Question Which of the following statements is false?

Answer a. Explicit costs of using market-supplied resources entail an

opportunity cost equal to the dollar cost of obtaining the
resources in the market.
b. Economic profit is usually bigger than accounting profit.
c. f economic profit is positi!e" accounting profit must also be
positi!e.
d. f economic profit is negati!e" accounting profit must also
be negati!e.
#$%%E&'(
Accounting )rofit * 'otal +e!enue , Explicit #osts-
Economic )rofits * 'otal +e!enue , Explicit #osts , mplicit #osts
f Economic )rofits . /" this implies that E# 0 # 1 '+. E# does not ha!e
to be greater than '+...to make A) negati!e.
2

Question Economic profit is the best measure of a firm3s performance
because
Answer a. normal profit is generally too difficult to measure.
b. economic profit fully accounts for all sources of re!enue.
c. only explicit costs influence managerial decisions since" in
general" only explicit costs can be subtracted from re!enue for
the purposes of computing taxable profit.
d. the opportunity cost of using A44 resources is subtracted
from total re!enue.

#$%%E&'( Economic profits remo!e A44 costs" whereas accounting profit
only remo!e explicit cost. 5ence" economic profits then to be the most
comprehensi!e.
6

#omment( Answer a is the %+ * %# requirement. Answer b is the true
meaning of profit maximi7ation. 5ence" Answer d is the right answer.
8
Question A firm will maximi7e profit by producing that le!el of output at
which
Answer a. the additional re!enue from the last unit sold equals the
additional cost of the last unit.
b. total re!enue exceeds total cost by the largest amount.
c. total re!enue equals total cost.
d. both a and b
Question A 9lue +ibbon #ommittee has decided that the amount of acid
rain should be reduced and is trying to determine the optimal
le!el of reduction. 'here are benefits from reducing acid rain
:reduced loss of wildlife and forest" better health" etc.;" but
there are also costs. 'he committee estimates that the
marginal benefit of each unit of reduction is <2"=// > ?+"
where + is units of reduction" and the marginal cost is 6+. f
the committee wants to maximi7e the net benefit from reducing
acid rain" what is marginal cost at the optimal le!el of
reduction?
Answer a. <6/
b. <2//
c. <6//
d. <=//

#$%%E&'( &ote that you need to find the !alue of the marginal cost :6+
in this problem" hence you must find the !alue of + and then double it;.
$ptimal le!el is always done where you set %+ * %#. 9oth are gi!en.
2=// , ?+ * 6+" so sol!e for +" which is 6//" then %# * 6+ * 6@6// *
<=//.
=
Question n making a decision about whether to increase its ad!ertising
budget the firm management should not consider
Answer the added re!enue from increased sales
the added cost of producing more goods for sale.
interest payments on the firmAs loan.
the cost of increased ad!ertising.
ncorrect
Beedback
s this fixed cost that the firm has to pay regardless of
ad!ertising?
#$%%E&'( &ote that the question is about what &$' to consider. 'he
interest payments on a loan is fixed and hence it has to be paid if you
increase the ad!ertising budget or not. 5ence" the right answer is the third
answer.
?
Question Ct. #harles 5ospital" located in an upper-income neighborhood
of a large city" recently recei!ed a restored mansion as a gift
from an appreciati!e patient. 'he board of directors decided to
remodel the mansion and use it as recuperati!e quarters for
patients willing to pay a premium for luxurious
accommodations. 'he cost to the hospital of using the mansion
includes
Answer a. nothing because it was a gift.
b. how much the hospital pays for upkeep--taxes" insurance"
utilities" maintenance" etc.
c. how much the hospital would recei!e if it rented or sold the
mansion.
d. both b and c
ncorrect
Beedback
What is the opportunity cost of using the building?

