Multiple choice questions:
1. Marginal revenue for a monopolist is
a. Downward sloping and always less than price
b. Downward sloping and always equal to price
c. Downward sloping and always greater than price
d. Horizontal, just like for the perfectly competitive firm
2. In the graph, the monopoly is
a. Making economic profits
b. Making either profits or losses. We cannot tell without more information
c. Breaking even
d. Making accounting profits, but economic losses
3. The marginal revenue curve for a perfectly competitive firm is ____________ while the marginal revenue curve of the monopolist is ____________.
a. Horizontal, downward sloping
b. Horizontal, upward sloping
c. Downward sloping, horizontal
d. Downward sloping, upward sloping
4. A monopoly is socially inefficient because it
a. Makes consumer buy goods they really don't need
b. Makes profits
c. Makes profits even in the long run
d. Charges a price greater than marginal cost
5. A firm can be the sole supplier of a good and still not be considered a monopoly if
a. The firm is making normal profits
b. The good produced is not important to the economy
c. The firm is not large
d. There are very close substitutes for the good
6. The demand curve faced by the monopolist
a. Has greater price elasticity of demand and close substitutes for the monopoly product are developed
b. Is perfectly inelastic
c. Has smaller price elasticity of demand as close substitutes for the monopoly product are developed
d. Is perfectly elastic
7. In order to price discriminate, a firm must
a. Be sure the price-marginal cost ratio is the same for all its submarkets
b. Have permission from the government
c. Face a downward-sloping demand curve
d. Set price equal to marginal cost
8. As opposed to other types of monopoly, a natural monopoly typically owes its monopoly position to
a. Economies of scale
b. Tariffs
c. Ownership of a resource without close substitutes
d. Patents
9. In a monopoly market structure, the firm (the monopolist)
a. Gouges the consumer
b. Gets unconscionably rich
c. Is the whole industry
d. Sells faulty products
10. In the graph to the right, the profit-maximizing price for a monopoly is
a. P3
b. P4
c. P2
d. P1
11. The fact that a monopolistically competitive firm does not produce the minimum ATC can be viewed as the cost of generating
a. Economies of scale
b. Homogeneous products
c. Product differentiation and variety
d. All of the above
12. A firm that produces an information product will
a. Earn negative or zero economic profits in the long run
b. Earn positive economic profits in the long run
c. Earn zero economic profits in the long run
d. Earn positive or zero economic profits in the long run
13. The downward slop of the demand curve of a monopolistically competitive firm implies that the firm has
a. No monopoly power over price, and therefore advertising will not increase profits
b. Some monopoly power over price, and therefore advertising may increase profits
c. Increasing returns to scale
d. Constant returns to scale
14. The greater the monopolistically competitive firm's success at product differentiation the lower is (are) the firm's
a. Price elasticity of demand
b. Opportunities for collusive behavior
c. Options for altering product price
d. None of the above are correct
15. When the qualities of a good are relatively easy to assess in advance of their purchase, the good I known as
a. An information product
b. An experience good
c. A search good
d. An interactive good
16. Which of the following graphs represents the cost curves for an informational product?
a. A
b. B
c. C
17. The monopolistically competitive firm in the diagram is
a. Earning positive economic profits
b. Earning positive accounting profits but negative economic profits
c. Earning negative economic profits
d. Earning economic profits equal to zero
18. In the long run, monopolistically competitive firms,
a. Make zero economic profits
b. Make positive economic profits
c. Can make either positive economic profits or zero economic profits, and always make positive accounting profits
d. Make zero accounting profits
19. In comparing the long-run equilibrium of perfect competition and monopolistic competition, which of the following is true?
