Which of the following is NOT true about price floors? Select correct option:
Consumer surplus is always lower than it would be in the competitive equilibrium.
Producer surplus could be lower, higher, or the same as it would be in competitive equilibrium.
Producer surplus could be negative as the result of a price floor.
Producers will often respond to a price floor by cutting production to the point at which price equals marginal cost.
Indifference curves that are convex to the origin reflect:
Select correct option:
An increasing marginal rate of substitution.
A decreasing marginal rate of substitution.
A constant marginal rate of substitution.
A marginal rate of substitution that first decreases, then increases.
Which of the following statements is true regarding the differences between economic and accounting costs?
Select correct option:
Accounting costs include all implicit and explicit costs.
Economic costs include implied costs only.
Accountants consider only implicit costs when calculating costs.
Accounting costs include only explicit costs.
Rabia and Samina are shopping for new cars (one each). Rabia expects to pay $15,000 with 1/5
probability and $20,000 with 4/5 probability. Samina expects to pay $12,000 with 1/4 probability
and $20,000 with 3/4 probability. Refer to the above scenario, Rabia’s expected expense for his
car is:
Select correct option:
$20,000.
$19,000.
$18,000.
$17,500.
A decreasing-cost industry has a downward-sloping: Select correct option:
Long-run marginal cost curve.
Short-run average cost curve.
Short-run marginal cost curve.
Long-run industry supply curve.
Producer surplus is measured as the:
Select correct option:
Area under the demand curve above market price.
Entire area under the supply curve.
Area under the demand curve above the supply curve.
Area above the supply curve up to the market price.
In a constant-cost industry, an increase in demand will be followed by: Select correct option:
No increase in supply.
An increase in supply that will not change price from the higher level that occurs after the demand shift.
An increase in supply that will bring price down to the level it was before the demand shift.
An increase in supply that will bring price down below the level it was before the demand shift.
The “perfect information” assumption of perfect competition includes all of the following except one. Which one?
Select correct option:
Consumers know their preferences.
Consumers know their income levels.
Consumers know the prices available.
Consumers can anticipate price changes.
A Giffen good:
Select correct option:
Is always the same as an inferior good.
Is the special subset of inferior goods in which the substitution effect dominates the income effect.
Is the special subset of inferior goods in which the income effect dominates the substitution effect.
Must have a downward sloping demand curve.
Goods X and Y are complements while goods X and Z are substitutes. If the supply of good X increases:
Select correct option:
The demand for both Y and Z will increase
The demand for Y will increase while the demand for Z will decrease
The demand for Y will decrease while the demand for Z will increase
The demand for both Y and Z will decrease
Which of the following can be thought of as a barrier to entry? Select correct option:
Scale economies.
Patents.
Strategic actions by incumbent firms.
All of the given options are true.
A new technology which reduces costs for firms’:
Select correct option:
Shifts the supply curve to the right
Shifts the supply curve to the left
Reduces the equilibrium quantity
Raises the equilibrium price
A normative economic statement:
Select correct option:
Is a statement of fact.
Is a hypothesis used to test economic theory.
Is a statement of what ought to be, not what is.
Is a statement of what will occur if certain assumptions are true.
The extra value that consumers receive above what they pay for that good is called: Select correct option:
Producer surplus
Utility
Marginal utility
Consumer surplus
The point at which AC intersects MC is where:
Select correct option:
AC is decreasing.
MC is at its minimum.
AC is at its minimum.
AC is at its maximum.
If the income elasticity of demand is 1/2, the good is: Select correct option:
A luxury.
A normal good (but not a luxury).
An inferior good.
A Giffen good.
What happens in the market for airline travel when the price of traveling by rail decreases? Select correct option:
The demand curve shifts left.
The demand curve shifts right.
The supply curve shifts left.
The supply curve shifts right.
Indifference curves that are convex to the origin reflect: Select correct option:
An increasing marginal rate of substitution.
A decreasing marginal rate of substitution.
A constant marginal rate of substitution.
A marginal rate of substitution that first decreases, then increases.
If diminishing marginal utility holds, and a person consumes less of a good, then all else being equal:
Select correct option:
The price of the good will rise.
Marginal utility will rise
Expenditure on the good will increase
Marginal utility will decline
Prospective sunk costs:
Select correct option:
Are relevant to economic decision-making.
Are considered as investment decisions.
Rise as output rises.
Do not occur when output equals zero
An isoquant:
Select correct option:
Must be linear.
Cannot have a negative slope.
Is a curve that shows all the combinations of inputs that yield the same total output.
Is a curve that shows the maximum total output as a function of the level of labor input.
Which of the following would cause a shift to the right of the supply curve for gasoline? I. A large increase in the price of public transportation. II. A large decrease in the price of
automobiles. III. A large reduction in the costs of producing gasoline.
Select correct option:
I only.
II only.
III only.
II and III only.
If price is between AVC and ATC, the best and most practical thing for a perfectly competitive firm to do is:
Select correct option:
Raise prices.
