.
Answer: A
Diff: 2 Type: MC

153) Who was the economist who first analyzed the advantages of specialization and the division of 153)
labor?
A) Ronald Coase B) Adam Smith
C) David Ricardo D) Arthur C. Pigou
Answer: B
Diff: 1 Type: MC

154) Engy sells Lebanese sandwiches. The cost of ingredients (bread, meat, spices, etc.) to make a 154)
sandwich is US$2. Engy pays her employees US$60 per day. She also incurs a fixed cost of US$120
per day. Calculate Engy's average fixed cost per day when she produces 50 sandwiches using two
workers?
A) US$6.80 B) US$2.40 C) US$4.40 D) US$2.00
Answer: B
Diff: 2 Type: MC

42
 Figure 7-1

155) Refer to Figure 7-1. The marginal product of the seventh worker is 155)
A) 9.43. B) -2. C) 66. D) 2.
Answer: B
Diff: 2 Type: MC

156) A decrease in the price of inputs used to produce flat-panel televisions causes 156)
A) the average cost curve to shift downwards but not the marginal cost curve.
B) a movement downwards along a given average cost curve only.
C) the marginal cost curve to shift downwards but not the average cost curve.
D) the average cost curve and the marginal cost curve to shift downwards.
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

157) If average product is decreasing, then marginal product must be negative. 157)
Answer: True False
Diff: 2 Type: TF

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

158) When a firm produces 50,000 units of output, its total cost equals US$6.5 million. When it increases 158)
its production to 70,000 units of output, its total cost increases to US$9.4 million. Within this range,
the marginal cost of an additional unit of output is
A) US$135. B) US$134.29. C) US$41.43. D) US$145.
Answer: D
Diff: 2 Type: MC

43
 Table 7-1

Number of Mushrooms per

Workers day (kilos)
1 12
2 30
3 45
4 50
5 54
6 56

Table 7-1 shows the technology of production at the Mostafa's Mushroom Farm for the month of May 2007.

159) Refer to Table 7-1. Diminishing marginal returns sets in when the ________ worker is hired. 159)
A) fourth
B) second
C) third
D) None of the above; the production function displays increasing marginal returns
Answer: C
Diff: 2 Type: MC

Figure 7-9

160) Refer to Figure 7-9. Suppose Hilda produces 100 gooseberry pies. What is the marginal rate of 160)
technical substitution of labor for capital when labor is increased from 10 to 20 hours?
A) 10 units of capital B) 1 unit of capital
C) 24 units of capital D) 14 units of capital
Answer: B
Diff: 2 Type: MC

44
 Figure 7-8

Figure 7-8 shows the optimal input combinations for the production of a given quantity of cotton in the United Arab
Emirates and in Egypt.

161) Refer to Figure 7-8. Which of the following could explain why the United Arab Emirates and Egypt 161)
use different input combinations to produce a given quantity of cotton, and yet each country
produces that quantity at the lowest possible cost?
A) because the United Arab Emirates has more sophisticated technology and therefore is more
efficient in cotton production
B) because the marginal product per dollar spent on capital yields a higher return in the United
Arab Emirates than in Egypt
C) because the prices of inputs are not the same for the two countries: labor is relatively lower
priced and capital is relatively higher priced in Egypt
D) because the prices of inputs are not the same for the two countries: labor is relatively lower
priced and capital is relatively higher priced in the United Arab Emirates
Answer: C
Diff: 3 Type: MC

162) Which of the following are implicit costs for a typical firm? 162)
A) utilities cost
B) business licensing fee
C) opportunity costs of capital owned and used by the firm
D) cost of labor hired by the firm
Answer: C
Diff: 1 Type: MC

45
Exam

Name___________________________________

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

1) The minimum point on the average variable cost curve is called the loss-minimizing point. 1)
Answer: True False
Diff: 1 Type: TF

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

2) A perfectly competitive market is in long run equilibrium. At present there are 100 identical firms 2)
each producing 5,000 units of output. The prevailing market price is $20. Assume that each firm
faces increasing marginal cost. Now suppose there is a sudden increase in demand for the
industry's product which causes the price of the good to rise to $24. Which of the following
describes the effect of this increase in demand on a typical firm in the industry?
A) In the short run, the typical firm increases its output but its total cost also rises. Hence, the
effect on the firm's profit cannot be determined without more information.
B) In the short run, the typical firm increases its output and makes an above normal profit.
C) In the short run, the typical firm's output remains the same but because of the higher price, its
profit increases.
D) In the short run, the typical firm increases its output but its total cost also rises, resulting in no
change in profit.
Answer: B
Diff: 3 Type: MC

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

3) Under what conditions should a competitive firm shut down in the short run? 3)
Answer: When market price is below average variable cost at the output where marginal
revenue equals marginal cost, the firm should shut down in the short run.
Diff: 2 Type: SA

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

4) If, for a perfectly competitive firm, if price exceeds the marginal cost of production, the firm should 4)
A) lower the price.
B) increase its output.
C) keep output constant and enjoy the above normal profit.
D) reduce its output.
Answer: B
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

5) A perfectly competitive firm in an increasing-cost industry faces an upward sloping long-run 5)

demand curve.
Answer: True False
Diff: 1 Type: TF

1
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

6) In a perfectly competitive industry, in the long-run equilibrium 6)

A) is maximizing its revenue.
B) the typical firm is producing at the output where its long-run average total cost is not
minimized.
C) the typical firm earns zero profit.
D) the typical firm is earning an accounting profit greater than its implicit costs.
Answer: C
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

7) For a perfectly competitive firm, at the profit maximizing output average revenue equals marginal 7)
cost.
Answer: True False
Diff: 2 Type: TF

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

8) A constant cost perfectly competitive market is in long run equilibrium. At present, there are 1,000 8)
firms each producing 400 units of output. The price of the good is $60. Now suppose there is a
sudden increase in demand for the industry's product which causes the price of the good to rise to
$64. In the new long run equilibrium, how will the average total cost of producing the good
compare to what it was before the price of the good rose?
A) The average total cost will be the same as it was before the price increase.
B) The average total cost will be higher than it was before the price increase because of
diseconomies of scale arising from the increased demand.
C) The average total cost will be lower than it was before the price increase because of economies
of scale.
D) The average total cost will be higher than it was before the price increase since the increase in
demand will drive up input prices.
Answer: A
Diff: 3 Type: MC

9) The demand for each seller's product in perfect competition is horizontal at the market price 9)
because
A) the price is set by the government.
B) each seller is too small to affect market price.
C) all the sellers get together and set the price.
D) all the demanders get together and set the price.
Answer: B
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

10) An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short 10)
run.
Answer: True False
Diff: 1 Type: TF

2
 11) A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a total 11)
cost of $50,000. If the prevailing market price is $48, the number of firms and the industry's output
will decrease in the long run.
Answer: True False
Diff: 2 Type: TF

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

12) If total variable cost exceeds total revenue at all output levels, a perfectly competitive firm 12)
A) should shut down in the short run. B) has covered its fixed costs.
C) should produce in the short run. D) is making short-run profits.
Answer: C
Diff: 2 Type: MC

13) Which of the following is not a characteristic of a monopoly? 13)

A) The firm has no control over price.
B) There is only one seller in the market.
C) It is easy for new firms to enter the market.
D) The product is not unique.
Answer: B
Diff: 1 Type: MC

Figure 8-6

Figure 8-6 shows cost and demand curves facing a profit-maximizing perfectly competitive firm.

14) Refer to Figure 8-6. Identify the short run shut down point for the firm. 14)
A) c B) d C) a D) b
Answer: D
Diff: 2 Type: MC

3
 15) Which of the following describes a situation in which every good or service is produced up to the 15)
point where the last unit provides a marginal benefit to consumers equal to the marginal cost of
producing it?
A) productive efficiency B) profit maximization
C) marginal efficiency D) allocative efficiency
Answer: D
Diff: 1 Type: MC

16) Which of the following is the best example of a perfectly competitive industry? 16)
A) electricity production B) steel production
C) airplane production D) wheat production
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

17) In the short run, a firm might choose to produce rather than shut down even if its market price is 17)
less than its average total cost of production.
Answer: True False
Diff: 1 Type: TF

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

Table 8-1

Total Cost Variable Cost

Quantity
(Dollars) (Dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800

Table 8-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that
output can only be increased in batches of 100 units.

18) Refer to Table 8-1. If the market price of each camera case is $8, what is the profit-maximizing 18)
quantity?
A) 300 units B) 600 units C) 400 units D) 500 units
Answer: C
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

19) The assumption that there are no barriers to new firms entering the market or exiting a market 19)
guarantees that any excess profits will be eliminated.
Answer: True False
Diff: 2 Type: TF

4
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 8-6

Figure 8-6 shows cost and demand curves facing a profit-maximizing perfectly competitive firm.

20) Refer to Figure 8-6. At price P3 , the firm would 20)

A) break even. B) lose an amount more than fixed costs.
C) lose an amount equal to its fixed costs. D) lose an amount less than fixed costs.
Answer: A
Diff: 2 Type: MC

21) If, as a perfectly competitive industry expands, it can supply larger quantities at the same long-run 21)
market price, it is
A) an increasing-cost industry. B) a fixed-cost industry.
C) a constant-cost industry. D) a decreasing-cost industry.
Answer: C
Diff: 2 Type: MC

22) An individual seller in perfect competition will not sell at a price lower than the market price 22)
because
A) demand for the product will exceed supply.
B) the seller would start a price war.
C) demand is perfectly inelastic.
D) the seller can sell any quantity she wants at the prevailing market price.
Answer: D
Diff: 2 Type: MC

5
 Figure 8-6

Figure 8-6 shows cost and demand curves facing a profit-maximizing perfectly competitive firm.

23) Refer to Figure 8-6. At price P3, the firm would produce 23)
A) Q3 units. B) Q2 units. C) Q5 units. D) Q4 units.
Answer: A
Diff: 2 Type: MC

24) In a competitive market, earning an economic profit in the long run is extremely difficult. This 24)
difficulty is greatly seen in the Apple iPhone App market. The long run for this market is quite
short due to:
A) the release of Samsung's Galaxy S. B) Apple's corporate governance structure.
C) the huge demand for apps on the iPhone. D) the ease of entry to the market.
Answer: D
Diff: 3 Type: MC

25) I the long-run average cost curve is U-shaped, the optimal scale of production from society's 25)
viewpoint is
A) where maximum economic profit is earned by producers.
B) one which guarantees economic profit.
C) the minimum efficient scale.
D) where firm profit is large enough to finance research and development.
Answer: C
Diff: 2 Type: MC

6
 26) In early 2007, Pioneer and JVC, two Japanese electronics firms, each announced that their profits 26)
were going to be lower than expected because they had both had to cut prices for LCD and plasma
television sets. Which of the following could explain why these firms did not simply raise their
prices and increase their profits?
A) In perfect competition, prices are determined by the market and firms will keep lowering
prices until there are no profits to be earned.
B) The move to cut prices is probably just a temporary one to gain market share. In the long run
the firms will raise prices and be able to increase their profits.
C) The firms are still making profits, just not as high as expected so there is room to lower prices
until one can force the other out of business.
D) Most likely, intense competition between these two major producers probably pushed prices
down. Thereafter, each feared that it would lose its customers to the other if it raised its
prices.
Answer: D
Diff: 3 Type: MC

Figure 8-4

Figure 8-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.

27) Refer to Figure 8-4. What is the amount of its total fixed cost? 27)
A) $1,440 B) $1,080
C) $2,520 D) It cannot be determined.
Answer: C
Diff: 2 Type: MC

7
 28) Both buyers and sellers are price takers in a perfectly competitive market because 28)
A) each buyer and seller knows it is illegal to conspire to affect price.
B) both buyers and sellers in a perfectly competitive market are concerned for the welfare of
others.
C) each buyer and seller is too small relative to others to independently affect the market price.
D) the price is determined by government intervention and dictated to buyers and sellers.
Answer: C
Diff: 2 Type: MC

29) In long-run perfectly competitive equilibrium, which of the following is false? 29)
A) Economies of scale are exhausted.
B) Firms earn economic profit.
C) Economic surplus is maximized.
D) There is efficient, low-cost production at the minimum efficient scale.
Answer: B
Diff: 2 Type: MC

30) The demand for an individual seller's product in perfect competition is 30)
A) downward sloping. B) vertical.
C) horizontal. D) the same as market demand.
Answer: C
Diff: 2 Type: MC

Figure 8-5

Figure 8-5 shows cost and demand curves facing a typical firm in a constant-cost perfectly competitive industry.

31) Refer to Figure 8-5. What is the minimum price the firm requires to produce output? 31)
A) $5 B) $20
C) $14 D) It cannot be determined.
Answer: A
Diff: 2 Type: MC

8
 32) How are sunk costs and fixed costs related? 32)
A) Sunk costs cannot be recovered and fixed costs can be avoided by shutting down.
B) They are not related in any way.
C) In the short run they are equal to each other.
D) In the long run they are equal to each other.
Answer: C
Diff: 2 Type: MC

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

33) How are market price, average revenue, and marginal revenue related for a perfectly 33)
competitive firm and why?
Answer: They are all equal to each other. The market price for any firm equals average
revenue. This can be verified by noting that average revenue = total revenue ÷
quantity = (price × quantity) ÷ quantity. Further, a perfectly competitive firm faces a
horizontal demand curve at the market price which means that it does not need to
reduce the price to sell more. Therefore, its marginal revenue equals price.
Diff: 2 Type: SA

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

34) Which of the following statements is correct? 34)

A) Accounting profit is the same as economic profit.
B) Economic profit takes into account all costs involved in producing a product.
C) Accounting profit is not relevant in preparing the firm's financial statement.
D) Economic profit always exceeds accounting profit.
Answer: B
Diff: 2 Type: MC

9
 Figure 8-2

35) Refer to Figure 8-2. What is the amount of profit if the firm produces Q2 units? 35)
A) It is equal to the vertical distance c to g multiplied by Q2 units.
B) It is equal to the vertical distance c to Q2 .
C) It is equal to the vertical distance c to g.
D) It is equal to the vertical distance g to Q2 .
Answer: C
Diff: 1 Type: MC

36) If the market price is $25, the average revenue of selling five units is 36)
A) $5. B) $125. C) $12.50. D) $25.
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

37) A perfectly competitive firm in long-run equilibrium produces output at the lowest possible 37)
average total cost.
Answer: True False
Diff: 1 Type: TF

38) Assume that price is greater than average variable cost. If a perfectly competitive firm is producing 38)
at an output where price is $114 and the marginal cost is $102, then the firm is probably producing
more than its profit-maximizing quantity.
Answer: True False
Diff: 2 Type: TF

10
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

39) Which of the following is not a characteristic of a perfectly competitive market structure? 39)
A) All firms sell identical products.
B) There are restrictions on exit of firms.
C) There are a very large number of firms that are small compared to the market.
D) There are no restrictions to entry by new firms.
Answer: B
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

40) In the short-run, if a firm shuts down its maximum loss equals the amount of its fixed cost. 40)
Answer: True False
Diff: 1 Type: TF

41) Maximizing average profit is equivalent to maximizing total profit. 41)

Answer: True False
Diff: 1 Type: TF

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

42) A perfectly competitive industry achieves allocative efficiency because 42)

A) it produces where market price equals marginal production cost.
B) goods and services are produced up to the point where the last unit provides a marginal
benefit to consumers equal to the marginal cost of producing it.
C) goods and services are produced at the lowest possible cost.
D) firms carry production surpluses.
Answer: B
Diff: 2 Type: MC

43) In response to decreasing profitability of Egyptian apparel producers in the last 2 years due to 43)
economic conditions, businessman Alaa Arafa said to producers "The ball has to keep rolling even
at a loss of profitability. Lose money but do not lose the market share," It is clear that Arafa was
advising others to keep producing and not shut down to maintain their market share. In which of
these cases should a producer ignore Arafa's advice and shut down?
A) If the average variable cost is higher than the market price.
B) If the average total cost equals the market price.
C) If the average total cost is higher than the market price, but, the average variable cost is less
than the market price.
D) None of the above.
Answer: A
Diff: 2 Type: MC

44) Which of the following is not a characteristic of a monopolistically competitive market structure? 44)
A) All sellers sell products that are differentiated.
B) Each firm must react to actions of other firms.
C) There are no barriers to entry of new firms.
D) There is a large number of independently acting small sellers.
Answer: B
Diff: 1 Type: MC

11
 45) In perfect competition 45)
A) the market demand curve is downward sloping while demand for an individual seller's
product is perfectly elastic.
B) the market demand curve is perfectly inelastic while demand for an individual seller's
product is perfectly elastic.
C) the market demand curve is perfectly elastic while demand for an individual seller's product
is perfectly inelastic.
D) the market demand curve and the individual's demand are identical.
Answer: A
Diff: 2 Type: MC

Figure 8-5

Figure 8-5 shows cost and demand curves facing a typical firm in a constant-cost perfectly competitive industry.

46) Refer to Figure 8-5. If the market price is $20, what is the amount of the firm's profit? 46)
A) $16,200 B) $6,750 C) $8,100 D) $5,400
Answer: B
Diff: 2 Type: MC

12
 Table 8-1

Total Cost Variable Cost

Quantity
(Dollars) (Dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800

Table 8-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that
output can only be increased in batches of 100 units.

47) Refer to Table 8-1. Suppose the fixed cost of production rises by $500 and if the price per unit is 47)
still $8. What happens to the firm's profit maximizing output level?
A) It must rise to offset the increased cost. B) It must fall.
C) It will remain the same. D) The firm will shut down.
Answer: C
Diff: 3 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

48) Being a price-taker, a perfectly competitive firm cannot receive a producer surplus in the short run. 48)
Answer: True False
Diff: 2 Type: TF

13
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 8-5

Figure 8-5 shows cost and demand curves facing a typical firm in a constant-cost perfectly competitive industry.

49) Refer to Figure 8-5. If the firm's fixed cost increases by $1,000 due to a new environmental 49)
regulation, what happens in the diagram above?
A) Only the average variable cost and average total cost curves shift upward; marginal cost is not
affected.
B) Only the average total cost curve shifts upward; the marginal cost and average variable cost
curves are not affected.
C) All the cost curves shift upward.
D) None of the curves shifts; only the fixed cost curve, which is not shown here, is affected.
Answer: B
Diff: 2 Type: MC

50) A very large number of small sellers who sell identical products imply 50)
A) a downward sloping demand for each seller's product.
B) chaos in the market.
C) a multitude of vastly different selling prices.
D) the inability of one seller to influence price.
Answer: D
Diff: 2 Type: MC

14
 Table 8-1

Total Cost Variable Cost

Quantity
(Dollars) (Dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800

Table 8-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that
output can only be increased in batches of 100 units.

51) Refer to Table 8-1. If the market price of each camera case is $8 and the firm maximizes profit, what 51)
is the amount of the firm's profit or loss?
A) loss of $1,000 B) loss of $440
C) $0 (it breaks even) D) profit of $440
Answer: D
Diff: 2 Type: MC

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

52) Why are individual buyers and sellers in perfect competition called price takers? 52)
Answer: They are called price takers because each firm is too small to influence the market
price and have to take the market price as given.
Diff: 2 Type: SA

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

53) Assume that the LCD and plasma television sets industry is perfectly competitive. Suppose a 53)
producer develops a successful innovation that enables it to lower its cost of production. What
happens in the short run and in the long run?
A) Initially, the firm will be able to increase its profit significantly but in the long run its profits
will still be greater than zero but lower than its short run profits because other firms would
also innovate.
B) This firm will be able to earn above normal profits indefinitely if it obtains a patent for its
innovation.
C) The firm will be able to increase its profits temporarily but in the long run, profits will be
eliminated as other firms copy the innovation.
D) The firm will probably incur losses temporarily because of the high cost of the innovation but
in the long run it will start earning positive profits.
Answer: C
Diff: 3 Type: MC

15
 54) Assume that the tuna fishing industry is perfectly competitive. Which of the following best 54)
characterizes the industry if, as demand for tuna increases, fishing boats have to go farther into the
ocean to harvest tuna?
A) a fixed-cost industry B) a decreasing-cost industry
C) an increasing-cost industry D) a constant-cost industry
Answer: C
Diff: 3 Type: MC

55) If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the 55)
fifth unit is
A) $125. B) $12.50. C) $25. D) $5.
Answer: C
Diff: 2 Type: MC

56) What is allocative efficiency? 56)

A) It refers to a situation in which resources are allocated such the last unit of output produced
provides a marginal benefit to consumers equal to the marginal cost of producing it.
B) It refers to a situation in which resources are allocated fairly to all consumers in a society.
C) It refers to a situation in which resources are allocated such that goods can be produced at
their lowest possible average cost.
D) It refers to a situation in which resources are allocated to their highest profit use.
Answer: A
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

57) If a perfectly competitive industry has a downward sloping long-run supply curve, it suggests that 57)
the demand for the industry's product is decreasing over time.
Answer: True False
Diff: 1 Type: TF

16
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 8-5

Figure 8-5 shows cost and demand curves facing a typical firm in a constant-cost perfectly competitive industry.

58) Refer to Figure 8-5. The firm's manager suggests that the firm's goal should be to maximize average 58)
profit. In that case, what is the output level and what is the average profit that will achieve the
manger's goal?
A) Q = 1,100 units, average profit =$6 B) Q = 1,350 units, average profit =$9
C) Q = 1,350 units, average profit =$5 D) Q = 1,800 units, average profit =$20
Answer: A
Diff: 2 Type: MC

17
 Figure 8-4

Figure 8-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.

59) Refer to Figure 8-4. If the market price is $30, should the firm represented in the diagram continue 59)
to stay in business?
A) Yes, because it is covering part of its fixed cost.
B) No, it should shut down because it is making a loss.
C) Yes, because it is making a profit.
D) No, it should shut down because it cannot cover its variable cost.
Answer: A
Diff: 2 Type: MC

60) If total revenue exceeds fixed cost, a firm 60)

A) should produce in the short run.
B) is making short-run profits.
C) has covered its variable costs.
D) may or may not produce in the short run, depending on whether total revenue covers
variable cost.
Answer: D
Diff: 2 Type: MC

18
 Figure 8-2

61) Refer to Figure 8-2. What happens if the firm produces more than Q4 units? 61)
A) Its profit increases.
B) Its total revenue is increasing faster than its total cost.
C) It could make a profit or a loss depending on what happens to demand.
D) It makes a loss.
Answer: D
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

62) In an increasing cost industry the long-run supply curve is upward sloping. 62)
Answer: True False
Diff: 1 Type: TF

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

63) If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, 63)
the firm
A) is earning a profit. B) should increase price.
C) should shut down. D) should increase output.
Answer: C
Diff: 2 Type: MC

19
 64) A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost 64)
of production is $20,000. The price of each good is $10. Should the firm continue to produce in the
short run?
A) Yes, it should continue to produce because it is minimizing its loss.
B) No, it should shut down because it is making a loss.
C) Yes, it should continue to produce because its price exceeds its average fixed cost.
D) There is insufficient information to answer the question.
Answer: A
Diff: 2 Type: MC

Figure 8-6

Figure 8-6 shows cost and demand curves facing a profit-maximizing perfectly competitive firm.

65) Refer to Figure 8-6. At price P4 , the firm would 65)

A) lose an amount less than fixed costs. B) lose an amount equal to its fixed costs.
C) make a normal profit. D) make a profit.
Answer: D
Diff: 2 Type: MC

66) For a perfectly competitive firm, which of the following is not true at profit maximization? 66)
A) Marginal revenue equals marginal cost.
B) Total revenue minus total cost is maximized.
C) Market price is greater than marginal cost.
D) Price equals marginal cost.
Answer: C
Diff: 2 Type: MC

20
 Figure 8-4

Figure 8-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.