a. Perfect competition: P = MC - minimum of AVC and zero economic profits; Monopolistic competition: P > MC = ATC and positive economic profits
b. Perfect competition: P = MC - minimum of ATC and zero economic profits; Monopolistic competition: P = MC > minimum of ATC and zero economic profits
c. Perfect competition: P = MC - minimum of ATC and zero economic profits; Monopolistic competition: P > MC, P > minimum ATC and zero economic profits
d. Perfect competition: P = MC - minimum of ATC and zero economic profits; Monopolistic competition: P = minimum of ATC > MC and zero economic profits
20. When a firm produces an information product the initial or fixed costs are (low/high).
21. Consequently the average fixed cost and average total cost (increase/decrease) as the volume of output increases.
22. Since most of the costs are the initial fixed costs of development, once the product is developed, the (total/average/marginal) cost of producing more units of the product are typically low and (decreasing/increasing/constant).
23. In this case, then, the low and constant marginal cost is (above/below) the average cost.
24. If the firm set the price, or average revenue, of the product equal to the marginal cost, the firm would have economic (gains/losses) since the marginal cost is (greater than/les than) the average cost.
25. Which of the market structures has unrestricted entry and exit, many sellers of the product and some ability to set the price?
a. Monopolistic competition
b. Oligopoly
c. Monopoly
d. Perfect competition
26. A situation where a consumer's willingness to use an item depends on how many others use it is
a. A positive-sum game
b. Price leadership
c. A vertical merger
d. A network effect
27. Oligopolies may emerge in an industry because of
a. Barriers to entry
b. Economies of scale
c. Mergers
d. All of the above
28. According to game theory, the strategic interaction between two or more individuals can take the form of
a. A zero-sum game
b. A non-cooperative game
c. A cooperative game
d. All of the above are correct
29. What is a cartel?
a. It is an association of producers in an industry that agree to set common prices to prevent competition
b. It is an association of producers in an industry that agree to set common prices and output quotas to promote competition
c. It is an association of producers in an industry that agree to set common prices to promote competition
d. It is an association of producers in an industry that agree to set common prices and output quotas to prevent competition
30. A game in which the players will not negotiate is a
a. Zero-sum game
b. Cooperative game
c. Non-cooperative game
d. Negative-sum game
31. How can an oligopoly form when there are network effects and market feedback?
a. A few firms may be able to capture most of the growth in demand that is caused by positive market feedback
b. Firms will successfully drive out their competitors when they pick a market leader and match any price changes made by the leader
c. Firms will engage in limit pricing
d. Firms will invest in excess productive capacity to signal other firms that they can outlast their competitors in a price war.
32. Under the Capper-Volstead Act of 1992, U.S. farmers are permitted to form cooperative organizations aimed at influencing aggregate production and market prices of their crops. Today, many of the nation's 10,000 potato farmers are aiming to expand the United Potato Growers of America (UPGA), an organization dedicated to restricting potato production, pushing up potato prices, and boosting profits. The UPGA includes farmers from California, Colorado, Idaho, Oregon, Texas, Washington, and Wisconsin. Members sign an agreement to restrict their production of potatoes. The UPGA uses satellite photography and global-positioning-system technology to enforce the agreement and fines members who are caught cheating. Based on the discussion of the factors favoring the organization and enforcement of a cartel, what aspects of US potato farming make the ultimate success of the UPGA's potato cartel more or less likely?
a. The number of firms makes it ______ likely the UPGA's cartel will be successful.
b. Being that the product is potatoes makes it ______ likely the UPGA's cartel will e successful.
c. The fact that potatoes are publically traded in large highly organized markets makes it ______ likely the UPGA's cartel will be successful.
d. If the demand for potatoes suddenly become more volatile, that would make it ______ likely the UPGA's cartel will be successful.
33. An industry battle between incompatible product formats can occur if competing firms selling sets of ________________________ products fail to take into account ________________________ effects.