#$%%E&'( b and c are right. 'he original cost is free. 5owe!er funds
ha!e to be spent to remodel and re!enues will increase. 5ence" these
must be included.
D
Question Eou recei!e a phone call from a telemarketing firm and are
informed that your name is one of only fi!e names drawn in a
recent lottery. Each of the fi!e people will recei!e a pri7e. n order
to claim your pri7e" howe!er" you must !isit summer +esorts" nc.
the following Briday :with no commitment to purchase anything;"
take a F/-minute tour of their facilities" and" at that time" your pri7e
will be awarded. n order to !isit Cummer +esorts" nc. the next
Briday" you would ha!e to miss G hours of work :<2? per hour;" pay
for the gas to dri!e there and back home :<6/;. 9ecause you won3t
go to work that day you won3t ha!e to pay the <8 for gas to dri!e to
and from work" not pay to park for which you already ha!e a
monthly pass that costs <?/. t is rational for you to !isit summer
+esorts" nc. if the pri7e has a minimum !alue to you of
Answer a.<GH
b.<28H
c. <2=/
d. <2GH
ncorrect
Beedback
What is the sunk cost that you would ha!e to pay regardless?
#$%%E&'( ncome loss( <G@2? * -<26/
Ias to go work * - <6/
Ca!ings in parking * 0<8
&et cost * <28H" hence the minimum pri7e is <28H
H

Question A clinic uses doctors and nurses to ser!e the maximum number of
patients gi!en a limited annual payroll. 'he clinic currently has 2/
doctors and 8/ nurses. 'he last doctor hired can ser!e 8// additional
patients" while the last nurse hired can ser!e 6// additional patients.
f doctors make <D/"/// a year and nurses make <6/"/// a year" the
clinic
Answer a. is making the correct hiring decision because doctors are more
producti!e than nurses.
b. is making the correct hiring decision because doctors are paid
more than nurses.
c. could ser!e more patients with the same payroll by hiring more
doctors and fewer nurses.
d. could ser!e more patients with the same payroll by hiring more
nurses and fewer doctors.
ncorrect
Beedback
Eou ha!e to consider the marginal product per dollar spent" i.e." the
number of additional patients ser!ed di!ided by salary. At the
optimal" %)J) must be equal for doctors and nurses. Are they?

#$%%E&'( %)J< for doctors * 8//J<D//// * 2J6//
%)J< for nurses * 6//J<6//// * 2J2//
Bor optimal allocation of resources" %)J< for doctor and for nurse must be equal.
#learly" this is not the case. %)J< for nurses is higher. 5ence" you must hire more
nurses to reduce the %)J< for nurses. E!entually" the two %)J< will become equal
Question A restaurant currently has two cooks and ten waiters. #ooks
earn <2/ an hour and waiters earn <? an hour. 'he last cook
added =/ meals ser!ed to total output" while the last waiter
added 6? meals ser!ed to total output. n order to maximi7e
the number of meals ser!ed with a fixed budget" the manager
should
Answer a. continue to use two cooks and ten waiters because output is
G
being maximi7ed.
b. should use more cooks and fewer waiters because cooks
are more producti!e than waiters.
c. should use more waiters and fewer cooks because waiters
are paid less than cooks.
d. should use more waiters and fewer cooks because
producti!ity per dollar is higher for waiters than for cooks.
ncorrect
Beedback
What is the %arginal )roduct :additional meals ser!ed; per
dollar spent :wages; for cooks? What is the %arginal )roduct
per dollar spent for waiters? Which is more producti!e per
dollar spent?
#$%%E&'( Came as the pre!ious question.
Bor cook( %)J< * =/ mealsJ<2/ * =J<2.
Bor waiter- %)J< * 6? mealsJ<? * ? mealsJ<2. 5ence" you get more from waiters than from
cooks" hence hire more waiters.
F
Question A package deli!ery ser!ice currently has 26 !ans and 2D
employees. Kans cost <=// per week and employees earn
<8// per week. 'he last !an added =G/ packages deli!ered to
total output" while the last employee added =?/ packages. 'he
firm
Answer a. is making the correct decision because the dollar
expenditure :<=G//; is equal for !ans and employees.
b. should use more !ans and fewer employees because the
last !an added =G/ packages while the last employee only
added =?/ packages.
c. should use fewer !ans and more employees because the
last dollar spent on !ans yielded 2.6 additional packages
deli!ered" while the last dollar spent on employees yielded 2.?
packages deli!ered.
d. none of the abo!e.
#$%%E&'( Came as abo!e. %)J< for !an * =G/J<=// * 2.6 packagesJ<2.
Bor employee( =?/ packagesJ<8// * 2.? packagesJ<2.
5ence" higher more employees until the %)J< for !an and %)J< for
employee are equal.
2/
Question %artha and Carah ha!e the same preferences and incomes.
Lust as %artha arri!ed at the theater to see a play" she
disco!ered that she had lost the <2/ ticket she had purchased
earlier. Carah Must arri!ed at the theater planning to buy a ticket
to see the same play when she disco!ered that she had lost a
<2/ bill from her wallet. f both %artha and Carah are rational
and both still ha!e enough money to pay for a ticket" which one
of the following statements is correct?
Answer a. %artha is more likely to pay for the ticket than Carah
because <2/ she paid for the lost ticket is a sunk cost.
b. Carah is more likely to pay for the ticket than %artha
because %artha doesn3t want to pay for the ticket twice.
c. %artha and Carah will take the same action :either to pay
for another ticket or not to buy; because the ticket lost or <2/
lost is a sunk cost and it should not factor into their decisions.
d. &one of the abo!e.

