Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
1. The coefficient of price elasticity of demand is the percentage change in
a. price divided by the percentage change in quantity demanded.
b. price divided by the percentage change in demand.
c. quantity demanded divided by the percentage change in price.
d. demand divided by the percentage change in price.
e. c and d
2. The demand curve D1 is
a. inelastic.
b. elastic.
c. unit elastic.
d. perfectly elastic.
e. perfectly inelastic.
3. The fewer substitutes for a good,
a. the lower its cross elasticity of demand.
b. the higher its cross elasticity of demand.
c. the lower its price elasticity of demand.
d. the higher its price elasticity of demand.
4. Airlines that try to lower fares in order to increase revenue believe the demand for airline service is
a. price inelastic.
b. income elastic.
c. income inelastic.
d. price elastic.
e. cross-price elastic.
5. Cross elasticity of demand is the percentage change in the quantity __________ of a good divided by the percentage change in __________.
a. demanded; the price of the good
b. supplied; the price of the good
c. demanded; the price of another good
d. supplied; the price of another good
e. demanded; income
6. Income elasticity of demand for an inferior good is
a. less than 0.
b. greater than 1.
c. equal to 1.
d. equal to 0.
e. none of the above
7. Economic theory assumes that people are motivated by
a. the desire to just get by.
b. the desire to sacrifice one's self for others.
c. rational self interest
d. irrational exuberance.
8. In microeconomic theory, households try to
a. maximize their cost.
b. maximize their satisfaction.
c. maximize their utility.
d. maximize their profits.
e. b and c
9. Total utility is defined as the
a. change in marginal utility a person derives from the consumption of a good.
b. change in total utility a person derives from the consumption of a good divided by the price of that good.
c. change in total utility a person derives from the consumption of a good divided by the change in the consumption of that good.
d. sum of the amounts of satisfaction a person receives from consuming a good.
e. change in total utility a person derives from the consumption of a good divided by the value in exchange of that good.
10. The law of diminishing marginal utility says that
a. the marginal utility gained by consuming equal successive units of a good will decline as the amount consumed increases.
b. the more of a particular good one consumes, the greater us the utility received from the consumption of that good.
c. the marginal utility gained by consuming equal successive units of a good will increase as the amount consumed increases.
d. the more of a particular product one sells, the less utility one receives from selling.
e. none of the above
11. Suppose you are consuming a particular good and you could somehow give back the last unit you consumed. What would happen to total and marginal utility?
a. Both total and marginal utility would decrease.
b. Both total and marginal utility would increase.
c. Total utility would increase but marginal utility would decrease.
d. Total utility would decrease but marginal utility would increase.
e. There would be no change in marginal utility but total utility would decrease.
12. If a person is receiving greater utility per penny from consuming one good than another, it follows that he or she is
a. maximizing disutility.
b. not maximizing utility.
c. maximizing utility.
d. There is not enough information to answer the question.
13. In order for an individual to achieve consumer equilibrium through the consumption of two goods, A and B, that individual must fulfill the condition
a. TUA = TUB.
b. TUA/PA = TUB/PB.
c. MUA = MUB.
d. MUA/PA = MUB/PB.
e. MUB/PB = MUB/PA.
14. Suppose a consumer is purchasing Coke and pretzels in quantities such that she is achieving consumer equilibrium. Then the price of Coke decreases. The consumer will likely __________ her consumption of Coke and the marginal utility of Coke will __________ while the total utility from Coke will __________.
a. increase; increase; increase
b. increase; decrease; decrease
c. increase; decrease; increase
d. decrease; increase; increase
e. decrease; decrease; decrease
15. The diamond-water paradox is the observation that
a. those things that have the greatest price often have little value in exchange and those things that have the lowest price often have the greatest value in exchange.
b. those things that have the greatest value in use often have little value in exchange and those things that have little value in use often have the greatest value in exchange.
c. those things that have the least value in use often have little value in exchange and those things that have the greatest value in use often have the greatest value in exchange.
d. those things that have the least price often have little value in exchange and those things that have the greatest price often have the greatest value in exchange.