34. Consider the following payoff matrix. Firm 1 and Firm 2 are seeking to choose between Format A and Format B for their products. Which of the following statements best describes their profit-maximization?
a. Since there are no network effects, Firm 1 would maximize its profit by producing format B and Firm 2 would maximize its profit by producing format A.
b. Since there are network effects, Firm 1 would maximize its profit by producing format B and Firm 2 would maximize its profit by producing format A.
c. Since there are no network effects, the firms would maximize profits if they both produced format A.
d. Since there are network effects, the firms would maximize profits if they both produced format A.
35. The legal system typically defines monopoly by looking at a firm's
a. Sales revenues
b. Market share
c. Adjusted taxable income
d. Advertising budget
36. The first legislation enacted to control the creation and growth of monopoly in the U.S. was
a. The Sherman Antitrust Act
b. The Federal Trade Commission Act
c. The Robinson-Patman Act
d. The Clayton Act
37. Which of the following are exempt from antitrust regulation?
a. The communications industry
b. The steel industry
c. The automobile industry
d. Professional baseball
38. The theory that regulators often end up adopting the views of the regulated is known as
a. The capture hypothesis
b. The share-the-gains, share-the-pains hypothesis
c. The deregulation hypothesis
d. None of the above
39. Market solutions to the lemons problem entail
a. Industry standards
b. Product certification
c. Product warranties
d. All of the above
40. Average cost pricing by regulated monopolies
a. Forces the firm to operate at a loss
b. Permits long-run monopoly profits
c. Allows the firm to make a "fair" rate of return
d. None of the above
41. Which of the following is not an issue in enforcing antitrust laws?
a. Marginal cost pricing
b. International competition
c. Defining the relevant market
d. The laws are vague
42. A natural monopoly exists when
a. A firm is able to make long-run profits without inducing entry by other firms
b. There is pure monopoly and the government grants an exclusive license to the firm
c. A firm's demand curve is downward sloping
d. A firm's long-run average cost curve is sloping down when it intersects the market demand curve
43. The federal regulatory agency that has jurisdiction over labor markets is
a. The Federal Trade Commission
b. The Occupational Safety and Health Administration
c. The Equal Employment Opportunity Commission
d. The Securities and Exchange Commission
44. The primary purpose of economic regulation is
a. To control the price that regulated enterprises are allowed to charge
b. To control the quality of serice provided by a monopolist
c. To force a firm to produce at the point where marginal cost equals marginal revenue
d. To focus on the impact of production on the environment and society, the working conditions under which good and services are produced, and sometimes the physical attributes of goods
45. The table gives some data from the production function of a firm that is a perfect competitor in both the product and labor markets. The wage rate in the industry is $300 and the price of the good produced is $15. The profit-maximizing quantity of labor to hire is
