1. Economics deals primarily with the concept of ( ). A) scarcity. B) money. C) poverty. D) banking.
Answer: A
2. Economics is the study of ( ). A) production methods. B) how society manages its scarce
resources. C) how households decide who performs which tasks. D) the interaction of business and
government.
Answer: B
3. The "invisible hand" directs economic activity through ( ). A) advertising. B) prices. C) central
planning. D) government regulations.
Answer: B
4. The invisible hand works to promote general well-being in the economy primarily through ( ).
A) government intervention. B) the political process. C) peoples pursuit of self-interest. D) altruism.
Answer: C
5. When computing the opportunity cost of attending a concert you should include ( ). A) the price
you pay for the ticket and the value of your time. B) the price you pay for the ticket, but not the value
of your time. C) the value of your time, but not the price you pay for the ticket. D) neither the price of
the ticket nor the value of your time.
Answer: A
6. Which of the following is a correct statement about production possibilities frontiers? ( ). A) An
economy can produce only on the production possibilities frontier. B) An economy can produce at
any point inside or outside a production possibilities frontier. C) An economy can produce at any
point on or inside the production possibilities frontier, but not outside the frontier. D) An economy
can produce at any point inside the production possibilities frontier, but not on or outside the frontier.
Answer: C
7. Prices rise when the quantity of money rises rapidly is an example of a ( ). A) negative
economic statement. B) positive economic statement. C) normative economic statement. D)
statement that contradicts one of the basic principles of economics.
Answer: B
8. Which of the following is an example of a normative, as opposed to positive, statement? ( ). A)
The price of gasoline came down sharply during the second half of 2006. B) If the government were
to set a maximum legal price on gasoline, then there would be a shortage of gasoline. C) Income
taxes should be reduced. D) The federal government obtains much of its revenue from income
taxes.
Answer: C
9. A production possibilities frontier shifts outward when ( ). A) the economy experiences
economic growth. B) the desires of the economys citizens change. C) at least one of the basic
principles of economics is violated. D) opportunity costs are lessened.
Answer: A
10. A production possibilities frontier can shift outward if( ). A) government increases the amount
of money in the economy. B) there is a technological improvement. C) resources are shifted from
the production of one good to the production of the other good. D) the economy abandons inefficient
production methods in favor of efficient production methods.
Answer: B
11. A shift in the consumer's demand for a good X cannot result from a change in the( ). A) price
of a substitute good for X. B) price of X. C) consumer's tastes. D) consumer's income.
Answer: B
12. An increase in the quantity supplied ( ). A) shifts the supply curve to the right. B) shifts the
supply curve to the left. C) indicates a movement along the supply curve. D) makes the supply curve
flatter.
Answer: C
13. An excess demand for a good or service tends to cause( ). A) its price to increase over time.
B) its price to decrease over time. C) an offsetting excess supply later. D) none of the above
Answer: A
14. Which of the following statements is true with respect to price ceilings? ( ). A) The true cost of
the good to consumers is usually greater than the money cost. B) All consumers benefit from the
lower price. C) Nonprice rationing associated with price controls is more efficient than rationing by
price. D) Shortages associated with price ceilings generally do not last any longer than shortages
associated with free markets.
Answer: A
15. When the government establishes a price ceiling below the equilibrium price( ). A) there will
be a temporary shortage that market forces will eventually clear. B) a shortage occurs which market
forces can not clear. C) producers will eliminate the resulting shortage by jointly deciding to increase
supply. D) the market equilibrium price will prevail.
Answer: B
16. Which one of the following would cause the demand for coffee to increase? ( ). A) an
increase in the price of tea, a substitute for coffee B) a decrease in the price of tea, a substitute for
coffee C) an increase in the price of cream, a complement to coffee D) a decrease in the price of
coffee
Answer: A
17. Which of the following statements about demand elasticity is correct? ( ). A) If demand is
price-inelastic, an increase in price will reduce total expenditures. B) If demand is price-elastic, an
increase in price will increase total expenditures. C) If demand is price-inelastic, an increase in price
will increase total expenditures. D) If demand is price-elastic, an increase in price will leave total
revenues unchanged.
Answer: C
18. Along a linear demand curve, the price elasticity( ). A) is constant. B) increases as price falls.
C) is equal to one at the midpoint. D) decreases as price rises.