#omment( 'hey both lost the equi!alent of <2/. 5ence" to attend is a new
decision and should not depend on the lost ticket or lost <2/.
22
Question Eou own two factories to produce bicycles. n factory 2 the
a!erage product of labor is 26 bicycles a day and in factory 6
the a!erage product of labor is 2G bicycles a day. 'his
information tells you that you should(
Answer a. mo!e labor from factory 2 to factory 6 to capitali7e on the
higher a!erage product.
b. mo!e labor from factory 6 to factory 2 to help it increase its
a!erage product.
c. close down factory 2 and produce all the bicycles in factory
6.
d. make no changes until you get more information that
would be rele!ant to the situation.
ncorrect
Beedback
Eou need to know marginal producti!ity of each factory. No
you ha!e that information?

#omment( 4ike before" you need %)J<. We only ha!e %) but no cost.
5ence" you do not ha!e enough info. 5ence Answer d.
26
Question 'he market demand cur!e for a gi!en good shifts when there is
a change in any of the following factors EO#E)'
Answer a. the price of the good.
b. the le!el of consumersA income.
c. the prices of goods related in consumption.
d. the tastes of consumers.
ncorrect
Beedback
)lease re!iew factors that affect demand --- p. 8H-p. =6

#omment( Nemand shifters are all !ariables others than price and
quantity. 'here is a list of demand shifters in the ))) and text , number of
buyers" income" tastes" expectations" etc.
28
Question When Conoma Kineyards reduces the price of its #abernet
Cau!ignon from <2? a bottle to <26 a bottle" the result is an
increase in
Answer a. the demand for this wine.
b. the supply of this wine.
c. the quantity of this wine demanded.
d. the quantity of this wine supplied.
ncorrect
Beedback
)lease re!iew the difference between change in quantity
demanded :mo!ements along demand" p =?; and change in
demand :shifts in demand" p. =D;.

#omment( When price drops" the quantity demanded will increase. 'he
demand cur!e will &$' shift.
2=
Question n which of the following cases will the effect on equilibrium
quantity be indeterminate :i.e." depend on the magnitudes of
the shifts in supply and demand;?
Answer a. Nemand increases and supply increases
b. Nemand decreases and supply decreases
c. Nemand decreases and supply increases
d. Nemand remains constant and supply increases

#omment( 5ere" you ha!e to ha!e all the graphs at your fingertips. Eou
can ha!e the text or the ))) open. +emember that there = graphs for
changes in demand and supply. Nemand cur!e shifts inward and supply
cur!e shift outwardsP imply that the new equilibrium quantity is not known
, indeterminate.
2?
Question f the market price of eggs rises at the same time as the market
quantity of eggs purchased decreases" this could ha!e been
caused by
Answer a. an increase in demand with no change in supply.
b. a decrease in supply with no change in demand.
c. an increase in supply and an increase in demand.
d. an increase in supply and a decrease in demand.