a. 102 workers
b. 103 workers
c. 104 workers
d. 105 workers
46. Which of the following is not a key factor that influences the elasticity of demand for labor?
a. How easy it is to substitute other inputs for labor in the production process
b. The proportion of total costs that is accounted for by labor
c. The availability of labor in the market
d. The price elasticity of demand for the final product
e. The length of time the firm has to adjust to a change in the labor's price
47. In the short run, labor outsourcing by U.S. firms tends to
a. Increase U.S. wages but reduce U.S. employment
b. Increase both U.S. wages and employment
c. Reduce both U.S. wages and employment
d. Reduce U.S. wages but increase U.S. employment
48. For affirm facing a perfectly elastic supply of labor, the employment of workers will continue until
a. MRP = wage rate
b. Marginal factor cost = wage rate
c. MPP = MR
d. All of the above
49. The price elasticity of demand for an input
a. Is larger the longer the time period being considered
b. Is lower the larger the proportion of total costs accounted for by that input
c. Is lower as more substitutes for the input are available
d. Is lower the greater the price elasticity of demand for the final product
50. How many workers will this firm employ if the weekly wage is $300?
a. 0
b. 27
c. 28
d. 29
51. The net short-run effects of outsourcing on U.S. wages and employment are
a. Always negative
b. Mixed
c. Always positive
d. Limited to blue collar workers
52. If the MRP of labor is less than the age rate, the perfectly competitive firm will
a. Maintain the current level of employment
b. Increase employment
c. Decrease employment
d. Raise the wage rate
53. Other things equal, an increase in the productivity of labor will lead to
a. Fewer workers being hired
b. Lower wages
c. Higher wages
d. No change in the number of workers being hired
54. The monopolist hires fewer workers than the perfect competitor because
a. A product price must rise for the monopolist to sell more
b. The MRP curve for the monopolist is above the MRP curve of the perfect competitor
c. The monopolist produces less than the perfect competitor and needs less labor, other things being equal.
d. None of the above
55. Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as
a. Black market payments
b. Demerit payments
c. Transfer payments
d. Merit payments
56. Subsidizing medical services through Medicare
a. Makes medical services available to a large percentage of the population, who otherwise could not afford them
b. Drives a wedge between the price received by providers and the price perceived by consumers
c. Is s relatively low percentage of U.S. GDP compared to other nations
d. All of the above are true
e. Only A and B are true
57. A cost or benefit of an economic activity that has an impact on an individual's well-being, even though the individual was not directly involved in the activity, is known as a(n)
a. Public good
b. Externality
c. Free-rider
d. Capital loss
58. Based on the accompanying graph which depicts the market for CAT scans, in the free market, the price of a CAT scan would be __________. In the free market the quantity of CAT scans consumed would be _________. The government subsidizes the CAT scans and pays hospitals $450. When the subsidy is paid there will be _________ CAT scans produced. Consumers are willing to pay _________ out of the pocket expenses for a CAT scan. The amount of the subsidy is _________. Subsidizing CAT scans results in _________ CAT scans being produced.
59. A good that has been deemed socially desirable through the political process is known as
a. A merit good
b. A demerit good
c. A positive externality
d. A free-rider
60. The study of collective decision making, or the process through which voters, politicians and other interested parties influence nonmarket choices is known as
a. A private choice theory
b. Antitrust legislation
c. Public choice theory
d. The exclusion principle
61. Market failure occurs because
a. The market system does not make individuals responsible for the social costs/benefits of their actions
b. The market system forces individuals to consider the social consequences of their actions
c. The market system forces individuals to consider the social and private consequences of their actions
d. The market system does not make individuals responsible for the private costs/benefits of their actions
62. A true public good must be provided by the government. Which of the following goods is a true public good?
a. Highways where tolls are collected
b. Postal service
c. Tax collection
d. Flood control
63. Other than correcting externalities, other economic functions of government include
a. Deciding which states may or may not impose income taxes, charge fees and enforce contracts
b. Providing a legal system, allocating public goods, promoting competition, and stabilizing the economy
c. Deciding what to produce, how to produce it and for whom to produce for all the sectors of the economy
d. Income redistribution and the regulation and provision of merit and demerit goods
64. Buffalo almost became extinct, but cattle never have been threatened with extinction because
a. Buffalo were wild and cattle were tame
b. Cattle provide economically valuable products and buffalo did not
c. Buffalo are bigger than cattle and thus provide more meat and hide
d. Buffalo were common property and cattle were private property
65. Economically speaking, the optimal quantity of pollution is
a. The output where the marginal benefit from cleaning up pollution equals the marginal cost of cleaning up pollution
b. Zero
c. The output where the total benefit from cleaning up pollution equals the total cost of cleaning up pollution
d. The output where the marginal cost of pollution is positive
66. Which of the following is true?
a. Private costs are the same thing as external costs
b. Social costs are the same thing as the sum of private and external costs
c. Internal costs are the same thing as social costs
d. All of the above statements are true
For questions 67-68, consider the following. In several African countries where the rhinoceros was once a thriving species, the animal is now nearly extinct. In most of these nations, rhinoceros horns are used as traditional ingredients in certain medicines. Rhinoceros farming has been proposed as an alternative to the imposition of stiff penalties on people who are caught engaging in rhinoceros hunting.
