Economics

Identify the choice that best completes the statement or answers the question.

 

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____ 1. Elasticity is

a. a measure of how much buyers and sellers respond to changes in market conditions.
b. the study of how the allocation of resources affects economic well-being.
c. the maximum amount that a buyer will pay for a good.
d. the value of everything a seller must give up to produce a good.

 

 

____ 2. If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?

a. immediately after the price increase
b. one month after the price increase
c. three months after the price increase
d. one year after the price increase

 

 

____ 3. Economists compute the price elasticity of demand as the

a. percentage change in price divided by the percentage change in quantity demanded.
b. change in quantity demanded divided by the change in the price.
c. percentage change in quantity demanded divided by the percentage change in price.
d. percentage change in quantity demanded divided by the percentage change in income.

 

 

____ 4. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is

a. 0.
b. 1.
c. 6.
d. 36.

 

 

____ 5. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a

a. 0.4 percent decrease in the quantity demanded.
b. 2.5 percent decrease in the quantity demanded.
c. 4 percent decrease in the quantity demanded.
d. 40 percent decrease in the quantity demanded.

 

 

____ 6. If the price elasticity of demand for a good is 0.25, then a 20 percent decrease in price results in a

a. 0.0125 percent increase in the quantity demanded.
b. 4 percent increase in the quantity demanded.
c. 5 percent increase in the quantity demanded.
d. 80 percent increase in the quantity demanded.

 

 

____ 7. If the price elasticity of demand for a good is 1.5, then a 3 percent decrease in price results in a

a. 0.5 percent increase in the quantity demanded.
b. 2 percent increase in the quantity demanded.
c. 4.5 percent increase in the quantity demanded.
d. 5 percent increase in the quantity demanded.

 

 

____ 8. Demand is inelastic if the price elasticity of demand is

a. less than 1.
b. equal to 1.
c. greater than 1.
d. equal to 0.

 

 

____ 9. Suppose the price of potato chips decreases from $1.45 to $1.25 and, as a result, the quantity of potato chips demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for potato chips in the given price range is

a. 2.00.
b. 1.55.
c. 1.00.
d. 0.64.

 

 

____ 10. Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded?

a. a 7.5 increase in the price of the good
b. a 13.33 percent increase in the price of the good
c. an increase in the price of the good from $7.50 to $10
d. an increase in the price of the good from $10 to $17.50

 

 

____ 11. Profit is defined as total revenue

a. plus total cost.
b. times total cost.
c. minus total cost.
d. divided by total cost.

 

 

____ 12. Daphne sells 300 glasses of lemonade at $0.50 each. Her total costs are $125. Her profits are

a. $25.
b. $124.50.
c. $125.
d. $150.

 

 

Table 13-3

Number of

Workers

Output Fixed

Cost

Variable

Cost

Total

Cost

0 0 $50 $0 $50
1 90 $50 $20 $70
2 170 $50 $40 $90
3 230 $50 $60 $110
4 240 $50 $80 $130

 

 

____ 13. Refer to Table 13-3. The marginal product of the second worker is

a. 90 units.
b. 85 units.
c. 80 units.
d. 20 units.

 

 

____ 14. If marginal cost is greater than average total cost, then

a. profits are increasing.
b. economies of scale are becoming greater.
c. average total cost remains constant.
d. average total cost is increasing.

 

 

____ 15. The minimum points of the average variable cost and average total cost curves occur where the

a. marginal cost curve lies below the average variable cost and average total cost curves.
b. marginal cost curve intersects those curves.
c. average variable cost and average total cost curves intersect.
d. slope of total cost is the smallest.

 

 

Figure 13-10

 

 

____ 16. Refer to Figure 13-10. The three average total cost curves on the diagram labeled ATC1, ATC2, and ATC3 most likely correspond to three different

a. time horizons.
b. products.
c. firms.
d. factory sizes.

 

 

____ 17. Refer to Figure 13-10. The firm experiences economies of scale if it changes its level of output from

a. Q1 to Q2.
b. Q2 to Q3.
c. Q3 to Q4.
d. Q4 to Q5.

 

 

Table 14-9

Suppose that a firm in a competitive market faces the following revenues and costs:

Quantity Total Revenue Total Cost
0 $0 $10
1 $9 $14
2 $18 $19
3 $27 $25
4 $36 $32
5 $45 $40
6 $54 $49
7 $63 $59
8 $72 $70
9 $81 $82

 

 

____ 18. Refer to Table 14-9. If the firm produces 4 units of output,

a. marginal cost is $4.
b. total revenue is greater than variable cost.
c. marginal revenue is less than marginal cost.
d. the firm is maximizing profit.

 

 

____ 19. Refer to Table 14-9. At which quantity of output is marginal revenue equal to marginal cost?

a. 3 units
b. 6 units
c. 8 units
d. 9 units

 

 

____ 20. Refer to Table 14-9. In order to maximize profit, the firm will produce a level of output where marginal revenue is equal to

a. $6.
b. $7.
c. $8.
d. $9.

 

 

____ 21. Refer to Table 14-9. In order to maximize profit, the firm will produce a level of output where marginal cost is equal to

a. $5.
b. $7.
c. $9.
d. $10.

 

 

____ 22. Refer to Table 14-9. The maximum profit available to the firm is

a. $2.
b. $3.
c. $4.
d. $5.

 

 

____ 23. Refer to Table 14-9. If the firm’s marginal cost is $11, it should

a. increase production to maximize profit.
b. increase the price of the product to maximize profit.
c. advertise to attract additional buyers to maximize profit.
d. reduce production to increase profit.

 

 

____ 24. Refer to Table 14-9. If the firm’s marginal cost is $5, it should

a. reduce fixed costs by lowering production.
b. increase production to maximize profit.
c. decrease production to maximize profit.
d. maintain its current level of production to maximize profit.

 

 

Figure 14-8

Suppose a firm operating in a competitive market has the following cost curves:

 

 

____ 25. Refer to Figure 14-8. The firm will exit the market for any price on the line segment

a. ABCD.
b. AB.
c. CD.
d. None of the above is correct.

 

 

____ 26. Bill operates a boat rental business in a competitive industry. He owns 10 boats and pays $1,000 per month on the loan that he took out to buy them. He rents each boat for $200 per month. The variable cost for each boat rental is $50. In the off season, Bill should

a. operate his business as long as he rents at least 7 boats per month.
b. operate his business as long as he rents at least 1 boat per month.
c. operate his business as long as he rents all 10 boats each month.
d. raise the price he charges per boat rental.

 

 

____ 27. When a perfectly competitive firm decides to shut down, it is most likely that

a. marginal cost is above average variable cost.
b. marginal cost is above average total cost.
c. price is below the firm’s average variable cost.
d. fixed costs exceed variable costs.

 

 

____ 28. A sunk cost is one that

a. changes as the level of output changes in the short run.
b. was paid in the past and will not change regardless of the present decision.
c. should determine the rational course of action in the future.
d. has the most impact on profit-making decisions.

 

 

____ 29. In the long run, a firm will exit a competitive industry if

a. total revenue exceeds total cost.
b. the price exceeds average total cost.
c. average total cost exceeds the price.
d. Both a and b are correct.