Lower prices to gain revenue from extra volume.
Shut down immediately, but not liquidate the business.
Continue operating, but plan to go out of business.
The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because:
Select correct option:
The market price is determined (through regulation) by the government. The firm supplies a different good than its rivals.
The firm’s output is a small fraction of the entire industry’s output.
The short run market price is determined solely by the firm’s technology.
The law of diminishing returns applies to:
Select correct option:
The short run only.
The long run only.
Both the short and the long run.
Neither the short nor the long run.
In an unregulated, competitive market consumer surplus exists because some: Select correct option:
Sellers are willing to take a lower price than the equilibrium price.
Consumers are willing to pay more than the equilibrium price.
Sellers will only sell at prices above equilibrium price (or actual price).
Consumers are willing to make purchases only if the price is below the actual price.
Which of the following is true concerning the income effect of a decrease in price? Select correct option:
It will lead to an increase in consumption only for a normal good.
It always will lead to an increase in consumption.
It will lead to an increase in consumption only for an inferior good.
It will lead to an increase in consumption only for a Giffen good.
The demand curve facing a perfectly competitive firm is:
► The same as the market demand curve.
► Downward-sloping and less flat than the market demand curve.
► Perfectly horizontal.
► Perfectly vertical.
Which of the following statements is TRUE about the demand curve for a perfectly competitive firm?
► The demand curve is same as its average revenue curve, but not the same as its marginal revenue curve.
► The demand curve is same as its average revenue curve and its marginal revenue curve.
► The demand curve is same as its marginal revenue curve, but not the same as its average revenue curve.
► The demand curve is not the same as either its marginal revenue curve or its average revenue curve.
In a perfectly competitive market:
► There are few buyers.
► There is a single seller.
► There is a cartel.
► No single buyer or seller can significantly affect the market price.
Although there are many reasons why a market can be non-competitive, the principal economic difference between a competitive and a non-competitive market is:
► The extent to which any firm can influence the price of the product.
► The size of the firms in the market.
► The annual sales made by the largest firms in the market.
► The presence of government intervention.
Our economy is characterized by:
► Unlimited wants and needs.
► Unlimited material resources.
► No energy resources.
► Abundant productive labor.
When the current price is above the market-clearing level, we would expect:
► Quantity demanded to exceed quantity supplied.
► Quantity supplied to exceed quantity demanded.
► Greater production to occur during the next period.
► None of the given options.
Which of the following will NOT cause a rightward shift in the demand curve for beer?
► A change in the price of beer.
► A decrease in the price of potato chips (a complement).
► A health study indicating positive health benefits of moderate beer consumption.
► An increase in the price of French wine (a substitute).
The assumption that preferences are complete:
► Recognizes that there may be pairs of market baskets that cannot be compared.
► Means that between any two market baskets of goods, the consumer can determine that either one is preferred to the other or that she is indifferent between them.
► Means that a consumer will spend his entire income.
► Is unnecessary, as long as transitivity is assumed.
The slope of an indifference curve reveals:
► That preferences are complete.
► The marginal rate of substitution of one good for another good.
► The ratio of market prices.
► That preferences are transitive.
Based on figure given above, it can be inferred that:
► Ahmad does not consider good X as “good.”
► Ahmad will never purchase any of good Y.
► Ahmad regards good X and good Y as perfect substitutes.
► Ahmad regards good X and good Y as perfect complements.
If indifference curves are concave to the origin, which of the following assumptions regarding preferences is being violated?
► Diminishing marginal rates of substitution.
► Transitivity of preferences.
► More is preferred to less.
► Completeness.
Assume that food is measured on the horizontal axis and clothing on the vertical axis. If the price of food falls relative to that of clothing then the budget line will:
► Become flatter.
► Become steeper.
► Shift outward.
► Become steeper or flatter depending on the relationship between prices and income.
An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket?
► MRSxy is at a maximum.
► Px / Py = Money income.
► MRSxy = Money income.
► MRSxy = Px / Py.
Denise is shopping for lobsters and eclairs. When she faces budget line b1, she chooses market basket A over market basket B. When she faces budget line b2, she chooses basket B over basket C. Which of the following assumption of consumer theory helps us determine Denise’s preference ordering over basket A and basket C?
► Completeness.
► More is better than less.
► Transitivity.
► Convexity.
Which of the following is NOT an assumption regarding people’s preferences in the theory of consumer behavior?
► Preferences are complete.
► Preferences are transitive.
► Consumers prefer more of a good to less.
► None of the given options.
Omar consumes only two goods, X and Y. Assume that Omar is not at a corner solution, but he is maximizing utility. Which of the following is NOT necessarily true?
► MRSxy = Px / Py.
► MUx / MUy = Px / Py.
► Px / Py = Money income.
► Px / Py = Slope of the indifference curve at the optimal choice.
Which of the following is TRUE regarding utility along a price consumption curve?
► It is constant.
► It changes from point to point.
► It changes only if income changes.