#$%%E&'( What changes in demand andJor supply that can generate this
result , an increase in price and a decrease in quantity purchased? Eou
were told that price went up. 5ence you mo!ed up on the demand cur!e.
'he only way to get a new equilibrium with a higher price and a lower
quantity if for the supply cur!e to shift leftward , a decrease in supply.
When income was $25,000, the quantity demanded was 600. When the income increased to $30,000, the
quantity demanded decreased to 500. Based on this information, this good is:
a
.
A norma good
!
.
A u"ury
c
.
An inferior
good
d
.
A su!stitute
2D
Question Qse the following demand and supply functions to answer the
following question(
Nemand( Qd * ?/ - =)
Cupply Qs * 6/ 0 6)
Equilibrium price and quantity are
Answer a. ) * <? amd Q * H/
b. ) * <26 and Q * ==
c. ) * <2? and Q * ?/
d. &one of the abo!e.
#omment( Cet the demand and supply equations equal and sol!e for )"
then substitute in either demand or supply equation to get the Q for
equilibrium. :t is equilibrium because you are setting demand and supply
equal.;
2H

Question Qse the following demand and supply functions to answer the
following question(
Nemand( Qd * ?/ - =)
Cupply Qs * 6/ 0 6)
f the price is <2/" there is a
Answer a. surplus of 8/ units.
b. shortage of 8/ units.
c. surplus of =/ units.
d. shortage of 2/ units.
ncorrect
Beedback
)lug in ) * <2/ and calculate Qd and Qs. f Qd 1 Qs" there is a
shortage" and if Qd . Qs" there is a surplus.

#$%%E&'( As stated abo!e" plug in ) * <2/" and get Qd and Qs. Qd *
?/ , =@2/ * 2/ units. Qs * 6/ 0 6@2/ * =/ units. 5ence supply is greater
than demand by 8/ units. 5ence we ha!e a surplus of 8/ units.
2G
Question Cuppose a frost destroys much of the Blorida orange corp. At
the same time" suppose consumer tastes shift toward orange
Muice. What would we expect to happen to the equilibrium price
and quantity in the market for orange Muice?
Answer a. )rice will increase" quantity is indeterminate :may
increase or decrease;.
b. )rice will increase" quantity will increase.
c. )rice will decrease" quantity is indeterminate.
d. 'he impact on both price and quantity is indeterminate.
ncorrect
Beedback
%ake sure you draw demand and supply cur!es and shift them
based on information gi!en.
#$%%E&'( Ees" draw the graph to see the final answer. Cupply will fall
due the frost. Cupply cur!e shifts inward. Nemand will increase" hence the
demand cur!e will shift outward. Cupply down and people want moreP
price W44 go up. Quantity up or down is not sure" depending on
magnitude of supply shift and the magnitude of demand shift.
2F

Question We obser!e that the equilibrium price of coffee falls and the
equilibrium quantity falls. Which of the following best fits the
obser!ed data?
Answer a. an increase in demand with supply constant.
b. an increase in demand coupled with a decrease in supply.
c. an increase in demand coupled with an increase in supply
d. a decrease in demand with supply constant.
#omment( Nraw the different scenarios. 'he demand cur!e shifted inward
and the supply did not change. 5ence 9$'5 the equilibrium price and the
equilibrium quantity will reduce.
6/

Question 4et Qd * 2/ , 6) and Qs * 8) be the demand and supply
cur!es for 9eer. 'hen the equilibrium ) and Q in the market is(
Answer a. ) * 6" Q * ?
b. ) * ?" Q * /
c. ) * 6" Q * D
d. ) * D" Q * 6
#omment( Lust set the demand equation and the supply equation equal"
then sol!e for the equilibrium price. Cubstitute in either the demand
equation or the supply equation to get the equilibrium quantity.
62

Question Which of the following will cause an increase in consumer
surplus?
Answer a. an increase in the production cost of the good
b. a technological impro!ement in the production of the good
c. a decrease in the number of sellers of the good
d. the imposition of a binding price floor in the market
#omment( A technological impro!ement will increase the supply to society
at a lower price. 5ence the #C will get larger.
66

Question #onsumer surplus
Answer a. is positi!e for all but the last unit purchased.
b. for a particular unit of consumption is computed by taking
the difference between demand price and market price.
c. for all units consumed is the area below demand and abo!e
market price o!er all the units consumed.
d. all of the abo!e
ncorrect
Beedback
)lease re!iew the section on #onsumer Curplus :#hapter 6" p.
D2-p.D8;.

