Multiple choice questions:
Part 1
1 . Revenue increases when
A. producer surplus increases
B. producer surplus decreases
C. consumer surplus increases
D. consumer surplus decreases
2 . An increase in the price of an inelastic good
A. decreases revenues
B. decreases the percentage change in quantity less than the percentage change in price
C. increases revenues
D. increases the percentage change in quantity more than the percentage change in price
3 . Price elasticity of Demand increases when
A. the number of complementary goods decreases
B. the number of substitute goods decreases
C. people become more price sensitive over time
D. people become less price sensitive over time
4 . The purpose of a market in a market system is to
A. allow government to control what is sold
B. set constraints between buyers and sellers
C. bring buyers and sellers into contact
D. allow an organization to set prices in relation to their products
5 . By specializing in the production of one good, a company is able to benefit from economies of scale which increases its revenue. Which of the following is an attribute of specialization?
A. Reducing costs by creating a surplus
B. Saving time by allowing a worker to focus on one task
C. Encouraging workers to learn new skills
D. Encouraging workers to learn a number of different skills
6 . The market system promotes progress by
A. creating incentive to continue to do things in the same way
B. restricting the amount of capital directed to specific goods
C. slowly adjusting to changes in the prices of resources
D. providing incentive for technological advances
7 . Productive efficiency is achieved when
A. the most valued combination of resources is used
B. the best technology is used
C. when production occurs at a fair cost per unit
D. fewer resources are left for production of other goods
8 . The market is said to be in equilibrium when
A. there is potential for a shortage but not a surplus
B. there is potential for a surplus but not a shortage
C. neither a shortage nor a surplus exists
D. the quantity sold equals the quantity purchased
9 . The market will move to a higher equilibrium price if
A. the decrease in supply is equal to the decrease in demand
B. the increase in supply is greater than the increase in demand
C. the decrease in demand is greater than the decrease in supply
D. the increase in demand is greater than the increase in supply
10 . The intersection of supply and demand will be at a lower equilibrium price but a higher equilibrium quantity if
A. supply is constant and demand increases
B. supply is constant and demand decreases
C. demand is constant and supply decreases
D. demand is constant and supply increases
11 . When a price ceiling occurs
A. the market price will be lower than the equilibrium price
B. the market price will be higher than the equilibrium price
C. the supply will exceed the demand
D. buyers will not be willing to pay more than the ceiling price
12 . Because the goals of firms, entrepreneurs, and workers have different incentives, which of the following principles applies?
A. Self-interest
B. Invisible hand
C. Moral hazard
D. Free enterprise
Part 2
1 . Purely competitive firms increase total revenue by
A. increasing production
B. decreasing production
C. increasing price
D. decreasing price
2 . What are two ways for a competitive firm to determine the optimal level of production, that is, the level of production that will maximize profit or minimize losses?
A. Comparing total revenue to total cost or marginal revenue to marginal costs
B. Comparing average revenue to average costs or marginal revenue to marginal costs
C. Comparing average variable costs to price or marginal revenue to price
D. Comparing total revenue to average variable costs or price to average variable costs
3 . Suppose that a firm determines that its marginal revenue is greater than its marginal cost, it would be better to
A. increase production
B. decrease production
C. keep production the same
D. increase price
4 . It is profitable for a firm to continue employing additional resources as long as
A. Marginal Revenue Product >= Marginal Resource Cost
B. Marginal Revenue Product <= Marginal Resource Cost
C. Marginal revenue >= Marginal cost
D. Marginal Revenue Product >= Price
5 . As additional units are produced, the marginal revenue product falls for all firms because marginal product decreases. For firms operating in industries that are not perfectly competitive, marginal revenue product also falls because
A. product price falls as output increases
B. product price falls as output decreases
C. product price increases as output increases
D. product price increases as output decreases
6 . All things being equal, an increase in demand for a product,
A. increases demand for the resources used in its production
B. decreases demand for the resources used in its production
C. increases the supply of a product
D. decreases the supply of resources used in its production
7 . Marginal cost can be defined as the addition to _____ of one more unit of output.