67) Refer to Figure 8-4. If the market price is $30 and if the firm is producing output, what is the 67)
amount of its total variable cost?
A) $5,400 B) $7,200 C) $3,960 D) $6,480
Answer: C
Diff: 2 Type: MC

68) If a perfectly competitive firm's price is less than its average total cost but greater than its average 68)
variable cost, the firm
A) should shut down. B) is earning a profit.
C) is breaking even. D) is incurring a loss.
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

69) Firms in perfect competition produce the allocatively efficient output in the short run and in the 69)
long run.
Answer: True False
Diff: 2 Type: TF

21
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 8-8

70) Refer to Figure 8-8. Consider a typical firm in a perfectly competitive industry that makes short run 70)
profits. Which of the diagrams in the Figure shows the effect on the industry as it transitions to a
long run equilibrium?
A) Panel D B) Panel B C) Panel C D) Panel A
Answer: B
Diff: 3 Type: MC

71) If, as a perfectly competitive industry expands, it can supply larger quantities only at a higher 71)
long-run equilibrium price, it is
A) a decreasing-cost industry. B) an increasing-cost industry.
C) a constant-cost industry. D) a fixed-cost industry.
Answer: B
Diff: 2 Type: MC

22
 72) Assume that the medical screening industry is perfectly competitive. Consider a typical firm in that 72)
is making short run losses. Suppose the medical screening industry runs an effective advertising
campaign which convinces a large number of people that yearly CT scans are critical for good
health. How will this affect a typical firm that remains in the industry?
A) The marginal revenue curve shifts upwards, the firm's output increases along its marginal
cost curve, it expands production until it breaks even.
B) The firm's marginal revenue curve and average cost curve shift upwards in response to the
increase in market price and advertising expenditure. The firm increases output until it starts
breaking even.
C) The firm's supply curve shifts right and its marginal revenue curve shifts upwards t as the
market price rises and ultimately the firm starts making profits.
D) The marginal revenue curve shifts upwards, the firm's output increases along its marginal
cost curve, it expands production and eventually starts making profits.
Answer: A
Diff: 3 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

73) A perfectly competitive firm's marginal revenue curve is downward sloping. 73)
Answer: True False
Diff: 2 Type: TF

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

74) For a perfectly competitive firm, at profit maximization 74)

A) production must occur where average cost is minimized.
B) total revenue is maximized.
C) market price exceeds marginal cost.
D) marginal revenue equals marginal cost.
Answer: D
Diff: 2 Type: MC

23
 Figure 8-7

75) Refer to Figure 8-7. If this is a constant cost industry, what is the market price in the long run 75)
equilibrium?
A) $14 B) $20 C) $15 D) $5
Answer: A
Diff: 2 Type: MC

24
 Figure 8-6

Figure 8-6 shows cost and demand curves facing a profit-maximizing perfectly competitive firm.

76) Refer to Figure 8-6. At price P1 , the firm would 76)

A) break even. B) lose an amount equal to its fixed costs.
C) lose an amount more than fixed costs. D) lose an amount less than fixed costs.
Answer: B
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

77) If a firm in a perfectly competitive industry introduces a lower-cost way of producing an existing 77)
product, the firm will be able to earn economic profits in the long run.
Answer: True False
Diff: 2 Type: TF

25
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 8-7

78) Refer to Figure 8-7. Suppose the prevailing price is $20 and the firm is currently producing 1,350 78)
units. In the long run equilibrium, the firm represented in the diagram
A) will continue to produce the same quantity.
B) will reduce its output to 1,100 units.
C) will reduce its output to 750 units.
D) will cease to exist.
Answer: B
Diff: 2 Type: MC

26
 Figure 8-2

79) Refer to Figure 8-2. The firm breaks even at an output level of 79)
A) Q4 units. B) Q2 units. C) Q1 units. D) Q3 units.
Answer: A
Diff: 1 Type: MC

80) In the long run, a perfectly competitive market will 80)

A) produce only the quantity of output that yields a long run profit for the typical firm.
B) supply whatever amount consumers will buy at an economic profit price.
C) generate a long run equilibrium where the typical firm operates at a loss.
D) supply whatever amount consumers demand at a price determined by the minimum point on
the typical firm's average total cost curve.
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

81) Assume that the personal computer industry is perfectly competitive. The fact that the price of 81)
personal computers over the last decade has fallen, despite increases in demand signifies that the
industry is a decreasing-cost industry.
Answer: True False
Diff: 2 Type: TF

82) A perfectly competitive firm breaks even at a price equal to its minimum average total cost. 82)
Answer: True False
Diff: 1 Type: TF

27
 83) If a firm's fixed cost exceeds its total revenue, the firm should stop production by shutting down 83)
temporarily.
Answer: True False
Diff: 2 Type: TF

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

84) An industry's long-run supply curve shows 84)

A) the relationship in the long run between market price and quantity supplied.
B) how the government determines the price of the product.
C) greater than normal profit.
D) how average productivity is changing.
Answer: A
Diff: 2 Type: MC

85) Perfect competition is characterized by all of the following except 85)

A) homogeneous products. B) heavy advertising by individual sellers.
C) horizontal demand for individual sellers. D) sellers are price takers.
Answer: B
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

86) If a perfectly competitive industry has a perfectly elastic long-run supply curve, then input prices 86)
remain constant as the industry expands.
Answer: True False
Diff: 2 Type: TF

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

Table 8-1

Total Cost Variable Cost

Quantity
(Dollars) (Dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800

Table 8-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that
output can only be increased in batches of 100 units.

87) Refer to Table 8-1. The firm will not produce in the short run if the output price falls below 87)
A) $8. B) $3.20. C) $2.80. D) $4.
Answer: C
Diff: 2 Type: MC

28
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

88) The market demand curve for a perfectly competitive industry is the horizontal summation of each 88)
individual firm's demand curve.
Answer: True False
Diff: 2 Type: TF

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

Table 8-1

Total Cost Variable Cost

Quantity
(Dollars) (Dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800

Table 8-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that
output can only be increased in batches of 100 units.

89) Refer to Table 8-1. If the market price of each camera case is $8, what is the firm's total revenue? 89)
A) $2,400 B) $4000 C) $3,200 D) $4,800
Answer: C
Diff: 2 Type: MC

90) The market for Egyptian Ramadan lanterns has been penetrated by Chinese producers of the same 90)
commodity. These Chinese producers are capturing market share due to the lower price of their
products. What is the factor that is helping Chinese producers keep their prices low?
A) They have a lower average total cost compared to Egyptian producers.
B) The seasonality of demand for Ramadan lanterns.
C) The high quality of the Chinese Ramadan lanterns.
D) None of the above.
Answer: A
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

91) In the short run, if price falls below a firm's minimum average total cost, the firm should shut 91)
down.
Answer: True False
Diff: 1 Type: TF

29
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 8-6

Figure 8-6 shows cost and demand curves facing a profit-maximizing perfectly competitive firm.

92) Refer to Figure 8-6. At price P1, the firm would produce 92)
A) zero units. B) Q5 units. C) Q1 units. D) Q3 units.
Answer: A
Diff: 2 Type: MC

93) In the last 15 years, mobile phone prices have been dropping significantly while the technology and 93)
features offered in these phones has increased dramatically. Along with technology advancement
and outsourcing the production of mobile phones to countries with low cost of labor such as China,
which of these economic phenomena explains the reduction in price?
A) Competition. B) Elasticity of Demand.
C) The substitution effect. D) The income effect.
Answer: A
Diff: 2 Type: MC

94) All of the following can be used to compute average profit except 94)
A) average revenue minus average total cost.
B) total profit divided by quantity.
C) price minus average total cost.
D) marginal profit minus marginal cost.
Answer: D
Diff: 2 Type: MC

30
 95) Assume that price is greater than average variable cost. If a perfectly competitive seller is 95)
producing at an output where price is $11 and the marginal cost is $14.54, then to maximize profits
the firm should
A) continue producing at the current output.
B) not enough information given to answer the question.
C) produce a smaller level of output.
D) produce a larger level of output.
Answer: C
Diff: 2 Type: MC

Figure 8-5

Figure 8-5 shows cost and demand curves facing a typical firm in a constant-cost perfectly competitive industry.

96) Refer to Figure 8-5. The firm's manager suggests that the firm's goal should be to maximize average 96)
profit. If the firm does this, what is the amount of profit that it will earn?
A) $36,000 B) $12,150 C) $6,600 D) $6,750
Answer: C
Diff: 2 Type: MC

97) If a typical firm in a perfectly competitive industry is earning profits, then 97)
A) all firms will continue to earn profits.
B) the number of firms in the industry will remain constant in the long run.
C) new firms will enter in the long run causing market supply to decrease, market price to rise
and profits to increase.
D) new firms will enter in the long run causing market supply to increase, market price to fall
and profits to decrease.
Answer: D
Diff: 2 Type: MC

31
 98) The price of a seller's product in perfect competition is determined by 98)
A) a few of the sellers. B) the individual seller.
C) market demand and market supply. D) the individual demander.
Answer: C
Diff: 1 Type: MC

Figure 8-9

99) Refer to Figure 8-9. Suppose the prevailing price is P1 and the firm is currently producing its 99)
loss-minimizing quantity. In the long run equilibrium,
A) there will be fewer firms in the industry but total industry output increases.
B) there will be more firms in the industry and total industry output increases.
C) there will be fewer firms in the industry and total industry output decreases.
D) there will be more firms in the industry and total industry output remains constant.
Answer: C
Diff: 2 Type: MC

100) If a firm shuts down in the short run, 100)

A) its loss equals zero.
B) its loss equals its fixed cost.
C) its total revenue is not large enough to cover its fixed costs.
D) is makes zero economic profit.
Answer: B
Diff: 2 Type: MC

32
 Figure 8-7

101) Refer to Figure 8-7. Suppose the prevailing price is $20 and the firm is currently producing 1,350 101)
units. In the long run equilibrium,
A) there will be more firms in the industry and total industry output remains constant.
B) there will be fewer firms in the industry and total industry output decreases.
C) there will be fewer firms in the industry but total industry output increases.
D) there will be more firms in the industry and total industry output increases.
Answer: D
Diff: 2 Type: MC

102) A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a total 102)
cost of $50,000. The prevailing market price is $48. What will happen to the market price of this
good in the long run?
A) The price rises above $48.
B) The price falls below $48.
C) The price remains constant at $48.
D) There is insufficient information to answer the question.
Answer: A
Diff: 2 Type: MC

33
 Table 8-1

Total Cost Variable Cost

Quantity
(Dollars) (Dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800

Table 8-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that
output can only be increased in batches of 100 units.

103) Refer to Table 8-1. What is the fixed cost of production? 103)
A) $1,000 B) $0
C) $500 D) It cannot be determined.
Answer: A
Diff: 3 Type: MC

Figure 8-6

Figure 8-6 shows cost and demand curves facing a profit-maximizing perfectly competitive firm.

104) Refer to Figure 8-6. At price P4, the firm would produce 104)
A) Q5 units. B) Q4 units. C) Q3 units. D) Q6 units.
Answer: A
Diff: 2 Type: MC

34
 Figure 8-5

Figure 8-5 shows cost and demand curves facing a typical firm in a constant-cost perfectly competitive industry.

105) Refer to Figure 8-5. If the market price is $20, what is the average profit at the profit maximizing 105)
quantity?
A) $20 B) $9 C) $5 D) $6
Answer: C
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

106) A perfectly competitive firm's horizontal demand curve implies that the firm does not have to 106)
lower its price to sell more output.
Answer: True False
Diff: 2 Type: TF

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

107) If, in a perfectly competitive industry, the market price facing a firm is above its average total cost 107)
at the output where marginal revenue equals marginal cost, then
A) new firms are attracted to the industry. B) firms are breaking even.
C) market supply will remain constant. D) existing firms will exit the industry.
Answer: A
Diff: 2 Type: MC

35
108) Saeed, an accountant quit his $80,000-a-year job and bought an existing laundry from its previous 108)
owner. The lease has five years remaining and requires a monthly payment of $4,000. The lease
A) is part of the marginal cost of operating the laundry.
B) is a fixed cost of operating the laundry.
C) is an implicit cost of operating the laundry.
D) is a variable cost of operating the laundry.
Answer: B
Diff: 2 Type: MC

Figure 8-3

109) Refer to Figure 8-3. Suppose the prevailing price is P1 and the firm is currently producing its 109)
loss-minimizing quantity. Identify the area that represents the loss.
A) P2 deP1 B) P3cbP1 C) P3caP0 D) 0P1 bQ1
Answer: B
Diff: 2 Type: MC

36
 Figure 8-2

110) Refer to Figure 8-2. Why is the total revenue curve array from the origin? 110)
A) because the firm can sell its product at a constant price
B) because the firm must lower its price to sell more
C) because revenue decreases at an increasing rate
D) because revenue increases at an increasing rate
Answer: A
Diff: 2 Type: MC

111) In a graph with output on the horizontal axis and total revenue on the vertical axis, what is the 111)
shape of the total revenue curve for a perfectly competitive seller?
A) a horizontal line B) a ray from the origin
C) inverted U-shaped D) U-shaped
Answer: B
Diff: 2 Type: MC

112) If a perfectly competitive firm's price is above its average total cost, the firm 112)
A) is breaking even. B) is earning a profit.
C) should shut down. D) is incurring a loss.
Answer: B
Diff: 2 Type: MC

113) Both individual buyers and sellers in perfect competition 113)

A) can influence the market price by their own individual actions.
B) can influence the market price by joining with a few of their competitors.
C) have the market price dictated to them by government.
D) have to take the market price as a given.
Answer: D
Diff: 1 Type: MC

37
 114) Which of the following describes a situation in which a good or service is produced at the lowest 114)
possible cost?
A) allocative efficiency B) marginal efficiency
C) profit maximization D) productive efficiency
Answer: D
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

115) If in the long run a firm makes zero profit, it should exit the industry. 115)
Answer: True False
Diff: 2 Type: TF

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

Figure 8-1

116) Refer to Figure 8-1. If the firm is producing 700 units, what is the amount of its profit or loss? 116)
A) profit equivalent to the area A
B) loss equivalent to the area A
C) loss of $280
D) There is insufficient information to answer the question.
Answer: D
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

117) Perfectly competitive industries tend to produce low-priced, low-technology products. 117)
Answer: True False
Diff: 2 Type: TF

38
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 8-5

Figure 8-5 shows cost and demand curves facing a typical firm in a constant-cost perfectly competitive industry.

118) Refer to Figure 8-5. What is the amount of the firm's fixed cost of production? 118)
A) $8,100 B) $5,400
C) $6,750 D) It cannot be determined.
Answer: B
Diff: 2 Type: MC

119) Which of the following is not true for a firm in perfect competition? 119)
A) Price equals average revenue.
B) Average revenue is greater than marginal revenue.
C) Marginal revenue equals the change in total revenue from selling one more unit.
D) Profit equals total revenue minus total cost.
Answer: B
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

120) If productive efficiency characterizes an industry, firms in that industry are using the best 120)
technology available to produce the goods.
Answer: True False
Diff: 1 Type: TF

39
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

121) If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing 121)
it, the firm
A) is maximizing marginal profit.
B) has minimized its losses.
C) added more to total revenue than it added to total costs.
D) added more to total costs than it added to total revenue.
Answer: C
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

122) Suppose there are economies of scale in the production a specialized memory chip that is used in 122)
manufacturing microwaves. This suggests that the microwave industry is a decreasing-cost
industry.
Answer: True False
Diff: 2 Type: TF

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

123) Many entrepreneurs found great economic opportunities in selling mobile phones in the 1990s, but 123)
as more entrepreneurs enter the mobile market, the fewer economic the opportunities found. In
other words, economic opportunities are exhausted because the additional supply of mobile
phones forced down prices. What effect did this have on the profit margin of existing sellers of
mobile phones?
A) It decreased the profit margin. B) It increased the profit margin.
C) It had no effect on the profit margin. D) None of the above.
Answer: A
Diff: 1 Type: MC

40
 Figure 8-1

124) Refer to Figure 8-1. If the firm is producing 200 units, 124)
A) it should increase its output to maximize profit.
B) it is making a loss.
C) it should cut back its output to maximize profit.
D) it breaks even.
Answer: A
Diff: 1 Type: MC

125) What is productive efficiency? 125)

A) a situation in which resources are allocated such the last unit of output produced provides a
marginal benefit to consumers equal to the marginal cost of producing it
B) a situation in which resources are allocated to their highest profit use
C) a situation in which resources are allocated such that goods can be produced at their lowest
possible average cost
D) a situation in which firms produce as much as possible
Answer: C
Diff: 1 Type: MC

126) A firm's total profit can be calculated as all of the following except 126)
A) marginal profit times quantity sold.
B) average profit per unit times quantity sold.
C) (price minus average total cost) times quantity sold.
D) total revenue minus total cost.
Answer: A
Diff: 2 Type: MC

41
127) When a perfectly competitive firm finds that its market price is below its minimum average 127)
variable cost, it will sell
A) the output level where marginal revenue equals marginal cost.
B) any positive output the entrepreneur decides upon because all of it can be sold.
C) nothing at all; the firm shuts down.
D) the output where average total costs equal price.
Answer: C
Diff: 2 Type: MC

128) Writing in the New York Times on the technology boom of the late 1990s, Michael Lewis argues, 128)
"The sad truth, for investors, seems to be that most of the benefits of new technologies are passed
right through to consumers free of charge." What does Lewis means by the benefits of new
technology being "passed right through to consumers free of charge"?
A) In perfect competition, consumers place a value on the food equal to its marginal cost of
production and since they are willing to pay the marginal valuation of the good, they are
essentially receiving the new technology "free of charge."
B) Firms in perfect competition are price takers. Since they cannot influence price, they cannot
dictate who benefits from new technologies, even if the benefits of new technology being
"passed right through to consumers free of charge."
C) In perfect competition, price equals marginal cost of production. In this sense, consumers
receive the new technology "free of charge."
D) In the long run, price equals the lowest possible average cost of production. In this sense,
consumers receive the new technology "free of charge."
Answer: D
Diff: 3 Type: MC

42
 Figure 8-5

Figure 8-5 shows cost and demand curves facing a typical firm in a constant-cost perfectly competitive industry.

129) Refer to Figure 8-5. The figure shows the cost structure of a firm in a perfectly competitive market. 129)
If the firm's fixed cost increases by $1,000 due to a new environmental regulation, what happens to
its profit maximizing output level?
A) It remains the same.
B) It increases.
C) It decreases.
D) It could increase, decrease or remain constant, depending on whether the firm is able to cut
cost somewhere else.
Answer: A
Diff: 2 Type: MC

43
 Figure 8-1

130) Refer to Figure 8-1. If the firm is producing 700 units, 130)
A) it should cut back its output to maximize profit.
B) it is making a profit.
C) it should increase its output to maximize profit.
D) it is making a loss.
Answer: A
Diff: 1 Type: MC

131) A perfectly competitive firm produces 1,000 units of a good at a total cost of $36,000. The price of 131)
each good is $50. Calculate the firm's short run profit or loss.
A) loss of $14,000
B) profit of $14,000
C) profit of $50,000
D) There is insufficient information to answer the question.
Answer: B
Diff: 1 Type: MC

132) A perfectly competitive firm's supply curve is its 132)

A) marginal cost curve above its minimum average variable cost.
B) marginal cost curve above its minimum average total cost.
C) marginal cost curve.
D) marginal cost curve above the minimum of its average fixed cost.
Answer: A
Diff: 2 Type: MC

44
 Figure 8-4

Figure 8-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.

133) Refer to Figure 8-4. If the market price is $30 and the firm is producing output, what is the amount 133)
of the firm's profit or loss?
A) loss of $1,080 B) loss of $2,520 C) profit of $1,300 D) profit of $1,440
Answer: A
Diff: 2 Type: MC

134) Market supply is found by 134)

A) vertically summing the relevant part of each individual producer's marginal cost curve.
B) horizontally summing the relevant part of each individual producer's marginal cost curve.
C) horizontally summing each individual producer's average total cost curve.
D) vertically summing each individual producer's average total cost curve.
Answer: B
Diff: 2 Type: MC

45
 Figure 8-11

135) Refer to Figure 8-11. Suppose typical firm in a perfectly competitive market is earning economic 135)
profits in the short run. Which of the diagrams in the Figure depicts what happens to in the
industry as it transitions to along run equilibrium?
A) Panel A B) Panel B C) Panel C D) Panel D
Answer: B
Diff: 3 Type: MC

136) A perfectly competitive firm in a constant-cost industry produces 3,000 units of a good at a total 136)
cost of $36,000. The prevailing market price is $15. What will happen to the number of firms in the
industry and to the industry's output in the long run?
A) The number of firms remains constant and the industry's output decreases.
B) The number of firms remains constant and the industry's output increases.
C) The number of firms and the industry's output decrease.
D) The number of firms and the industry's output increase.
Answer: D
Diff: 2 Type: MC

46
 Figure 8-6

Figure 8-6 shows cost and demand curves facing a profit-maximizing perfectly competitive firm.

137) Refer to Figure 8-6. At price P2, the firm would produce 137)
A) Q4 units. B) zero units. C) Q3 units. D) Q2 units.
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

138) In the short-run, if a firm shuts down it avoids its variable cost but not its fixed cost. 138)
Answer: True False
Diff: 2 Type: TF

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

139) A perfectly competitive firm earns a profit when price is 139)

A) above minimum average total cost. B) equal to minimum average variable cost.
C) equal to minimum average fixed costs. D) equal to minimum average total cost.
Answer: A
Diff: 2 Type: MC

47
 Figure 8-10

140) Refer to Figure 8-10. Consider a typical firm in a perfectly competitive industry is incurring short 140)
run losses. Which of the diagrams in the Figure shows the effect on the industry as it transitions to a
long run equilibrium?
A) Panel A B) Panel C C) Panel B D) Panel D
Answer: A
Diff: 3 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

141) If a firm's total variable cost exceeds its total revenue, the firm should stop production by shutting 141)
down temporarily.
Answer: True False
Diff: 2 Type: TF

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

142) Which of the following is a characteristic of an oligopolistic market structure? 142)

A) Each firm need not react to the actions of rivals.
B) There are few dominant sellers.
C) It is easy for new firms to enter the industry.
D) Each firm sells a unique product.
Answer: B
Diff: 1 Type: MC

48
 143) If a typical firm in a perfectly competitive industry is incurring losses, then 143)
A) some firms will exit in the long run causing market supply to decrease and market price to
rise increasing profits for the remaining firms.
B) some firms will exit in the long run causing market supply to decrease and market price to
fall increasing losses for the remaining firms.
C) some firms will enter in the long run causing market supply to increase and market price to
rise increasing profit for all firms.
D) all firms will continue to lose money.
Answer: A
Diff: 2 Type: MC

Figure 8-5

Figure 8-5 shows cost and demand curves facing a typical firm in a constant-cost perfectly competitive industry.

144) Refer to Figure 8-5. If the market price is $20, what is the firm's profit maximizing output? 144)
A) 750 units B) 1,350 units C) 1,800 D) 1,100 units
Answer: B
Diff: 1 Type: MC

49
 Figure 8-12

145) Refer to Figure 8-12. If the market price is P1 , what is the allocatively efficient output level? 145)
A) Q1
B) Q2
C) Q0
D) There is no allocatively efficient output level because the firm is making a loss.
Answer: A
Diff: 2 Type: MC

146) A perfectly competitive firm in a constant-cost industry produces 3,000 units of a good at a total 146)
cost of $36,000. The prevailing market price is $15. What will happen to the market price of this
good in the long run?
A) The price rises above $15.
B) The price falls to $12.
C) The price remains constant at $15.
D) There is insufficient information to answer the question.
Answer: B
Diff: 2 Type: MC

50
 Figure 8-6

Figure 8-6 shows cost and demand curves facing a profit-maximizing perfectly competitive firm.

147) Refer to Figure 8-6. At price P2 , the firm would 147)

A) lose an amount less than fixed costs. B) break even.
C) lose an amount more than fixed costs. D) lose an amount equal to its fixed costs.
Answer: A
Diff: 2 Type: MC

148) The perfectly competitive market structure benefits consumers because 148)
A) firms do not produce goods at the lowest possible price in the long run.
B) firms add a much smaller markup over average cost than firms in any other type of market
structure.
C) firms are forced by competitive pressure to be as efficient as possible.
D) firms produce high quality goods at low prices.
Answer: C
Diff: 2 Type: MC

149) A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a total 149)
cost of $50,000. The prevailing market price is $48. Assuming that this firm continues to produce in
the long run, what happens to output level in the long run?
A) The firm's output falls.
B) The firm's output increases.
C) There is insufficient information to answer the question.
D) The firm produces the same output level.
Answer: B
Diff: 2 Type: MC

51
 Figure 8-4

Figure 8-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.

150) Refer to Figure 8-4. If the market price is $30, the firm's profit maximizing output level is 150)
A) 130. B) 0. C) 180. D) 240.
Answer: C
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

151) Firms in perfect competition produce the productively efficient output level in the short run and in 151)
the long run.
Answer: True False
Diff: 2 Type: TF

152) In the short-run, a firm that incurs losses might choose to produce rather than shut down if the 152)
amount of its revenue is less than its fixed cost.
Answer: True False
Diff: 1 Type: TF

52
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 8-6

Figure 8-6 shows cost and demand curves facing a profit-maximizing perfectly competitive firm.