#omment( Lust definition of #C.
68
Question Ii!en a market demand cur!e ) * =G/ , 2/Q" a market supply
cur!e ) * 6Q" and the market is in equilibrium. 5ow much
consumer surplus is generated in the entire market?
Answer a. </
b. <="D//
c. <G"///
d. <2D"///
#orrect
Beedback
'his is one of the hardest problems in this chapter. Iood MobR
ncorrect
Beedback
Birst" graph the supply and demand equations. 'hen you ha!e
to calculate the equilibrium ) and Q from the demand and
supply equations. #onsumer surplus is the area of triangle
under the demand cur!e" and abo!e the price.
#omment( 'his is easier if you can draw the demand cur!e and the supply
cur!e. Eou ha!e to find the area of the triangle" A9$KE the price line. Cee
text or ))) for a picture. Q * =/" and ) * <G/. #C * .?@ :<=G/ -<G/;@ =/ *
<G"///. &ote that <=G/ is the price" when Q * /" or the intercept on the y-
axis for the demand cur!e.
6=

Question 'he nterior Nepartment recently announced that it will
increase the entrance fees at Eellowstone &ational )ark in
order to increase park re!enues. 'he nterior Nepartment must
belie!e that
Answer a. park goers are !ery responsi!e to price changes.
b. the demand for park ser!ices is elastic.
c. the percentage increase in fees will be greater than the
percentage decrease in the number of park !isitors.
d.demand is unitary elastic" and thus the number of !isitors will
&$' decrease.
#omment( 'his is an elasticity of demand question.
6?

Question Which of the following will &$' affect the elasticity of demand
for a product?
Answer a. the number of substitutes
b. how long consumers ha!e to adapt to price changes
c. the cost of producing the product
d. the percentage of the consumer3s budget spent on the
product
ncorrect
Beedback
)lease re!iew the section on SBactors affecting )rice Elasticity
of NemandS" textbook p. 622-628.

#omment( Cee the text andJor the ))). Lust definition. #ost of
production is not a part of the demand elasticity equation. Elasticity of
demand is a number to help you understand how the consumer will beha!e
if you change the price of the finished product.
6D
Question When income was <6?"///" the quantity demanded was D//.
After the income increased to <8/"///" the quantity demanded
decreased to ?//. What is the income elasticity of demand
:use the midpointJinter!al method;( ?
Answer a. -2./
b. >/.2G2G
c. /.2G2G
d. >2.?
#omment( 'his is an income elasticity question. )ercent change in Quantity
NemandedJ)ercent change in ncome. We use the mid-point calculation.
)ercent Quantity #hange * :?// , D//;J:?// 0 D//;J6
)ercent ncome #hange * :8//// , 6?///;J:8////06?///;J6
When you di!ide )ercent Quantity #hangeJ)ercent ncome #hange" you get -2./" which says
that this good is an inferior goodR
6H
Question When income was <6?"///" the quantity demanded was D//.
When the income increased to <8/"///" the quantity
demanded decreased to ?//. 9ased on this information" this
good is(
Answer a. A normal good
b. A luxury
c. An inferior good
d. A substitute
#omment( As stated abo!e" this is an inferior goodR ncome goes up" you
buy 4ECC of the good.
6G