A. total variable costs
B. average total costs
C. average variable costs
D. total fixed costs
8 . If a firm stars small and, over time, builds successively larger plant sizes or adds additional work space in an office, average total costs are most likely to
A. initially decrease, then begin to rise
B. initially rise, then begin to decrease
C. remain constant over time
D. continually increase
9 . Demand for resources, including labor, depend on its
A. productivity
B. profitability
C. availability
D. accessibility
10 . The primary difference between increasing- and decreasing-cost industries lies in
A. fixed-cost components: only increasing-cost industries have significant fixed costs
B. variable-cost components: only decreasing-cost industries have significant variable costs
C. the fact that the average total cost (ATC) of firms in increasing-cost industries will first decline and then eventually increase with output, while decreasing-cost firms experience progressively lower ATC with increased output
D. efficiency of production
11 . When adding labor or other factors of production, businesses may see their total product rise, but see their per-unit increase in return for each additional unit diminish. This phenomenon
A. occurs only for firms that do not efficiently use their factors of production
B. applies only to capital-intensive industries
C. is known as diminishing marginal product and has general market application
D. depends on how abundant or scarce labor is in existing factor-markets
12 . In the short run, firms should shut down if
A. AVC > P
B. ATC > P > AVC
C. P > ATC
D. P > MC
13 . When you are considering the value of a resource in its next best use, you are considering its
A. opportunity cost
B. production cost
C. marginal cost
D. price
14 . Of the four major market structures-perfectly competitive, monopolistic competition, oligopoly, monopoly-reducing variable costs of production
A. is not a viable option for perfectly competitive firms- or price-takers-because the per-unit profit margin is fixed by the equilibrium price
B. can enhance profit for all but the monopoly firm, which, because it has no competition, has little financial incentive to lower its per-unit costs
C. will result in significant increases in profit-margin, regardless of market structure, if coupled with significant increases in product price
D. enhance profit per-unit, because profit equals revenue minus cost
Part 3
1 . A purely- or perfectly-competitive firm would be characterized by which of the following?
A. Large number of firms, price taker, free entry and exit, and standardized product
B. Large number of firms, price maker, free entry and exit, and a differentiated product
C. Small number of firms, price maker, limited entry and exit, and a standardized product
D. One firm, price maker, limited entry and exit, and a unique product
2 . For a purely-competitive firm, price must be
A. equal to marginal revenue and average revenue
B. greater than marginal revenue and average revenue
C. greater than marginal revenue, and equal to average revenue
D. less than both marginal revenue and average revenue
3 . What will excessive or economic profits induce for a firm in any industry structure?
A. entry into the market
B. exit from the market
C. equilibrium in the market
D. greater demand in the market
4 . A pure-monopoly firm's demand curve is also the market demand curve. This kind of firm may successfully engage in price discrimination to increase its total profit if it
A. engages in rent-seeking behaviors to prevent possible price challenges from firms in other industries
B. segregates its market into clearly definable groups of consumers with different elasticity of demand, and prevents buyers in one market segment from reselling to buyers in another market segment.
C. determines that consumers are relatively sensitive to price changes along its envisioned range of price differentials (price elastic)
D. determines that demand for its goods or services is relatively insensitive along its envisioned range of differential prices (price inelastic)
5 . Oligopolies are characterized by a small number of firms where the top three firms hold the majority of the market. If in an oligopoly market, firm A is almost twice as big as firm B and firm C then
A. firm A is perfectly free to price however it chooses, since it is by far the most dominant firm in the market
B. firm C has to beware of pricing collusion by A and B to avoid being picked off in a price war
C. firms A, B, and C will tend to use non-price strategies to maintain their profits or market share.
D. firms B and C will try to observe non-price strategies taken by firm A and follow similar strategies to maintain their profits.
6 . In a monopolistic competition industry, if one firm appreciably increased its price from the existing equilibrium price, which of the following outcomes would most likely ensue?
A. It would likely suffer a significant decrease in its market share, because its competitors would be unlikely to deviate from the established equilibrium price.
B. The firm would stand to gain much additional revenue if its competitors did not follow suit by raising their prices.
C. Any gain or loss in the firm's revenue from increasing its price would depend on the price elasticity of demand: The more elastic the demand, the higher the revenue potential from a price increase.
D. It would probably see no change in its revenue position as its competitors would raise their prices accordingly.
7 . Which factor characterizes the competitive relationship between firms in an oligopoly market structure?
A. Total independence of action-reaction
B. Interdependence: what one firm does-in setting prices, determining production levels, investing in R & D, and so forth-can significantly affect other firms' competitive positions.
C. Despite the relatively small number of oligopoly firms, the action(s) of any one firm have little direct effect on the decisions of its competitors.