► It changes only for normal goods.
The curve in the diagram below is called:
► The price-consumption curve.
► The demand curve.
► The income-consumption curve.
► The Engel curve.
Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying —————- of the good and the income effect results in the person buying —————- of the good.
► Less, less.
► More, more.
► More, less.
► Less, more.
The difference between what a consumer is willing to pay for a unit of a good and what must be paid when actually buying it is called:
► Producer surplus.
► Consumer surplus.
► Cost benefit analysis.
► Net utility.
When the snob effect exists, a change in price is likely to:
► Change total revenue less than if there were no network externalities.
► Change total revenue more than if there were no network externalities.
► Change total revenue the same amount as if there were no network externalities.
► Not change total revenue at all.
Rabia and Samina are shopping for new cars (one each). Rabia expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samina expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability.
Refer to the above scenario, Rabia’s expected expense for his car is:
► $20,000.
► $19,000.
► $18,000.
► $17,500.
Rabia and Samina are shopping for new cars (one each). Rabia expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samina expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability.
Refer to the above scenario, Samina’s expected expense for her car is:
► $19,000.
► $18,000.
► $17,500.
► $15,000.
The individual pictured in above figure:
► Must be risk-averse.
► Must be risk-neutral.
► Must be risk-loving.
► None of the given options.
The budget line in portfolio analysis shows that:
► The expected return on a portfolio increases as the standard deviation of that return increases.
► The expected return on a portfolio increases as the standard deviation of that return decreases.
► The expected return on a portfolio is constant.
► The standard deviation of a portfolio is constant.
The indifference curve between expected return and the standard deviation of return for a risk-averse investor is:
► Downward-sloping.
► Upward-sloping.
► Horizontal.
► Vertical.
Which point has the highest marginal productivity of labor?
► Point A.
► Point B.
► Point C.
► Point D.
According to the diagram below, where each isoquant’s output level is marked to the right of the isoquant, production is characterized by:
► Decreasing returns to scale.
► Constant returns to scale.
► Increasing returns to scale.
► None of the given options.
Which of the following statements is TRUE regarding the differences between economic costs and accounting costs?
► Accounting costs include all implicit and explicit costs.
► Economic costs include implied costs only.
► Accountants consider only implicit costs when calculating costs.
► Accounting costs include only explicit costs.
Prospective sunk costs:
► Are relevant to economic decision-making.
► Are considered as investment decisions.
► Rise as output rises.
► Do not occur when output equals zero.
Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making?
I. “Even though I hate my MBA classes, I can’t quit because I’ve spent so much money on tuition.”
II. “To break into the market for soap, our firm needs to spend $10 million on
creating an image that is unique to our new product. When deciding whether
to develop the new soap, we need to take this marketing cost into account.”
► I only.
► II only.
► Both I and II.
► Neither I nor II.
Which of the following statements correctly uses the concept of opportunity cost in decision making?
I. “Because my secretary’s time has already been paid for, my cost of taking on an additional project is lower than it otherwise would be.”
II. “Since NASA is running under budget this year, the cost of another space
shuttle launch is lower than it otherwise would be.”
► Only I.
► Only II.
► Both I and II.
► Neither I nor II.
Rabia knows average total cost and average variable cost for a given level of output. Which of the following costs can she not determine given this information?
► Average fixed cost.
► Fixed cost.
► Variable cost.
► Rabia can determine all of the costs given the information provided.
For any given level of output:
► Marginal cost must be greater than average cost.
► Average fixed cost must be greater than average variable cost.
► Fixed cost must be greater than variable cost.
► None of the given options is necessarily correct.
Assume that a firm spends $500 on two inputs, labor (plotted on the horizontal axis) and capital (plotted on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be:
► 500.
► 25/500.
► -20/25 or – 4/5.
► -25/20 or -5/4.
The curve in the diagram is called:
► The income-consumption curve.
► The long-run total cost curve.
► The expansion path.
► The price-consumption curve.
A firm employs 100 workers at a wage rate of $10 per hour and 50 units of capital at a rate
of $21 per hour. The marginal product of labor is 3 and the marginal product of capital is
The firm:
► Is producing its current output level at the minimum cost.
► Could reduce the cost of producing its current output level by employing more capital and less labor.
► Could reduce the cost of producing its current output level by employing more labor and less capital.
► Could increase its output at no extra cost by employing more capital and less labor.
A movement from A to C in the above figure may represent:
► Economies of scale.
► Diseconomies of scale.
► Learning.
► Economies of scope.
If current output is less than the profit-maximizing output, then the next unit produced:
► Will decrease profit.
► Will increase cost more than it increases revenue.
► Will increase revenue more than it increases cost.
► Will increase revenue without increasing cost.
If current output is less than the profit-maximizing output then which of the following must be TRUE?
► Total revenue is less than total cost.
► Average revenue is greater than average cost.
► Marginal revenue is less than marginal cost.
► Marginal revenue is greater than marginal cost.