Question f the price elasticity of demand is 2.? :in absolute !alue;"
regardless of which two points on the demand cur!e are used
to compute the elasticity" then
Answer a. demand is perfectly inelastic" and the demand cur!e is
!ertical.
b. demand is elastic" and the demand cur!e is a straight"
downward-sloping line.
c. demand is perfectly elastic" and the demand cur!e is
hori7ontal.
d. demand is elastic" and the demand cur!e is downward
sloping but not a straight line.
#omment( 'his one is harder. Ed * 2.?" implying the produce is elastic.
6F
Question Bor a particular good" a 6 percent increase in price causes a
26 percent decrease in quantity demanded. Which of the
following statements is most likely applicable to this good?
Answer a. 'here are no close substitutes for this good.
b. 'he good is a luxury.
c. 'he market for the good is broadly defined.
d. 'he rele!ant time hori7on is short.
#omment( Elasticity of demand is large" implying !ery price sensiti!e.
5ence" a luxury good.
8/
Question Cuppose a producer is able to separate customers into two
groups" one ha!ing an inelastic demand and the other ha!ing
an elastic demand. f the producerAs obMecti!e is to increase
total re!enue" she should
Answer a. increase the price charged to customers with the elastic
demand and decrease the price charged to customers with the
inelastic demand.
b. decrease the price charged to customers with the elastic
demand and increase the price charged to customers with the
inelastic demand.
c. decrease the price to both groups of customers.
d. increase the price for both groups of customers.

#omment( 'o maximi7e total re!enue" you must price at the Elasticity * 2.
5ence" if you are pricing in the elastic region" then you must drop your
price to get to Ed * 2. f you are in the inelastic region" then you must
increase the price until you get to Ed * 2.
82
Question When marginal re!enue is positi!e"
Answer a. demand is elastic.
b. marginal re!enue is greater than price.
c. decreasing price will decrease total re!enue.
d. both b and c

#omment( 4ook at the graph for '+ and elasticity. Answer is a.
86
Question Cuppose that the 5ouston +ocketsA management is
considering a plan in which fans who donate blood can attend
games for <8? instead of the usual <=/. f both ticket re!enues
and blood donations rise with this plan" which of the following
is true?
Answer a. 'he demand for 5ouston +ocketsA tickets is price elastic.
b. 'he demand for 5ouston +ocketsA tickets is price inelastic.
c. 'he demand for blood donations is price elastic.
d. 'he demand for blood donations is price inelastic.
#omment( When you drop the price :essentially that is what is going on;
and total re!enues increase" then you are at the elastic portion of the
demand cur!e.
88
Question A demand cur!e is marked with two points. )oint A
corresponds to ) * <H and Q * 26" and )oint 9 corresponds to
) * <? and Q * 6/. 9etween point A and point 9"
Answer a. the slope is equal to -2J= and the arc price elasticity of
demand is equal to 6J8.
b. the slope is equal to -2J= and the arc price elasticity of
demand is equal to 8J6.
c. the slope is equal to -8J6 and the arc price elasticity of
demand is equal to 2J=.
d. the slope is equal to -6J8 and the arc price elasticity of
demand is equal to 8J6.
#omment( Eou ha!e to calculate both the slope and the elasticity of
demand.
2. Clope is( the change in the )riceJthe change in Quantity demanded
&ote( 9ecause the price is on the y axis and quantity is on the x axis" you
ha!e to calculate the slope as abo!e. :#hange in y o!er change in x.; * :H
, ?;J:26 , 6/; * -6JG * -2J=. We ha!e the first part rightR
6. 'he elasticity of demand( )ercent change in quantityJpercent change
in price
)ercent change in quantity * :26 , 6/;J :2606/;J6 * -2J6
)ercent change in )rice * :H -?;J:H0?;J6 * 6JD
Elasticity of demand *:-2J6;J:6JD; * -2.?. We take the absolute !alue
to get 2.?. 5ence the right answer is b.
8=

Question A demand cur!e is marked with two points. )oint A
corresponds to ) * <H and Q * 26" and point 9 corresponds to
) * ? and Q * 6/. 9etween point A and point 9" demand is
Answer a. perfectly elastic.
b. inelastic.
c. unit elastic.
d. elastic" but not perfectly elastic.
#omment( We calculated the demand elasticity to be -2.?" which means
that the good is elastic. )erfectly elastic means that the demand elasticity
* infinity.
8?

Question Which of the following is consistent with the elasticities gi!en in
the following table?
Iood )rice Elasticity of Nemand
A 2.8
9 6.2
Answer a. A is a luxury and 9 is a necessity.
b. A is a good se!eral years after a price increase" and 9 is
that same good se!eral days after the price increase.
c. A is a Tit Tat bar and 9 is candy.
d. A has fewer substitutes than 9.