153) Refer to Figure 8-6. Identify the firm's short run supply curve. 153)
A) the marginal cost curve B) the marginal cost curve from b and above
C) the marginal cost curve from d and above D) the marginal cost curve from a and above
Answer: B
Diff: 2 Type: MC

154) A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The 154)
price of each good is $10. Calculate the firm's short run profit or loss.
A) profit of $30,000
B) loss of $6,000
C) profit of $6,000
D) There is insufficient information to answer the question.
Answer: B
Diff: 1 Type: MC

53
 Figure 8-2

155) Refer to Figure 8-2. Suppose the firm is currently producing Q2 units. What happens if it expands 155)
output to Q3 units?
A) It makes less profit.
B) Its profit increases by the size of the vertical distance df.
C) It incurs a loss.
D) It will be moving toward its profit maximizing output.
Answer: A
Diff: 1 Type: MC

54
 Figure 8-9

156) Refer to Figure 8-9. Suppose the prevailing price is P1 and the firm is currently producing its 156)
loss-minimizing quantity. If the firm represented in the diagram continues to stay in business, in
the long run equilibrium,
A) it will expand its output to Q3 and face a price of P1.
B) it will continue to produce Q1 but faces a higher price P2.
C) it will expand its output to Q2 and face a price of P2.
D) it will reduce its output to Q0 and face a price of P0 .
Answer: C
Diff: 2 Type: MC

157) If in a perfectly competitive industry, the market price facing a firm is below its average total cost 157)
but above average variable cost at the output where marginal cost equals marginal revenue
A) firms are breaking even. B) new firms are attracted to the industry.
C) the industry supply will not change. D) some existing firms will exit the industry.
Answer: D
Diff: 2 Type: MC

55
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

158) Consider the market for wheat which is a perfectly competitive market. Is the market 158)
demand curve the same as the demand curve facing an individual producer? If not, explain
how and why they are different? Illustrate your answer graphically.
Answer: The market demand is downward sloping while the demand for an individual
firm's output is horizontal at the equilibrium market price. This is because an
individual producer is too small to influence the market price and must take the
market price as given. At the market price, the individual seller can sell all the
output she desires. The figure below shows the market demand curve and the
demand curve for a single firm.

Diff: 2 Type: SA

56
Chapter 8: Unemployment and Inflation

​
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ​
1.

The labor force is the sum of ​

A.

employed workers and discouraged workers. ​

B.

employed workers and unemployed workers. ​

C.

employed workers and individuals not looking for work. ​

D.

employed workers and the working age population. ​

E.

unemployed workers and the working age population. ​

Answer:

B​
Diff: 1 ​

​
2.

During the recession of 2007-2009, the demand for print advertising has ________ and this has ________ unemployment in the
newspaper industry. ​
A.

increased; reduced

B.

increased; increases ​
C.

declined; increased

D.

declined; reduced ​
Answer:

C​
Diff: 1 ​

​
3.

Upon your graduation from college, you find that the economy is in recession and the unemployment rate is relatively high.
Nonetheless, you continue along your career path looking for a new job because ​
A.

the cost of additional education is always higher during recession. ​

B.

high unemployment rates do not usually last for very long. ​

C.

looking for work is your only option. ​

D.

the wages of college graduates do not fall during recession. ​

Answer:

B​
Diff: 1 ​

​
4.

The unemployment rate is ​

 A.

the percentage of the labor force that is employed. ​

B.

the percentage of the number employed that is unemployed. ​

C.

the percentage of the working-age population that is unemployed. ​

D.

the percentage of the labor force that is unemployed. ​

E.

the percentage of the working-age population that is employed. ​

Answer:

D​
Diff: 1 ​

​
5.

A full-time student who is not working is categorized as ​

A.

unemployed. ​
B.

employed. ​
C.

not in the labor force. ​

D.

a discouraged worker. ​
E.

frictionally unemployed. ​
Answer:

C​
Diff: 1 ​

​
6.

Discouraged workers are classified by the BLS as ​

A.

part of the labor force. ​

B.

out of the labor force. ​

C.

unemployed. ​
D.

employed. ​
E.

part-time employees. ​
Answer:

B​
Diff: 1 ​

​
7.

Discouraged workers are ​

A.

workers who have a part time job but want a full time job. ​
B.

workers who find their current jobs unfulfilling and are considering a job change. ​
C.

workers who have consistently been looking for work for more than 4 weeks. ​
D.
workers who have stopped looking for work because they believe there are no jobs for them. ​
Answer:

D​
Diff: 1 ​

​
8.

The labor force participation rate is defined as ​

A.

the percentage of the working-age population that is employed. ​

B.

the percentage of the working-age population that is unemployed. ​

C.

the percentage of the labor force that is employed. ​

D.

the percentage of the labor force that is unemployed. ​

E.

the percentage of the working-age population in the labor force. ​

Answer:

E​
Diff: 1 ​

​
9.

Mike has been unemployed for over a year. He hasn't looked for a job in the last three months, but he's just started looking for work
again. Because Mike started looking for a new job, ​
A.

the unemployment rate increased.

B.

the labor force participation rate decreased. ​

C.

the unemployment rate decreased.

D.

the working-age population increased. ​

Answer:

A​
Diff: 2 ​

​
10.

During the month of May, 10 million workers moved from being classified as "unemployed" to being classified as "employed." As a
result, ​
A.

the unemployment rate rose.

B.

the labor force participation rate fell. ​

C.

the unemployment rate fell.

D.

the labor force participation rate rose. ​

Answer:

C​
Diff: 2 ​

​
 11.

Which of the following would reduce the labor force participation rate, all else equal? ​
A.

an increase in the number of people in the labor force ​

B.

an increase in the unemployment rate ​

C.

a decrease in the unemployment rate ​

D.

an increase in the working-age population ​

Answer:

D​
Diff: 2 ​

​
12.

Jack lost his job six months ago, and he's been actively looking for a new job ever since. The Bureau of Labor Statistics would classify
Jack as ​
A.

unemployed.

B.

out of the labor force. ​

C.

a discouraged worker.

D.

all of the above. ​

Answer:

A​
Diff: 2 ​

​
13.

Which of the following causes the unemployment rate to understate the true extent of joblessness? ​
A.

Many full time workers really want to be part time workers. ​

B.

Persons who collect unemployment benefits report themselves to be searching for a job. ​
C.

Discouraged workers are not counted as unemployed. ​

D.

A drug dealer reports herself as unemployed. ​

E.

Discouraged workers are counted as unemployed. ​

Answer:

C​
Diff: 2 ​

​
14.

The U.S. unemployment rate is highest for ​

A.

white adults. ​
B.

Hispanic adults. ​​
C.

black adults. ​
 D.

black teenagers. ​
E.

white teenagers. ​
Answer:

D​
Diff: 1 ​

​
15.

If the number employed is 190 million, the working-age population is 230 million, and the number unemployed is 10 million, then the
unemployment rate is ​
A.

5%.

B.

5.2%.

C.

8%.

D.

10%.

E.

50%. ​
Answer:

A​
Diff: 2 ​

​
16.

If the number employed is 190 million, the number unemployed is 10 million, and the working-age population is 250 million, then the
labor force participation rate is ​
A.

4%.

B.

5.2%.

C.

60%.

D.

76%.

E.

80%. ​
Answer:

E​
Diff: 2 ​

​
17.

Except for recessions, the duration of unemployment for the typical person lasts ​
A.

less than six months. ​

B.

six to nine months. ​

C.

over nine months. ​

 D.

over one year. ​

E.

over five years. ​

Answer:

A​
Diff: 1 ​

​
18.

If the number of unemployed workers is 200 million, and the number in the labor force is 500 million, what is the unemployment rate?

A.

0.4%

B.

4%

C.

14%

D.

40% ​
Answer:

D​
Diff: 2 ​

​
19.

If the number of unemployed workers is 200 million, the number of employed workers is 300 million, and the working-age population
is 800 million, what is the labor force participation rate? ​
A.

12.5%

B.

37.5%

C.

40%

D.

62.5% ​
Answer:

D​
Diff: 2 ​

​
20.

If the number of unemployed workers is 19 million, the number in the working-age population is 500 million, and the unemployment
rate is 4%, what is the labor force participation rate? ​
A.

4.75%

B.

7.8%

C.

95%

D.

96.2% ​
Answer:
C​
Diff: 3 ​

​
21.

If the number of unemployed workers is 19 million, the number in the working-age population is 500 million, and the unemployment
rate is 4%, how many workers are in the labor force? ​
A.

1 million

B.

20 million

C.

475 million

D.

481 million ​
Answer:

C​
Diff: 2 ​

​
22.

Which of the following describes actual trends in the U.S. labor force participation rate? ​
A.

The labor force participation rate of adult men has risen since 1950. ​
B.

The labor force participation rate of adult women has fallen since 1950. ​
C.

The labor force participation rate of adult men not in school, but too young to retire has risen since 1950. ​
D.

The labor force participation rate of adult women has risen since 1950. ​
E.

The labor force participation rate of all adults has fallen since 1950. ​
Answer:

D​
Diff: 1 ​

​
23.

In the United States in 2009, the gap between the unemployment rate for men and women ​
A.

was virtually nonexistent. ​

B.

got significantly smaller. ​

C.

was comparable to the gap during the recession of 2001. ​

D.

was the highest ever recorded. ​

Answer:

D​
Diff: 1 ​

​
24.

Jack was unemployed two weeks ago but just started a new job. As a result of this increase in the number of employed workers, which
of the following occurred? ​
A.
The labor force participation rate increased.

B.

The unemployment rate increased. ​

C.

The labor force participation rate decreased.

D.

The unemployment rate decreased. ​

Answer:

D​
Diff: 2 ​

​
25.

Jack just received a promotion at work and now works 50 hours per week instead of 35. As a result, ​
A.

the unemployment rate increased. ​

B.

the unemployment rate decreased. ​

C.

the labor force participation rate increased. ​

D.

neither the unemployment rate nor the labor force participation rate changed. ​
Answer:

D​
Diff: 2 ​

​
26.

For the last few decades, the labor force participation rates of men have ________, and the labor force participation rates of women
have ________. ​
A.

risen; risen

B.

fallen; fallen

C.

risen; fallen

D.

fallen; risen ​
Answer:

D​
Diff: 1 ​

​
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. ​
27.

The household survey asks adults about their employment status and is used to compile the monthly unemployment rate. ​
Answer:

​
True

False ​
Diff: 1 ​

​
 28.

The household survey is compiled from firms who answer questions about the number of persons who are employed and on the
company payroll. ​
Answer:

True

​
False ​
Diff: 1 ​

​
29.

In recent years, economists have come to rely more on the establishment survey rather than the household survey to analyze current
labor market statistics. ​
Answer:

​
True

False ​
Diff: 1 ​

​
30.

The labor force participation rates of men have gradually increased since 1948. ​
Answer:

True

​
False ​
Diff: 1 ​

​
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. ​
Article Summary

In February 2009, the labor force in the United States grew by roughly a half-million people, increasing unemployment by
almost as much as did the sharp decline in jobs. A smaller proportion of unemployed workers dropped out of the labor force
during the recession of 2007-2009 than in past recessions, and this has increased the unemployment rate by as much as half a
percentage point. Often during a recession, unemployed workers become discouraged while looking for a job and drop out of
the labor force, a situation referred to as the discouraged worker effect. Other times, additional members of the household
enter the labor force and join the unemployed worker in searching for a job to compensate for the loss in wages. Research
indicates that the discouraged worker effect tends to be the more common occurrence during a recession, but it was not as
prevalent during the recession of 2007-2009 as it had been during previous post-World War II recessions in the United States

Source: Alfred Tella, "Tella: Workers and wealth," Washington Times, March 10, 2009.
​
31.

Refer to the Article Summary. How would the labor force growing by a half-million people lead to an increase in the unemployment
rate? ​
Answer:

The labor force is calculated as the sum of employed workers and unemployed workers in the economy. If the labor force is growing
and, simultaneously, the unemployment rate is increasing, the number of people in the labor force classified as unemployed workers
must be increasing. ​

Diff: 2 ​

​
32.

How would the unemployment rate and the labor force participation rate change if discouraged workers were counted as unemployed
rather than counted as out of the labor force? Show using the formula for both measurements. ​
Answer:

The unemployment rate is calculated as:

 × 100

Including discouraged workers would increase the number of people counted as being in the labor force and would increase the
number of people counted as unemployed. In terms of our calculation, the numerator would rise, and the denominator would rise.
However, the numerator would rise by a greater percentage than the denominator as the denominator is the sum of employment plus
unemployment. If the top number rises more quickly than the bottom number, then the whole number rises. This would increase the
unemployment rate.

The labor force participation rate is calculated as:

× 100

Including discouraged workers would increase the number of people in the labor force, but not change the number of people in the
working-age population. This would increase the labor force participation rate because the numerator increases. Increasing the
numerator of a fraction increases the fraction. ​
Diff: 3 ​

​
33.

Suppose 180,000 people are employed, 20,000 people are unemployed, the working-age population is 250,000, and 50,000 people are
out of the labor force. Calculate the unemployment rate. ​
Answer:

The unemployment rate is calculated as:

× 100
The labor force is the sum of those employed plus the unemployed. This is 180,000 plus 20,000 which equals 200,000 people.
Substituting this information into our equation, we get:

× 100
which equals 10%. ​
Diff: 2 ​

​
34.

Suppose 180,000 people are employed, 20,000 people are unemployed, and 50,000 people are out of the labor force, then calculate the
labor force participation rate. ​
Answer:

The labor force participation rate is calculated as:

× 100

The labor force is the sum of those employed plus the unemployed. This is 180,000 plus 20,000 which equals 200,000 people. The
working-age population is the sum of those in the labor force and those out of the labor force. This is 200,000 plus 50,000 which
equals 250,000. Substituting this information into our equation, we get:

× 100
which equals 80%. ​
Diff: 2 ​

​
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ​
35.

The short-term unemployment arising from the process of matching workers with jobs is called ​
A.

frictional unemployment. ​
B.

structural unemployment. ​
C.
cyclical unemployment. ​
D.

seasonal unemployment. ​
E.

unnatural unemployment. ​
Answer:

A​
Diff: 1 ​

​
36.

Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is
called ​
A.

frictional unemployment. ​
B.

structural unemployment. ​
C.

cyclical unemployment. ​
D.

seasonal unemployment. ​
E.

unnatural unemployment. ​
Answer:

B​
Diff: 1 ​

​
37.

Workers laid off as a result of a recession suffer ​

A.

frictional unemployment. ​
B.

structural unemployment. ​
C.

cyclical unemployment. ​
D.

seasonal unemployment. ​
E.

natural unemployment. ​
Answer:

C​
Diff: 1 ​

​
38.

People who lost their jobs as hand-drawn animators because of the popularity of computer-generated 3D animation are examples of
persons who are suffering ​
A.

frictional unemployment. ​
B.

structural unemployment. ​
C.

cyclical unemployment. ​
D.

seasonal unemployment. ​
E.

unnatural unemployment. ​
 Answer:

B​
Diff: 2 ​

​
39.

Which of the following is an example of a worker experiencing cyclical unemployment? ​

A.

A worker that changes jobs to move closer her family. ​

B.

An assembly line worker who loses his job because of automation. ​

C.

A freightliner employee that got laid off because of the recession of 2007-2009. ​
D.

A lifeguard who was hired during the summer season is laid off after summer is over. ​
E.

A worker quits his job because he does not get along with his boss. ​
Answer:

C​
Diff: 2 ​

​
40.

Jack just told his boss that he thinks his boss is an idiot. It is likely that Jack will be experiencing ________ unemployment in the near
future. ​
A.

permanent

B.

cyclical

C.

frictional

D.

structural ​
Answer:

C​
Diff: 2 ​

​
41.

Sarah is a full-time student who is not looking for work. What kind of unemployment is Sarah experiencing? ​
A.

cyclical ​
B.

structural ​
C.

frictional ​
D.

Sarah is not experiencing unemployment of any kind because she is not currently part of the labor force. ​
Answer:

D​
Diff: 2 ​

​
42.

Emma is a road construction worker. During the winter months, emmy finds it more difficult to get work. The unemployment Emma
experiences in the winter is ​
 A.

structural.

B.

cyclical.

C.

seasonal.

D.

functional. ​
Answer:

C​
Diff: 2 ​

​
43.

Which of the following is an example of a worker experiencing frictional unemployment? ​

A.

A worker quits his job at the Post Office to find more interesting work. ​
B.

A computer programmer loses her job because it is outsourced to India. ​

C.

An employee is laid off because the economy is suffering a recession. ​

D.

A United Airlines pilot loses her job because of lack of demand for air travel. ​
Answer:

A​
Diff: 2 ​

​
44.

An example of a seasonally unemployed worker would be ​

A.

a software engineer who is laid off because of declining demand for the software he writes. ​
B.

a day care provider who quits his job to go back to school. ​

C.

a General Motors employee loses her job because the company is downsizing its work force. ​
D.

a ski lift operator who loses his job when the snow melts in the spring. ​
E.

a mother who quits her job to stay home with her children. ​
Answer:

D​
Diff: 2 ​

​
45.

What are the three main kinds of unemployment? ​

A.

frictional, seasonal, and cyclical

B.

temporary, permanent, and volunteer ​

C.

cyclical, structural, and temporary

D.
structural, frictional, and cyclical ​
Answer:

D​
Diff: 1 ​

​
46.

When the labor market is at full employment ​

A.

there is only cyclical unemployment in the economy. ​

B.

there is only structural unemployment in the economy. ​

C.

the unemployment rate is 0%. ​

D.

there is no cyclical unemployment in the economy. ​

Answer:

D​
Diff: 2 ​

​
47.

When an economy is at its natural rate of unemployment, which of the following will be true? ​
A.

The unemployment rate will be 0%. ​

B.

The labor force participation rate will be 100%. ​

C.

The unemployment rate will be greater than 0%. ​

D.

Only structural unemployment as a result of technological change will exist in the economy. ​
Answer:

C​
Diff: 2 ​

​
48.

The natural rate of unemployment is made up of ​

A.

frictional, cyclical, and structural unemployment. ​

B.

frictional and cyclical unemployment. ​

C.

cyclical and structural unemployment. ​

D.

frictional and structural unemployment. ​

E.

seasonal and structural unemployment. ​

Answer:

D​
Diff: 1 ​

​
49.

An increase in cyclical unemployment will result in ​

A.

an increase in the natural rate of unemployment. ​

B.
an increase in the unemployment rate. ​
C.

an increase in structural unemployment. ​

D.

a decrease in frictional unemployment. ​

Answer:

B​
Diff: 2 ​

​
50.

We say that the economy is at full employment if the unemployment rate is equal to ​
A.

zero. ​
B.

the natural rate of unemployment. ​

C.

the amount of cyclical unemployment. ​

D.

the sum of frictional and cyclical unemployment. ​

E.

the sum of structural and cyclical unemployment. ​

Answer:

B​
Diff: 2 ​

​
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. ​
51.

The natural rate of unemployment consists of frictional unemployment plus cyclical unemployment. ​
Answer:

True

​
False ​
Diff: 1 ​

​
52.

Eliminating structural unemployment would be good for the economy. ​

Answer:

True

​
False ​
Diff: 2 ​

​
53.

The full-employment rate of unemployment is zero. ​

Answer:

True

​
False ​
Diff: 2 ​
 ​
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. ​
54.

Describe the three types of unemployment. ​

Answer:

Frictional unemployment is short-term unemployment that arises from the process of matching workers with jobs. Structural
unemployment arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs. Cyclical
unemployment is caused by a business cycle recession. ​
Diff: 2 ​

​
55.

Explain what economists mean by full employment and why this rate of unemployment is not zero. ​
Answer:

Full employment occurs in the macro economy when cyclical unemployment is zero. The full-employment rate of unemployment is
then made up of the frictional rate of unemployment and the structural rate of unemployment. Because it will always take time to find
a job, frictional unemployment will never be zero. Also because demand and technology are constantly changing in an economy,
structural unemployment will never be zero. That is, some workers will always lose their jobs as the demands for the products they
make fall or disappear entirely. ​
Diff: 2 ​

​
56.

What is the natural rate of unemployment, and what types of unemployment constitute the natural rate of unemployment? ​
Answer:

The natural rate of unemployment is the rate of unemployment that exists in the economy when cyclical unemployment is zero. This
underlying level of unemployment in the economy consists of frictional and structural unemployment. The natural rate of
unemployment is also known as the full-employment rate of unemployment. ​
Diff: 1 ​

​
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ​
57.

The U.S. unemployment insurance program ​

A.

increases the amount of time the unemployed spend searching for a job. ​
B.

decreases the level of frictional unemployment. ​

C.

pays the unemployed a benefit equal to twice the average wage. ​

D.

eliminates structural unemployment. ​

Answer:

A​
Diff: 2 ​

​
58.

By offering training to workers whose firms laid them off because of competition from foreign firms, the federal government is
attempting to reduce ​
A.

frictional unemployment. ​
B.

structural unemployment. ​
C.

cyclical unemployment. ​
D.

seasonal unemployment. ​
E.

unnatural unemployment. ​
Answer:
B​
Diff: 1 ​

​
59.

Establishing a state employment agency that speeds up the process of matching unemployed workers with unfilled jobs is an attempt
to lower ​
A.

frictional unemployment. ​
B.

structural unemployment. ​
C.

cyclical unemployment. ​
D.

seasonal unemployment. ​
E.

unnatural unemployment. ​
Answer:

A​
Diff: 1 ​

​
60.

Which of the following explains why many European countries have unemployment rates that are higher than in the United States? ​
A.

Technological change occurs at a faster rate in Europe, so structural unemployment is higher in Europe. ​
B.

European countries offer higher unemployment benefits than the United States. ​
C.

Firms in European countries offer employees higher wages and higher benefits than do firms in the United States. ​
D.

The minimum wage in Europe is lower than it is in the United States. ​

Answer:

B​
Diff: 2 ​

​
61.

The average unemployment rate from 1999 to 2008 was the lowest for which of the following countries? ​
A.

Spain ​
B.

Italy ​
C.

France ​
D.

Germany ​
E.

the United States ​

Answer:

E​
Diff: 1 ​

​
62.

Workers in Canada are eligible for unemployment benefits for about twice as long a period of time as workers in the United States. As
a result, ​
A.
the average duration of unemployment is longer in the United States than in Canada. ​
B.

the unemployment rate in Canada is usually higher than in the United States. ​
C.

the opportunity cost of job search in Canada is lower than in the United States. ​
D.

frictional unemployment is higher, on average, in the United States than in Canada. ​

Answer:

B​
Diff: 2 ​

​
63.

Which of the following has a tendency to raise the unemployment rate? ​

A.

implementing a minimum wage in an economy ​

B.

reducing unemployment insurance in an economy ​

C.

offering wages at the market-clearing rate ​

D.

reducing labor unions membership in an economy ​

Answer:

A​
Diff: 1 ​

​
64.

An efficiency wage ​
A.

is higher than the market wage and tends to increase productivity. ​

B.

is lower than the market wage and tends to increase productivity. ​

C.

is higher than the market wage and tends to decrease productivity. ​

D.

is lower than the market wage and tends to decrease productivity. ​

Answer:

A​
Diff: 1 ​

​
65.

Costco pays its employees higher wages, on average, than Wal-Mart pays its employees. Which of the following best explains that
difference? ​
A.

Wal-Mart sells products that cater to a higher-income customer base than Costco does. ​
B.

Wal-Mart employees receive higher benefits than Costco employees, so they don't have to receive as much in wages. ​
C.

Higher wages increase the productivity of Costco workers and reduce turnover, thereby potentially increasing profit. ​
D.

Costco employees work longer hours, on average, than Wal-Mart employees. ​

Answer:

C​
Diff: 3 ​
 ​
66.

Why might firms pay wages that are above the equilibrium wage in a market? ​
A.

to increase the productivity of their workers

B.

to reduce the unemployment rate ​

C.

to encourage workers to form labor unions

D.

to reduce profit ​
Answer:

A​
Diff: 2 ​

​
67.

The equilibrium wage in a local labor market is $6 per hour. If a minimum wage of $8 per hour is imposed, which of the following
will occur? ​
A.

There will be an increase in unemployment. ​

B.

There will be an increase in the quantity of labor demanded by firms. ​

C.

There will be a decrease in the quantity of labor supplied by households. ​

D.

All of the above will occur. ​

Answer:

A​
Diff: 3 ​

​
Figure 8-1

​
68.

Refer to Figure 8-1. Based on the graph of the labor market above, if a minimum wage of $8 per hour is imposed, which of the
following will result? ​
A.

The quantity of labor demanded by firms will rise. ​

B.

The quantity of labor demanded by firms will fall. ​

C.

The unemployment rate will fall. ​

D.

Both A and C will occur. ​

Answer:

B​
Diff: 2 ​
 ​
69.

Refer to Figure 8-1. Based on the graph of the labor market above, if a minimum wage is set at $5 per hour, which of the following
will occur? ​
A.

The unemployment rate will rise. ​

B.

The unemployment rate will fall. ​

C.

The level of unemployment will rise, but the percentage of the labor force unemployed will not change. ​
D.

None of the above will occur. ​

Answer:

D​
Diff: 2 ​

​
70.

