Practice

Question 1

In an economy where heating oil is the primary source of heat for most households, new supplies of natural gas, a substitute for heating oil, are discovered. Natural gas provides heat at a much lower cost. What is the most likely effect of these discoveries on the market price and quantity of heating oil produced?

a. Price will decrease and quantity will decrease.
b. Price will decrease and quantity will increase.
c. Price will increase and quantity will decrease.
d. Price will increase and quantity will increase.

Answer 1

a. Price will decrease and quantity will decrease.

Question 2

Suppose a city facing a shortage of rental apartments eliminates rent controls. Which of the fol- lowing is most likely to occur?

a. a decrease in the demand for apartments and an increase in the number of apartment units supplied
b. a decrease in rents and a decrease in the number of apartment units supplied
c. an increase in the demand for apartments and a decrease in the number of apartment units supplied
d. an increase in rents and an increase in the number of apartment units supplied

Answer 2

d. an increase in rents and an increase in the number of apartment units supplied

Question 3

If all of the firms in a competitive industry are legally required to meet new regulations that in-crease their costs of production:

a. the short-run economic profits of individual firms in the industry will increase.
b. demand for the product will decrease.
c. supply of the product will decrease.
d. the long-run economic profits of individual firms in the industry will decrease.

Answer 3

c. Supply of the product will decrease.

Question 4

At the profit-maximizing level of output, a purely competitive firm will:

a. try to sell all the output it can produce, to spread fixed costs across the largest possible number of units.
b. produce the quantity of output at which marginal cost is minimized.
c. produce the quantity of output at which marginal cost equals price.
d. keep marginal cost lower than price, so profits will be greater than zero.

Answer 4

c. Produce the quantity of output at which marginal cost equals price.

Question 5

The demand for a factor of production will usually be more elastic when:

a. demand for the product the factor produces is highly elastic
b. few close substitutes for the factor exist
c. the time period under consideration is very short
d. the factor’s cost is a small part of the final product’s total cost of production.

Answer 5

a. Demand for the product the factor produces is highly elastic

Question 6

Which of the following correctly describes an external benefit resulting from an individual’s purchase of flu shots from a doctor?

a. Doctors earn income by charging for flu shots.
b. Flu shots reduce the likelihood of others catching the flu.
c. Flu shots are less expensive than catching the flu.
d. Flu shots reduce sick days, allowing those who get flu shots to earn more income.

Answer 6

b. Flu shots reduce the likelihood of others catching the flu.

Question 7

A state legislature increased the tax on gasoline sold in the state from $.20 to $.30 per gallon. A supporter said the tax would “make the distribution of after-tax income in the state more equal.” This statement would be true only if it could be shown that, after the tax is increased:

a. people with high incomes tend to spend the same proportion of their incomes on gasoline as people with low incomes.
b. people with low incomes buy more gasoline than people with high incomes.
c. people with high incomes tend to spend a larger proportion of their incomes on gasoline than people with low incomes.
d. the quantity of gasoline purchased in the state is highly responsive to changes in price

Answer 7

c. People with high incomes tend to spend a larger proportion of their incomes on gasoline than people with low incomes.

Question 8

The opportunity cost of being a full-time student at a university instead of working full-time at a job includes all of the following EXCEPT:

a. income from the full-time job.
b. payments for tuition.
c. payments for books
d. payments for meals.

Answer 8

d. payments for meals.

Question 9

A recent hurricane destroyed half of the orange crop. Consumers are responding to an increase in the price of oranges by buying more apples. This change is expected to increase the price and quantity of apples sold. In terms of basic supply and demand analysis, there has been a:

a. movement along the demand curve for both oranges and apples.
b. movement along the demand curve for oranges and a shift in the demand curve for apples.
c. shift in the demand curve for both oranges and apples.
d. shift in the demand curve for oranges and a movement along the demand curve for apples.

Answer 9

b. Movement along the demand curve for oranges and a shift in the demand curve for apples.

Question 10

“Water is essential to life, but inexpensive to buy.” Which of the following best explains this observation?

a. The quantity supplied of water is less than the quantity demanded at the market price.
b. Water has a high total utility, but a low marginal utility.
c. The quantity supplied of water is greater than the quantity demanded at the market price.
d. Water has a low total utility, but a high marginal utility.

Answer 10

b. Water has a high total utility, but a low marginal utility.

