Multiple choice questions

Question 1

41). To an Economist, total costs include:
A)	Explicit, but not implicit costs
B)	Implicit, but not explicit costs
C)	Explicit and implicit costs
D)	Neither explicit nor implicit costs

Answer 1

C) Explicit and implicit costs

Question 2

42) Which of the following is a relevant cost?

A) replacement cost
B) sunk cost
C) historical cost
D) fixed cost
E) All of the above are relevant.

Answer 2

A) replacement cost

Question 3

43) Which of the following distinctions does not help to explain the difference between relevant and irrelevant cost?

A) historical vs. replacement cost
B) sunk vs. incremental cost
C) variable vs. fixed cost
D) out-of-pocket vs. opportunity cost
E) All help to explain the difference.

Answer 3

D) out-of-pocket vs. opportunity cost

Question 4

44) Economic profit equals accounting profit minus
A)	 explicit costs.
B)	 implicit costs
C)	 fixed costs
D)	 variable costs.

Answer 4

B) implicit costs

Question 5

45) Average fixed cost
A) Does not change as total output increases or decreases
B) Varies directly with total output
C) Falls continuously as total output expands
D) Rises as the output is expanded.

Answer 5

C) Falls continuously as total output expands

Question 6

46) Average fixed cost is

A) AC minus AVC.
B) TC divided by Q.
C) AVC minus MC.
D) TC minus TVC.

Answer 6

A) AC minus AVC.

Question 7

47) Which of the following cost relationships is not true?

A) AFC = AC - MC
B) TVC = TC - TFC
C) The change in TVC/the change in Q = MC.
D) The change in TC/ the change in Q = MC.

Answer 7

A) AFC = AC - MC

Question 8

48) When a firm increased its output by unit, its AFC decreased. This is an indication that

A) the law of diminishing returns has taken effect.
B) MC

Answer 8

D) the firm is spreading out its total fixed cost.

Question 9

49) The distinction between sunk and incremental costs is most helpful in answering which
question?

A) How many more people should be added to the production process?
B) What is the correct price to charge?
C) Should we begin to build a new factory?
D) Should we continue developing a new software application that we began last year?

Answer 9

D) Should we continue developing a new software application that we began last year?

Question 10

50) Which of the following relationships is correct?

A) When marginal product starts to decrease, marginal cost starts to decrease.
B) When marginal cost starts to increase, average cost starts to increase.
C) When marginal cost starts to increase, average variable cost starts to increase.
D) When marginal product starts to decrease, marginal cost starts to increase.

Answer 10

D) When marginal product starts to decrease, marginal cost starts to increase.

Question 11

61) Which of the following markets comes closes to the model of perfect competition?
A) Automobile industry
B) Information Technology industry
C) Aerospace industry
D) Agriculture

Answer 11

D) Agriculture

Question 12

62) Which of the following characteristics is most important in differentiating between perfect competition and all other types of markets?

A) whether or not the product is standardised
B) whether or not there is complete market information about price
C) whether or not firms are price takers
D) All of the above are equally important.

Answer 12

C) whether or not firms are price takers

Question 13

63) Demand facing an individual, perfectly competitive firm is:
A) perfectly inelastic at the quantity the firm chooses to produce.
B) perfectly inelastic at the quantity determined by market forces.
C) perfectly elastic at the price the firm chooses to charge.
D) perfectly elastic at the price determined by market forces.

Answer 13

D) perfectly elastic at the price determined by market forces.

Question 14

64) According to the shutdown rule, a firm should produce no output in the short run if:
A) price is below minimum average total cost.
B) price is above minimum average total cost.
C) total revenues are lower than total fixed costs.
D) price is below minimum average variable costs.

Answer 14

D) price is below minimum average variable costs.

Question 15

65) A normal profit is:
A) revenues minus opportunity cost only.
B) revenues minus accounting costs only.
C) a zero accounting profit.
D) revenues minus accounting and opportunity costs.