Labor unions cause unemployment because the union contract wage is set ​
A.

below the market wage, causing a shortage of labor. ​

B.

below the market wage, causing a surplus of labor. ​

C.

above the market wage, causing a surplus of labor. ​

D.

above the market wage, causing a shortage of labor. ​

Answer:

C​
Diff: 2 ​

​
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. ​
71.

The unemployment rate tends to be higher in the European Union as compared to the United States. ​
Answer:

​
True

False ​
Diff: 1 ​

​
72.

The unemployment rate is higher with a minimum wage law than it would be without a minimum wage law. ​
Answer:

​
True

False ​
Diff: 1 ​

​
73.

Paying efficiency wages are a way for a company to cut costs and become more efficient, and are therefore lower than market wages. ​
Answer:

True
​
False ​
Diff: 1 ​

​
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. ​
74.

What effect does the payment of government unemployment insurance have on the unemployment rate? ​
Answer:

The payment of government unemployment insurance likely raises the unemployment rate. The unemployment insurance payments
lower the opportunity cost (the salary that the unemployed are giving up by not working) of continuing to search for a job, which leads
the unemployed to spend more time searching for a job. ​
Diff: 2 ​

​
75.

Why would a firm pay efficiency wages? ​

Answer:

An efficiency wage is a wage that is higher than the market wage. Firms pay efficiency wages to raise productivity. Studies show that
workers are motivated to work harder if they are paid higher wages. Put differently, a firm does not monitor workers as closely in
order to get them to be more productive. The higher wage motivates them to be productive. ​
Diff: 2 ​

​
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ​
76.

The broadest measure of the price level that includes all final goods and services is ​
A.

the producer price index ​. ​ ​

B.

the consumer price index. ​

C.

the GDP deflator.

D.

the wholesale price index. ​

Answer:

C​
Diff: 1 ​

​
77.

The most widely used measure of inflation is based on which of the following price indices? ​
A.

the producer price index ​ ​

B.

the consumer price index ​

C.

the GDP deflator

D.

the wholesale price index ​

Answer:

B​
Diff: 1 ​

​
 78.

The CPI is also referred to as ​

A.

the GDP deflator.

B.

the inflation-consumption index. ​

C.

the cost-of-living index.

D.

the producer price index. ​

Answer:

C​
Diff: 1 ​

​
79.

Which of the following is the smallest portion of the market basket of goods that makes up the CPI? ​
A.

housing

B.

food and beverages ​

C.

transportation

D.

apparel ​
Answer:

D​
Diff: 1 ​

​
Table 8-1

CPI
Year
(1982-1984 = 100)
2008 175
2009 180

80.

Refer to Table 8-1. Suppose that the data in the table above reflect price levels in the economy. What is the inflation rate between 2008
and 2009? ​
A.

2.9%

B.

3.5%

C.

4.6%

D.

5%

E.

7.5% ​
Answer:

A​
Diff: 3 ​
 ​
Table 8-2

CPI
Year
(1982-1984 =100)
2008 100
2009 120

81.

Refer to Table 8-2. Suppose that the data in the table above reflect the price levels in the economy. What is the inflation rate in
between 2008 and 2009? ​
A.

2%

B.

5%

C.

10%

D.

12%

E.

20% ​
Answer:

E​
Diff: 2 ​

​
Table 8-3

CPI
Year
(1982-1984 =100)
2008 100
2009 113

82.

Refer to Table 8-3. Suppose that the data in the table above reflect the price levels in the economy. Given that data, we can say that the
cost of living rose by ________ between 2008 and 2009? ​
A.

2%

B.

5%

C.

8%

D.

11%

E.

13% ​
Answer:

E​
Diff: 2 ​

​
83.

Monthly expenditures for a family of 4 in 2008 averaged $1,400. In 2009, the cost of the same purchases was $1,500. If 2008 is the
base year, what was the CPI in 2009? ​
A.

110
 B.

107

C.

100

D.

93 ​
Answer:

B​
Diff: 2 ​

​
84.

If the CPI changes from 125 to 120 between 2008 and 2009, how did prices change between 2008 and 2009? ​
A.

Prices increased by 5%.

B.

Prices decreased by 5% ​
C.

Prices increased by 25%.

D.

Prices decreased by 4%. ​

Answer:

D​
Diff: 3 ​

​
85.

Which of the following describes the accuracy of the Consumer Price Index? ​
A.

Changes in the CPI accurately reflect the true rate of inflation. ​

B.

Changes in the CPI understate the true rate of inflation. ​

C.

Changes in the CPI overstate the true rate of inflation. ​

D.

Changes in the CPI are unrelated to the true rate of inflation. ​

Answer:

C​
Diff: 2 ​

​
86.

If the CPI rises from 206.7 to 212.7 between two consecutive years, by how much has the cost of living changed between these two
years? ​
A.

The cost of living has increased by 6%.

B.

The cost of living has increased by 2.9%. ​

C.

The cost of living has increased by 12.7%.

D.

The cost of living has decreased by 6%. ​

Answer:
B​
Diff: 3 ​

​
87.

If consumers purchase fewer of those products that increase most in price and more of those products that decrease in price as
compared to the CPI basket, then ​
A.

changes in the CPI accurately reflect the true rate of inflation. ​

B.

changes in the CPI understate the true rate of inflation. ​

C.

changes in the CPI overstate the true rate of inflation. ​

D.

changes in the CPI are unrelated to the true rate of inflation. ​

Answer:

C​
Diff: 2 ​

​
88.

Most economists believe that biases cause changes in the CPI to overstate the inflation rate by ​
A.

0.1%.

B.

0.2%.

C.

0.4%.

D.

0.5%.

E.

0.9%. ​
Answer:

D​
Diff: 1 ​

​
89.

The formula for calculating the CPI is ​

A.

(Expenditures in the current year/Expenditures in the base year) × 100. ​

B.

(Expenditures in the current year × Expenditures in the base year)/100. ​

C.

(Expenditures in the base year/Expenditures in the current year). ​

D.

(Expenditures in the base year × 100)/(Expenditures in the current year). ​

Answer:

A​
Diff: 1 ​

​
90.

When the price of gasoline rises, some consumers begin riding their bikes more frequently or riding the bus instead of driving their
cars. The fact that the CPI does not fully account for such changes in consumer behavior is called ​
A.
outlet bias.

B.

increase in quality bias. ​

C.

substitution bias.

D.

discrimination bias. ​
Answer:

C​
Diff: 1 ​

​
91.

The base period for CPI calculations is generally 1982-84. In 2005, 50% of households accessed the Internet through a broadband
connection that would not have existed in the 1980s. This potential for bias in the CPI is referred to as ________ bias and results in
________. ​
A.

outlet bias; the CPI underestimating the true change in the cost of living ​
B.

new product; the CPI overestimating the true change in the cost of living ​
C.

outlet bias; the CPI overestimating the true change in the cost of living ​
D.

net product; the CPI underestimating the true change in the cost of living ​
Answer:

B​
Diff: 2 ​

​
92.

What is outlet bias? ​

A.

the tendency for households to spend more money over time ​

B.

the tendency for households to spend their money at discount stores as prices rise ​
C.

the tendency for the quality of products to improve over time even though the CPI does not measure changes in quality ​
D.

the tendency for consumers to purchase newer, more technologically advanced products even though they have higher prices ​
Answer:

B​
Diff: 1 ​

​
93.

In 1986, an Apple IIe computer with 65 kilobytes of memory cost around $1,500. Today, a $1,500 iMac computer (also made by
Apple) comes with 4 gigabytes of memory. This illustrates the potential for what kind of bias in CPI calculations? ​
A.

new product bias

B.

increase in quality bias ​

C.

substitution bias

D.

outlet bias ​
Answer:
B​
Diff: 1 ​

​
Table 8-4

Expenditure
(on base year
Expenditure Price quantities)
Product Quantity (2004) Price (2004) (2004) (2009) (2009)
Computers 1 $1,200 $1,200 $900 $900
Books 10 25 250 30 300
Burgers 50 3 150 4 200
Total $1,600 $1,400

​
94.

Refer to Table 8-4. Suppose an economy has only three goods and the typical family purchases the amounts given in the table above.
If 2004 is the base year, then what is the CPI for 2009? ​
A.

14.3

B.

87.5

C.

114.3

D.

160 ​
Answer:

B​
Diff: 3 ​

​
Table 8-5

Expenditure (on
base year
Price Expenditure Price quantities)
Product Quantity (2000) (2000) (2000) (2008) (2008)
Hair cuts 6 $50 $300 $70 $420
Backpacks 4 25 100 30 120
Tacos 100 1 100 5 500
Total $500 $1,040

​
95.

Refer to Table 8-5. Suppose an economy has only three goods and the typical family purchases the amounts given in the table above.
If 2000 is the base year, then what is the CPI for 2008? ​
A.

40.08

B.

100

C.

180

D.

208 ​
Answer:

D​
Diff: 2 ​
 ​
96.

The PPI is the ​

A.

price parity index.

B.

prime producer index. ​

C.

producer price index.

D.

production performance indicator. ​

Answer:

C​
Diff: 1 ​

​
97.

What does the PPI measure? ​

A.

the average change in the prices paid for all goods produced in the economy over a given year ​
B.

the average of the prices received by producers of goods and services at all stages of the production process ​
C.

the level of production of goods and services generated in the economy in a given year ​
D.

the difference between the prices consumers pay for goods and services and the prices producers pay for goods and services ​
Answer:

B​
Diff: 1 ​

​
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. ​
98.

The inflation rate measures the percentage increase in the price level from one year to the next. ​
Answer:

​
True

False ​
Diff: 1 ​

​
99.

If the CPI falls from 142 to 140 between two consecutive years, this implies that prices fell by 2% between those two years. ​
Answer:

True

​
False ​
Diff: 1 ​

​
100.

The producer price index tracks the prices firms receive for goods and services at all stages of production. ​
Answer:
​
True

False ​
Diff: 1 ​

​
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. ​
101.

List three different price indices and explain how they differ in terms of the market basket on which they are based. ​
Answer:

Three examples of price indices are the GDP deflator, the consumer price index, and the producer price index. All three differ by the
kinds of goods that are contained in the market basket that is used to calculate the average level of prices. The GDP deflator is based
on the average price of all final goods and services produced. The consumer price index is based on the average price of 211
goods/services purchased by the typical urban family of four. The producer price index is based on the prices received by producers of
goods and services at all stages of the production process. ​
Diff: 2 ​

​
102.

Explain how the CPI is constructed. ​

Answer:

The Bureau of Labor statistics surveys 30,000 households to determine their spending habits and to construct a listing or market
basket of these goods. The survey is also used to determine the importance of the items in the consumer's budget. Each month the BLS
collects the prices of the goods in the market basket from 23,000 stores. A weighted average is taken of those prices, with the more
important items receiving higher weights. A base year is chosen and the CPI is set to 100 in the base year. In every other year, the CPI
is calculated as the ratio of the cost of the market basket in that year, divided by the cost of the market basket in the base year, times
100. ​
Diff: 2 ​

​
Table 8-6

Base Year Price

Product Quantity (2001) Price (2009) Price (2010)
Burritos 10 $1.00 $1.50 $1.75
Flashlights 15 5.00 7.00 6.75
Golf balls 8 2.00 3.00 3.50

103.

Refer to Table 8-6. Consider a simple economy that produces only three products: burritos, flashlights, and golf balls. Use the
information in the table to calculate the inflation rate for 2010, as measured by the consumer price index. ​
Answer:

Total expenditures for 2001 = (10 × $1.00) + (15 × $5.00) + (8 × $2.00) = $101.00.
Total expenditures for 2009 = (10 × $1.50) + (15 × $7.00) + (8 × $3.00) = $144.00.
Total expenditures for 2010 = (10 × $1.75) + (15 × $6.75) + (8 × $3.50) = $146.75.

The CPI for 2009 = [($144.00/$101.00) × 100] = 142.57

The CPI for 2010 = [($146.75/$101.00) × 100] = 145.30.
So, the inflation rate for 2010 = [((145.30 − 142.57)/142.57) × 100)] =1.9%. ​
Diff: 3 ​

​
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ​
104.

The CPI in 1990 was 131, and the CPI in 2008 was 215. If you earned a salary of $40,000 in 1990, what would be a salary with
equivalent purchasing power in 2008? ​
A.

$52,400

B.

$65,649

C.

$86,000

D.
$105,649 ​
Answer:

B​
Diff: 3 ​

​
105.

If your nominal wage rises more slowly than the price level, we can say your real wage has ________ and the purchasing power of a
dollar has ________. ​
A.

fallen; fallen

B.

fallen; risen

C.

risen; risen

D.

risen; fallen ​
Answer:

A​
Diff: 2 ​

​
Table 8-7

Nominal Average CPI

Year
Hourly Earnings (1982-1984 =100)
2007 $10 100
2008 10 105
2009 12 110

106.

Refer to Table 8-7. Looking at the table above, real wages ________ from 2007 to 2008, and real wages ________ from 2008 to 2009.

A.

rose; rose

B.

rose; fell

C.

fell; rose

D.

fell; fell ​
Answer:

C​
Diff: 2 ​

​
Table 8-8

Nominal Average CPI

Year
Hourly Earnings (1982-1984 =100)
2004 $10 188.9
2005 11 195.3
2006 13 201.6

107.

Refer to Table 8-8. Looking at the table above, real average hourly earnings in 2005 were ​
A.
$3.67.

B.

$5.63.

C.

$10.24.

D.

$11.37. ​
Answer:

B​
Diff: 2 ​

​
108.

Refer to Table 8-8. Looking at the table above, real average hourly earnings between 2005 and 2006 changed by ​
A.

1.2%.

B.

4.5%.

C.

9.9%.

D.

14.5%. ​
Answer:

D​
Diff: 3 ​

​
109.

Between 2008 and 2009, the CPI of a small nation rose from 182 to 185. If household incomes rose by 3% during that period of time,
which of the following is true? ​
A.

The purchasing power of household income rose between 2008 and 2009. ​
B.

The purchasing power of household income fell between 2008 and 2009. ​
C.

The purchasing power of household income remained constant between 2008 and 2009. ​
D.

The CPI cannot be used to determine how the purchasing power of household income changes over time. ​
Answer:

A​
Diff: 2 ​

​
Table 8-9

Nominal Average Hourly CPI

Year
Earnings (1982-1984 =100)
2007 $10 100
2008 10 105
2009 12 117

110.

Refer to Table 8-9. Looking at the table above, what is the rate of growth of real average hourly earnings from 2008 to 2009? ​
A.

7.7%
 B.

6.25%

C.

4%

D.

-4% ​
Answer:

A​
Diff: 3 ​

​
Table 8-10

Nominal Average Hourly CPI

Year
Earnings (1982-1984 =100)
2007 $10 100
2008 10 105
2009 12 110

111.

Refer to Table 8-10. Looking at the table above, what is the approximate rate of growth of real average hourly earnings from 2007 to
2008? ​
A.

15%

B.

4.4%

C.

-1.5%

D.

-4.8% ​
Answer:

D​
Diff: 3 ​

​
112.

Refer to Table 8-10. Looking at the table above, what is the rate of growth of the average price level from 2007 to 2008? ​
A.

1%

B.

2%

C.

3%

D.

4%

E.

5% ​
Answer:

E​
Diff: 2 ​

​
113.
Refer to Table 8-10. Looking at the table above, what is the rate of growth of the average price level from 2008 to 2009? ​
A.

1%

B.

2%

C.

3.5%

D.

4.76%

E.

5.25% ​
Answer:

D​
Diff: 2 ​

​
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. ​
114.

To obtain real average hourly earnings, nominal average hourly earnings are multiplied by the CPI. ​
Answer:

True

​
False ​
Diff: 1 ​

​
115.

The CPI in 2008 was 217, while the CPI in 1980 was 82. If you had $5,000 in 1980, its equivalent purchasing power in 2008 would be
$10,850. ​
Answer:

True

​
False ​
Diff: 2 ​

​
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. ​
Table 8-11

Nominal Average Hourly CPI

Year
Earnings (1982-1984 =100)
2007 $10 100
2008 11 105
2009 12 110

116.

Refer to Table 8-11. Using the above table, calculate real average hourly earnings for 2007, 2008, and 2009. Calculate the rate of
growth of real average hourly earnings from 2008 to 2009. ​
Answer:

Real average hourly earnings in 2007 are × 100 = $10.

Real average hourly earnings in 2008 are × 100 = $10.48

Real average hourly earnings in 2009 are × 100 = $10.91.

The rate of growth of real average hourly earnings from 2008 to 2009 is × 100 = 4.103%. ​
Diff: 3 ​
 ​
Table 8-12

Nominal CPI
Year
Minimum Wage (1982-1984 =100)
1974 $2.00 49.3
2008 6.55 215.3

117.

Refer to Table 8-12. The table above lists the actual minimum wage and CPI in 1974 and in 2008. Using the above table, calculate the
real minimum wage for 1974 and 2008. Calculate the rate of growth of the real minimum wage from 1974 to 2008. Are workers better
off in terms of the purchasing power of a dollar in 1974 or 2008? Explain why. ​
Answer:

The real minimum wage in 1974 is × 100 = $4.06.

The real minimum wage in 2008 is × 100 = $3.04

The rate of growth of the real wage from 1974 to 2008 is × 100 = -25%

Workers who earned the minimum wage were better off in 1974 as compared to 2008. The value of the real minimum wage was
higher in 1974. It has declined by 25% from 1974 to 2008. ​
Diff: 3 ​

​
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ​
118.

During a deflationary period, ​

A.

the nominal interest rate is less than the real interest rate. ​ ​​
B.

the real interest rate is less than the nominal interest rate. ​
C.

the price level rises. ​

D.

the nominal interest rate does not change. ​

Answer:

A​
Diff: 3 ​

​
119.

The real rate of interest is ​

A.

the nominal interest rate plus the inflation rate. ​

B.

the nominal interest rate minus the inflation rate. ​

C.

the interest rate determined by the supply and demand in the money market. ​
D.

the nominal interest rate. ​

Answer:

B​
Diff: 1 ​

​
120.

If the nominal interest rate is 6% and the inflation rate is 9%, then the real interest rate is ​
A.
-3%.

B.

3%.

C.

6.67%.

D.

15%. ​
Answer:

A​
Diff: 2 ​

​
121.

If you want to earn a real interest rate of 3% on money you lend, and you expect that inflation will be 2%, what nominal rate of
interest will you charge? ​
A.

1%

B.

5%

C.

6%

D.

9% ​
Answer:

B​
Diff: 2 ​

​
122.

If the nominal interest rate is 6% and the inflation rate is 2% then the real interest rate is ​
A.

8%.

B.

4%.

C.

3%.

D.

2%.

E.

1%. ​
Answer:

B​
Diff: 2 ​

​
123.

Deflation occurs when ​

A.

there is a sustained increase in the price level. ​ ​​

B.
there is a one-time increase in the price level. ​
C.

there is a decline in the price level. ​

D.

there is a decrease in the expected rate of inflation. ​

Answer:

C​
Diff: 1 ​

​
124.

You lend $5,000 to a friend for one year at a nominal interest rate of 10%. The CPI over that year rises from 180 to 190. What is the
real rate of interest you will earn? ​
A.

0%

B.

4.4%

C.

5.5%

D.

5.8% ​
Answer:

B​
Diff: 3 ​

​
125.

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. If inflation over the year is 2%, what is the real interest
rate you are paying? ​
A.

2%

B.

2.5%

C.

3%

D.

5% ​
Answer:

C​
Diff: 2 ​

​
126.

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year rises from 180 to 200. What is
the real interest rate you are paying? ​
A.

15%

B.

5%

C.

-1.1%

D.

-6.1% ​
 Answer:

D​
Diff: 3 ​

​
127.

The nominal interest rate will be less than the real interest rate when ​
A.

the rate of inflation is positive but decreasing.

B.

the rate of inflation is positive and increasing. ​

C.

the rate of inflation is negative.

D.

the real interest rate is negative. ​

Answer:

C​
Diff: 3 ​

​
128.

You agree to lend $1,000 for one year at a nominal interest rate of 10%. You anticipate that inflation will be 4% over that year. If
inflation is instead 3% over that year, which of the following is true? ​
A.

The real interest rate you earn on your money is lower than you expected. ​
B.

The purchasing power of the money that will be repaid to you will be lower than you expected. ​
C.

The person who borrowed the $1,000 will be worse off as a result of the unanticipated decrease in inflation. ​
D.

The real interest rate you earn on your money will be negative. ​
Answer:

C​
Diff: 2 ​

​
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. ​
129.

The nominal interest rate minus the inflation rate equals the real interest rate. ​
Answer:

​
True

False ​
Diff: 2 ​

​
130.

If inflation is higher than expected, this helps borrowers (by reducing the real interest rate they pay) and hurts lenders (by reducing the
real interest rate they receive). ​
Answer:

​
True

False ​
Diff: 2 ​
 ​
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. ​
131.

What is the difference between the nominal interest rate and the real interest rate? ​ ​​
Answer:

The nominal interest rate is the stated interest rate on a loan, while the real interest rate is the nominal interest rate minus the inflation
rate. ​
Diff: 1 ​

​
132.

Suppose you obtain a fixed rate mortgage during a period of relatively high inflation. During the next ten years, inflation falls. Are
you a winner or a loser due to inflation? Explain why. ​ ​ ​​
Answer:

You would be a loser under this scenario. Your mortgage rate is the sum of the real rate of interest plus the amount of inflation that
was expected over the life of the mortgage. When inflation is high, people's expectations of future inflation are high. In those
circumstances, your fixed mortgage rate contains a high expected-inflation premium. Therefore, as inflation falls, the real rate of
interest on your mortgage increases. ​
Diff: 3 ​

​
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ​
133.

Which of the following individuals would be most negatively affected by anticipated inflation? ​
A.

a retired railroad engineer who receives a fixed income payment every month ​
B.

a union contractor whose pay is adjusted based on changes in the CPI ​

C.

a full-time employee at a pizza parlor who makes more than the minimum wage ​
D.

a student who borrows $10,000 at a nominal interest rate of 5% to finance educational expenses ​
Answer:

A​
Diff: 2 ​

​
134.

If inflation is completely anticipated, ​

A.

no one loses in the economy.

B.

borrowers lose in the economy. ​

C.

lenders lose in the economy.

D.

firms lose because they incur menu costs. ​

Answer:

D​
Diff: 2 ​

​
135.

If inflation increases unexpectedly, then ​

A.

borrowers pay a higher real interest rate than they expected. ​ ​​

B.
lenders receive a lower real interest rate than they expected. ​
C.

lenders gain and borrowers gain. ​

D.

neither borrowers nor lenders lose. ​

Answer:

B​
Diff: 2 ​

​
136.

Which of the following do not suffer the costs of inflation? ​

A.

persons on fixed incomes ​

B.

persons whose incomes rise more rapidly than inflation ​

C.

firms that have to devote more time and labor to raising prices ​
D.

an investor that has to pay higher taxes because of the inflation ​

Answer:

B​
Diff: 2 ​

​
137.

Inflation that is ________ than what is expected benefits ________ and hurts ________. ​
A.

less; lenders; borrowers

B.

less; borrowers; lenders ​

C.

greater; lenders; borrowers

D.

greater; lenders; no one ​

Answer:

A​
Diff: 2 ​

​
138.

The costs to firms of changing prices are called ​

A.

redistribution costs.

B.

menu costs. ​
C.

anticipation costs.

D.

money illusion costs. ​

Answer:

B​
Diff: 1 ​
 ​
139.

What are menu costs? ​

A.

the full list of a firm's costs of production ​

B.

the costs to a firm of changing prices ​

C.

the cost to a household of borrowing money when there is deflation ​

D.

the opportunity cost of dining in a restaurant instead of at home ​

Answer:

B​
Diff: 1 ​

​
140.

Which of the following is not a cost posed by inflation? ​

A.

Inflation reduces the affordability of goods and services to the average consumer. ​
B.

The money that consumers and firms hold loses its purchasing power. ​
C.

Firms must pay for changing prices on products and printing new catalogs. ​
D.

Banks can lose if they under predict inflation and charge an interest rate that does not completely compensate for inflation. ​
Answer:

A​
Diff: 2 ​

​
141.

The deflation of the 1930s impacted the U.S. economy because it led some consumers to ________ and because it ________. ​
A.

postpone purchases while they waited for prices to fall even lower; increased the burden on borrowers. ​
B.

demand higher wages in anticipation of prices eventually rising again; increased manufacturing since firms could afford to hire more
labor. ​
C.

borrow more money since money was now cheap; reduced the amount of money consumers would have to pay back on their
outstanding loans. ​
D.

increase purchases to take advantage of the falling prices; increased the burden on lenders. ​
Answer:

A​
Diff: 2 ​

​
142.

