Multiple Choice Answers

1) Economics is the study of
A) how to invest in the stock market.
B) how society uses limited resources.
C) the role of money in markets.
D) how government officials decide which goods and services are produced.

2) Deciding how a society’s products are distributed among its citizens answers the economic question of
A) who consumes the products produced.               B) what products will be produced.
C) where will the products be consumed. D) how will the products be produced.

3) If the vertical variable increases by 12 and the horizontal variable increases by 4, the slope of the line is
A) 3.                      B) 4                       C) 12.                    D) 48

4) Suppose that your tuition to attend college is $16,000 per year and you spend $6,000 per year on room and board. If you were working full time, you could earn $20,000 per year. What is your opportunity cost of attending college for one year?
A) $22,000           B) $26,000           C) $36,000           D) $42,000

5) What do economists mean when they say that there is no such thing as a free lunch

6) The principle of diminishing returns implies that as one input increases while the other inputs are held fixed, output
A) increases at an increasing rate.              B) increases at a decreasing rate.
C) decreases at a decreasing rate.              D) decreases at an increasing rate.

7) Consider two individuals, Celia and Sondra, who produce bracelets and pendants. Table 3.1 shows how much of each good Celia and Sondra can produce in one hour. Sondra’s opportunity cost of one pendant is
A) 2 bracelets.                   B) 4 bracelets.                   C) 5 bracelets.                   D) 10 bracelets.

8) The Law of Demand can be explained as
A) a lot of people wanting the same thing.
B) the higher the price, the smaller the quantity demanded, ceteris paribus.
C) people are willing to make limited sacrifices to acquire products.
D) legal reasons people make purchases in the marketplace.

9) Figure 4.3 illustrates the demand for tacos. Assume tacos are an inferior good. An increase in income would bring about a movement from
A) point b to point c.        B) point b to point a.        C) D1 to D0.                       D) D1 to D2.

10) The price of pens increases from $2 to $2.20. At the same time, the quantity of pens demanded decreases from 100 to 90. Demand for pens is:
A) perfectly inelastic.       B) inelastic.         C) unitary elastic.              D) elastic.

11) Refer to Table 5.2. A change in the price of calculators caused the change in quantity demanded shown in the table. The price elasticity of demand for calculators, using the initial-value formula, is:
A) 1.75.                B) .25.                                 C) 0.75.                D) 25.

12) Draw the demand curve for a good whose price elasticity of demand is equal to zero. Be sure to label both axes. Explain what the graph represents.

13) Suppose the price of a box of pop tarts is $3. If Michael is willing to pay $4 for that box of pop tarts, his consumer surplus is:
A) $0.                    B) $1.                    C) $2.                    D) $3.

14) Refer to Figure 6.3. On this graph, area ACD is:
A) producer surplus.         B) total surplus.  C) consumer net benefit.               D) consumer surplus.

15) Draw a picture to illustrate why total surplus is highest at the competitive equilibrium price and not at a price below equilibrium. Explain your diagram.

16) Assume that you have a monthly fixed income of $ 1500 and has $50 of your income allocated to buy pizza and ice cream. Suppose that there is a decrease in the price for pizza and in the price for ice cream, this will shift:
A) indifference curves to the left.               B) indifference curves to the right.
C) the budget line to the left.                       D) the budget line to the right.

17) As a consumer moves along an indifference curve, the benefits of trading will be exhausted only when:
A) the MRS equals the price ratio.              B) the MRS is greater than the price ratio.
C) the MRS is smaller than the price ratio.               D) There is not sufficient information.

18) Refer to Figure 7.7. The marginal rate of substitution (in absolute value) is ________ the price ratio (in absolute value) at point A; ________ the price ratio at point B; and ________ the price ratio at point C (trading peaches for herbs).
A) greater than; less than; equal to            B) less than; equal to; greater than
C) equal to; less than; equal to     D) greater than; equal to; less than

19) Refer to Table 8.2, which gives a firm’s production function. Assume that all non-labor inputs are fixed. Diminishing returns set in with the addition of the:
A) third worker.  B) fourth worker.              C) fifth worker.  D) sixth worker.