67. The imposition of stiff penalties
a. Reduces the supply of rhino horns
b. Increases the price of rhino horns
c. Makes poaching more lucrative
d. All of the above are correct
e. B & C only are correct
68. If rhinoceros farming was legal
a. The market price of rhino horns would fall
b. The incentive to poach would be reduced
c. More rhino horns would be produced
d. All of the above are correct
e. B & C only are correct
69. If the marginal cost of making the air in Los Angeles 10 percent cleaner is $20 million, then the marginal cost of making the air in Los Angeles 20 percent cleaner is
a. Between $20 and $40 million
b. Uncertain. We need more information
c. $40 million
d. More than $40 million
70. Assume the figure to the right represents a market with a negative externality. One of the supply curves only includes the private costs of producing the good, while the other includes both the private cost and the external cost of production. Referring to the figure, the socially optimal price is:
a. Between P2 and P3
b. P1
c. P3
d. P2
71. A common property resource
a. Has property rights that are indefinite or nonexistent
b. Is one that everyone owns
c. Is a nonexclusive resource in that no one can be prevented from using it
d. All of the above are correct
72. For private contracting to solve the externality problem, all of the following conditions must be met except
a. The government enforces contracts
b. The government knows the extent to which social costs exceed private costs
c. Transaction costs are low
d. The resources are privately owned
73. Under a program called the Emissions Trading Scheme, the governments of European Union member nations establish overall targets for greenhouse gas emissions and issue ________, or permits, authorizing companies to emit certain amounts. In theory, an increase in the market clearing price of ______ should induce firms to develop methods of _______ their emissions of greenhouse gases.
a. Vouchers; pollution; reducing
b. Allowances; allowances; eliminating
c. Allowances; allowances; reducing
d. Vouchers; pollution; eliminating
74. Externalities can be corrected and the market system will produce the socially efficient amount of goods if
a. The externality is "internalized" so that people are forced to face the private and social costs of their actions
b. Individuals are faced with the private and external costs of their actions when making decisions
c. Signals in the economy make decision-makers confront all the costs of their actions
d. Any of the above take place
75. Which of the following is not a regional trading bloc?
a. NAFTA
b. WTO
c. ASEAN
d. The EU
76. The North American Free Trade Agreement and the European Union are examples of
a. Labor agreements designed only for industrialized contries
b. Trade blocs
c. Agriculturally based economies
d. Defense treaties
77. One main difference between tariffs and quotas is that
a. Tariffs benefit domestic producers but quotas do not
b. Consumers can import any amount of the imports that have tariffs placed on them, but they are restricted to a set maximum amount they can import for goods subject to quotas
c. Tariffs raise the price of imported products but quotas do not
d. All of the above
78. Which of the following is consistent with international trade theory?
a. A country should strive for comparative advantage in manufacturing
b. The United States has been falling behind Europe and Japan because its economy is too open
c. The standard of living within a country is a function of the strength of the economy and not of its relative position
d. The United States needs trade restrictions to stay competitive
79. If a firm in China sells its product in the U.S. at a price below its cost of production, the firm is said to be
a. Acting in the interest of consumers and producers in the U.S. market
b. Experiencing diseconomies of scale
c. Dumping its goods in the U.S. market
d. None of the above
80. In the long run, imports are paid for by exports because
a. The regulations of the World Bank stipulate that this is how international accounts must be settled
b. All U.S. dollars ultimately must be held in the United Sates
c. For the most part, foreigners want U.S. produced goods in exchange for the goods that are shipped to the United States
d. All of the above
81. The United States economy is considered by the Institute for Management Development to be the most competitive economy because
a. Of a high saving rate
b. Of selected restrictions on imports from Japan and Europe.