The recession of 2007-2009 had different effects on various sectors of the economy. In April 2009, the overall unemployment rate in
the United States was 8.6 percent. Which of the following sectors of the U.S. economy had a much lower unemployment rate than 8.6
percent in April 2009? ​
A.

education and health services

B.

leisure and hospitality ​

C.

construction
 D.

manufacturing ​
Answer:

A​
Diff: 2 ​

​
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. ​
143.

The problem with inflation is that as prices rise, consumers can no longer afford to buy as many goods and services. ​
Answer:

True

​
False ​
Diff: 1 ​

​
144.

Inflation redistributes income to a greater extent when the inflation is unanticipated compared to when the inflation is anticipated. ​
Answer:

​
True

False ​
Diff: 1 ​

​
145.

There are no costs to inflation if it is fully anticipated. ​

Answer:

True

​
False ​
Diff: 2 ​

​
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. ​
146.

Explain why you would rather be a borrower during a period of unexpected rising inflation, and a lender during a period of
unexpected declining inflation. ​
Answer:

The nominal interest rate includes a charge to compensate the lender for the loss in the purchasing power due to inflation. If inflation
unexpectedly rises, the lender does not get compensated enough for the loss in purchasing power. Likewise the borrower pays too little
to compensate the lender for inflation. So it is better to be a borrower in times of unexpected rising inflation.

​
When inflation unexpectedly falls, then the lender gets compensated too much for inflation. The borrower likewise pays too
much for inflation. So it is better to be a lender rather than a borrower during a period of unexpected declining inflation. ​
Diff: 3 ​

​
147.

Describe how a lender can lose during inflation if the inflation is unanticipated and the loan is a fixed-interest-rate loan. How would a
variable-interest-rate loan (one that adjusts over the contract period) eliminate these loses? ​
Answer:

Lenders require compensation for inflation when charging interest. The nominal interest rate (also called the market interest rate) they
charge equals the real rate of interest plus the expected inflation over the loan contract period. The interest rate they charge is
determined at the beginning of the loan period, so the charge for inflation is a prediction of what the lender thinks inflation will be
over the contract period. If the loan has a fixed rate, the interest rate does not change over the period of the loan. If the lender under-
predicts inflation, then the lender will not be compensated enough for the loss in purchasing power due to inflation. The lender will
lose to the extent of the under-prediction.
If the loan is a variable-rate loan, the interest rate can be adjusted upwards if the lender under-predicts inflation. This can lower the
loss to the lender. The variable rate automatically adjusts for mistakes in predicting inflation. The more frequently the rate can be
adjusted, the less the lender's losses. ​
Diff: 3 ​
Chapter 8 : Unemployment and Inflation

​
1.

The Seattle Post-Intelligencer faced growing competition from Internet news sites and its sales and profits declined. In response it
________ the number of persons it employed and this ________ the total number of persons unemployed in the economy. ​
A.

decreased; increased ​
B.

decreased; decreased ​
C.

increased; decreased ​
D.

increased; increased ​
Answer:

A​
Diff: 1 ​

​
2.

The economy has gone into a recession. You have majored in computer science and, because of the recession, have difficulty in
finding a job. Should you go back to school and get a second major? ​
A.

Yes, the recession will ensure that you will never find a job as a programmer. ​
B.

Yes, the recession will lower income in my field permanently. ​

C.

No, the recession will most likely be short-lived and I can get a job after it is over. ​
D.

No, the recession will have no impact on my ability to get a job or my future income. ​
Answer:

C​
Diff: 2 ​

​
3.

The unemployment rate is an important economic statistic that can tell us about the health of the economy. If the unemployment rate
turns out to be high or higher than anticipated, we would expect ​
A.

it is more likely that an incumbent president will be re-elected. ​

B.

that stock prices are more likely to fall. ​

C.

that jobs are less difficult to find. ​

D.

that investors will be more optimistic about the economy. ​

Answer:

B​
Diff: 1 ​

​
4.

The Bureau of Labor Statistics would categorize a person as ________ if they were temporarily away from their job because they
were ill. ​
A.

employed ​
B.
unemployed ​
C.

a discouraged worker ​
D.

out of the labor force ​

Answer:

A​
Diff: 1 ​

​
5.

The Bureau of Labor Statistics would categorize a retiree who is not working as ​
A.

employed. ​
B.

unemployed. ​
C.

a discouraged worker. ​
D.

out of the labor force. ​

Answer:

D​
Diff: 1 ​

​
6.

The labor force equals the number of people ​

A.

employed. ​
B.

unemployed. ​
C.

employed plus unemployed. ​

D.

in the working-age population. ​

Answer:

C​
Diff: 1 ​

​
Table 8-1

Total population 20,000

Working-age population 15,000
Employment 1,000
Unemployment 100

Consider the data above for a simple economy.

​
7.

Refer to Table 8-1. The unemployment rate for this simple economy equals ​
A.

(100/1,000) × 100. ​
B.

(100/1,100) × 100. ​
C.

(100/15,000) × 100. ​
D.
(100/20,000) × 100. ​
Answer:

B​
Diff: 2 ​

​
8.

Refer to Table 8-1. The labor force participation rate for this simple economy equals ​
A.

(1,000/1,100) × 100. ​
B.

(1,000/15,000) × 100. ​
C.

(1,100/15,000) × 100. ​
D.

(1,100/20,000) × 100. ​
Answer:

C​
Diff: 2 ​

​
9.

Suppose the working-age population of a fictional economy falls into the following categories: 90 are retired or homemakers; 60 have
full-time employment; 20 have part-time employment; 20 do not have employment, but are actively looking for employment; and 10
would like employment but do not have employment and are not actively looking for employment. The official unemployment rate as
calculated by the U.S. Bureau of Labor would equal ​
A.

(20/60) × 100. ​
B.

(20/80) × 100. ​
C.

(30/80) × 100. ​
D.

(20/100) × 100. ​
Answer:

D​
Diff: 2 ​

​
10.

Suppose the labor force stays constant, and the working-age population stays constant, but a greater number of persons who were
unemployed become employed. The labor force participation rate will ​
A.

increase. ​
B.

decrease. ​
C.

remain constant. ​
D.

not change in a way that can be predicted. ​

Answer:

C​
Diff: 2 ​

​
11.

The unemployment rate equals the number of unemployed divided by the ________, all times 100. ​
A.
number of employed ​
B.

labor force ​
C.

working-age population ​
D.

total population ​
Answer:

B​
Diff: 1 ​

​
12.

Suppose the government launches a successful advertising campaign that convinces workers with high school degrees to quit their
jobs and become full time college students. This would cause ​
A.

the unemployment rate to decrease. ​

B.

the labor force participation rate to decrease. ​

C.

the number of discouraged workers to increase. ​

D.

no change in the unemployment rate. ​

Answer:

B​
Diff: 3 ​

​
13.

Someone who is available for work but has not actively looked for work in the previous four weeks would be classified as ​
A.

employed. ​
B.

unemployed. ​
C.

not in the labor force. ​

D.

not in the working-age population. ​

Answer:

C​
Diff: 1 ​

​
14.

The labor force participation rate equals the ​

A.

(number of employed divided by the labor force) × 100. ​

B.

(labor force divided by the number of people not in the labor force) × 100. ​
C.

(labor force divided by working-age population) × 100. ​

D.

(labor force divided by the total population) × 100. ​

Answer:

C​
Diff: 1 ​

​
 15.

Which of the following labor market statistics best indicates the amount of labor that is available to the economy from a given
working-age population? ​
A.

unemployment rate ​
B.

discouraged-worker ratio ​
C.

labor force participation rate ​

D.

the ratio of minimum wage to inflation ​

Answer:

C​
Diff: 1 ​

​
16.

Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to understate the true extent of
joblessness? ​
A.

inflation ​
B.

discouraged workers ​
C.

people employed in the underground economy ​

D.

unemployed persons falsely report themselves to be actively looking for a job ​

Answer:

B​
Diff: 2 ​

​
17.

Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to overstate the true extent of
joblessness? ​
A.

inflation ​
B.

discouraged workers ​
C.

counting people as employed who are working part time, although they would prefer to be working full time ​
D.

unemployed persons falsely report themselves to be actively looking for a job ​

Answer:

D​
Diff: 2 ​

​
18.

Which of the following explains the changes in the U.S. adult male labor force participation rate over the period 1948-2008? ​
A.

more men are joining the military as compared to the past ​

B.

more men are retiring later in life as compared to the past ​

C.

fewer men consider themselves discouraged workers as compared to the past ​

D.

younger men are remaining in school longer as compared to the past ​

Answer:
D​
Diff: 1 ​

​
19.

Between the start of the recession in December 2007 and July 2009, total employment in the United States declined by about 6.7
million. Of this decline, males represented about ​
A.

25 percent. ​
B.

35 percent. ​
C.

50 percent. ​
D.

75 percent. ​
Answer:

D​
Diff: 1 ​

​
20.

Employment in industries that fared relatively well during the recession of 2007-2009, such as medical services and education, is
disproportionately ​
A.

Hispanic. ​
B.

white male. ​
C.

female. ​
D.

male. ​
Answer:

C​
Diff: 1 ​

​
21.

Since 1948, the labor force participation rate for adult men has ________ and for adult women has ________. ​
A.

increased; increased ​
B.

increased; decreased ​
C.

decreased; increased ​
D.

decreased; decreased ​
Answer:

C​
Diff: 1 ​

​
22.

Which of the following demographic groups tend to have an unemployment rate above average? ​
A.

white teenagers and Hispanics adults ​

B.

black adults and teenagers ​

C.
black adults and adult women ​
D.

white adults and teenagers ​

Answer:

B​
Diff: 1 ​

​
23.

In the modern U.S. economy, the typical unemployed person stays unemployed for ​
A.

a relatively long time, over a year. ​

B.

a relatively short time, less than six months. ​

C.

for a long time during expansions and short time during recessions. ​
D.

an amount of time that is hard to quantify. ​

Answer:

B​
Diff: 1 ​

​
24.

An advantage of the establishment survey over the household survey of the labor market is that the establishment survey ​
A.

is based on actual payrolls, rather than on unverified answers. ​

B.

includes the number of self-employed persons. ​

C.

includes persons employed at newly opened firms. ​

D.

provides an estimate of the number of persons unemployed. ​

Answer:

A​
Diff: 1 ​

​
25.

An advantage of the household survey over the establishment survey of the labor market is that the household survey ​
A.

is based on actual payrolls, rather than on unverified answers. ​

B.

includes the number of self-employed persons. ​

C.

includes the number of discouraged workers. ​

D.

omits persons employed at newly opened firms. ​

Answer:

B​
Diff: 1 ​

​
26.

Which of the following statements is true about the U.S. economy? ​

A.

Each year, many new jobs are created, but few existing jobs are destroyed, and the unemployed find jobs quickly. ​
 B.

Each year, few new jobs are created, but few existing jobs are destroyed, keeping unemployment low. ​
C.

Each year, many new jobs are created and many existing jobs are destroyed. ​
D.

Each year few jobs are created, and therefore it takes the unemployed a long time to find a new job. ​
Answer:

C​
Diff: 1 ​

​
27.

Counting part-time workers who are looking for full-time work as employed overstates the degree of joblessness in the economy. ​
Answer:

True

​
False ​
Diff: 2 ​

​
28.

In the United States, the typical person who has lost his or her job finds another one in a few months except during severe recessions. ​
Answer:

​
True

False ​
Diff: 1 ​

​
29.

The labor force participation rates of women have rapidly increased since 1948. ​
Answer:

​
True

False ​
Diff: 2 ​

​
30.

Fill in the missing values in the table of data collected in the household survey for December, 1996. The working-age population,
employment, unemployment, and labor force are measured in thousands. Show your work.
Working-age population
Employment
Unemployment
Unemployment rate 5.4%
Labor force 135,113
Labor force participation
rate 67.0%

Answer:

Working-age population 201,661

Employment 127,817
Unemployment 7,296
Unemployment rate 5.4%
Labor force 135,113
Labor force participation
rate 67.0%

Unemployment rate = × 100.

Unemployed = (Labor force × Unemployment rate)/100
(135,113 × 5.4)/100 = 7,296

Labor force = Employed + Unemployed

Employed = Labor Force - Unemployed
Employed = 135,113 - 7,296 = 127,817

Labor force participation rate = × 100.

Labor force = (Working-age population × Labor force participation rate) × 100
Working-age population = (Labor force/Labor force participation rate) × 100
Working-age population= (135,113/67) × 100 =201,661 ​
Diff: 3 ​

​
31.

Fill in the missing values in the table of data collected in the household survey for November, 2009. The working-age population,
employment, unemployment, and labor force are measured in thousands. Show your work.

Working-age population 235,900

Employment
Unemployment
Unemployment rate 9.4%
Labor force
Labor force participation
rate 65.5%

Answer:

Working-age population 235,900

Employment 139,991
Unemployment 14,524
Unemployment rate 9.4%
Labor force 154,515
Labor force participation
rate 65.5%

Labor force participation rate = × 100.

Labor force = (Working-age population × Labor force participation rate)/100
Labor force = (227,204 × 66.1)/100 = 150,182

Unemployment rate = × 100.

Unemployed = (Labor force × Unemployment rate)/100
(150,182 x 5)/100 = 7,509

Labor force = Employed + Unemployed

Employed = Labor force - Unemployed
Employed = 150,182 - 7,509 = 142,673 ​
Diff: 3 ​

​
32.

The Bureau of Labor Statistics counts as employed people who work part-time, but would prefer to work full-time. Suppose the
people who had part-time jobs, but wanted full-time jobs, were counted as unemployed. Explain how the unemployment rate and the
labor force participation rate would change. ​
Answer:

The unemployment rate would increase and the labor force participation rate would stay the same. The number of unemployed would
rise, but the labor force would stay the same. The part-time workers who wanted to be full-time workers would simply go from being
employed to unemployed. With no change in the labor force, the labor force participation rate would not change. ​
Diff: 3 ​

​
33.
The Bureau of Labor Statistics does not count discouraged workers as unemployed. Suppose discouraged workers were counted as
unemployed. Explain how the unemployment rate and the labor force participation rate would change. ​
Answer:

Both the unemployment rate and the labor force participation rate would increase. The number of unemployed would rise, as would
the labor force. The unemployment rate would rise because adding the same number to the numerator and the denominator of a
fraction that is less than one increases the value of the fraction. The labor force participation rate would rise because the labor force
increases with no change in the working-age population. ​
Diff: 3 ​

​
34.

Frictional unemployment is the result of ​

A.

a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. ​
B.

the search process of matching workers with jobs. ​

C.

the ups and downs in inflation. ​

D.

a slowdown in the economy. ​

Answer:

B​
Diff: 1 ​

​
35.

The advice to "keep searching, there are plenty of jobs around here for which you are qualified", would be most appropriate for which
of the following types of unemployment? ​
A.

frictional unemployment ​
B.

structural unemployment ​
C.

cyclical unemployment ​
D.

seasonal unemployment ​
Answer:

A​
Diff: 2 ​

​
36.

A student who just graduated from college but has not found a job would most likely be ​
A.

frictionally unemployed. ​
B.

structurally unemployed. ​
C.

cyclically unemployed. ​
D.

seasonally unemployed. ​
Answer:

A​
Diff: 2 ​

​
37.

Cyclical unemployment is the result of ​

A.
a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. ​
B.

the search process of matching workers with jobs. ​

C.

the ups and downs in inflation. ​

D.

a slowdown in the economy. ​

Answer:

D​
Diff: 1 ​

​
38.

Structural unemployment is the result of ​

A.

a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. ​
B.

the search process of matching workers with jobs. ​

C.

the ups and downs in inflation. ​

D.

a slowdown in the economy. ​

Answer:

A​
Diff: 1 ​

​
39.

According to the text, economists consider full employment to occur when ​

A.

everyone who wants a job has a job. ​

B.

frictional unemployment equals zero. ​

C.

the sum of frictional unemployment and structural unemployment equals zero. ​

D.

the unemployment rate consists of only frictional and structural unemployment. ​

Answer:

D​
Diff: 2 ​

​
40.

If cyclical unemployment is eliminated in the economy, then ​

A.

the economy is considered to be at full employment. ​

B.

the unemployment rate is below the natural rate of unemployment. ​

C.

the unemployment rate is above the natural rate of unemployment. ​

D.

the economy is at less than full employment. ​

Answer:

A​
Diff: 2 ​

​
 41.

Full employment is not considered to be zero unemployment, because ​

A.

some cyclical unemployment always exists. ​

B.

some people do not want a job. ​

C.

there are not enough jobs for everyone who wants one. ​
D.

people do not find jobs instantaneously. ​

Answer:

D​
Diff: 2 ​

​
42.

The natural rate of unemployment is the amount of unemployment ​

A.

associated with the business cycle. ​

B.

equal to frictional plus structural unemployment. ​

C.

that exists when the economy goes into recession. ​

D.

that exists when the economy is in an expansion. ​

Answer:

A​
Diff: 2 ​

​
43.

During the Great Depression, cyclical unemployment increased as the recession continued. This increase in cyclical unemployment ​
A.

increased the natural rate of unemployment. ​

B.

decreased the natural rate of unemployment. ​

C.

had no effect on the natural rate of unemployment. ​

D.

could have increased or decreased the natural rate of unemployment. ​

Answer:

C​
Diff: 2 ​

​
44.

A lumberjack loses his job because timber cutting restrictions were imposed by the EPA to protect the spotted owl habitat. This
lumberjack would be ​
A.

frictionally unemployed. ​
B.

cyclically unemployed. ​
C.

structurally unemployed. ​
D.

seasonally unemployed. ​
Answer:

C​
 Diff: 2 ​

​
45.

If you have trouble finding a job because of a slowdown in the overall economy, we would say that you are ​
A.

frictionally unemployed. ​
B.

structurally unemployed. ​
C.

cyclically unemployed. ​
D.

seasonally unemployed. ​
Answer:

C​
Diff: 1 ​

​
46.

The advice to "retrain" would be most appropriate for which of the following types of unemployment? ​
A.

frictional unemployment ​
B.

structural unemployment ​
C.

cyclical unemployment ​
D.

core unemployment ​
Answer:

B​
Diff: 2 ​

​
47.

Most of the unemployment that occurred during the Great Depression was ​
A.

frictional unemployment. ​
B.

structural unemployment. ​
C.

cyclical unemployment. ​
D.

core unemployment. ​
Answer:

C​
Diff: 1 ​

​
48.

If the federal government implements programs so that the unemployed are more quickly matched with jobs, then ​
A.

the natural rate of unemployment will increase. ​

B.

the natural rate of unemployment will decrease. ​

C.

the natural rate of unemployment will not change. ​

D.
the natural rate of unemployment could either increase or decrease. ​
Answer:

B​
Diff: 3 ​

​
49.

Eliminating frictional unemployment would be good for the economy. ​

Answer:

True

​
False ​
Diff: 2 ​

​
50.

Unemployment caused by a business cycle recession is called cyclical unemployment. ​

Answer:

​
True

False ​
Diff: 1 ​

​
51.

The natural rate of unemployment consists of frictional unemployment plus structural unemployment. ​
Answer:

​
True

False ​
Diff: 1 ​

​
52.

To understand why someone cannot get a job, it helps to know the three types of unemployment. List the three types of
unemployment and explain what causes each type. What advice for finding a job would be appropriate for someone in each type of
unemployment? ​
Answer:

Frictional unemployment is the unemployment that arises from the process of matching workers with jobs. These workers are
qualified; they just need to search for a job. The advice for finding a job would be to keep searching, because there are jobs available
for which they are qualified.

​
Structural unemployment is unemployment arising from a persistent mismatch between the skills and characteristics of
workers and the requirements of the jobs. The advice for finding a job would be to retrain so that they can match up with the
requirements of current jobs.

​
Cyclical unemployment is unemployment caused by a business cycle recession. The advice for finding a job would be to
hang in there and continue searching, but realize that there are less jobs available than the number of applicants. The cyclically
unemployed person could perhaps get a temporary job until the economy picks up, or perhaps consider continuing his or her education
while the business cycle slowdown lasts. ​
Diff: 3 ​

​
53.

The reasons why someone cannot get a job are similar to the reasons why someone cannot get a date. Using the ideas of frictionally
unemployed, structurally unemployed, and cyclically unemployed, describe and explain how a student at your university might be
frictionally "undated," structurally "undated," and cyclically "undated." ​
Answer:

The frictionally "undated" student does not have a date because of the search process of matching up people. It is an information
search problem. There are lots of other students who would go out with the student, but it takes time to find them.
 ​
The structurally "undated" student does not match up with the characteristics of the other students looking for dates. Perhaps
the structurally "undated" student is considerably older, from another region or country, or just has different preferences.
​
The cyclically "undated" student does not have a date because there are not many dates to be had there is a recession in
dates. This could be during final exams when most students do not date. ​
Diff: 3 ​

​
54.

A central concept in macroeconomics is the idea of the natural rate of unemployment. Why does it make sense to define full
employment to occur when the unemployment rate equals the natural rate of unemployment, instead of when the unemployment rate
equals zero? Elaborate and explain carefully. ​
Answer:

With a growing, dynamic economy where businesses expand and contract, technological change regularly occurs, and people enter
and leave the labor market on a continual basis, zero percent unemployment is not possible nor desirable. Frictional unemployment
and structural unemployment are normal parts of a healthy, growing economy. With frictional unemployment, people and firms have
to search for one another and that takes time. With structural unemployment, technology changes and international competition cause
people to have to retrain to match up with the evolving job requirements. Economists, consequently, consider full employment to
occur when the only unemployment is frictional unemployment and structural unemployment. ​
Diff: 3 ​

​
55.

An increase in unemployment insurance payments would, in effect, ________ the amount of time spent searching for a job, which
would increase ________ unemployment. ​
A.

increase; cyclical ​
B.

increase; frictional ​
C.

decrease; cyclical ​
D.

decrease; frictional ​
Answer:

B​
Diff: 2 ​

​
56.

Which of the following would increase the unemployment rate? ​

A.

a law making it illegal to work more than 35 hours per week ​

B.

a cut in unemployment compensation ​

C.

an increase in unemployment insurance payments ​

D.

a decrease in the minimum wage ​

Answer:

C​
Diff: 1 ​

​
57.

Which of the following would decrease the unemployment rate? ​

A.

an increase in the minimum wage ​

B.

an increase in the efficiency wage ​

C.

an increase in labor union membership ​

D.
government aid to retrain unemployed workers ​
Answer:

D​
Diff: 1 ​

​
58.

Which of the following policies would reduce structural unemployment? ​

A.

an increase in the minimum wage ​

B.

a job retraining program ​

C.

implementing an unemployment insurance policy ​

D.

building an on-line job database that helps workers find jobs ​

Answer:

B​
Diff: 2 ​

​
59.

Which of the following policies would reduce frictional unemployment? ​

A.

a decrease in the minimum wage ​

B.

a job retraining program ​

C.

implementing an unemployment insurance policy ​

D.

building an on-line job database that helps workers find jobs ​

Answer:

D​
Diff: 2 ​

​
60.

An unemployment insurance program has which of the following effects? ​

A.

It decreases the amount of personal income of the unemployed. ​

B.

It contributes to the severity of a recession or economic downturn. ​

C.

It increases the amount of time spent searching for a job. ​

D.

It lowers the overall unemployment rate. ​

Answer:

C​
Diff: 2 ​

​
61.

The United States and Japan have ________ social insurance programs, and generally have ________ unemployment rates, as
compared to Canada and Western Europe. ​
A.

less generous; lower ​

B.
less generous; greater ​
C.

more generous; lower ​

D.

more generous; greater ​

Answer:

A​
Diff: 2 ​

​
62.

The increased generosity of unemployment insurance programs in Canada as compared to the United States should ​
A.

decrease the duration of unemployment in Canada as compared to the United States. ​

B.

increase the duration of unemployment in Canada as compared to the United States. ​

C.

have no impact on the duration of unemployment in Canada. ​

D.

raise the duration of unemployment in the United States. ​

Answer:

B​
Diff: 3 ​

​
63.

If the minimum wage is set above the market wage, ​

A.

the quantity of labor supplied will be below the quantity of labor demanded. ​
B.

unemployment will rise. ​

C.

highly-skilled workers will have a harder time finding jobs. ​

D.

All of the above are correct. ​

Answer:

B​
Diff: 2 ​

​
64.

Minimum wage laws cause unemployment because the legal minimum wage is set ​
A.

below the market wage, causing labor demand to be greater than labor supply. ​
B.

below the market wage, causing labor demand to be less than labor supply. ​
C.

above the market wage, causing labor demand to be greater than labor supply. ​
D.

above the market wage, causing labor demand to be less than labor supply. ​
E.

too low. ​
Answer:

D​
Diff: 3 ​

​
65.
Suppose that the labor movement has a revival in the United States and the majority of workers join labor unions. As a result we
would expect ​
A.

the labor force participation rate to fall. ​

B.

the unemployment rate to fall. ​

C.

the unemployment rate to rise. ​

D.

no change in the unemployment rate or labor force participation rate. ​

Answer:

C​
Diff: 3 ​

​
66.