Answer: C
19. When the actual price in a market is above the equilibrium price we would expect( ). A)
equilibrium price and quantity to prevail. B) a shortage of the good or service. C) a surplus of the
good or service. D) an excess demand or excess supply depending upon the extent of the
difference between actual and equilibrium price.
Answer: C
20. A vertical supply curve may be described as:( ). A) relatively price elastic. B) perfectly price
inelastic. C) relatively price inelastic. D) perfectly price elastic.
Answer: B
21. Rank the demand curves in the figure below in order of greatest to least price elasticity of
demand at their in common intersection point. ( ). A) A, B, C. B) B, C, A. C) B, A, C. D) C, A, B.
Answer: C
22. Rank the points A, B and C on the demand curve in the figure below in order of greatest to least
elasticity of demand. ( ). A) C, A, B. B) B, A, C. C) A, B, C. D) They are of equal elasticity.
Answer: A
23. If at a price of $10, quantity bought will be 5400 per day, and at $15, quantity bought will be
4600 per day, then the price elasticity of demand is approximately: ( ). A) 0.2. B) 0.4. C) 0.6. D)
2.5.
Answer: B
24. How is it possible for a corn farmer to have a bumper crop season and yet make less income? (
). A) demand for corn is elastic. B) demand for corn is inelastic. C) demand for corn is unit elastic.
D) corn has lots of substitutes.
Answer: B
25. A shift to the left of the demand curve for X together with a shift to the right of the supply curve
for X tends to: ( ). A) increase the price of X; the effect upon the quantity exchanged is
indeterminate. B) increase the price of X and to increase the quantity exchanged. C) decrease the
price of X and to decrease the quantity exchanged. D) decrease the price of X; the effect upon
quantity exchanged is indeterminate.
Answer: D
26.Since almost all forms of transportation produce some type of pollution, ( ). A) the government
should ban all transportation. B) the government should ban all pollution. C) society has to weigh the
cost and benefits when deciding how much pollution to allow. D) refrain from intervening because
the market can best solve this problem.
Answer: C
27.Some environmentalists argue that we should protect the environment as much as possible,
regardless of cost. Which of the following is not a likely outcome of pursuing such a course of
action? ( ). A) lower levels of nutrition, health care, and housing B) a lower standard of living C)
slowing or reversing technological advancement D) the elimination of all pollution
Answer: D
28.Corrective taxes are typically advocated to correct for the effects of ( ). A) positive externalities.
B) negative externalities. C) patents. D) All of the above are correct.
Answer: B
29. Suppose that an MBA degree creates no externality because the benefits of an MBA are
internalized by the student in the form of higher wages. If the government offers subsidies for MBAs,
then which of the following statements is correct? ( ). A) The equilibrium quantity of MBAs will
equal the socially optimal quantity of MBAs. B) The equilibrium quantity of MBAs will be greater than
the socially optimal quantity of MBAs. C) The equilibrium quantity of MBAs will be less than the
socially optimal quantity of MBAs. D) There is not enough information to answer the question.
Answer: B
30. The best remedy for market failure is often ( ). A) a market-based solution. B) shutdown of the
market. C) no government intervention. D)externalizing the externalities.
Answer: A
31. Which of the following is true if marginal cost is above average variable cost as output rises? (
). A) Average total cost must be falling. B) Average fixed cost must be rising. C) Average variable
cost must be falling. D) Average variable cost must be rising.
Answer: D
32. Which of the following are rules about the relation between average cost and marginal cost: (
). A) When marginal cost is below average cost, it is pulling average cost down. B) When MC is
above AC, it is pulling up AC. C) When MC just equals AC, AC is constant. D) All of the above.
Answer: D
33. Suppose that a sneaker company produces output using capital and labor. Capital costs $50 per
unit and labor costs $5 per unit. If the firm is minimizing the costs of production when the marginal
product of capital is 100 units, the marginal product of labor is: ( ). A) 5 units. B) 10 units. C) 50
units. D) 100 units.
Answer: B
34. Which of the following is typically not U-shaped? ( ). A) Average cost B) Average variable
cost C) Average fixed cost D) Marginal cost
Answer: C
35. Which of the following is true at the quantity of output where average cost has reached its
minimum level? ( ). A) AVC = FC. B) MC = AVC. C) MC = AC. D) AC = AFC.