Answer 15

D) revenues minus accounting and opportunity costs.

Question 16

66. Which of the following is false? A monopolist
    A) will sell less at a higher price
    B) has a marginal revenue that is less than the price.
    C) will produce where MR = MC.
    D) is a price taker

Answer 16

D) is a price taker

Question 17

67). A monopolist sells 100 units at $10 per unit and 90 units at $15 per unit. The marginal revenue from the tenth unit is:
A) $1000 B) $1350 C) $100 D) $350

Answer 17

D) $350

Question 18

68). If an industry could be organized either perfectly competitively or as monopoly, a monopoly      
      would
A)	Produce less output
B)	Produce where P > MC 
C)	Charge higher prices.
D)	All of the above

Answer 18

D) All of the above

Question 19

69) Which of the following correctly completes this statement? The monopolist’s marginal 
      revenue  
A)	will be greater than price
B)	will be less than price
C)	will be equal to price.
D)	will be greater than total revenues

Answer 19

B) will be less than price

Question 20

70) At the point at which P=MC, suppose that a perfectly competitive firm’s MC = $100, its
AVC = $80 and its AC = $110. This firm should

A) shut down immediately.
B) continue operating in the short run.
C) try to take advantage of economies of scale.
D) try to increase its advertising and promotion.

Answer 20

B) continue operating in the short run.

Question 21

71) Which of the following industries is most likely to represent the Monopolistic competition market structure?

A) automobiles
B) tobacco products
C) utility companies
D) farm equipment

Answer 21

C) utility companies

Question 22

72) The main difference between perfect competition and monopolistic competition is:

A) the number of sellers in the market.
B) the ease of exit from the market.
C) the difference in the firm’s profits in the long run.
D) the degree of product differentiation.

Answer 22

D) the degree of product differentiation.

Question 23

73) Firms in monopolistic competition would:

     A)  persistently realize economic profits in both the short and long run
     B)  may realize economic profits in the long run and normal profits in the short run
     C)  tend to incur persistent losses in both the short and long run
     D)  tend to realize economic profits in the short run and normal profits in the long run

Answer 23

D) tend to realize economic profits in the short run and normal profits in the long run

Question 24

74) Which of the following represents a good example of an Oligopoly?
A) The Agriculture industry
B) A Public Utility
C) The Automobile industry
D) The Restaurant Industry

Answer 24

C) The Automobile industry

Question 25

75) In general, there is a(n) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ relationship between the height/strength of the barriers and the number of firms in an industry.
A) direct            
B) inverse                  
C) constant                    
D) random

Answer 25

B) inverse

Question 26

76) Mutual interdependence occurs when:
A) All firms in an industry are affected by the same macro economic conditions, such as a
recession, inflation, interest rates, exchange rates, etc.
B) The actions of firms are independent of each other
C) The actions of one firm in an industry are easily recognized and perhaps copied by others
D) Monopolists recognize that they must face eventual competition in the long run

Answer 26

C) The actions of one firm in an industry are easily recognized and perhaps copied by others

Question 27

77) The existence of a kinked demand curve under oligopoly conditions may result in

A) price flexibility.
B) price rigidity.
C) competitive pricing.
D) None of the above.

Answer 27

B) price rigidity

Question 28

78) When a company is faced by a kinked demand curve, the marginal revenue curve:

A) will be upward sloping.
B) will be horizontal.
C) will always be zero at the quantity produced.
D) will be discontinuous.

Answer 28

D) will be discontinuous.

Question 29

79) In which of these markets would the firms be facing the least elastic demand curve?

A) perfect competition
B) pure monopoly
C) monopolistic competition
D) oligopoly

Answer 29

B) pure monopoly

Question 30

80) Porter’s “Five Forces Model” is based on:

A) the laws of supply and demand.
B) the law of diminishing returns.
C) the Structure-Conduct-Performance model.
D) the key factors affecting demand.

Answer 30

C) the Structure-Conduct-Performance model.