If firms pay what are called "efficiency wages," they pay wages that ​
A.

motivate workers to increase their productivity. ​

B.

are lower than average to ensure maximum profit. ​

C.

will eventually lower the unemployment rate. ​

D.

are mandated by the government. ​

Answer:

A​
Diff: 2 ​

​
67.

Efficiency wages cause unemployment because ​

A.

firms pay wages that are below the market wage, causing the quantity of labor demanded to be greater than the quantity of labor
supplied. ​
B.

firms pay wages that are below the market wage, causing the quantity of labor demanded to be less than the quantity of labor supplied.

C.

firms pay wages that are above the market wage, causing the quantity of labor demanded to be greater than the quantity of labor
supplied. ​
D.

firms pay wages that are above the market wage, causing the quantity of labor demanded to be less than the quantity of labor supplied.

Answer:

D​
Diff: 3 ​

​
68.

Costco pays higher wages than Wal-Mart ​

A.

to raise the productivity of Costco workers. ​

B.

because Costco requires higher skilled workers to sell higher-end products. ​

C.

because Costco is unionized and Wal-Mart is not. ​

D.

A and B ​
 Answer:

D​
Diff: 2 ​

​
69.

The unemployment rate in the United States is lower than in Western Europe because the United States has tougher requirements for
the unemployed to receive government payments. ​
Answer:

​
True

False ​
Diff: 2 ​

​
70.

Most economists believe that labor unions significantly increase the overall unemployment rate in the United States. ​
Answer:

True

​
False ​
Diff: 2 ​

​
71.

Efficiency wage is another name for the minimum wage. ​

Answer:

True

​
False ​
Diff: 1 ​

​
72.

Discuss the likely impact of each of the following on the unemployment rate:
a. The length of time workers are eligible to receive unemployment insurance payments is cut in half.
b. The government passes a law making labor unions illegal.
c. The minimum wage is raised by 50 percent.
d. The government funds an Internet site where companies can post job openings at no charge. ​
Answer:

a. The unemployment rate will likely decrease, since decreasing the time people are eligible to receive unemployment benefits will
increase the opportunity cost of searching for a job.
b. The unemployment rate will likely decrease the unemployment rate, since companies will no longer have to pay above-market
union wages and will be able to afford to hire more workers.
c. The unemployment rate will likely increase since an increase in minimum wage will raise the wage above the market wage for some
workers.
d. The unemployment rate will likely decrease, since making information on job openings more available lowers the search involved
in frictional unemployment. ​
Diff: 2 ​

​
73.

What are some reasons why the unemployment rate is typically lower in the United States as compared to Canada and some Western
European countries? ​
Answer:

Workers in Western Europe and Canada are eligible for unemployment insurance benefits for about twice as long as in the United
States. In addition, some of the social insurance programs in these countries are more generous as compared to the United States. This
makes the opportunity cost of job search lower in Canada and Western Europe, so unemployed workers in those regions will search
longer for jobs. This increase in the duration of unemployment raises the unemployment rate in these countries, relative to the United
States. ​
Diff: 3 ​

​
74.

The average price of goods and services in the economy is also known as ​
A.

the price level. ​

B.

the inflation rate. ​

C.

a market basket. ​
D.

the cost of living. ​

Answer:

A​
Diff: 1 ​

​
75.

If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would ​
A.

increase. ​
B.

remain the same. ​

C.

decrease. ​
D.

equal 20%. ​
Answer:

C​
Diff: 3 ​

​
76.

Which of the following is true about the consumer price index? ​

A.

It accounts for people switching to goods whose prices have fallen. ​

B.

It assumes that consumers purchase the same amount of each product in the market basket each month. ​
C.

It frequently updates the price changes of new products added to the market basket, as these have a tendency to fall. ​
D.

It filters out the part of price increases that occurs because of quality improvements in products. ​
Answer:

B​
Diff: 3 ​

​
77.

Which of the following price indices comes closest to measuring the cost of living of the typical household? ​
A.

GDP deflator ​
B.

producer price index ​

C.

consumer price index ​

D.
household price index ​
Answer:

C​
Diff: 1 ​

​
78.

Which of the following would be the best measure of the cost of living? ​
A.

real GDP ​
B.

real GDP per person ​

C.

GDP deflator ​
D.

consumer price index ​

Answer:

D​
Diff: 2 ​

​
79.

The consumer price index is the ​

A.

cost of a market basket of goods and services typically consumed in the base year. ​
B.

cost of a market basket of goods and services typically consumed in the current period. ​
C.

average of the prices of the goods and services purchased by a typical urban family of four. ​
D.

average of the prices of new final goods and services produced in the economy over a period of time. ​
Answer:

C​
Diff: 2 ​

​
Table 8-2

Base Year (2004) 2009

Product Quantity Price Price
Milk 50 $1.20 $1.50
Bread 100 1.00 1.10

80.

Refer to Table 8-2. Assume the market basket for the consumer price index has two products bread and milk with the
following values in 2004 and 2009 for price and quantity: The Consumer Price Index for 2009 equals ​
A.

118. ​
B.

116. ​
C.

86. ​
D.

85. ​
Answer:

B​
Diff: 2 ​
 ​
Table 8-3

Base Year (2004) 2009

Product Quantity Price Price
Cokes 100 $0.50 $0.75
Hamburgers 200 2.00 2.50
CDs 10 20.00 21.00

81.

Refer to Table 8-3. Assume the market basket for the consumer price index has three products Cokes, hamburgers, and CDs
with the following values in 2004 and 2009 for price and quantity: The Consumer Price Index for 2009 equals ​
A.

75. ​
B.

93. ​
C.

108. ​
D.

121. ​
Answer:

D​
Diff: 2 ​

​
Table 8-4

Base Year (2004) 2009

Product Quantity Price Quantity Price
Meat 100 $10 120 $12
Potatoes 200 2 180 3

82.

Refer to Table 8-4. Assume the market basket for the consumer price index has two products meat and potatoes with the
following values in 2004 and 2009 for price and quantity: The Consumer Price Index for 2009 equals ​
A.

125. ​
B.

129. ​
C.

135. ​
D.

141. ​
Answer:

D​
Diff: 3 ​

​
Article Summary

According to a survey by the National Association of Independent Colleges and Universities, for the upcoming academic year
tuition and fees for private American colleges and universities will increase by 4.3 percent, the lowest percentage increase in 37
years. Among the 350 institutions surveyed were schools such as William Jessup University in Rocklin, California that had
decreased tuition, Merrimack College in North Andover, Massachusetts which froze tuition, and Otterbein College in
Westerville, Ohio, whose 3.4 percent tuition increase was its lowest since 1963. According to the association, the average
annual increase in tuition and fees has been 6 percent over the last decade, yet despite the significantly smaller average
increase for the new academic year, the 4.3 percent rate was still higher than the increase in the consumer price index.
According to the College Board, in the 2008-2009 academic year, the average tuition and fees at a private four-year college
totaled $25,143.

Source: Jacques Steinberg, "Tuition Rises at Lowest Rate in Nearly Four Decades, Survey Finds," New York Times, June 29,
2009.

​
83.
Refer to the Article Summary. According to the article, the percent increase in tuition and fees for private American colleges and
universities was still higher than the percent increase in the CPI. The percent increase in the CPI from one year to the next is a
measure of the ​
A.

GDP deflator. ​
B.

unemployment rate. ​
C.

real interest rate. ​

D.

inflation rate. ​
Answer:

D​
Diff: 1 ​

​
84.

Refer to the Article Summary. According to the article, the percent increase in tuition and fees for private American colleges and
universities was still higher than the percent increase in the CPI. The average annual CPI values for 2007 and 2008 were 207.3 and
215.3, respectively. What was the percent increase in the CPI between these two years? ​
A.

0.96 ​
B.

1.04 ​
C.

3.86 ​
D.

8.0 ​
Answer:

C​
Diff: 2 ​

​
85.

A consumer price index of 160 in 1996 with a base year of 1982-1984 would mean that the cost of the market basket ​
A.

equaled $160 in 1996. ​

B.

equaled $160 in 1983. ​

C.

rose 160% from the cost of the market basket in the base year. ​
D.

rose 60% from the cost of the market basket in the base year. ​
Answer:

D​
Diff: 3 ​

​
Table 8-5

Year CPI
2007 207
2008 215

86.

Refer to Table 8-5. Consider the following values of the consumer price index for 2007 and 2008: The inflation rate for 2008 was
equal to ​
A.

215 percent. ​
B.
21.5 percent. ​
C.

8.0 percent. ​
D.

3.9 percent. ​
Answer:

D​
Diff: 2 ​

​
Table 8-6

Year CPI
1996 157
1997 161
1998 163

87.

Refer to Table 8-6. Consider the following values of the consumer price index for 1996, 1997, and 1998: The inflation rate for 1997
was equal to ​
A.

1.2 percent. ​
B.

2.0 percent. ​
C.

2.5 percent. ​
D.

4.0 percent. ​
Answer:

C​
Diff: 2 ​

​
88.

Your grandfather tells you that he earned $5,000/year in his first job in 1949. You earn $35,000/year in your first job in 2009. You
know that average prices have risen steadily since 1949. You earn ​
A.

7 times as much as your grandfather in terms of real income. ​

B.

more than 7 times as much as your grandfather in terms of real income. ​

C.

less than 7 times as much as your grandfather in terms of real income. ​

D.

less than 7 times as much as your grandfather in terms of nominal income. ​

Answer:

C​
Diff: 3 ​

​
89.

If we want to use a measure of inflation that foreshadows price changes before they affect prices at the retail level, we would base our
measure of inflation on ​
A.

the producer price index. ​

B.

the consumer price index. ​

C.

the GDP deflator. ​

D.

the household price index. ​

 Answer:

A​
Diff: 2 ​

​
90.

The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in
response to price, and the CPI does not reflect this and ________ the cost of the market basket. ​
A.

change; over-estimates ​
B.

change; under-estimates ​
C.

do not change; over-estimates ​

D.

do not change; under-estimates ​

Answer:

A​
Diff: 2 ​

​
91.

The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but
________ quality increases. This causes the CPI to ________ the cost of the market basket. ​
A.

also; understate ​
B.

also; overstate ​
C.

not; understate ​
D.

not; overstate ​
Answer:

D​
Diff: 2 ​

​
92.

The "new product bias" in the consumer price index refers to the idea that ​
A.

consumers switch to new goods when the prices of old goods increase, and the CPI overestimates the cost to consumers. ​
B.

consumers switch to old goods when the prices of new goods increase, and the CPI underestimates the cost to consumers. ​
C.

consumers prefer new goods, even if they are worse in quality than old goods, and this causes the CPI to underestimate the cost to
consumers. ​
D.

new products' prices often decrease after their initial introduction, and the CPI is adjusted infrequently and overestimates the cost to
consumers. ​
Answer:

D​
Diff: 2 ​

​
93.

The consumer price index implicitly assumes that the demand curve for each good and service in the representative market basket is ​
A.

positively sloped. ​
B.
negatively sloped. ​
C.

vertical. ​
D.

horizontal. ​
Answer:

C​
Diff: 3 ​

​
94.

Most economists believe that the biases in the consumer price index cause the CPI to overstate the true inflation rate by about ​
A.

one-half to one percentage point. ​

B.

one to two percentage points. ​

C.

one quarter percentage point. ​

D.

one and one-half percentage points. ​

Answer:

A​
Diff: 1 ​

​
95.

Which of the following would be a consequence of substitution bias in the CPI? ​

A.

Social Security payments would not adequately compensate retired workers for inflation. ​
B.

Businesses would over-compensate employees for inflation when giving the cost of living rises. ​
C.

The inflation rate based on the CPI would under-estimate the true level of inflation. ​
D.

Judges would award child support payments that would not adequately keep up with the true cost of inflation. ​
Answer:

B​
Diff: 3 ​

​
96.

To reduce the bias in the consumer price index, the Bureau of Labor Statistics ​
A.

updates the market basket every two years, rather than every 10 years. ​
B.

updates the market basket every 10 years, rather than every two years. ​
C.

incorporates substitutions by consumers when prices of specific products rise rapidly. ​

D.

incorporates substitutions by consumers when prices of specific products fall rapidly. ​

Answer:

A​
Diff: 1 ​

​
97.

The Bureau of Labor Statistics has taken several steps to reduce the bias in the consumer price index. Which of the following is not
one of the steps taken to reduce the bias? ​
A.

using statistical methods to reduce the size of the quality bias ​

B.

updating the market basket every two years, rather than every 10 years ​
C.

incorporating substitutions by consumers when prices of specific products rise rapidly ​

D.

conducting a point-of-purchase survey to track where consumers actually make their purchases ​
Answer:

C​
Diff: 1 ​

​
98.

The producer price index measures the prices that firms ​

A.

pay for imported natural resources that go into the production process. ​
B.

receive for the goods and services they export. ​

C.

receive for the goods and services they use at all stages of production. ​
D.

pay for labor, whether or not the labor is foreign or domestic. ​

Answer:

C​
Diff: 1 ​

​
99.

The inflation rate measures the average prices of goods and services in the economy. ​
Answer:

True

​
False ​
Diff: 1 ​

​
100.

Housing is the largest component of the U.S. CPI market basket. ​

Answer:

​
True

False ​
Diff: 1 ​

​
101.

The GDP deflator is the best measure that reflects the prices of goods and services purchased by the typical household. ​
Answer:

True

​
False ​
Diff: 1 ​
 ​
102.

Why does the substitution bias cause the consumer price index to overstate inflation and the cost of living? Why does the increase in
quality bias cause the consumer price index to overstate inflation and the cost of living? ​
Answer:

The substitution bias causes the CPI to overstate inflation and the cost of living because the CPI, being based on a fixed market basket
of goods and services, implicitly assumes that consumers do not switch away from products whose prices are rising and into products
whose prices are falling (or rising less). Consumers dodge some price increases by switching to other products, therefore decreasing
their cost of living below what the CPI indicates.

​
The increase in quality bias causes the CPI to overstate inflation and the cost of living because a portion of the price increase
of many goods and services is due to an increase in quality. The Bureau of Labor Statistics tries to filter out the portion of the price
increase due to quality, but does not fully adjust the price increase for quality improvements. ​
Diff: 2 ​

​
Table 8-7

Base Year Price

Product Quantity (2001) Price (2009) Price (2010)
Tacos 5 $1.50 $2.00 $2.25
Earplugs 10 6.00 7.50 7.00
Toothbrushes 3 2.50 3.50 3.50

103.

Refer to Table 8-7. Consider a simple economy that produces only three products: tacos, earplugs, and toothbrushes. Use the
information in the table to calculate the inflation rate for 2010, as measured by the consumer price index. ​
Answer:

Total expenditures for 2001 = (5 x $1.50) + (10 x $6.00) + (3 × $2.50) = $75.00.

Total expenditures for 2009 = (5 x $2.00) + (10 x $7.50) + (3 × $3.50) = $95.50.
Total expenditures for 2010 = (5 x $2.25) + (10 x $7.00) + (3 × $3.50) = $91.75.

The CPI for 2009= [($95.50/$75.00) × 100] = 127.33; CPI for 2010 = [($91.75/$75.00) × 100] = 122.33. So, the inflation rate for
2010 = [((122.33 − 127.33)/127.33) × 100)] = −3.9%. ​
Diff: 3 ​

​
104.

The real wage equals the nominal wage ________ the CPI, all times 100. ​
A.

divided by ​
B.

times ​
C.

minus ​
D.

plus ​
Answer:

A​
Diff: 1 ​

​
105.

If your nominal wage rises faster than the price level, we can say your real wage has ________ and the purchasing power of your
income has ________. ​
A.

fallen; fallen ​
B.

fallen; risen ​
C.

risen; risen ​
D.

risen; fallen ​
 Answer:

C​
Diff: 3 ​

​
106.

You earned $30,000 in 1980, and your salary rose to $80,000 in 2006. If the CPI rose from 82 to 202 between 1980 and 2006, which
of the following is true? ​
A.

There was deflation between 1980 and 2006. ​

B.

The purchasing power of your salary fell between 1980 and 2006. ​
C.

The purchasing power of your salary remained constant between 1980 and 2006. ​
D.

The purchasing power of your salary increased between 1980 and 2006. ​
Answer:

D​
Diff: 2 ​

​
Table 8-8

Nominal Average Hourly

Year Earnings CPI (1982-1984 = 100)
1965 $2.65 32
2008 18.08 207

The table above reports the nominal average hourly earnings in private industry and the consumer price index for 1965 and 2008.

​
107.

Refer to Table 8-8. The real average hourly earnings for 1965 in 1982-1984 dollars equal ​
A.

$1.28. ​
B.

$6.49. ​
C.

$8.28. ​
D.

$15.45. ​
Answer:

C​
Diff: 2 ​

​
108.

Refer to Table 8-8. The percentage change in real average earnings from 1965 to 2008 equals ​
A.

-5.15 percent ​
B.

4.5 percent. ​
C.

5.43 percent. ​
D.

94.8 percent. ​
Answer:

C​
Diff: 3 ​
 ​
109.

Refer to Table 8-8. The real average hourly earnings for 1965 in 2008 dollars equal ​
A.

$1.28. ​
B.

$6.49. ​
C.

$15.45. ​
D.

$17.14. ​
Answer:

D​
Diff: 3 ​

​
Table 8-9

Nominal Average
Year CPI
Hourly Earnings
2007 $10 100
2008 10 105
2009 12 110

110.

Refer to Table 8-9. Looking at the table above, real average hourly earnings in 2007 were ​
A.

$9 ​
B.

$9.52 ​
C.

$10 ​
D.

$12.63 ​
Answer:

C​
Diff: 2 ​

​
111.

Refer to Table 8-9. Looking at the table above, real average hourly earnings were equal to ________ in 2008. ​
A.

$9 ​
B.

$9.52 ​
C.

$10 ​
D.

$12 ​
Answer:

B​
Diff: 2 ​

​
112.

Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and 207 in 2008, then the value of your
grandfather's salary in 2008 dollars equals ​
A.

$80,130. ​
 B.

$68,130. ​
C.

$37,200. ​
D.

$21,120. ​
Answer:

A​
Diff: 3 ​

​
113.

Nominal income is equal to real income if the CPI is less than 100. ​
Answer:

True

​
False ​
Diff: 1 ​

​
114.

Currently, the base year for the CPI is the average of prices in the years 1982 to 1984. ​
Answer:

​
True

False ​
Diff: 1 ​

​
Table 8-10

Median Salary: New

Year York Yankees CPI (1982-1984 = 100)
1989 $500,000 124
2009 5,200,000 216

Salaries in major league baseball have soared over the last 30 to 40 years. Some of the salary increase is due to inflation. The table
above reports the consumer price index and the median nominal salary of the New York Yankees for 1989 and 2009.
Source: USA Today Salaries Database, asp.usatoday.com/sports/baseball/salaries/default.aspx

​
115.

Refer to Table 8-10. Calculate the real median salary of the New York Yankees in both 1982-1984 dollars and 2009 dollars. Calculate
the percentage increase in the median salary of the Yankees from 1989 to 2009 in both nominal terms and in real terms. ​
Answer:

Real median salary = × 100.

Real median salary in 2009 dollars =

​ ​Real median salary in 1982-1984 dollars ×

Median Salary: CPI Real Median Real Median
New York (1982-1984 = Salary (1982- Salary
Year Yankees 100) 1984 dollars) (2009 dollars)
1989 $500,000 124 $403,226 $870,968
2009 5,200,000 216 2,407,407 5,200,000

In nominal terms, the median salary increased × 100 = 1,040 percent

In real terms, the median salary increased × 100 = 497 percent ​

Diff: 3 ​
 ​
Table 8-11

Average Retail Price

Unleaded Regular
Gasoline CPI
Year Month (cents per gallon) (1982-1984 = 100)
1976 June 59.2 56.8
1981 September 137.6 93.2
1994 December 114.3 149.7
2009 July 254.3 215.4

​Source: Energy Information Administration

​
116.

Refer to Table 8-11. The table above reports the consumer price index and the average U.S. retail price for unleaded regular gasoline
for four different periods since 1976. Note that the gasoline prices are in cents per gallon.
​
Calculate the real average retail price of unleaded regular gasoline in 1982-1984 dollars. In which period were gasoline
prices the highest in real terms? Also, calculate the real average retail price of unleaded regular gasoline in 2009 dollars. ​
Answer:

Real gasoline price in 1982-1984 dollars = × 100.

Real gasoline price in 2009 dollars =

​ ​ ​ ​ ​Real gasoline price in 1982-1984 dollars ×

Real Average
Average Retail Retail Price Real Average
Price Unleaded Retail Price
Unleaded Regular Unleaded
Regular Gasoline Regular
Gasoline CPI (cents per Gasoline (cents
(cents per (1982-1984 = gallon) (1982- per gallon)
Year Month gallon) 100) 1984 dollars) (2009 dollars)
1976 June 59.2 56.8 104.2 224.4
1981 September 137.6 93.2 147.6 317.9
1994 December 114.3 149.7 76.4 164.6
2009 July 254.3 215.4 118.1 254.3

The highest gasoline prices in real terms were in September, 1981. ​

Diff: 3 ​

​
117.

The nominal interest rate equals the real interest rate ________ the inflation rate. ​
A.

times ​
B.

divided by ​
C.

plus ​
D.

minus ​
Answer:

C​
Diff: 1 ​

​
118.

The real interest rate equals the nominal interest rate ________ the inflation rate. ​
A.

times ​
B.
divided by ​
C.

plus ​
D.

minus ​
Answer:

D​
Diff: 1 ​

​
119.

The stated interest rate on a loan is the ​

A.

real interest rate. ​

B.

nominal interest rate. ​

C.

actual inflation rate. ​

D.

expected inflation rate. ​

Answer:

B​
Diff: 1 ​

​
120.

If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest? ​
A.

-9.5% ​
B.

-3.5% ​
C.

1.5% ​
D.

3.5% ​
E.

9.5% ​
Answer:

D​
Diff: 2 ​

​
121.

Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest. If the inflation rate
was 4%, what was the real interest rate you paid? ​
A.

16 percent ​
B.

12 percent ​
C.

8 percent ​
D.

6 percent ​
Answer:

C​
Diff: 3 ​
 ​
122.

Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100 of interest. If the inflation rate
was 7%, what was the real interest rate you paid? ​
A.

17 percent ​
B.

10 percent ​
C.

7 percent ​
D.

3 percent ​
Answer:

D​
Diff: 2 ​

​
123.

Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate is 5 percent, then the rate of inflation
over the upcoming year that would be most beneficial to you would be a rate of inflation ​
A.

equal to 0 percent. ​
B.

greater than 7 percent. ​

C.

equal to 7 percent. ​
D.

less than 7 percent. ​

Answer:

B​
Diff: 3 ​

​
124.

Suppose you lend $1,000 at an interest rate of 10 percent over the next year. If the expected real interest rate at the beginning of the
loan contract is 4 percent, then what rate of inflation over the upcoming year would be most beneficial to you as the lender? An
inflation rate ​
A.

equal to 0 percent. ​
B.

greater than 6 percent. ​

C.

equal to 6 percent. ​
D.

equal to 4 percent. ​
Answer:

A​
Diff: 3 ​

​
125.

You lend $5,000 to a friend for one year at a nominal interest rate of 10%. Inflation during that year is 5%. As a result, you will
receive ________ at the end of the year, but that money has a purchasing power of ________. ​
A.

$5,050; $5,025 ​
B.

$5,100; $5,050 ​
C.

$5,500; $5,250 ​
 D.

$6,000; $5,500 ​
Answer:

C​
Diff: 3 ​

​
126.

When deflation occurs, ​

A.

the real interest rate is greater than the nominal interest rate. ​
B.

the nominal interest rate is greater than the real interest rate. ​
C.

the nominal interest rate is equal to the real interest rate and inflation is negative. ​
D.

the nominal interest rate is equal to the real interest rate and inflation is positive. ​
Answer:

A​
Diff: 2 ​

​
127.

When prices are rising, which of the following will be true? ​

A.

The real interest rate will be lower than the nominal interest rate. ​
B.

The real interest rate will be negative. ​

C.

The real interest rate will be higher than the nominal interest rate. ​
D.

The nominal interest rate will be negative. ​

Answer:

A​
Diff: 2 ​

​
128.

The nominal interest rate plus the inflation rate equals the real interest rate. ​
Answer:

True

​
False ​
Diff: 2 ​

​
129.

If inflationary expectations are increasing, we would expect that the nominal interest rate would also be increasing, holding all else
constant. ​
Answer:

​
True

False ​
Diff: 2 ​
 ​
130.