#omment( A more elastic good is more price sensiti!e. 'his means that
there are more substitutes a!ailable.
8D
Question Cuppose that for a particular firm the only !ariable input into
the production process is labor and that output equals 7ero
when no workers are hired. n addition" suppose that when the
firm hires 6 workers" the total cost of production is <2//. When
the firm hires 8 workers" the total cost of production is <26/. n
addition" assume that the !ariable cost per unit of labor is the
same regardless of the number of units of labor that are hired.
What is the firmAs fixed cost?
Answer a. <=/
b. <D/
c. <G/
d. <2//
#omment( Lust a little tricky. f you hire 6 people the total cost is <2//. f
you hire 8 people" the total cost is <26/. 5ence" the third person cost you
<6/. 9ut all employee costs the same. 5ence" the other two employees
cost you <=/. 5ence" your fixed cost is <26/ - <D/ :for the three
employees; * <D/" or answer b.
8H

Question Cuppose that the firmAs only !ariable input is labor. When 6/
workers are used" the a!erage product of labor is 6? and the
marginal product of labor is 8/. 'he wage rate is <=/ and the
total cost of the fixed input is <?//. 'he marginal cost at the
current production le!el is
Answer a. </.G?
b. <2./H
c. <2.88
d. <2.D/
#omment( 'he extra cost to make $&E more * <=/J8/ * <2.88
A demand cur#e is mar$ed with two %oints. &oint A corres%onds to & ' $( and ) ' *2, and
&oint B corres%onds to & ' $5 and ) ' 20. Between %oint A and %oint B,
a
.
the so%e is equa to +*,- and the arc %rice easticity of demand is equa to 2,3.
!
.
the so%e is equa to +*,- and the arc %rice easticity of demand is equa to 3,2.
c
.
the so%e is equa to +3,2 and the arc %rice easticity of demand is equa to *,-.
d
.
the so%e is equa to +2,3 and the arc %rice easticity of demand is equa to 3,2
8G

Question Lohn has decided to start his own lawn-mowing business. 'o
purchase the mowers and the trailer to transport the mowers"
Lohn withdrew <2"/// from his sa!ings account" which was
earning 8U interest" and borrowed an additional <6"/// from
the bank at an interest rate of HU. What is LohnAs annual
opportunity cost of the financial capital that has been in!ested
in the business?
Answer a. <8/
b. <2=/
c. <2H/
d. <8//
#omment( $pportunity of capital* 8U of <2"/// * <8/.
9orrowed <6"/// at HU. * <2=/.
'otal opportunity cost * <2H/.
8F

Question A firm is using ?// units of capital and 6// units of labor to
produce 2/"/// units of output. #apital costs <2// per unit and
labor <6/ per unit. 'he last unit of capital added ?/ units of
output" while the last unit of labor added 6/ units of output. 'he
firm
Answer a. is using the cost>minimi7ing combination of capital and
labor.
b. should use less of both inputs in equal proportions.
c. could produce the same le!el of output at a lower cost by
using more capital and less labor.
d. could produce the same le!el of output at a lower cost by
using less capital and more labor.
#omment( %)J< for labor and %)J< for capital are required.
4abor( 6/ unitsJ<6/ * 2 unitJ<2
#apital( ?/ unitsJ<2// * /.? unitsJ<2
5ence" you get your biggest bang per buck from labor" hence" the answer
d.
=/

Question A dry cleaner currently has 2/ workers and = machines. 'he
workersA wage rate is <8// per worker and the rental rate for a
machine is <?//. 'he last worker added D// units to total
output and the last machine also added D// units to total
output. f the dry cleaner uses 22 workers and 8 machines
instead" then
Answer a. cost will be unchanged and output will increase by 8// units.
b. cost will be unchanged and output will decrease by 6//
units.
c. output will be unchanged and cost will decrease by <?//.
d. output will be unchanged and cost will decrease by <6//.
#omment( 'his one is similar to the one before. #alculate the output and
the cost.
#ost( $ne more worker * 0<8//
$ne less machine * -<?//
#ost decrease * <6//
$utput( $ne more worker will add D// units.
$ne less machine will subtract D// units.
&et output change * / units" implying that output will remain the same.
=2