Question 31

80) A Cartel is defined to be:

  A) Any oligopolistic industry with fewer than 4 firms
  B) A form of oligopoly in which firms agree to sell at different prices like in monopolistic 
       competition C)	A form of oligopoly in which firms formally agree to establish a common price, in effect  acting like a monopoly
  D) A form of oligopoly in which firms agree to compete with each other on an equal basis.

Answer 31

C) A form of oligopoly in which firms formally agree to establish a common price, in effect acting like a monopoly

Question 32

82) A successful and stable cartel can be established if there are:

  A) many firms producing a storable product
  B) many firms producing a perishable product
  C) a few firms producing a storable product
  D) a few firms producing a perishable product

Answer 32

C) a few firms producing a storable product

Question 33

83) Cartel agreements tend to break down:

A) during economic downturns.
B) because of price “chiseling” by one or more members.
C) when there is overcapacity in the industry.
D) because of all of the above.

Answer 33

D) because of all of the above.

Question 34

84) Barometric price leadership exists when:

A) one firm in the industry initiates a price change and the others may or may not follow.
B) one firm imposes its best price on the rest of the industry.
C) when all firms agree to change prices simultaneously.
D) when one company forms a price umbrella for all others.

Answer 34

A) one firm in the industry initiates a price change and the others may or may not follow.

Question 35

85) Barometric price leadership can occur when oligopolistic firms

A) compete on the basis of differentiated products.
B) want to avoid price competition and violating antitrust laws.
C) try to enforce cartel agreements.
D) All of the above.

Answer 35

B) want to avoid price competition and violating antitrust laws.

Question 36

86) Dominant price leadership exists when:

A) one firm drives the others out of the market.
B) the dominant firm decides how much each of its competitors can sell.
C) the dominant firm establishes the price at the quantity where its MR = MC, and permits
all other firms to sell all they want to sell at that price.
D) the dominant firm charges the lowest price in the industry.

Answer 36

C) the dominant firm establishes the price at the quantity where its MR = MC, and permits all other firms to sell all they want to sell at that price.

Question 37

87) The oligopolistic situation in which a company’s objective is to maximize revenue subject to a minimum profit requirement is usually referred to as:

A) the aggregate model.
B) the Baumol model.
C) the aggressive model.
D) the Marshall model.

Answer 37

B) the Baumol model.

Question 38

88) In order that price discrimination can exist,

A) markets must be capable of being separated.
B) markets must be interdependent.
C) different demand price elasticities must exist in different markets.
D) demand price elasticities must be identical in all markets.
E) Both A and C.

Answer 38

E) Both A and C.

Question 39

89) The result for the seller of being able to practice price discrimination will be:
A) higher profits. 	
B) lower demand elasticity.
C) lower quantity sold. 	
D) cost minimization.

Answer 39

A) higher profits.

Question 40

90) The practice by a monopolist of charging each buyer the highest price he/she is willing to pay is called:

A) first-degree discrimination.
B) second-degree discrimination.
C) third-degree discrimination.
D) fourth-degree discrimination.

Answer 40

A) first-degree discrimination.

Question 41

91) Which of the following conditions, if present, is sufficient to make a game cooperative?
a. Individual payoffs are greater if all players choose the same strategy.
b. Players can communicate with each other.
c. Players can negotiate binding contracts committing them to particular strategies.
d. Players must agree unanimously on any set of strategies.
e. The payoff that is highest for all individuals together is also highest for each individual player.

Answer 41

c. Players can negotiate binding contracts committing them to particular strategies.

Question 42

92) You are playing a game in which a dollar bill is auctioned. The highest bidder receives the dollar in return for the amount bid. However, the second-highest bidder must pay the amount that he or she bids, and gets nothing in return. The optimal strategy is:
a. to bid the smallest allowable increment below $1.
b. to bid nothing.
c. to bid $0.99.
d. to bid more than a dollar.

Answer 42

b. to bid nothing.