Real interest rates at times have been negative. Why would anyone lending money agree to a negative real interest rate? ​
Answer:

The lender did not agree to a negative real interest rate, instead unanticipated inflation occurred. If the actual inflation rate exceeds the
anticipated inflation rate, the actual real interest rate received by lenders and paid by borrowers can end up negative. ​
Diff: 3 ​

​
131.

During the 1990s, Japan experienced periods of deflation and very low nominal interest rates, approaching zero percent. Why would
lenders of money agree to a nominal interest rate of almost zero? ​
Answer:

With the deflation, the real interest rate exceeded the nominal interest rate. Lenders were making their decisions based on the higher
real interest rate, not the very low nominal interest rate. ​
Diff: 3 ​

​
132.

Suppose that in 2010, all prices in the economy double and that all wages and salaries have also doubled. In 2010 you ​
A.

are worse off than you were in 2009 as you can no longer afford to buy as many goods and services. ​
B.

are better off than you were in 2009 as your salary is higher than it was in 2009 and you can now buy more goods and services. ​
C.

are no better off or worse off than you were in 2009 as the purchasing power of your salary has remained the same. ​
D.

cannot determine whether you are better off or worse off than you were in 2009, because the purchasing power of your salary cannot
be determined. ​
Answer:

C​
Diff: 2 ​

​
133.

Which of the following describes a situation in which the person is hurt by inflation? ​
A.

a retiree whose pension is adjusted for inflation ​

B.

a person who borrows money during a period when inflation is under-predicted ​

C.

a person who lends money during a period when inflation is over-predicted ​

D.

a person paid a fixed income during an inflationary period ​

Answer:

D​
Diff: 2 ​

​
134.

If inflation is positive and is perfectly anticipated, ​

A.

those that borrow money lose. ​

B.

those that lend money lose. ​

C.

those that hold paper money lose. ​

D.
no one in the economy loses. ​
Answer:

C​
Diff: 2 ​

​
135.

Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is currently 6%. If actual inflation
turns out to be 7% over the loan contract period, then ​
A.

borrowers gain 1% of the loan value. ​

B.

lenders gain 1% of the loan value. ​

C.

borrowers lose 3% of the loan value.

​
D.

lenders gain 3% of the loan value. ​

Answer:

A​
Diff: 2 ​

​
136.

The cost to firms of changing prices ​

A.

is small even when there is rapid inflation. ​

B.

is called a menu cost. ​

C.

does not exist if inflation is perfectly anticipated. ​

D.

all of the above ​

Answer:

B​
Diff: 2 ​

​
137.

When actual inflation is less than expected inflation, ​

A.

borrowers lose and lenders gain. ​

B.

borrowers gain and lenders lose. ​

C.

borrowers and lenders both gain. ​

D.

borrowers and lenders both lose. ​

Answer:

A​
Diff: 2 ​

​
138.

Which of the following is not an example of inflation causing a redistribution of income because the inflation was unanticipated? ​
A.

A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation per year, and the actual rate of inflation
ends up being 7 percent per year. ​
 B.

A worker receives a raise in salary that is less than the rate of inflation, because management under-predicted inflation. ​
C.

Firms have to hire an extra worker to change prices in its store because of inflation. ​
D.

A bank collects a lower amount of interest from a loan because inflation was under-predicted. ​
Answer:

C​
Diff: 2 ​

​
139.

If an economy experiences deflation, the real interest rate ​

A.

will be less than the nominal interest rate. ​

B.

will be negative when the nominal interest rate is positive. ​

C.

will be greater than the nominal interest rate. ​

D.

will be equal to the deflation rate, so long as the nominal interest rate is positive. ​
Answer:

C​
Diff: 2 ​

​
140.

The recession of 2007-2009 had different effects on various sectors of the economy. Which of the following sectors of the U.S.
economy had the highest unemployment rate in April 2009, topping 15 percent? ​
A.

education and health services ​

B.

leisure and hospitality ​

C.

construction ​
D.

financial activities ​
Answer:

C​
Diff: 2 ​

​
141.

The costs to firms of changing prices are called menu costs. ​

Answer:

​
True

False ​
Diff: 1 ​

​
142.

If inflation is unanticipated, no redistribution of income can occur. ​

Answer:

True
​
False ​
Diff: 1 ​

​
143.

If inflation is anticipated, some effects of inflation on the redistribution of income can be avoided. ​
Answer:

​
True

False ​
Diff: 1 ​

​
144.

Describe how inflation can be costly even if it is anticipated. ​

Answer:

First, there will be redistribution as some incomes fall behind even an anticipated level of inflation. Second, firms and individuals
must hold money to perform transactions. Those holding money lose purchasing power at a rate equal to inflation. Third, firms must
pay individuals to change prices. These costs, called menu costs, can be substantial at very high levels of inflation. Fourth, investors
have to pay higher taxes on interest and capital gains income as the government taxes nominal interest and capital gains income.
Investors then lose real after-tax income. ​
Diff: 2 ​

​
145.

When the actual inflation rate turns out to be greater than the expected inflation rate, who gains  the borrower or the lender  and
who loses? Explain why. ​
Answer:

The borrower gains because he pays back the loan in cheaper dollars  dollars that have lost more purchasing power than was
expected. The lender loses because she receives dollars that have lost more purchasing power than was expected. ​
Diff: 2 ​

​
146.

Explain whether you agree or disagree with the following statement: "The reason that inflation is bad is because it increases the cost
of living  the costs of goods and services we buy  without increasing income in general." ​
Answer:

Disagree. Inflation, in general, must increase both our cost of living and nominal income. The increases in the prices of goods and
services will be paid to the factors of production. Since the payments to the factors of production make up national income, nominal
income will increase, in general, along with the cost of living. ​
Diff: 2 ​
Exam

Name___________________________________

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

1) Suppose an industry is made up of 25 firms, all with equal market share. The four-firm 1)
concentration ratio of this industry is
A) 25%.
B) 16%.
C) 20%.
D) It cannot be determined from the information given.
Answer: B
Diff: 2 Type: MC

2) In 2000, the Hirschman-Herfindahl Index (HHI) was calculated to find the market concentration in 2)
the Egyptian steel industry and was found to be 3,822. This number means
A) the Egyptian steel industry is dominated by a single complete monopoly.
B) the Egyptian steel industry is perfectly competitive.
C) the calculated monopolistic performance from the HHI of the entire Egyptian steel industry
appears to exceed one-third the scale of monopoly power.
D) the number has no indication of market power concentration in the Egyptian steel industry.
Answer: C
Diff: 2 Type: MC

1
 Figure 11-1

Figure 11-1 above shows the demand and cost curves facing a monopolist.

3) Refer to Figure 11-1. To maximize profit, the firm will produce 3)

A) Q4 . B) Q1 . C) Q3 . D) Q2 .
Answer: D
Diff: 1 Type: MC

2
 Table 11-2

Quantity Total Cost of

Price per dose Demanded Production
(Dose) (Dollars)
$80 0 $80
72 1 82
64 2 88
56 3 100
48 4 124
40 5 164
32 6 208
24 7 268
16 8 340

Shaikha Inc. has been granted a patent for its toothache balm. Table 11-2 shows the demand and the total cost schedule for
the firm.

4) Refer to Table 11-2. What is the economically efficient output level? 4)

A) 5 units B) 7 units C) 6 units D) 8 units
Answer: A
Diff: 2 Type: MC

5) In most towns and cities you are likely to only find one provider of fixed-line telecoms. This is an 5)
example of
A) occupational licensing.
B) a monopoly.
C) the government maintaining consistent standards in the telecoms industry.
D) a government-imposed barrier.
Answer: B
Diff: 1 Type: MC

3
 Figure 11-7

Figure 11-7 shows the cost and demand curves for the Erickson Power Company.

6) Refer to Figure 11-7. The firm would maximize profit by producing 6)

A) Q4 units. B) Q1 units. C) Q2 units. D) Q3 units.
Answer: C
Diff: 1 Type: MC

4
 Figure 11-1

Figure 11-1 above shows the demand and cost curves facing a monopolist.

7) Refer to Figure 11-1. If the firm's average total cost curve is ATC1 , the firm will 7)
A) make a profit. B) break even.
C) suffer a loss. D) face competition.
Answer: A
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

8) In the short-run, even if a monopoly's total revenue does not cover its variable costs, it should 8)
continue to produce because ultimately in the long run, the monopoly will start earning profits.
Answer: True False
Diff: 2 Type: TF

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

9) Popular and classic movies are shown on some channels like Orbit, Showtime, and ART Cable 9)
Networks. These networks are available on basic tiers through satellite providers but several major
cable companies make these networks available only to customers who want to pay extra each
month to watch them. If Tamer chooses to pay the additional fee and Hussein does not, then
A) Hussein's demand for classic movies is more price elastic than Tamer's demand.
B) Tamer's demand for classic movies is more price elastic than Hussein's demand.
C) Tamer has lost some consumer surplus by paying the additional fee.
D) Hussein has gained some consumer surplus by not having to pay the additional fee.
Answer: A
Diff: 2 Type: MC

5
 Figure 11-4

Figure 11-4 shows the demand and cost curves for a monopolist.

10) Refer to Figure 11-4. At the profit maximizing quantity, what is the difference between the 10)
monopoly's price and the marginal cost of production?
A) $8 B) $11.50
C) $21 D) There is no difference.
Answer: C
Diff: 2 Type: MC

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

11) How do the price and quantity of a monopoly compare to that of a perfectly competitive 11)
industry?
Answer: A monopolist sells a smaller quantity and charges a price greater than the perfectly
competitive price.
Diff: 2 Type: SA

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

12) To maintain a monopoly, a firm must have 12)

A) a perfectly inelastic demand. B) marginal revenue equal to demand.
C) few competitors. D) an insurmountable barrier to entry.
Answer: D
Diff: 2 Type: MC

6
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

13) A vertical merger is one that takes place between two companies producing different goods or 13)
services for one specific finished product.
Answer: True False
Diff: 1 Type: TF

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

14) If a natural monopoly regulatory commission sets a price where marginal cost is equal to demand 14)
A) the firm would earn monopoly profits.
B) the firm would incur a loss.
C) the firm would break even.
D) economic efficiency would not be achieved.
Answer: B
Diff: 2 Type: MC

15) The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One 15)
source of competition comes from people who might resell their previously owned diamonds. Why
is De Beers worried that people might resell their previously owned diamonds?
A) because De Beers will not be able to guarantee the quality of previously owned diamonds and
fears that its reputation might be harmed
B) because the availability of previously owned diamonds would increase the market demand
for diamonds and dilute De Beers' monopoly
C) because previously owned diamonds would be a close substitute to newly mined diamonds
and therefore reduce De Beers' market power
D) because the availability of previously owned diamonds would make the market demand
curve for diamonds more inelastic and force De Beers to lower its price
Answer: C
Diff: 2 Type: MC

7
 Figure 11-7

Figure 11-7 shows the cost and demand curves for the Erickson Power Company.

16) Refer to Figure 11-7. The profit-maximizing price is 16)

A) P1. B) P3. C) P2. D) P4.
Answer: B
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

17) A product's price approaches its marginal cost as market concentration increases. 17)
Answer: True False
Diff: 2 Type: TF

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

18) For a natural monopoly to exist 18)

A) a firm must have a government-imposed barrier.
B) a firm's long run average cost curve must exhibit diseconomies of scale beyond the
economically efficient output level.
C) a firm's long run average cost curve must exhibit economies of scale throughout the relevant
range of market demand.
D) a firm must continually buy up its rivals.
Answer: C
Diff: 2 Type: MC

8
 Figure 11-4

Figure 11-4 shows the demand and cost curves for a monopolist.

19) Refer to Figure 11-4. What is the economically efficient output level? 19)
A) 600 units B) 940 units C) 1160 units D) 800 units
Answer: B
Diff: 2 Type: MC

9
 Table 11-2

Quantity Total Cost of

Price per dose Demanded Production
(Dose) (Dollars)
$80 0 $80
72 1 82
64 2 88
56 3 100
48 4 124
40 5 164
32 6 208
24 7 268
16 8 340

Shaikha Inc. has been granted a patent for its toothache balm. Table 11-2 shows the demand and the total cost schedule for
the firm.

20) Refer to Table 11-2. What is the amount of Shaikha's profit? 20)
A) $124 B) $68 C) $72 D) $192
Answer: B
Diff: 2 Type: MC

21) A monopoly differs from monopolistic competition in that 21)

A) a monopoly can never make a loss but a firm in monopolistic competition can.
B) a monopoly faces a perfectly inelastic demand curve while a monopolistic competitor faces an
elastic demand curve.
C) a monopoly has market power while a firm in monopolistic competition does not have any
market power.
D) in a monopoly there are entry barriers but there are no barriers to entry in a monopolistically
competitive market structure.
Answer: D
Diff: 2 Type: MC

10
 Figure 11-7

Figure 11-7 shows the cost and demand curves for the Erickson Power Company.

22) Refer to Figure 11-7. What is the economically efficient output level and what is the price at that 22)
level?
A) Q3 , P2 B) Q2 , P3 C) Q2 , P2 D) Q4 , P1
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

23) If a monopolist's marginal revenue is $15 a unit and its marginal cost is $25, then to maximize 23)
profit the firm should decrease output.
Answer: True False
Diff: 2 Type: TF

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

24) Market power refers to 24)

A) the ability of a firm to advertise its product and succeed in selling more output.
B) the ability of a firm to sell at a lower price than rival sellers.
C) the ability of consumers to dictate what products should be produced.
D) the ability of a firm to charge a price higher than the marginal cost of production.
Answer: D
Diff: 1 Type: MC

11
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

25) A monopoly is defined as a firm that has the largest market share in an industry. 25)
Answer: True False
Diff: 1 Type: TF

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

Figure 11-1

Figure 11-1 above shows the demand and cost curves facing a monopolist.

26) Refer to Figure 11-1. The firm's profit maximizing price is 26)
A) P1. B) P2. C) P4. D) P3.
Answer: D
Diff: 1 Type: MC

12
 Table 11-2

Quantity Total Cost of

Price per dose Demanded Production
(Dose) (Dollars)
$80 0 $80
72 1 82
64 2 88
56 3 100
48 4 124
40 5 164
32 6 208
24 7 268
16 8 340

Shaikha Inc. has been granted a patent for its toothache balm. Table 11-2 shows the demand and the total cost schedule for
the firm.

27) Refer to Table 11-2. What is the amount of the deadweight loss generated by Shaikha when it 27)
produces the monopoly output?
A) $42 B) $24 C) $36 D) $124
Answer: B
Diff: 3 Type: MC

28) Governments grant patents to encourage 28)

A) competition.
B) low prices.
C) research and development on new products.
D) firms to form public enterprises.
Answer: C
Diff: 1 Type: MC

29) Relative to a perfectly competitive market, a monopoly results in 29)

A) a gain in producer surplus less than the loss in consumer surplus.
B) a gain in producer surplus equal to the loss in consumer surplus.
C) a gain in producer surplus equal to the gain in consumer surplus.
D) greater economic efficiency.
Answer: A
Diff: 2 Type: MC

30) Compared to a monopolistic competitor, a monopolist faces 30)

A) a more elastic demand curve at higher prices and a more inelastic demand curve at lower
prices.
B) a more elastic demand curve.
C) a demand curve that has a price elasticity coefficient of zero.
D) a more inelastic demand curve.
Answer: D
Diff: 2 Type: MC

13
 31) Which of following is the best example of a monopoly if we use a broader definition of monopoly? 31)
A) Samer, a wealthy potato farmer
B) AlMasood Rentals, a car rental service downtown.
C) Cheap Gas, one of two gasoline stations in a large rural community
D) Ahmed Tacos, the only Mexican restaurant in town.
Answer: D
Diff: 1 Type: MC

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

32) What happens to a monopoly's revenue when it sells more units of its product? 32)
Answer: The monopolist must lower its price to sell more. Two things happen when a
monopolist lowers its price. First, revenue will tend to rise as the monopolist sells
more units and second, revenue tend to fall because less revenue is received from
each unit than the amount received at the higher price. The total effect on total
revenue could be an increase in total revenue, or a decrease or no change.
Diff: 2 Type: SA

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

33) If a monopolist's price is $50 at the output where marginal revenue equals marginal cost and 33)
average total cost is $43, then the average profit is $7.
Answer: True False
Diff: 2 Type: TF

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

34) How does a network externality serve as a barrier to entry? Is this barrier surmountable? 34)
Explain.
Answer: A network externality exists where the usefulness of the product increases with the
number of people who use it. It can serve as an entry barrier because the popularity
of the product attracts more and more consumers, thereby increasing the supplier's
dominance in the market. However, this barrier is not insurmountable. If a rival
enters the market with a superior product, then it is possible that customers will
switch to the superior product.
Diff: 2 Type: SA

14
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 11-5

35) Refer to Figure 11-5. What is the area that represents producer surplus under a monopoly? 35)
A) the triangle 0P2 E B) the trapezium 0P1 FH
C) the triangle 0P3 H D) the rectangle P1 P3HF
Answer: B
Diff: 2 Type: MC

36) In the late 1990s, what did the anti-monopoly polices in Egypt aim to achieve? 36)
A) marginal cost pricing.
B) collusive price agreements among rival sellers.
C) reduce market barriers.
D) selling below average total cost.
Answer: C
Diff: 1 Type: MC

37) Governments grant patents to 37)

A) encourage competition.
B) encourage low prices.
C) encourage firms to reveal secret production techniques.
D) compensate firms for research and development costs.
Answer: D
Diff: 1 Type: MC

15
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

38) If a monopolist's price is $50 at the output where marginal revenue equals marginal cost and 38)
average total cost is $43, then the incremental profit from the last unit sold is $7.
Answer: True False
Diff: 2 Type: TF

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

Figure 11-2

Figure 11-2 above shows the demand and cost curves facing a monopolist.

39) Refer to Figure 11-2. Suppose the monopolist represented in the diagram above produces positive 39)
output. What is the profit maximizing/loss-minimizing output level?
A) 850 units B) 630 units C) 880 units D) 800 units
Answer: B
Diff: 2 Type: MC

40) Refer to Figure 11-2. Suppose the monopolist represented in the diagram above produces positive 40)
output. What is the price charged at the profit-maximizing/loss-minimizing output level?
A) $54 B) $38 C) $68 D) $75
Answer: C
Diff: 2 Type: MC

16
41) If a firm's average total cost is less than price where MR=MC, 41)
A) the firm should produce if its price exceeds average variable cost.
B) the firm should cut back on its output to lower its cost.
C) the firm should shut down.
D) the firm should raise its price.
Answer: A
Diff: 2 Type: MC

42) De Beers is one of the oldest and most profitable monopolies in the world. By controlling diamond 42)
deposits in South Africa, the company was able to erect a barrier of entry represented in exclusive
control of a natural resource. However, in the year 2000, more diamond deposits were discovered
and that brought competition to the diamonds market. De Beers adapted by marking each of its
products with a "Forever Mark" to assure quality and authenticity of the product. What was De
Beers trying to achieve with this strategy?
A) Gloat about the quality of its products in comparison to other producers.
B) Differentiating and branding its product to maintain its market share.
C) Erect another barrier to entry by improving the quality of its product.
D) None of the above.
Answer: B
Diff: 1 Type: MC

17
 Figure 11-4

Figure 11-4 shows the demand and cost curves for a monopolist.

43) Refer to Figure 11-4. What is the difference between the monopoly output and the perfectly 43)
competitive output?
A) 140 units B) 560 units C) 340 units D) 240 units
Answer: C
Diff: 2 Type: MC

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

44) What is the relationship between marginal revenue and average revenue a monopolist and 44)
is it the same for a perfect competitor?
Answer: Average revenue is equal to price for any firm but for a monopolist, marginal
revenue is always less than price and therefore marginal revenue is less than
average revenue. For a perfect competitor, marginal revenue is equal to price.
Diff: 2 Type: SA

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

45) Some economists argue that the existence of network externalities is a surmountable barrier if a 45)
competing firm can offer a product that better satisfies consumer preferences.
Answer: True False
Diff: 2 Type: TF

18
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

46) Which one of the following about a monopoly is false? 46)

A) A monopoly could break even in the long run.
B) A monopoly could make profits in the long run.
C) A monopoly status could be temporary.
D) A monopoly must have some kind of government privilege or government imposed barrier to
maintain its monopoly.
Answer: D
Diff: 2 Type: MC

47) Because a monopoly's demand curve is the same as the market demand curve for its product, 47)
A) the monopoly must lower its price to sell more of its product.
B) the monopoly's average total cost always falls as it increases its output.
C) the monopoly is a price taker.
D) the monopoly's marginal revenue equals its price.
Answer: A
Diff: 2 Type: MC

48) Many Arab countries have devised anti-monopoly policies and in some cases taken the further step 48)
of passing antitrust laws in order to
A) to limit the control of large international companies.
B) ensure social justice and control the markets by the government.
C) transform their economies into a more competitive and business friendly markets.
D) cope with the global trend of becoming market economies.
Answer: C
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

49) A monopoly is guaranteed profits in the long run. 49)

Answer: True False
Diff: 1 Type: TF

19
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 11-3

Figure 11-3 shows the demand and cost curves for a monopolist.

50) Refer to Figure 11-3. What is the profit maximizing/loss-minimizing output level? 50)
A) 600 units B) 800 units C) 940 units D) 1,160 units
Answer: A
Diff: 1 Type: MC

51) In regulating a natural monopoly, the price strategy that ensures the highest possible output and 51)
zero profit is one that sets price
A) equal to average total cost where it intersects demand curve.
B) equal to marginal cost where it intersects demand curve.
C) equal to average variable cost where it intersects demand curve.
D) corresponding to the demand curve where marginal revenue equals zero.
Answer: A
Diff: 2 Type: MC

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

52) Explain why the monopolist has no supply curve? 52)

Answer: A supply curve that shows the relationship between the price of a product and the
quantity that suppliers are willing and able to supply. The monopolist selects its
profit maximizing output by equating marginal revenue to marginal cost and takes
the price dictated by the demand curve. Thus, there is no array of prices and
quantities supplied.
Diff: 3 Type: SA

20
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

53) A monopoly is characterized by all of the following except 53)

A) the firm has market power.
B) there are no close substitutes to the firm's product.
C) there are only a few sellers each selling a unique product.
D) entry barriers are high.
Answer: C
Diff: 1 Type: MC

54) A monopoly is a seller of a product 54)

A) with many substitutes. B) without a close substitute.
C) with a perfectly inelastic demand. D) without a well-defined demand curve.
Answer: B
Diff: 1 Type: MC

55) Microsoft thought that the initial Xbox was sufficiently different from PS2 that it could charge a 55)
significantly higher price for the Xbox than Sony could charge for PS2. Which of the following
statements is implied by Microsoft's product positioning?
A) Microsoft believed that the PS2 was poor substitute for the Xbox and therefore the demand
curve for Xbox would be inelastic. Charging a higher price would enable it to increase its
profits.
B) Microsoft believed that the PS2 was a distant substitute for the Xbox and therefore the
demand curve for Xbox would be elastic. Charging a higher price would enable it to increase
its profits.
C) Microsoft believed that it had differentiated the Xbox sufficiently to insulate it from
competition and to cater to a unique niche. Consequently, it would be able to charge a higher
price and increase its profits.
D) Microsoft recognized that the PS2 was a substitute for the Xbox but it believed that the
Microsoft name would be sufficient to draw customers away from the PS2 and that customers
would be willing to pay a premium for Microsoft's product.
Answer: A
Diff: 2 Type: MC

56) A virtuous cycle occurs 56)

A) when a firm's sales volume reaches a level where the firm can take advantage of economies
of scale; thereby reducing the price of the product to further boost its sales.
B) when a firm can attract enough buyers initially to increase a product's usefulness to attract
even more buyers.
C) when lobbyists petition the government to grant a public franchise; the lobbyist then raise
money for the government who granted the franchise.
D) when monopoly profits are used to create new products for additional monopoly profits.
Answer: B
Diff: 2 Type: MC

21
 57) What is a network externality? 57)
A) It refers to a product that requires connection to a network for it to be useful.
B) It means having a network of suppliers and buyers for a good or service.
C) It means lobbying to form a public enterprise.
D) It refers to a situation in which a product's usefulness increases with the number of people
using it.
Answer: D
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

58) For a natural monopoly, the marginal cost of producing an additional unit of its product is 58)
relatively small.
Answer: True False
Diff: 2 Type: TF

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

Figure 11-5

59) Refer to Figure 11-5. Compared to a perfectly competitive market, consumer surplus is lower in a 59)
monopoly by an amount equal to the
A) area P1P2 GF. B) area FHE. C) area FGE. D) area P1P2 EF.
Answer: D
Diff: 2 Type: MC

22
 Figure 11-8

Suppose the Ministry of Communications in Kuwait changes its regulatory policy to allow competition into the mobile phone
market. Figure 11-8 shows the mobile phone market in Kuwait.