Question 11

The demand for coffee increases and coffee producers begin earning economic profits. Assume the coffee industry is perfectly competitive. Compared to this new situation, in the long run how are the price of coffee and economic profits for coffee producers most likely to change?

a. Price will decrease and economic profits will decrease.
b. Price will increase and economic profits will increase.
c. Price will decrease and economic profits will increase.
d. Price will increase and economic profits will decrease.

Answer 11

a. Price will decrease and economic profits will decrease.

Question 12

A firm is most likely to monopolize a market whenever:

a. the income elasticity of demand is high for the firm’s product.
b. economies of scale are large relative to market demand.
c. it has a U-shaped average total cost curve.
d. fixed capital costs are small relative to total costs.

Answer 12

b. economies of scale are large relative to market demand.

Question 13

As a firm increases its output level in the short run, the costs of producing additional units of output eventually increase because of:

a. increases in average fixed costs.
b. specialization and division of labor.
c. diseconomies of scale.
d. diminishing marginal returns.

Answer 13

d. diminishing marginal returns.

Question 14

Which of the following is true for this profit-maximizing firm at price P in the graph below?

a. It is currently earning short-run economic profits.
b. It will continue to earn economic profits in the long run.
c. It should shut down to minimize its economic losses.
d. It is not earning any economic profits.

Answer 14

a. It is currently earning short-run economic profits.

Question 15

Many U.S. interstate highways are crowded with traffic, but tolls are not collected even when the highways are crowded. Which of the following is true about this no-toll policy?

a. It is inefficient because tolls would increase government revenues, allowing other taxes to be decreased.
b. It is efficient because there is no cost of using the interstate once it is built.
c. It is inefficient because each person’s use of the interstate adds to the congestion.
d. It is efficient because interstates are needed to transport goods.

Answer 15

c. It is inefficient because each person’s use of the interstate adds to the congestion.

Question 16

“The effect of an excise tax on the products of pollution-producing industries will be a cutback in production. If the tax was levied directly on the amount of pollution generated, the long-run cut- backs in production would be much smaller.” This statement is most likely to be:

a. true, because most taxes levied on pollution affect the demand curve; taxes on products affect the supply curve.
b. true, because firms would have a greater incentive to adopt new technology that causes less pollution.
c. false, because most firms would rather pay the tax than cut back production.
d. false, provided the amount of the taxes on products and pollution is equal.

Answer 16

d. false, provided the amount of the taxes on products and pollution is equal.

Question 17

A key economic objection to unregulated, profit- maximizing monopoly is that in the short run monopolists:

a. do not try to minimize the costs of the level of output they produce.
b. restrict output to levels at which their products are valued more than the marginal cost of producing them.
c. produce a level of output at which marginal revenue is greater than marginal cost.
d. produce too many products, which they sell at prices that are too high, earning economic profits.

Answer 17

b. restrict output to levels at which their products are valued more than the marginal cost of producing them.

Question 18

A firm is more likely to increase its total revenue by decreasing the price of its product if:

a. its product accounts for a small portion of a consumer’s budget.
b. the demand for the product is perfectly inelastic.
c. the supply of the product is perfectly elastic.
d. there are many close substitutes for its product.

Answer 18

d. there are many close substitutes for its product.

Question 19

The market demand for a product has increased if:

a. more of the product is produced.
b. the product price has increased.
c. more of the product can be sold at all possible prices.
d. the cost of producing the product decreased due to new technology.

Answer 19

c. more of the product can be sold at all possible prices.

Question 20

Which of the following statements is correct regarding profit-maximizing firms in the long run?

a. In monopolistic competition, firms produce more than the output at which average total cost is minimized.
b. In perfect competition, firms produce an output at which price is greater than marginal cost.
c. In monopolistic competition, firms produce less than the output at which average total cost is minimized.
d. In perfect competition, firms produce an output at which price is less than marginal cost.

Answer 20

c. In monopolistic competition, firms produce less than the output at which average total cost is minimized.

Question 21

One way in which monopolistic competition and oligopoly are similar is that, typically, in both kinds of industries:

a. there are a large number of independent firms selling similar but differentiated products.
b. resources are underallocated to the production of goods and services produced by these firms at their profit-maximizing level of output.
c. each firm has a small share of the market for a product.
d. there are no barriers to entry for firms.

Answer 21

b. resources are underallocated to the production of goods and services produced by these firms at their profit-maximizing level of output.