20) Table 8.3 presents the cost schedule for Candy’s Cakes. If Candy produces zero cake, Candy’s total costs are:
A) $0.                    B) $50.  C) $100.               D) $150

21) Figure 8.3 shows a firm’s marginal cost, average total cost, and average variable cost curves.  At Q=50, the total cost is:
A) $2,100.            B) $2,800.                           C) $4,500.            D) $6,300.

22) If marginal cost is above average cost, average cost must be rising.
TRUE/FALSE

23 ) Suppose that Figure 10.4 shows a monopolist’s demand curve, marginal revenue, and its costs. The monopolist would maximize its profit by producing a quantity of:
A) 30 units.          B) 50 units.          C) 60 units.          D) There is no sufficient information.

24) Which of the following is NOT a characteristic of a monopolistically competitive market?
A) Firms hold patents on their products.   B) The products that firms sell are slightly different.
C) Firms have some control over price.     D) There are no artificial barriers to entry.&

25) Figure 11.3 shows demands and costs for a monopolistically competitive firm. When the firm’s demand curve shifts from D1 to D2 and to D3,
A) the demand for the firm’s product is decreasing.
B) the firm’s average cost of production is increasing.
C) the firm’s marginal revenue curve also shifts to the left.
D) all of the above

26) Oligopoly differs from monopoly and perfect competition in that:
A) firms consider each other’s actions when choosing price and quantity.
B) there are a few firms in the industry.    C) firms act strategically.
D) all of the above

27) When a few firms sell similar products in a market, the market structure is most likely to be:
A) a perfectly competitive market.             B) a monopoly.
C) a monopolistically competitive market.              D) an oligopoly.

28) Suppose that there are five firms in a market, each controlling 20% of the market. The HHI would equal
A) 2,000.              B) 100.  C) 20.                    D) 1,000.

29) Suppose that there are five firms in a market, each controlling 20% of the market. The HHI would equal
A) 2,000.              B) 100.  C) 20.                    D) 1,000.

30) What are the key characteristics of an oligopoly?
1. the products may or may not be differentiated
2 only a few firms account for most or all of the total production
3 some or all firms earn substantial profits over the long run because barriers to entry make it difficult or impossible for new firms to enter

31) What is meant be strategic behavior?
strategic behavior is when someone considers how their behavior affects the behavior of others and acts accordingly.

32) Figure 12.1 shows the market for a successful price-fixing arrangement (cartel) between two identical firms . When the two firms act like one and charge the same price, the market price will be ________ and each firm will produce and sell a quantity of ________.
A) $10; 200          B) $10; 100                         C) $5; 500                           D) $5; 250

33) Figure 12.1 shows a successful price-fixing arrangement (cartel) between two identical firms. When the two firms act like one and charge the same price, each firm will earn an economic profit of ________.
A) $1,250             B) $1,000             C) $500 D) $0

34) Figure 12.1 shows a successful price-fixing arrangement (cartel) between two identical firms. When the two firms act like one and charge the same price, each firm will earn an economic profit of ________.
A) $1,250             B) $1,000             C) $500 D) $0

35) Consider Figure 12.3. Becky’s dominant strategy is ________ and David’s dominant strategy is ________.
A) high; high                       B) low; low                         C) high; low                        D) low; high

36) Consider Figure 12.3. David chooses to charge a low price:
A) only if Becky chooses a high price.        B) only if Becky chooses a low price.
C) regardless of whether Becky chooses a high or low price.
D) in order to induce Becky to choose a high price.

37) A Nash Equilibrium in a game is that outcome in which
A) each player is doing the best he or she can given the other player’s action.
B) the players’ profits are equal.
C) the players’ earn the highest profits possible.
D) neither player plays his or her dominant strategy.