60) Refer to Figure 11-8. Following the policy change, the subscription price falls from PM to Pc. What 60)
is the increase in consumer surplus as a result of this change?
A) the area D+F B) the area A+B+C C) the area B+C+D D) the area B+C
Answer: C
Diff: 3 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

61) Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after 61)
the patent on the prescription drugs expire because they have established a strong foothold in the
market.
Answer: True False
Diff: 2 Type: TF

23
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 11-7

Figure 11-7 shows the cost and demand curves for the Erickson Power Company.

62) Refer to Figure 11-7. Why won't regulators require a natural monopoly to produce the 62)
economically efficient output level?
A) because there is insufficient demand at that output level
B) because the firm will sustain persistent losses and will not continue in business in the long
run
C) because a natural monopoly will earn zero profit
D) because at the economically efficient output level, the marginal cost of producing the last unit
sold exceeds the consumers' marginal value for that last unit
Answer: B
Diff: 2 Type: MC

63) A monopolist's profit maximizing price and output correspond to the point on a graph 63)
A) where price is as high as possible.
B) where total costs are the smallest relative to price.
C) where average total cost is minimized.
D) where marginal revenue equals marginal cost and charging the price on the market demand
curve for that output.
Answer: D
Diff: 3 Type: MC

24
64) Compared to perfect competition, the consumer surplus in a monopoly 64)
A) is unchanged because price and output are the same.
B) is eliminated.
C) is lower because price is higher and output is lower.
D) is higher because price is higher and output is the same.
Answer: C
Diff: 2 Type: MC

65) A patents given by Arab governments usually lasts 65)

A) forever. B) 7 years. C) 20 years. D) 50 years.
Answer: C
Diff: 1 Type: MC

66) The Aluminum Company of America (Alcoa) had a monopoly until the 1940s because 66)
A) the company had a secret technique for making aluminum from bauxite.
B) it was a public enterprise.
C) it had a patent on the manufacture of aluminum.
D) it had control of almost all available supply of bauxite.
Answer: D
Diff: 1 Type: MC

25
 Figure 11-5

67) Refer to Figure 11-5. What is the area that represents consumer surplus under a monopoly? 67)
A) the rectangle P1 P3HF B) the trapezium P1P2 EF
C) the triangle P0 P2E D) the triangle P0 P1F
Answer: D
Diff: 2 Type: MC

26
 Figure 11-7

Figure 11-7 shows the cost and demand curves for the Erickson Power Company.

68) Refer to Figure 11-7. A firm is a natural monopoly because 68)

A) of its continually declining long-run average total cost as output rises.
B) its t marginal cost lies below the long run average cost throughout.
C) of its continually declining marginal revenue curve as output rises.
D) it is a power company and all power companies are natural monopolies.
Answer: A
Diff: 1 Type: MC

69) If a monopolist's price is $50 a unit and its marginal cost is $25, then 69)
A) to maximize profit the firm should continue to produce the output it is producing.
B) to maximize profit the firm should decrease output.
C) to maximize profit the firm should increase output.
D) Not enough information is given to say what the firm should do to maximize profit.
Answer: D
Diff: 2 Type: MC

70) Which of the following statements applies to a monopolist but not to a perfectly competitive firm at 70)
its profit maximizing output?
A) Price equals marginal cost. B) Average revenue equals average cost.
C) Marginal revenue equals marginal cost. D) Marginal revenue is less than price.
Answer: D
Diff: 2 Type: MC

27
 Table 11-1

Quantity Total Cost of

Price per unit Demanded Production
(Units) (Dollars)
$85 10 $400
80 11 500
75 12 550
70 13 560
65 14 575
60 15 595
55 16 625

A monopoly producer of a foreign language translation software faces a demand and cost structure as given in Table 11-1.

71) Refer to Table 11-1. What is the firm's maximum profit maximizing output and what is the price 71)
charged to sell this output?
A) P = $65; Q = 14 B) P = $75; Q = 12 C) P = $85; Q = 10 D) P = $70; Q = 13
Answer: D
Diff: 2 Type: MC

72) A possible advantage of a horizontal merger for the economy is that 72)
A) the merged firm might reap economies of scale which could translate into lower prices.
B) the government stands to collect more corporate income tax revenue.
C) the degree of competition in the industry will be intensified.
D) the merging firms could avoid losses.
Answer: A
Diff: 2 Type: MC

73) A local electricity-generating company has a monopoly that is protected by an entry barrier that 73)
takes the form of
A) economies of scale. B) perfectly inelastic demand curve.
C) network externalities. D) control of a key raw material.
Answer: A
Diff: 1 Type: MC

28
 Figure 11-3

Figure 11-3 shows the demand and cost curves for a monopolist.

74) Refer to Figure 11-3. What is likely to happen to this monopoly in the long run? 74)
A) It will be regulated by the government because of its excess profits.
B) It will expand its output to take advantage of economies of scale so as to further increase its
profit.
C) New firms will enter the market to eliminate its profits.
D) As long as there are entry barriers, this firm will continue to enjoy economic profits.
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

75) Unlike a perfect competitor, a monopolist faces the market demand curve. 75)
Answer: True False
Diff: 2 Type: TF

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

76) When a proposed merger between two companies is reviewed by the government, the relevant 76)
market is defined by
A) how elastic the demand is for each firm's product.
B) whether or not there are close substitutes for the products of the two firms.
C) how much advertising is done in the industry.
D) counting the number of firms that are produce the same product.
Answer: B
Diff: 2 Type: MC

29
 Figure 11-3

Figure 11-3 shows the demand and cost curves for a monopolist.

77) Refer to Figure 11-3. What is the amount of the monopoly's profit? 77)
A) $4,200 B) $2,700 C) $12,600 D) $10,400
Answer: B
Diff: 2 Type: MC

78) A profit maximizing monopoly's price is 78)

A) less than the price that would prevail if the industry is perfectly competitive.
B) not consistently related to price that would prevail if the market is perfectly competitive.
C) greater than the price that would prevail if the industry is perfectly competitive.
D) the same as the price that would prevail if the industry is perfectly competitive.
Answer: C
Diff: 2 Type: MC

30
 Figure 11-1

Figure 11-1 above shows the demand and cost curves facing a monopolist.

79) Refer to Figure 11-1. If the firm's average total cost curve is ATC3 , the firm will 79)
A) make a profit. B) face competition.
C) suffer a loss. D) break even.
Answer: C
Diff: 2 Type: MC

31
 Table 11-1

Quantity Total Cost of

Price per unit Demanded Production
(Units) (Dollars)
$85 10 $400
80 11 500
75 12 550
70 13 560
65 14 575
60 15 595
55 16 625

A monopoly producer of a foreign language translation software faces a demand and cost structure as given in Table 11-1.

80) Refer to Table 11-1. What is the amount of the firm's profit? 80)
A) $910 B) $350 C) $335 D) $880
Answer: B
Diff: 2 Type: MC

81) A public franchise 81)

A) is an unregulated monopoly necessary for the public good.
B) is a government designation that a private firm is the only legal producer of a good or service.
C) results from ownership of a key raw material.
D) is a corporation that is owned by stockholders.
Answer: B
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

82) In reality, because few markets are perfectly competitive, some loss of economic efficiency occurs in 82)
the market for nearly every good or service.
Answer: True False
Diff: 1 Type: TF

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

83) Consider an industry that is made up of nine firms each with a market share (percent of sales) as 83)
follows:
a. Firm A: 30%
b. Firm B: 20%
c. Firms C, D and E: 10% each
d. Firms F, G, H and J: 5% each

What is the value of the Herfindahl-Hirschman Index and how is the industry categorized?
A) 1425; moderately concentrated B) 1600; moderately concentrated
C) 2600; highly concentrated D) 1700; moderately concentrated
Answer: D
Diff: 2 Type: MC

32
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

84) A profit maximizing monopoly produces a lower output level that would be produced if the 84)
industry is perfectly competitive.
Answer: True False
Diff: 2 Type: TF

85) Holding everything else constant, government approval of horizontal mergers is more likely to be 85)
granted if the "market" that firms are in broadly defined rather than narrowly defined.
Answer: True False
Diff: 2 Type: TF

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

86) Consider an industry that is made up of nine firms each with a market share (percent of sales) as 86)
follows:
a. Firm A: 30%
b. Firm B: 20%
c. Firms C, D and E: 10% each
d. Firms F, G, H and J: 5% each

What is the value of the four-firm concentration ratio and how is the industry categorized?
A) 75%; oligopoly B) 80%; strongly oligopolistic
C) 70%; oligopoly D) 50%; monopolistic competition
Answer: C
Diff: 2 Type: MC

87) The demand curve for the monopoly's product is 87)

A) more inelastic than the market demand for the product.
B) the market demand for the product.
C) more elastic than the market demand for the product.
D) undefined.
Answer: B
Diff: 2 Type: MC

88) In Dubai there are three very popular supermarkets: Spenies, Carrefour, and LuLu hypermarket. 88)
While Spenies remains open twenty-four hours a day; Carrefour and LuLu close at midnight.
Which of the following statements is true?
A) Spenies can ignore the pricing decisions of the other two supermarkets.
B) Spenies probably has a higher markup to compensate for its higher cost of production.
C) Spenies is a monopoly all day because it produces a service that has no close substitutes.
D) Spenies has a monopoly at midnight but not during the day.
Answer: D
Diff: 2 Type: MC

33
 89) If a monopolist's marginal revenue is $25 a unit and its marginal cost is $25, then 89)
A) to maximize profit the firm should decrease output.
B) to maximize profit the firm should increase output.
C) to maximize profit the firm should continue to produce the output it is producing.
D) Not enough information is given to say what the firm should do to maximize profit.
Answer: C
Diff: 2 Type: MC

90) The size of a deadweight loss in a market is reduced by 90)

A) market price being close to marginal cost. B) government legislating a price floor.
C) creative destruction. D) government legislating a ceiling price.
Answer: A
Diff: 2 Type: MC

Figure 11-2

Figure 11-2 above shows the demand and cost curves facing a monopolist.

91) Refer to Figure 11-2. What happens to the monopolist represented in the diagram in the long run? 91)
A) It will be forced out of business by more efficient producers.
B) It will raise its price at least until it breaks even.
C) If the cost and demand curves remain the same, it will exit the market.
D) The government will subsidize the monopoly to enable it to break even.
Answer: C
Diff: 2 Type: MC

34
92) Why does a monopoly cause a deadweight loss? 92)
A) because it increases producer surplus at the expense of consumer surplus
B) because it does not produce some output for which marginal benefit exceeds marginal cost
C) because it appropriates a portion of consumer surplus for itself
D) because it does not produce some output for which demand exceeds supply
Answer: B
Diff: 2 Type: MC

93) A monopolist faces 93)

A) a downward-sloping demand curve. B) a horizontal demand curve.
C) a perfectly elastic demand curve. D) a perfectly inelastic demand curve.
Answer: A
Diff: 1 Type: MC

94) If a theatre company expects $250,000 in ticket revenue from five performances and 288,000 in 94)
ticket revenue if it adds a sixth performance, the
A) cost of staging the sixth performance is probably higher than the cost of staging the previous
five.
B) marginal revenue of the sixth performance is $48,000.
C) marginal revenue of the sixth performance is $38,000.
D) company will be making a loss on the sixth performance because its ticket sales will be less
than average received from the previous five.
Answer: C
Diff: 2 Type: MC

95) The last mobile monopoly in the Arab world ended when the British Vodafone started operating as 95)
a second mobile telecom provider in Qatar in 2009, ending a 20-year-long monopoly by Qtel.
What's the reason for the end of these monopolies?
A) The companies were - exploiting consumers, so the government wanted to - increase
competition.
B) Arab governments set up independent agencies to regulate the telecommunications market
and increase competition, effectively removing the barrier to entry.
C) The Arab World's mobile telecom market didn't seem profitable until 2009.
D) None of the above.
Answer: B
Diff: 2 Type: MC

96) Long run economic profits would most likely exist in which market structure? 96)
A) monopoly, monopolistic competition and oligopoly
B) monopoly only
C) monopoly and oligopoly
D) monopoly and monopolistic competition
Answer: C
Diff: 1 Type: MC

35
 Figure 11-7

Figure 11-7 shows the cost and demand curves for the Erickson Power Company.

97) Refer to Figure 11-7. If the government regulates Erickson Power Company so that the firm can 97)
earn a normal profit, the price would be set at ________ and the output level is ________.
A) P3, Q2 B) P2, Q2 C) P2, Q3 D) P1, Q4
Answer: C
Diff: 2 Type: MC

98) Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly? 98)
A) Each sets a price for its product that will maximize its revenue.
B) Each maximizes profits by producing a quantity for which price equals marginal cost.
C) Each must lower its price to sell more output.
D) Each maximizes profits by producing a quantity for which marginal revenue equals marginal
cost.
Answer: D
Diff: 2 Type: MC

99) If a monopolist's marginal revenue is $35 a unit and its marginal cost is $25, then 99)
A) to maximize profit the firm should increase output.
B) to maximize profit the firm should continue to produce the output it is producing.
C) to maximize profit the firm should decrease output.
D) Not enough information is given to say what the firm should do to maximize profit.
Answer: A
Diff: 2 Type: MC

36
 100) Niro Coffee and Teas produces some flavorful varieties of Niro's brand coffee. Is Niro's a 100)
monopoly?
A) Yes, there are no substitutes to Niro's coffee.
B) No, Niro's is not a monopoly because there are many branches of Niro's.
C) Yes, Niro's is the only supplier of Niro's coffee in a market where there are high barriers to
entry.
D) No, although Niro's coffee is a unique product, there are many different brands of coffee that
are very close substitutes.
Answer: D
Diff: 2 Type: MC

Figure 11-3

Figure 11-3 shows the demand and cost curves for a monopolist.

101) Refer to Figure 11-3. What is the amount of the monopoly's total revenue? 101)
A) $20,400 B) $7,800 C) $21,600 D) $19,740
Answer: A
Diff: 2 Type: MC

37
 Figure 11-2

Figure 11-2 above shows the demand and cost curves facing a monopolist.

102) Refer to Figure 11-2. Suppose the monopolist represented in the diagram above produces positive 102)
output. What is the profit/loss per unit?
A) loss of $21 per unit B) profit of $30 per unit
C) profit of $14 per unit D) loss of $7 per unit
Answer: D
Diff: 2 Type: MC

38
 Figure 11-3

Figure 11-3 shows the demand and cost curves for a monopolist.

103) Refer to Figure 11-3. What is the amount of the monopoly's total cost of production? 103)
A) $17,700 B) $7,800 C) $21,600 D) $9,340
Answer: C
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

104) The market demand curve facing a monopolist is more elastic than the market demand curve 104)
facing a monopolistic competitor.
Answer: True False
Diff: 2 Type: TF

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

105) Identify two ways by which the government controls monopolies? 105)
Answer: The government control monopolies by enforcing antitrust laws and through
economic regulation of natural monopolies.
Diff: 2 Type: SA

39
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Figure 11-5

106) Refer to Figure 11-5. The deadweight loss due to a monopoly is represented by the area 106)
A) FGE. B) FQ1Q2 E. C) GEH. D) FHE.
Answer: D
Diff: 2 Type: MC

107) A firm that has the ability to control to some degree the price of the product it sells 107)
A) faces a demand curve that is inelastic throughout the range of market demand.
B) is also able to dictate the quantity purchased.
C) is a price maker.
D) faces a perfectly inelastic demand curve.
Answer: C
Diff: 1 Type: MC

108) If we use a narrow definition of monopoly, then a monopoly is defined as a firm 108)
A) that has the largest market share in an industry.
B) that can ignore the actions of all other firms because it produces a product for which there are
no close substitutes.
C) that has been granted special production rights by the government.
D) that can ignore the actions of all other firms because it produces a superior product compared
to its rivals' products.
Answer: B
Diff: 1 Type: MC

40
 Figure 11-1

Figure 11-1 above shows the demand and cost curves facing a monopolist.

109) Refer to Figure 11-1. If the firm's average total cost curve is ATC2 , the firm will 109)
A) break even. B) suffer a loss.
C) face competition. D) make a profit.
Answer: A
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

110) Abu Ashraf owns the only pizza in a small town that is also home to a McDonald's, a Taco Bell and 110)
a Kentucky Fried Chicken. Using a broad definition of a monopoly, Abu Ashraf has a monopoly.
Answer: True False
Diff: 2 Type: TF

111) Producers in perfect competition receive a smaller the producer surplus than a monopoly producer. 111)
Answer: True False
Diff: 2 Type: TF

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

112) A merger between Eiz Steel and Alexandia Steel in Egypt was an example of a 112)
A) conspiracy in restraint of trade. B) vertical merger.
C) horizontal merger. D) conglomerate merger.
Answer: B
Diff: 1 Type: MC

41
 Table 11-2

Quantity Total Cost of

Price per dose Demanded Production
(Dose) (Dollars)
$80 0 $80
72 1 82
64 2 88
56 3 100
48 4 124
40 5 164
32 6 208
24 7 268
16 8 340

Shaikha Inc. has been granted a patent for its toothache balm. Table 11-2 shows the demand and the total cost schedule for
the firm.

113) Refer to Table 11-2. What is Shaikha's profit-maximizing output? 113)

A) 5 units B) 6 units C) 4 units D) 7 units
Answer: C
Diff: 2 Type: MC

114) A Herfindahl-Hirschman Index is calculated by 114)

A) summing the amount of sales by the four largest firms and dividing by total industry sales.
B) summing the advertising expenditures of the firms that want to merge by total industry
advertising expenditures.
C) dividing the number of firms wanting to merge by the total number in the industry.
D) summing the squares of the market shares of each firm in the industry.
Answer: D
Diff: 1 Type: MC

115) Economic efficiency in a free market occurs when 115)

A) consumer surplus is maximized.
B) price is as low as possible.
C) the sum of consumer surplus and producer surplus is maximized.
D) producer surplus is maximized.
Answer: C
Diff: 2 Type: MC

116) Consider the following characteristics: 116)

a. a market structure with barriers to entry
b. demand curves that are easily identified
c. firm cannot make zero profits in the long run
d. firm can reap long run profits.

Which of the characteristics in the list above is shared by an oligopolist and a monopolist?
A) a and d B) a, b and d C) a, b, c and d D) a, c, and d
Answer: A
Diff: 2 Type: MC

42
 117) Which of the following firms is patent protection of vital importance to? 117)
A) pharmaceutical firms B) auto makers
C) furniture producers D) software firms
Answer: A
Diff: 1 Type: MC

118) Firms do not have market power in which of the following market structures? 118)
A) oligopoly
B) monopoly
C) perfect competition and monopolistic competition
D) perfect competition only
Answer: D
Diff: 1 Type: MC

Table 11-1

Quantity Total Cost of

Price per unit Demanded Production
(Units) (Dollars)
$85 10 $400
80 11 500
75 12 550
70 13 560
65 14 575
60 15 595
55 16 625

A monopoly producer of a foreign language translation software faces a demand and cost structure as given in Table 11-1.

119) Refer to Table 11-1. What is the marginal revenue from the sale of the 12th unit? 119)
A) -$5 B) $50 C) $20 D) $75
Answer: C
Diff: 2 Type: MC

120) Economic efficiency requires that a natural monopoly's price be 120)

A) equal to the lowest price the firm can charge and still make a normal profit.
B) equal to average total cost where it intersects the demand curve.
C) equal to marginal cost where it intersects the demand curve.
D) equal to average variable cost where it intersects the demand curve.
Answer: C
Diff: 2 Type: MC

43
 Figure 11-3

Figure 11-3 shows the demand and cost curves for a monopolist.

121) Refer to Figure 11-3. What is the price charged for the profit-maximizing output level? 121)
A) $34 B) $21 C) $27 D) $13
Answer: A
Diff: 1 Type: MC

122) Which of the following statements is consistent with the views of Joseph Schumpeter? 122)
A) A lack of competition discourages firms from developing new technologies.
B) Research and development by competitive firms is responsible for most technological
changes.
C) Enforcement of antitrust laws is necessary to promote competition among firms.
D) An economy benefits from firms having market power because these firms are more likely to
be able to commit funds for research and development.
Answer: D
Diff: 2 Type: MC

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

123) What is the difference between a monopoly's marginal revenue curve and a perfect 123)
competitor's marginal revenue curve?
Answer: A monopoly's marginal revenue curve lies everywhere below its market demand
curve and is downward-sloping but a perfect competitor's marginal revenue curve
is the same as its demand curve which is horizontal at the prevailing market price.
Diff: 2 Type: SA

44
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

124) A patent or copyright is a barrier to entry based on 124)

A) large economies of scale as output increases.
B) widespread network externalities.
C) government action to protect a producer.
D) ownership of a key necessary raw material.
Answer: C
Diff: 1 Type: MC

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

125) Provide two examples of a government barrier to entry? 125)

Answer: 1. A patent or copyright which gives an individual or a firm the exclusive right to
produce a product for a given period of time.
2. A public franchise which makes it the exclusive legal producer of a good or
service.
Diff: 1 Type: SA

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

126) If a monopolist's price is $50 at 63 units of output and marginal revenue equals marginal cost and 126)
average total cost equals $43, then the firm's total profit is
A) $2,709. B) $441. C) $7. D) $3,150.
Answer: B
Diff: 3 Type: MC

45
 Figure 11-8

Suppose the Ministry of Communications in Kuwait changes its regulatory policy to allow competition into the mobile phone
market. Figure 11-8 shows the mobile phone market in Kuwait.

127) Refer to Figure 11-8. What is the size of the deadweight loss prior to the policy change and what 127)
happens to this deadweight loss after the policy change?
A) The deadweight loss of area C+D is converted to consumer surplus.
B) The deadweight loss of area D is converted to producer surplus.
C) The total deadweight loss is the area D+F; D is converted to consumer surplus and F to
producer surplus.
D) The deadweight loss of area D is converted to consumer surplus.
Answer: D
Diff: 3 Type: MC

128) A merger between the Ford Motor Company and General Motors would be an example of a 128)
A) trust. B) vertical merger.
C) conglomerate merger. D) horizontal merger.
Answer: D
Diff: 1 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

129) To maximize profit, a monopolist will produce and sell a quantity such that for the last unit sold, 129)
marginal revenue equals marginal cost, and charges a price given by the demand curve at that
output level.
Answer: True False
Diff: 2 Type: TF

46
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

130) Natural monopolies are generally regulated by 130)

A) the Department of Commerce. B) local or state regulatory commissions.
C) the Trade Commission. D) the Department of Justice.
Answer: B
Diff: 1 Type: MC

131) Microsoft hires marketing and sales specialists to decide what prices it should set for its products, 131)
whereas a wealthy corn farmer who sells his output in the world commodity market, does not.
Why is this so?
A) because the wealthy corn farmer is a price taker who choosing his optimal output
independently of market price but Microsoft's optimal output depends on the price it selects
B) because Microsoft is large enough to hire the best people in the field
C) because unlike Microsoft, the wealthy corn farmer is probably a monopolist
D) because Microsoft could potentially lose sales if it sets prices indiscriminately
Answer: D
Diff: 2 Type: MC

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

132) A natural monopoly is characterized by large fixed costs relative to variable costs. 132)
Answer: True False
Diff: 2 Type: TF

133) A monopolist currently sells 18 units of a good. If marginal revenue on the last unit sold is $117, 133)
then the price of the good must be less than $117.
Answer: True False
Diff: 2 Type: TF

134) The Egyptian government would never approve a proposed merger between two firms that could 134)
significantly increase the newly merged firm's market power even if the efficiency gains from the
newly merged firm could make consumers better off.
Answer: True False
Diff: 2 Type: TF

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

135) A market economy benefits from market power 135)

A) under no circumstances.
B) if market power gets so bad the government creates public enterprises.
C) if firms with market power do research and development with the profits earned.
D) if the majority of the population are entrepreneurs.
Answer: C
Diff: 2 Type: MC

47
 Figure 11-4

Figure 11-4 shows the demand and cost curves for a monopolist.

136) Refer to Figure 11-4. What is the difference between the monopoly's price and perfectly competitive 136)
industry's price?
A) The monopoly's price is higher by $9.50. B) The monopoly's price is higher by $13.
C) The monopoly's price is higher by $3.50. D) The monopoly's price is higher by $21.
Answer: B
Diff: 2 Type: MC

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

137) What gives rise to a natural monopoly? How do consumers benefit from a natural 137)
monopoly?
Answer: A natural monopoly arises when the production function exhibits economies of scale
over the relevant range of market demand. The average cost of production is lower
as the output produced increases. Consumers benefit from having one supplier
because the supplier will be able to pass some of the cost savings to consumers.
Diff: 3 Type: SA

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

138) Economic efficiency requires that a natural monopoly's price be set corresponding to the quantity 138)
where marginal revenue equals marginal cost.
Answer: True False
Diff: 2 Type: TF

48