Answer: C
36. If output rises and total costs remain fixed, then: ( ). A) average cost will fall. B) average cost
will rise. C) average cost will eventually increase. D) fixed cost will eventually rise.
Answer: A
37. If 25 units of a good are produced at a fixed cost of $50 and a total cost of $550, then the
average variable cost of producing the good is: ( ). A) $15. B) $20. C) $25. D) $30.
Answer: B
38. The long-run supply curve of an individual firm in perfect competition is the same thing as: ( ).
A) the rising segment of its marginal cost curve, above average cost. B) the rising segment of its
average cost curve. C) its entire average cost curve. D) that entire part of its total cost curve in
which total cost rises or remains constant as output increases.
Answer: A
39. If you are a wheat farmer and you want to earn as much profit as you can, you should do which
of the following: ( ). A) try to produce and sell that quantity of output at which marginal cost has
risen to equality with price. B) try to produce and sell that quantity of output at which marginal cost is
equal to average variable cost. C) try to produce and sell that quantity of output at which marginal
cost has reached its minimum possible level. D) never let marginal cost reach equality with price,
since this is the point at which profits become zero.
Answer: A
40. Which panel in the figure below most accurately indicates by q* the level of output which a single
supplier in a perfectly competitive industry will produce, given it produces a positive amount? ( ).
A) a B) b C) c D) d
Answer: B
41. What is the underlying reason that maximum profit comes at the level of output where marginal
cost equals price? ( ). A) there is additional profit as long as the price is greater than the marginal
cost of the last unit. B) there is additional profit when the marginal cost of a unit is higher than the
price. C) there is no more profit when the price is greater than the marginal cost of the last unit. D)
price is not important in determining profit.
Answer: A
42. If four firms constituting a competitive industry have the supply schedules given below, then their
combined market supply may be stated as: ( ). Ql s= 16 + 4P Q3 s= 32 + 8P Q2 s= 5 + 5P Q4 s=
60 + 10P A) Q = 113 - 27P. B) Q = 113 + 27P. C) Q = 51 + 4P. D) Q = 92 + 18P.
Answer: B
43. Which of the following statements is correct in reference to the figure below? ( ). A) B is the
shutdown point. B) B is the profit-maximizing point. C) C is the zero-profit point. D) A is the
shutdown point.
Answer: D
44. The zero-profit point for a perfectly competitive firm occurs where the price equals the minimum
point of the: ( ). A) AVC curve. B) AC curve. C) MC curve. D) AFC curve.
Answer: B
45. The short-run supply curve of a firm in perfect competition is the rising segment of its short-run: (
). A) marginal cost curve. B) average fixed cost curve. C) average variable cost curve. D)
marginal cost curve above its average variable cost curve.
Answer: D
46. Pareto efficiency occurs: ( ). A) when no possible reorganization of production or distribution
can make anyone better off without making someone else worse off. B) when everyone gets a fair
share of the goods produced. C) when reorganizing the production makes everyone better off. D)
when I am better off and everyone else stays the same.
Answer: A
47. In a market economy, if you are only one of many wheat farmers you are considered a which of
the following: ( ). A) price-maker. B) price-taker. C) price manipulator. D) price-negotiator.
Answer: B
48. When a firm has a natural monopoly, other firms do not enter the market because ( ). A) by
definition natural monopolies are protected by the government. B) the owners of natural monopolies
have exclusive rights to key resources. C) new firms cannot achieve the same low costs as the
current monopolist. D) None of the above is correct.
Answer: C
49.The demand curve for an individual firms output is ( ). A) downward sloping for both a
competitive firm and a monopoly. B) horizontal for both a competitive firm and a monopoly. C)
downward sloping for a competitive firm and horizontal for a monopoly. D) horizontal for a
competitive firm and downward sloping for a monopoly.
Answer: D
50. The marginal revenue of a monopoly is ( ). A) greater than price. B) greater than price for low
levels of output, but less than price at higher levels of output. C) equal to price. D) less than price.
Answer: D
51. The average revenue of a monopoly is ( ). A) greater than price. B) greater than price for low
levels of output, but less than price at higher levels of output. C) equal to price. D) less than price.