38) Joe and Steve are duopolists who each can follow two strategies: cooperate and jointly act like a monopolist, or don’t cooperate (cheat) and act like duopolists. Their profits are as follows:

If both cooperate:            both receive $1 million
If one cooperates:           cooperator receives $200,000, cheater receives $1.2 million
If both cheat:     both receive $500,000

What will they do?

39) If two firms use a tit-for-tat scheme to maintain cartel pricing and one firm chooses a high price in the current time period then:
A) that firm will also choose a low price in the next time period.
B) that firm will also choose a high price in the next time period.
C) the other firm will choose a low price in the next time period.
D) the other firm will choose a high price in the next time period.

40) At quantities less than Q1 in Figure 12.4,
A) competitors match price increases.      B) competitors do not match price increases.
C) demand is inelastic.                                   D) the firm does not have competitors.

41) The diagram shown in Table 12.2 describes a game in which
A) firms make their decisions simultaneously.
B) Firm 1 always decides first, and Firm 2 always decides last.
C) the firms take turns moving first.
D) firms must communicate with each other before making a decision.

42) In Figure 12.6, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market. If Fly Smart accommodates the entry, what will its profit be?
A) $44,400                          B) $33,600                          C) $29,600                          D) $16,800

43) In Figure 12.6, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market. If the minimum market entry quantity is 130 passengers per day, Fly Smart’s entry-deterring quantity is:
A) 500 passengers per day.            B) 420 passengers per day.
C) 370 passengers per day.            D) 300 passengers per day.

44) The path of the game in Figure 12.7 will be:
A) Fred chooses a large quantity and Barney stays out.
B) Fred chooses a large quantity and Barney enters.
C) Fred chooses a small quantity and Barney stays out.
D) Fred chooses a small quantity and Barney enters.

45) Consider the game tree in Figure 12.8. If Store A and Store B could coordinate their decisions,
A) both firms choose to advertise and earn profits of $200 each.
B) both firms choose not to advertise and earn profits of $300 each.
C) only Store A advertises and earns a profit of $400.
D) only Store B advertises and earns a profit of $400.

46) A natural monopoly arises when
A) economies of scale are so great that only one firm can exist in a market.
B) a firm acquires a patent.
C) two firms merge to become the only firm serving an entire market.
D) a single firm controls all of a natural resource.

47) Figure 13.1 shows a demand and costs of an unregulated monopoly. At the profit maximization output, the firm earns a profit of:
A) $80,000.                        B) $10,000.                        C) $50,000.                        D) $0.

48) Figure 13.1 shows a demand and costs of an unregulated monopoly. At the output level of 22,000 units,
A) the firm’s marginal revenue is smaller than its marginal cost.
B) the firm is earning a zero economic profit.
C) the firm is producing more than its profit maximizing level of output.
D) All of the above are correct.

49) When compared to the profit maximizing price and quantity supplied, an average-cost pricing policy for a natural monopoly causes the price the monopolist charges to ________ and the quantity it sells to ________.
A) increase; decrease      B) decrease; decrease     C) decrease; increase      D) increase; increase

50) Explain what is meant by predatory pricing, and the inherent difficulties involved with predatory pricing from a firm’s point of view.

51) A public good is a good that:
A) is consumed by a single person or household.
B) cannot be used by private citizens.
C) is available for everyone to consume, regardless of who pays.
D) is provided by the government.

52) A private good is a good that:
A) is nonrival.                     B) is not excludable.
C) is provided only by private sectors         D) is consumed by a single person or household.

53) The free-rider problem implies that:
A) each person will pay the full cost of the public good.
B) nobody wants the public good.
C) everybody will pay a portion of the cost of the public good.
D) each person will try to benefit from the public good without paying for it.

54) Provide an intuitive explanation of the free-rider problem.

55) In the market in Figure 15.1.
A) social benefits are greater than private benefits.
B) the quantity provided by the market is greater than efficient.
C) when left alone, the market produces the socially optimum quantity.
D) all of the above.