Question 43

93) Which of the following are examples of cooperative games?
a. the bargaining between a buyer and seller over the price of a car
b. independent action by two firms in a market regarding advertising strategies
c. independent pricing strategies by two firms in a market
d. independent pricing strategies by many firms in a market
e. team games (such as baseball or basketball).

Answer 43

a. the bargaining between a buyer and seller over the price of a car

Question 44

94) In the spring of 1994, Northwest Airlines took the independent action of reducing fares on its flights. Other competing airlines quickly matched the fare cuts. These actions might be interpreted as:
a. a noncooperative game.
b. a cooperative game.
c. a constant sum game.
d. a competitive game.

Answer 44

a. a noncooperative game.

Question 45

Scenario 1:
You are negotiating with your florist over the price of flowers for your wedding. You value the floral arrangements at $500. It cost your florist $200 to do the arrangements. You finally settled on a price of $250.

95) Refer to Scenario 1. Your negotiations are an example of:
a. a noncooperative game.
b. a cooperative game.
c. a constant sum game.
d. a competitive game.
e. both (b) and (c)

Answer 45

e. both (b) and (c)

Question 46

Scenario 1:
You are negotiating with your florist over the price of flowers for your wedding. You value the floral arrangements at $500. It cost your florist $200 to do the arrangements. You finally settled on a price of $250.
96) Refer to Scenario 1. At your negotiated price your consumer surplus is: a. $0
a. $50
b. $200
c. $250
d. $300

Answer 46

c. $250

Question 47

Scenario 1:
		You are negotiating with your florist over the price of flowers for your wedding.  You value the floral arrangements at $500.  It cost your florist $200 to do the arrangements.  You finally settled on a price of $250.
97) Refer to Scenario 1.  At your negotiated price the producer surplus is: 
a.	$0
b.	$50
c.	$200
d.	$250
e.	$300

Answer 47

b. $50

Question 48

Scenario 1:
You are negotiating with your florist over the price of flowers for your wedding. You value the floral arrangements at $500. It cost your florist $200 to do the arrangements. You finally settled on a price of $250.

If your negotiated price had been $350 instead of $250, the sum of consumer surplus and producer surplus would be:

a. less than what would have accrued at the $250 price.
b. the same as what would have accrued at the $250 price.
c. more than what would have accrued at the $250 price.
d. None of the above is necessarily correct.

Answer 48

b. the same as what would have accrued at the $250 price.

Question 49

99) A dominant strategy can best be described as
a. a strategy taken by a dominant firm.
b. the strategy taken by a firm in order to dominate its rivals.
c. a strategy that is optimal for a player no matter what an opponent does.
d. a strategy that leaves every player in a game better off.
e. all of the above.

Answer 49

c. a strategy that is optimal for a player no matter what an opponent does.

Question 50

.100) Your economics professor has decided that your class will not be graded on a curve but on an absolute scale. Therefore, it is possible for every student in the class to get an “A.” Your grade will not depend in any way on your classmates’ performance. Based on this information, you decide that you should study economics three hours each day, regardless of what your classmates do. In the language of game theory, your decision to study three hours each day is:

a. a dominant strategy.
b. a minimax strategy.
c. a maximin strategy.
d. a Prisoner’s dilemma.

Answer 50

a. a dominant strategy.

Question 51

Used cars sell for much less than new cars because

a. of imperfect competition in the automobile industry.
b. buyers know much more about the quality of cars than sellers do.
c. sellers know much more about the quality of cars than buyers do.
d. physical depreciation of cars is very high.
e. of licensing arrangements by the government.

Answer 51

c. sellers know much more about the quality of cars than buyers do.

Question 52

The problem of adverse selection in insurance results in a situation in which

a. people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies.
b. people choose too much coverage because they do not understand the complex information in the policies.
c. people choose too little coverage because they do not understand the complex information in the policies.
d. unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market.
e. healthy people become more likely to buy insurance than unhealthy people, which drives premiums up, which drives even more unhealthy people away from the market even though they are the ones who need it most.