D. The common practice of collusive price-setting.
8 . Unregulated (natural) monopolies maintain their status through a variety of measures. Whether any particular measure can effectively constrain new firms from entering the market depends on
A. proprietary technology, exclusive ownership of resources, or government licenses.
B. the number and size of the firm(s) attempting to enter the market
C. the willingness of suppliers and distributors doing business with the monopoly firm to boycott potential entrants
D. the amount of revenue loss the monopoly is willing to accept to undersell potential competitors
9 . Regulated monopolies are empowered by public authority for which specific reason?
A. The provision of a good or service that, if left to the free market system, would require additional government regulation to prevent negative externalities to consumers as well as the public.
B. The need to avoid the unnecessary use of duplicate resources that could be more efficiently employed by a single supplier to meet the needs of the broadest range of consumers.
C. The public policy of protecting consumers from the excesses of unrestricted, demand-driven pricing.
D. The government's goal of maintaining artificially low prices for particular goods or services.
10 . Using a significantly greater economy of scale-with attendant lower, long-run average total costs-to restrict the market entry of new competitors
A. can be a successful tactic for established firms regardless of industry type, technology, market dynamics, or nature of the consumer base
B. may not be effective in industries in which dynamic technology-driven changes frequently alter the demand for product design features, performance qualities, and or production methods
C. is more effective in industry structures having low, minimum efficiencies of scale
D. is a tactic seldom employed due to legislation governing unfair trade practices
11 . In technology-intensive oligopolies-characterized by dynamically evolving product design-restricting the entry of additional firms is
A. not possible through customary legal protections, such as patents, because of the wide latitude of possible product alternatives afforded by highly advanced technologies
B. achieved by patenting, the effective use of licensing restrictions, as well as by maintaining sustained advantages in design and production
C. invariably a matter of establishing and maintaining economy of scale to minimize long-run average total cost
D. accomplished by requiring key suppliers of production factors to do business exclusively with firms currently in the industry
12 . Whether the market structure is monopolistic or oligopolistic, a firm may increase consumer demand for its product as an overall portion of market share if
A. the firm acquires or possesses a resource that is difficult or impossible for competitors to imitate-such as a geographic location, technologies, or design and production applications that cannot be replicated
B. it can field an advertising campaign large and convincing enough to persuade large numbers of consumers to purchase its product
C. it repackages its product to appeal to fashion trends
D. the firm restricts distribution of its product to core market areas or demographic groups
13 . One difference between firms already established in a monopolistic competition industry and those attempting to enter it is that
A. existing firms often have established, core-consumer marketing bases, while entrants may have to advertise and otherwise promote themselves to develop market share in the new industry
B. product development is more important than establishing market visibility for firms entering a monopolistic industry
C. cost control is more difficult for incumbent than for entrant firms due to costs of counter marketing
D. established firms may be able to use product differentiation to help distinguish themselves from new competitors
14 . An average firm in an industry characterized by a homogeneous product, relatively low barriers to entry, and a low concentration ratio
A. is unable to make any changes in characteristic product design or services to enlarge its market share
B. has no pricing options but the market equilibrium price
C. can attempt to increase market share through consumer-oriented changes in the design and perceived value of its product(s)
D. has numerous pricing options -frequent discounts, extended sales, and so forth-if it properly uses the strength of its brand-image relative to those of its competitors
15 . A monopolistic firm may operate in a relatively mature market with little likelihood for significant change in technology or process efficiencies. To maximize its profits, such a firm might
A. observe the existing market equilibrium price and concentrate on lowering its break-even point through cost reduction measures
B. consider diversifying its product line by offering modestly-enhanced variants of the same good or service and selling these at prices marginally higher than for its existing product
C. attempt to leverage its existing resources to fund its acquisition of smaller competitors, in hopes of increasing market share and revenue
D. abandon the market altogether, as it really has no effective way of changing the status quo
16 . Production differentiation can effectively be achieved by
A. emphasizing the weaknesses and disadvantages of competing products through comparative advertising, especially in oligopoly markets
B. implementing a broader range of combinations of price and quality than those offered by competitors
C. concentrating exclusively on market segments most likely to recognize differences in product value
D. utilizing consumer satisfaction surveys and other metrics to determine what it is the customer really wants
17 . While mass retail industries have one or several dominant producers, smaller firms have a limited set of nonpricing options. The most feasible of these include
A. attempting to garner increased market share by simultaneously expanding capacity, increasing economy of scale, and discounting prices
B. seeking to differentiate themselves from their larger competitors by appealing to specific niche markets
C. mimicking the advertising, marketing, and other successful non-pricing strategies of the dominant firm(s)
D. attempting to develop markets in related industries rather than trying to compete head-to-head with industry leaders
18 . In monopolistic competition industries, effective product differentiation is illustrated by
A. widespread brand recognition across most, if not all, consumer age and income groups; otherwise, the firm cannot generate sufficient demand to enlarge market share
B. concentrated appeal to consumers in market demographics most likely to want or use the firm's principal products
C. a balanced combination of innovation, new product development, and intensive marketing
D. having a long-established reputation for distinctly superior product quality
19 . Differentiation strategies vary in degree of effectiveness from one type of market structure to another. For firms other than perfect competition
A. opportunities exist throughout the acquisition, production, sales, and service process to distinguish their products based on perceived quality and consumer appeal
B. the competitive margin is so tight that they cannot afford the costs associated with extensive product or market development
C. selective product development and enhancements which appeal to particular consumer classes can create marketable differences between one firm's products and another's
D. the best way of distinguishing the firm's product is through every-day low pricing
20 . If a firm's industry devolved from a monopolistic competition into an oligopolistic structure, the firm would discover that
A. clearly distinguishing its products' unique attributes from those of competitors in an oligopoly market would be more difficult for consumers than in a monopolistic structure
B. quality of maintenance and warranty service would become more important as differentiating attributes in an oligopoly market