Question 22

Suppose the only two cola companies (Acola and Bcola) in a nation are deciding whether to charge high or low prices for their colas. The companies’ price strategies are shown in the table below. The four pairs of payoff values show what each company expects to earn or lose in millions of dollars, depending on what the other company does.

both companies believe that most consumers are soon going to quit drinking colas, and switch to other products, what is the equilibrium outcome?

a. Both Acola and Bcola will charge a low price.
b. Both Acola and Bcola will charge a high price.
c. Acola will charge a low price; Bcola will charge a high price.
d. Acola will charge a high price; Bcola will charge a low price.

Answer 22

a. Both Acola and Bcola will charge a low price.

Question 23

“Ticket prices for professional team sports are high because the team owners just pass the costs of the athletes’ high salaries on to ticket buyers.” Is this statement generally correct or incorrect? Why?

a. Correct. High sports salaries contain “economic rent” and economic rent normally gets passed on to consumers.
b. Incorrect. Owners can afford to pay the high salaries without raising ticket prices. They raise prices simply to increase their marginal revenue above their marginal cost.
c. Correct. High sports salaries force owners to charge high ticket prices, which they can pass on to consumers because demand is elastic.
d. Incorrect. High sports salaries contain “economic rent” and would not be so high if the public were unwilling to buy tickets at the high prices.

Answer 23

d. Incorrect. High sports salaries contain “economic rent” and would not be so high if the public were unwilling to buy tickets at the high prices.

Question 24

In Sunshine City, one local ice cream company operates in a competitive labor market and product market. It can hire workers for $45 a day and sell ice cream cones for $1.00 each. The table beow shows the relationship between the number of workers hired and the number of ice cream cones produced and sold.

As long as the company stays in business, how many workers will it hire to maximize profits or minimize losses?

a. 8
b. 6
c. 7
d. 5

Answer 24

b. 6

Question 25

Government decisions that are more likely to suffer from the influence of special interest groups are typically ones that yield:

a. costs to all now and benefits to all later.
b. large benefits for each individual in a large group and small losses for each individual in a small group.
c. benefits to all now and costs to all later.
d. large benefits for each individual in a small group and small losses for each individual in a large group.

Answer 25

d. large benefits for each individual in a small group and small losses for each individual in a large group.

Question 26

In a country where only two goods are produced and consumed, the production and consumption of Good X results in external benefits, while the production and consumption of Good Y results in external costs. Would unregulated markets produce too much or too little of Good X and Good Y, compared to the efficient output levels for these products?

a. Too little of Good X and too much of Good Y
b. Too much of both Good X and Good Y
c. Too little of both Good X and Good Y
d. Too much of Good X and too little of Good Y

Answer 26

a. Too little of Good X and too much of Good Y

Question 27

Public goods are generally provided by government rather than private firms because:

a. public goods can be used by one person without reducing the amount that is available to others.
b. people must pay for public goods if they want to consume them.
c. it is less expensive for government to produce goods that are most important to consumers because the government does not make profits.
d. special interest groups get the government to produce public goods, even if the costs of producing them are greater than the benefits.

Answer 27

a. public goods can be used by one person without reducing the amount that is available to others.

Question 28

The table below shows the tons of rice and corn that can be produced in Country X and Country Y in one year, using the same amount of productive resources.

According to the theory of comparative advantage, what should firms in Country X do?

a. export corn to Country Y and import rice
b. export both rice and corn to Country Y
c. import both rice and corn from Country Y
d. export rice to Country Y and import corn

Answer 28

d. export rice to Country Y and import corn

Question 29

“To correct our balance of trade deficit, we should increase tariffs on imported goods.” If tariffs are increased, the long-run effect is most likely to be:

a. a decrease in both U.S. imports and exports.
b. an increase in both U.S. imports and exports.
c. an increase in U.S. imports, and a decrease in U.S. exports.
d. a decrease in U.S. imports, and an increase in U.S. exports.

Answer 29

a. a decrease in both U.S. imports and exports.

Question 30

If the exchange rate between dollars ($) and yen (¥) changes from $1 = ¥200 to $1 = ¥100, and domestic prices in both countries stay the same, has the dollar appreciated or depreciated, and would U.S. imports from Japan become less expensive or more expensive?

a. The dollar has appreciated and imports from Japan have become more expensive.
b. The dollar has appreciated and imports from Japan have become less expensive.
c. The dollar has depreciated and imports from Japan have become more expensive.
d. The dollar has depreciated and imports from Japan have become less expensive.

Answer 30

c. The dollar has depreciated and imports from Japan have become more expensive.