Answer: C
52.According to the graph, what price does the profit-maximizing monopolist charge? ( ). A) PA
B) PB C) PC D) PD
Answer: C
53. According to the graph, what are the revenues of a profit-maximizing monopolist? ( ). A) 1020
B) 900 C) 750 D) None of the above is correct
Answer: D
54. Price discrimination is the practice of: ( ). A) charging lower prices in the short run than in the
long run. B) charging lower prices in the long run than in the short run. C) selling the same good at
different prices to different customers. D) selling more output in one market than in another market.
Answer: C
55. Monopolistic competition is characterized by ( ). A) few sellers and free entry. B) few sellers
and restricted entry. C) many sellers and free entry. D) many sellers and restricted entry.
Answer: C
56. Monopolistic competition features: ( ). A) many buyers and sellers. B) easy entry and exit. C)
long term economic profits equal to zero. D) all of the above.
Answer: D
57. The demand curve of a monopolistically competitive firm is ( ). A) downward sloping; as it
also is for a monopolist. B) downward sloping; as it also is for monopolists and perfectly competitive
firms. C) horizontal; as it also is for a perfectly competitive firm. D) horizontal; as it also is for
monopolists and perfectly competitive firms.
Answer: A
58.A monopolistically competitive firm maximizes profits at the quantity where ( ). A) average
total cost = marginal cost. B) average total cost = average revenue. C) marginal revenue = average
revenue. D) marginal revenue = marginal cost.
Answer: D
59. A monopolistically competitive firm maximizes its profits and has profits greater than zero if ( ).
A) average total cost equals average revenue and average total cost is greater than price. B)
average total cost equals average revenue and average total cost is less than price. C) marginal
revenue equals marginal cost and average total cost is greater than price. D) marginal revenue
equals marginal cost and average total cost is less than price.
Answer: D
60. Critics of advertising argue that advertising: ( ). A) increases the elasticity of demand for the
firms product. B) impedes competition. C) decreases demand for the firms product. D) decreases
supply of the firms product.
Answer: B
61. Which of the following is correct? ( ). A) Monopolistically competitive firms are price takers. B)
For monopolistically competitive firms the marginal revenue curve lies above the demand curve. C)
Under monopolistic competition, if price exceeds average total cost, firms will enter the market. D)
For monopolistically competitive firms, price equals marginal cost in the long run.
Answer: B
62. Oligopoly means ( ). A)one seller. B) two sellers. C) a few sellers. D) a regulated utility.
Answer: C
63. A concentration ratio measures: ( ). A) the number of firms in a perfectly competitive industry.
B) the number of products sold in a monopolistically competitive market. C) the ratio of the total
number of firms in the market to the dollar value of industry revenues. D) the percent of total industry
output that is accounted for by the largest firms.
Answer: D
64. Collusive oligopoly produces prices and quantities very similar to those produced by: ( ). A)
perfect monopoly. B) monopolistic competition. C) perfect competition. D) noncollusive oligopoly.
Answer: A
65. A cartel may be defined as: ( ). A) a group of firms. B) a group of monopolies. C) a group of
firms cooperating in regulating production and marketing so as to restrict quantity and fix price. D)
the vesting of the control of different corporations in a single one by the issue of stock of the
controlling corporation in place of a majority of the stock of the others.
Answer: C
66. Price discrimination occurs when: ( ). A) the same product is sold by a firm to different
consumers for different prices. B) consumers sell products to one another. C) the same product is
produced by a firm with different costs of production. D) a firm charges the same price to consumers
with different levels of income.
Answer: A
67. Which of the following are examples of price discrimination? ( ). A) a movie theater charges
children less for tickets than is charged adults. B) A pharmacy gives discounts to senior citizens. C)
An airline sets lower prices for passengers who stay over a Saturday night during their travels. D) All
of these are examples of price discrimination.
Answer: D
68. If the market indicated by Figure 10-1 is perfectly competitive, the level of output and price will
be, respectively: ( ). A) F, C. B) H, C. C) F, B. D) H, B. Figure 1
Answer: B
69.If the market indicated by Figure 1 is monopolized by one large seller, the level of output and
price will be, respectively: ( ). A) F, C. B) H, C. C) F, B. D) H, B.
Answer: C
70.Compared to pricing under perfect competition, which of the areas in Figure 1 represents the
consumer surplus lost by consumers due to monopoly pricing? ( ). A) DEG. B) ACG. C) BCGD.
D) BCED.
Answer: A