C. nothing has changed. It all depends on the individual industry
D. as surviving firms gain market share, they may enjoy lower average costs.
21 . A firm can increase both profit and per-unit profit margin by lowering production costs. To make this a long-term outcome, the firm should
A. acquire factors of production at lower prices, defer planned investments in expansion capital, and downsize its workforce
B. increase productivity through better applications of existing technologies, curtail product development plans, and implement energy conservation programs
C. seek to update existing production technologies for greater future efficiencies, consider alternative energy sources for production, and better retain and develop its human and intellectual capital resources
D. concentrate on improving present levels of productivity through greater process efficiencies, seeking to reinvesting the savings in future R&D programs
22 . A firm's cost-reduction strategies may span multiple stages, from acquisition of production input factors to product service and maintenance. When seeking to lower cost in the short term, firms should
A. reduce capital indebtedness through refinancing at more favorable long-term interest rates
B. curtail output across the board to reduce variable operating costs
C. streamline and consider alternative methods of production
D. attempt to restructure long-standing contracts with suppliers and distributors, to reduce fixed costs in the short-run
23 . Firms can shift their marginal cost curves to the right, resulting in higher outputs at the same or lower maximum-profit prices. This can be done by
A. eliminating fixed-cost components in the short term
B. reducing average total cost through reorganizing, production and increasing efficiencies in distribution
C. only if demand for the firm's product(s) shifts to the right: Businesses are always demand driven
D. better product innovation through enhanced research and development
Part Four
1 . Business cycles occur when output
A. falls below its potential
B. rises above its potential
C. is fixed at its potential
D. fluctuates around its growth trend
2 . Which of these statements best describes a complete individual business cycle?
A. Movement from peak to trough to peak
B. Movement from recession to expansion
C. Movement from peak to recession to trough
D. Movement from trough to expansion then to peak
3 . During the business cycle, the period between the point at which output reaches a high and the point at which it reaches a low is called
A. a peak
B. a trough
C. an expansion
D. a recession
4 . Which of the following equals the market value of all final goods and services produced in an economy, stated in the prices of a specific base year?
A. Nominal GNP
B. Nominal GDP
C. Real GDP
D. Real GNP
5 . Imagine a country has a population of 210 million. Within the country there are 95 million people who are employed workers, 50 million people incapable of working, and 60 million people capable of working, but not actively looking. Based on this information, what is the unemployment rate?
A. 3%
B. 5%
C. 7%
D. 9%
6 . The unemployment produced by fluctuations in economic activity is called
A. frictional unemployment
B. cyclical unemployment
C. natural unemployment
D. structural unemployment
7 . New college graduates are most likely to experience
A. frictional unemployment
B. cyclical unemployment
C. natural unemployment
D. structural unemployment
8 . The natural rate of unemployment is defined as the
A. highest sustainable rate of unemployment achievable under existing conditions
B. unemployment rate that is consistent with the economy operating at its potential output
C. unemployment rate at which there is no cyclical unemployment
D. the rate of unemployment that should exist according to policy makers
9 . The Consumer Price Index (CPI) is based on
A. surveys of retail store sales
B. a broad index of all items in GDP
C. surveys of the prices of items in a market basket
D. Bureau of Labor Statistics estimates of price changes
10 . Unanticipated inflation is a problem for society because it
A. rewards lenders at the expense of borrowers
B. increases real profits in the short term
C. rewards savers at the expense of spenders
D. benefits borrowers at the expense of lenders
Part Five
1 . The Classical Theory of Asset Prices assumes which of the following ideas?