c. Of Widespread entrepreneurship
d. Americans are willing to work harder than anyone else is
82. When a firm's production is subsidized by its government and then the firm sells its products in a foreign country at a price below the cost of production, this is called
a. A quota
b. A tariff
c. Involuntary export expansion
d. Dumping
83. If a country has a comparative advantage in the production of some good then
a. That country should let other nations produce that good so that they may focus on new products that will expand job opportunities for their citizens
b. That country can produce the good at a lower opportunity cost compared to other producers
c. That country should specialize in the production of that good and not trade with other nations so that they can keep all the gains for themselves
d. All of the above
84. In the graph shown, both world trade and world real GDP are measured as index numbers and are arbitrarily set equal to 100 for 1950. By 2005, the index for world trade has increased to a little over 2,400. Since 1950 world trade has increased by a multiple of
a. 16
b. 24
c. 8
d. 12
85. What is the difference between a deficit item and a surplus item in the balance of payments?
a. A deficit item is when a country imports more than it exports while a surplus is when a country exports more than it imports
b. A surplus item is when a transaction leads to a payment by a country and a deficit item is when a transaction leads to a receipt by a country
c. A deficit item is when a country exports more than it imports while a surplus item is when a country imports more than it exports
d. A deficit item is when a transaction leads to a payment by a country and a surplus item is when a transaction leads to a receipt by a country
86. Under the gold standard, if a country had a balance of payments deficit
a. Gold would flow out of that country and the domestic money supply would contract
b. National output and prices would fall discouraging imports and encouraging exports leading to an improvement in the balance of payments
c. Interest rates would rise which would attract foreign capital and lead to an improvement in the balance of payments
d. All of the above
87. In the following graph, what is the equilibrium exchange rate between the South African rand the U.S. dollars?
a. 0.05
b. 0.15
c. 0.20
d. 0.25
88. In the graph, what is the situation when the dollar price of the South African rand is at 0.10?
a. There is a shortage of 8 trillion rand demanded
b. There is a surplus of 4 trillion rand
c. There is a shortage of 0.4 trillion rand
d. There is a surplus of 0.4 trillion U.S. dollars
89. The larger the current account surplus, the
a. Larger the total account surplus
b. Larger the capital account deficit
c. Larger the balance of merchandise trade deficit
d. Greater the depreciation of the dollar
90. If the current account is in a deficit, the capital account
a. Will be in a surplus
b. Will be in a deficit
c. Will be in balance
d. Can either be a deficit or surplus
91. A problem associated with flexible exchange rates is
a. Hedging
b. The inability for an economy to compete against foreign substitutes
c. Foreign exchange risk
d. Government control over the exchange rate
92. The following table lists the dollar figures of international transactions of the US. Figures are in billions of dollars. The current account balance is
a. $-50
b. $-150
c. $-100
d. $150
93. The capital account balance in the graph is
a. $150
b. $-150
c. $-100
d. $-50
94. How are flexible exchange rates determined?
a. The exchange rate is determined where the current account is equal to the capital account
b. The exchange rate is determined where the quantity of exports demanded is equal to the quantity supplied of exports
c. The exchange rate is determined where the quantity of exports demanded is equal to the quantity supplied of imports
d. The exchange rate is determined where the quantity of a currency demanded is equal to the quantity supplied of the currency
95. The range of permitted exchange rate fluctuations between upper and lower bounds is referred to as the
a. Target zone
b. Exchange zone
c. Flexibility range
d. Gold points
96. Nations manage their currency's exchange rate within this target zone by
a. Buying and selling of government securities
b. Open market operations
c. Buying and selling foreign exchange
d. Buying and selling corporate bonds
97. Which of the following statements is consistent with bot the gold standard and the Bretton Woods agreement?
a. Exchange rate risk was a serious problem under both exchange rate systems
b. Each exchange rate system was based on flexible exchange rates
c. Increases in the money supply do not cause inflation
d. Active monetary policy could not be pursued by a single economy