Chapter 9 MCQ

Question 1

If your business decision results in marginal revenue being greater than zero, profits will increase. T  F

Answer 1

False. Profits increase only if marginal revenue is greater than marginal cost.

Question 2

Products that can easily be resold tend to have a single price. T  F

Answer 2

True. Resale creates competition.

Question 3

To sell more, monopolists must lower the price on new sales only. T  F

Answer 3

False. For products that can be easily resold, even monopolists must live by the one-price rule.

Question 4

Marginal costs tend to be constant as output increases if the business is operating below capacity. T  F

Answer 4

True. Businesses near capacity have increasing marginal costs.

Question 5

The marginal cost of adding passengers on a plane increases with every ticket sold. T  F

Answer 5

False. Although there are marginal costs of adding passengers since additional snacks are served and fuel consumption increases — when each additional ticket is sold, marginal cost is constant as long as the airplane is below 100-percent capacity.

Question 6

Constant marginal cost means total costs are always the same. T  F

Answer 6

False. Total costs increase by the same amount when quantity increases.

Question 7

If marginal costs are greater than marginal revenues, then profits decrease. T  F

Answer 7

True. Smart to increase quantity only when marginal revenue greater than marginal cost.

Question 8

An increase in the cost of rent will change the profit-maximizing quantity of output for a business. T  F

Answer 8

False. A change in fixed costs does not change smart decisions about price or quantity.

Question 9

The price your business chooses does not depend on the quantity you expect to sell. T  F

Answer 9

False. Quantity decision comes first. Then set highest price that allows you to sell that quantity

Question 10

Price discrimination occurs when a business charges different customers different prices for the same product or service. T  F

Answer 10

True. Definition.

Question 11

Price discrimination occurs more frequently among products than services. T  F

Answer 11

False. Products are more likely than services to be resold. Things that can easily be resold tend to have a single price.

Question 12

Price discrimination increases profits when businesses can provide discounts to the inelastic demand group. T  F

Answer 12

False. Discounts should be given to the elastic-demand group, which is sensitive to prices.

Question 13

Economic profits are a sign of an efficient market structure. T  F

Answer 13

False. Efficient market structures have normal profits only.

Question 14

Efficient market structures are always better than inefficient market structures. T  F

Answer 14

False. There are benefits (product variety, innovations raising living standards) to inefficient market structures that must be compared with costs of inefficiency.

Question 15

Price-making power reduces consumer surplus and increases producer surplus. T  F

Answer 15

True. Transfers some consumer surplus to producer surplus, but also creates deadweight loss.

Question 16

Marginal revenue is the additional

sales revenue from staying open later.

profit from staying open later.

cost from staying open later.

all of the above.

Answer 16

a) Marginal revenue is additional revenue from more sales or from selling one more unit.

Question 17

Self-interest and competition will most likely push the price toward a single price for

haircuts.
coffee.
tennis lessons.
Broadway show tickets.

Answer 17

b) Easily resold and less differentiated than services listed in other choices.

Question 18

Which statement about prices and marginal revenues is true?

Marginal revenue equals price for monopolists.

Marginal revenue equals price for businesses in perfect competition.

Marginal revenue is greater than price for monopolists.

Marginal revenue is greater than price for businesses in perfect competition.

Answer 18

b) Because they are small, businesses in perfect competition can increase sales without lowering the (market-set) price.

Question 19

The marginal cost of staying open an extra hour includes

additional wages.
additional costs of hydro/electricity.
additional costs of time.
all of the above.

Answer 19

d) Notice the word additional for all. Fixed costs are not part of marginal costs.

Question 20

to increase output, marginal costs increase when a business must

shift to more expensive sources of raw materials.

switch workers from jobs they are good at to jobs they are not so good at.

use more workers at overtime rates.

do all of the above.

Answer 20

d) Due to diminishing returns or switch to more expensive inputs.

Question 21

A business probably has constant marginal costs if

workers are sending text messages and checking Facebook instead of working.

customers are angry that wait times at the checkout are ridiculously long.

it is offering workers increased overtime-pay rates.

it is selling Christmas trees and it is the Christmas season.

Answer 21

a) Indicates business is not operating near capacity.

Question 22

With each additional item sold by a monopolist under the one-price rule,

total revenue falls.

marginal revenue falls by less than price.

marginal revenue falls by the same amount as the fall in price.

marginal revenue falls by more than price.

Use the information from question 3 of the “Refresh” summary at the end of section 9.3 (repeated here) to answer questions 8 and 9.
You have been working too many hours at your part-time job (which pays $10 per hour), and your Economics marks are suffering. Your father, who wants you to do better in school but recognizes your desire for cash, offers you this deal. For every 1-percent increase in your mark on the next test, he will pay you $6. You estimate that one additional hour of studying will raise your mark 5 percent; a second hour of studying will raise your mark 4 percent; a third hour, 3 percent; a fourth hour, 2 percent; and a fifth hour, 1 percent. If all you are trying to do is make the most money, how many hours do you study?

Answer 22

d) To sell more, must lower price not just on last unit sold, but on all units sold.

Question 23

If all you are trying to do is make the most money, and you have only five hours to divide between studying and working, how many hours should you work?

1
2
3
4

Answer 23

a) For the first four hours of studying, marginal revenue is greater than the marginal opportunity cost of $10 per hour for working. For the fifth hour, you make more by working than by studying ($6).

Question 24

You have only five hours to divide between studying and working. Suppose your boss gets desperate and offers to pay you $15 an hour. How many hours will you now work?

1
2
3
4

Answer 24

b) Marginal revenue of hours of studying still $30 for 1st hour, $24 for 2nd, $18 for 3rd, $12 for 4th. Marginal opportunity cost now = $15, so only 3 hours of studying is smart, leaving 2 hours for work.

Question 25

Price discrimination increases profits when businesses can

charge lower prices to consumers with elastic demand.

charge higher prices to consumers with inelastic demand.

control resentment among higher-price buyers.

do all of the above.

Answer 25

d) Recipe for successful price discrimination.

Question 26

The secret for successful price discrimination is to set

higher prices for customers with elastic demand.

higher prices for all customers.

lower prices for customers with elastic demand.

lower prices for customers with inelastic demand.

Answer 26

c) And higher prices for customers with inelastic demand.

Question 27

The passenger next to you who paid more than you did for her airline ticket is probably

smarter than you.
older than you.
travelling for business.
all of the above.

Answer 27

c) Demand for business travel is more inelastic.

Question 28

When businesses follow the recipe for maximum profits, the outcome is

always efficient.

efficient for price-taking market structures and inefficient for price-making market structures.

efficient for price-making market structures and inefficient for price-taking market structures.

also best for the economy.

Answer 28

b) Maximum total surplus for perfect competition and deadweight loss for other market structures.

Question 29

industries with perfect competition have

maximum total surplus.
deadweight loss.
the benefits of creative destruction.
product variety.

Answer 29

a) No deadweight loss, product differentiation, or innovation.

Question 30

Industries with price-making power have

the benefits of creative destruction.

deadweight loss.

marginal revenue equal to marginal cost at the quantity of output with maximum total profits.

all of the above.

Answer 30

d) Same recipe for profits; inefficient but with benefits of creative destruction.