A. The interest rate to use is the nominal rate, assets are the discounted sum of their future values, and expected income is the best information available.
B. Actual past income is the best information available, assets are the discounted sum of their future values, and the interest rate is the safe interest rate plus a risk premium.
C. The value of an asset is the discounted present value of expected cash flows, expected income is the best information available, and the interest rate is the safe interest rate plus a risk premium.
D. The interest rate to use is the real rate, expected income is the best information available, and the assets are the discounted sum of their future values.
2 . Economists use two principle interest rates: nominal and real. The purpose of this distinction is to
A. use nominal interest rates during periods when the economy is growing and real interest rates during economic down turns
B. adjust for the influences that inflation may have on business profits
C. account for and factor the influences that inflation may have on the behavior that consumers and firms use to determine how much to save out of their incomes
3 . During periods of increasing inflationary pressure, the Federal Reserve should
A. buy member bank's bonds to encourage increased lending to the public
B. sell bonds to member banks to discourage lending to the public
C. reduce the discount rate to make it easier for small businesses to borrow money
4 . What is the increased moral hazard associated with the too big to fail (TBTF) bailouts of the largest of financial institutions?
A. Financial institutions might misuse the bailout funds and continue the same practices that lead to the original failure.
B. Depositors will lose their deposits.
C. Employees of the financial institutions will lose their jobs.
5 . The Federal Reserve's primary tool for managing the money flow is
A. discount rate
B. reserve ratio
C. open-market operations
D. term auction facility
6 . Which of the following is a major drawback of a flexible exchange rate?
A. Government intervention in the form of reserves
B. Use of exchange controls
C. Discouraging the flow of trade due to risks and uncertainties
7 . The major advantage to a flexible exchange-rate policy is
A. automatic adjustments to balance of payments
B. relative interest rates between countries are automatically adjusted
C. increased foreign investment
D. increased overall wealth
8 . _____________suggests that a country will engage in trade and export products that it can produce at a lower-opportunity cost than a competing nation.
A. Comparative advantage
B. Absolute advantage
C. Arbitrage
D. Heckscher-Ohlin theory
9 . Absolute advantage encourages a country to
A. enact protective tariffs
B. specialize and trade with other countries
C. export the technology that gives it an absolute advantage
10 . The _____________________ explains that long-run trends in exchange rates are based on a predictable relationship between product price levels and exchange rates.
A. monetary approach to exchange rates
B. asset market approach to exchange rates
C. purchasing power parity
11 . A business traveler to Germany who, upon deplaning in Berlin, uses an airport ATM to withdraw 100 Euros from her U.S. bank would receive which kind of exchange rate?
A. Spot
B. Forward
C. Fixed
D. Flexible
12 . Suppose Nation A can produce 2 million pounds of sugar per Part OR 1 million pounds of rice in a Part and Nation B can produce 10 million pounds of sugar per Part OR 3 million pounds of rice in a Part. If this is a two-good, two nation model, what would Nation B's best choice in regards to trade and specialization?
A. Nation B should produce both rice and sugar.
B. Nation B should produce only sugar and trade for rice.
C. Nation B should produce sugar, produce rice, and trade some sugar for rice.
D. Nation B should produce sugar, produce rice, and trade some rice for sugar.
Part 6
1. If the demand curve is QD = 100 - 10P and there is a $1 price increase, then the elasticity of demand at P = 2 is
A. -0.25
B. -0.5
C. -0.75
D. -1
2. If the absolute value of a demand elasticity is less than 1, then
A. the demand is inelastic, and a price rise will reduce the total revenue
B. the demand is inelastic, and a price rise will increase the total revenue
C. the demand is elastic, and a price rise will reduce the total revenue
D. the demand is elastic, and a price rise will increase the total revenue
3. If the cross-price elasticity is negative, then the two goods are
A. unrelated
B. substitutes
C. complements
D. normal goods
4. Under perfect competition, a firm maximizes its profit by setting
A. P = MC because P = MR
B. P above MC where MC = MR
C. P = FC
5. In a large city, a good, real-world example for perfect competition would be
A. lawyers
B. gas stations
C. Time Warner Cable
D. clothing stores
6. A firm under monopolistic competition will earn
A. positive economic profit because it has some monopoly power
B. zero economic profit because it sets P = MC
C. zero economic profit because its P = ATC
D. positive economic profit because it sets MC = MR