16. Diamonds are more expensive than water because
a. markets do not always reflect value.
b. they have fewer uses.
c. they yield higher marginal utility.
d. they yield higher total utility.
e. all of the above
17. The "visible hand" is a metaphor used to describe
a. market coordination.
b. managerial coordination.
c. the separation of ownership from control.
d. how price changes motivate individual coordination.
18. Economists Alchian and Demsetz suggest that firms are formed when
a. the sum of what individuals can produce alone is greater than what they can produce as a team.
b. someone wants to earn profits.
c. someone comes up with the idea that customers will buy a new product.
d. the sum of what individuals can produce as a team is greater than the sum of what they can produce alone.
19. The sole proprietor of a proprietorship has
a. unlimited liability, which means he or she is responsible for settling all debts of the firm, but not if it means selling his or her personal property to do so.
b. limited liability, which means he or she is responsible for settling all debts of the firm, even if this means selling his or her personal property to do so.
c. limited liability, which means he or she cannot be sued for the proprietorship's failure to pay its debts.
d. unlimited liability, which means he or she is responsible for settling all debts of the firm, even if this means selling his or her personal property to do so.
20. Which of the following business organizations is subject to double taxation of its profit?
a. the proprietorship
b. the partnership
c. the corporation
d. the nonprofit firm
21. Economic profit is the difference between total revenue and
a. explicit costs.
b. implicit costs.
c. sunk costs.
d. the sum of explicit and implicit costs.
22. Joe is the owner-operator of Joe's Haircuts Unlimited. Last year he earned $100,000 in total revenues and paid $65,000 to his employees and suppliers. During the course of the year, he received three offers to work for other barbers, with the highest offer being $40,000 per year. Is Joe earning a normal profit?
a. Yes, in fact, an above-normal profit.
b. No, but he is earning an accounting profit and that is all that matters.
c. Yes, but his economic profit is $0 and that is not good.
d. We cannot be sure, because "normal" profit is a subjective judgment.
e. No, his economic profit is negative.
23. The law of diminishing marginal returns holds for a situation in which
a. all inputs are variable.
b. all inputs are fixed.
c. some inputs are variable and some inputs are fixed.
d. all inputs are increased in the same proportion.
24. The marginal physical product (MPP) of a variable input is
a. total output divided by the quantity of the input used.
b. the change in total output that results from changing the variable input by one unit.
c. the change in total revenue that results from changing the variable input by one unit.
d. the change in total output that results from changing the fixed input by one unit.
e. the change in total costs that results from a change in output.
25. Which of the following is not an assumption of the theory of perfect competition?
a. There are many sellers and many buyers, none of which is large in relation to total sales or purchases.
b. Each firm produces and sells a differentiated product.
c. Buyers and sellers have all relevant information with respect to prices, product quality, and sources of supply.
d. There is easy entry and exit.
26. In the theory of perfect competition,
a. the market demand curve is horizontal.
b. the single firm's demand curve is horizontal.
c. the single firm's demand curve is downward sloping.
d. a and b
e. a and c
27. Refer to Exhibit 21-4. Curve A is a(n) __________ cost curve.
a. marginal
b. average variable
c. average total
d. average fixed
28. Refer to Exhibit 21-4. Curve B is a(n) __________ cost curve.
a. marginal
b. average variable
c. average total
d. average fixed
29. The perfectly competitive firm produces at the output level where
a. price equals marginal cost.
b. price equals minimum average variable cost.
c. marginal revenue equals zero.
d. marginal revenue equals minimum average variable cost.
e. a and c
30. The perfectly competitive firm's short-run supply curve is the
a. upward-sloping portion of its average total cost curve.
b. horizontal portion of its marginal revenue curve.
c. portion of its average variable cost curve that lies above the average fixed cost curve.
d. upward-sloping portion of its marginal cost curve.
e. portion of its marginal cost curve that lies above its average variable cost curve.