Answer 52

d. unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market.

Question 53

Julia is a 28-year-old nonsmoking, non-drinking female of normal weight. Because of adverse selection in health insurance,

a. She will be charged less for her premiums than people who are higher risks.
b. She is less likely to buy health insurance than the average person, because policy premiums are based on expected medical expenditures of people who are less healthy than she is.
c. When she get health insurance, she will be less likely to take care of herself.
d. She must get health insurance early in life, and is likely to lose health insurance if she smokes, drinks to excess, or gains weight.
e. She is more likely than the average person to buy health insurance, because she is more likely to be offered it.

Answer 53

b. She is less likely to buy health insurance than the average person, because policy premiums are based on expected medical expenditures of people who are less healthy than she is.

Question 54

John is a 55-year-old male smoker, about 50 pounds overweight, who has high blood sugar and drinks to excess a couple of times each month. Because of adverse selection in health insurance,

a. John is less likely to buy health insurance than the average person, because the average person’s policy premiums will be based on his risk, not the average risk.
b. John is more likely to buy health insurance than the average person, because his policy premiums will be based on the average risk, not his personal risk.
c. when John gets health insurance, he will be less likely to take care of himself.
d. when John gets health insurance, he will be more likely to take care of himself.
e. if John doesn’t have health insurance already, he will not be able to get it.

Answer 54

b. John is more likely to buy health insurance than the average person, because his policy premiums will be based on the average risk, not his personal risk.

Question 55

The problem of adverse selection in health insurance leads to a situation in which

a. health insurance covers inappropriate items for the population it serves.
b. overinsurance of the premium-paying population occurs.
c. underinsurance of the premium-paying population occurs.
d. the percentage of the premium-paying population that is healthy rises, squeezing unhealthy individuals out of the market.
e. the percentage of the premium-paying population that is unhealthy rises, squeezing healthy individuals out of the market.

Answer 55

e. the percentage of the premium-paying population that is unhealthy rises, squeezing healthy individuals out of the market.

Question 56

When sellers have more information about products than buyers do, we would expect

a. sellers to get higher prices for their goods than they could otherwise.
b. buyers to pay lower prices for goods than they would otherwise.
c. high quality goods to drive low quality goods out of the market.
d. low quality goods to drive high quality goods out of the market.

Answer 56

d. low quality goods to drive high quality goods out of the market.

Question 57

Assume that both high and low quality appliances are sold in the used appliance market. If we assume asymmetric information with sellers having more information regarding quality than buyers, which of the following is necessarily true? The

a. fraction of high quality appliances will be greater than under perfect knowledge.
b. fractions of high and low quality appliances will be the same as with perfect information.
c. fraction of high quality appliances will be less than with perfect information.
d. None of the above.

Answer 57

c. fraction of high quality appliances will be less than with perfect information.

Question 58

Consider a market in which high quality and low quality television sets are sold. Before consumers make a purchase, they do not know the quality of the sets, but the sellers do know. As compared to a situation where both consumers and sellers know the quality of the sets, this situation would

a. cause no change in the ratio of low to high quality sets sold.
b. increase the fraction of high quality sets sold.
c. increase the fraction of low quality sets sold.
d. cause the average price of goods sold to rise.

Answer 58

c. increase the fraction of low quality sets sold.

Question 59

Which of the following represent examples of adverse selection?

a. Unhealthy people are more likely to want health insurance.
b. Careless drivers purchasing extra auto insurance.
c. Risk averse individuals choosing to buy extra insurance.
d. All of the above.
e. (a) and (b) only.

Answer 59

e. (a) and (b) only.

Question 60

Assume that a particular state has decided to outlaw the sharing of individuals’ credit histories as an illegal invasion of privacy. As a result of this action we would expect the

a. cost of borrowing money to rise.
b. number of loans to unworthy credit risks to rise.
c. problems of asymmetric information to become more severe.
d. All of the above.
e. None of the above

Answer 60

d. All of the above.