Question Cuppose that the firmAs only !ariable input is labor. When ?/
workers are used" the a!erage product of labor is ?/ and the
marginal product of labor is H?. 'he wage rate is <G/ and the
total cost of the fixed input is <?//. What is a!erage !ariable
cost?
Answer a. </.D8
b. <2.D/
c. <8.6/
d. &one of the abo!e

#omment( 'he total !ariable cost * 'otal !ariable costJ'otal output
'otal !ariable cost * ?/@<G/ * <=///
'otal output * ?/@?/ * 6?//
AK# * <=///J6?// * <2.D/" hence answer b.
=6
Question f marginal cost is equal to a!erage total cost" then
Answer a. marginal cost is minimi7ed.
b. a!erage total cost is minimi7ed.
c. a!erage !ariable cost is minimi7ed.
d. marginal cost is 7ero.

#omment( 'his is more of a definition or property of cost cur!es. 'he
marginal cost cur!e hits the minimum of the AK# and A'# cur!es.
=8
Question When marginal cost is rising" a!erage !ariable cost
Answer a. must be rising.
b. must be falling.
c. must be constant.
d. could be rising or falling.

#omment( &eed to look at the cost cur!es to see this answer. Cee ))) or
text.
==
Question A firm is using ?// units of capital and 6// units of labor to
produce 2/"/// units of output. #apital costs <2// per unit and
labor <6/ per unit. 'he last unit of capital added ?/ units of
output" while the last unit of labor added 6/ units of output. 'he
firm
Answer a. is using the cost>minimi7ing combination of capital and
labor.
b. should use less of both inputs in equal proportions.
c. could produce the same le!el of output at a lower cost by
using more capital and less labor.
d. could produce the same le!el of output at a lower cost by
using less capital and more labor.
#omment( &eed %)J< for labor and %)J< for capital. 'he one that is
largest" is the one that you will use more.
#apital( ?/J<2// * /.?J<2
4abor( 6/J<6/ * 2J<2
5ence" use more labor.
=?
Question SAt 5uffyAs ... bicycle factory" 2"H// employees turn out 2?"///
bicycles a day :in 2FGH;. Bi!e years ago" it required 6"6//
workers to make 2/"/// bikes daily.S :'he Wall Ctreet Lournal;.
n 2FGH"
Answer a. total product was 2?"/// bicycles per day.
b. the a!erage product of labor was /.22.
c. the marginal product of labor was G.G.
d.both a and b
#omment( 'his appears to be a Vstupid3 questionP
=D

Question SAt 5uffyAs ... bicycle factory" 2"H// employees turn out 2?"///
bicycles a day :in 2FGH;. Bi!e years ago" it required 6"6//
workers to make 2/"/// bikes daily.S :'he Wall Ctreet Lournal;.
5olding all else :including wages; equal" we can conclude that"
between 2FGH and fi!e years ago"
Answer a. 5uffyAs a!erage !ariable cost decreased.
b. 5uffyAs a!erage !ariable cost increased.
c. 5uffyAs marginal cost decreased.
d. 5uffyAs marginal cost increased.
#omment( 'his one is o.k. Eou make less bicycles with %$+E people.
=H

Question f a firm is producing the le!el of output at which short>run
a!erage cost equals long>run a!erage cost" then
Answer a. the firm has chosen the cost>minimi7ing combination of
inputs to produce this le!el of output.
b. with a fixed amount of capital" short>run a!erage cost is
greater than long>run a!erage cost at any other le!el of output.
c. the firm has chosen the profit-maximi7ing le!el of output.
d.both a and b
#omment( Ctraight definition for long run and short run.
+efer to 'able ?-2. Which of the following is consistent with the elasticities
gi!en in 'able ?-6?
.ood &rice /asticity of 0emand
A *.3
B 2.*
a. A is a luxury" and 9 is a necessity.
b. A is a good se!eral years after a price increase" and 9 is that same good
se!eral days after the price increase.
c. A is a Tit Tat bar" and 9 is candy.
d. A has fewer substitutes than 9.

* Economic theory is a valuable tool for business decision making because it

a. identifies for managers the essential information for making a decision.
!. assumes away the problem.
c. creates a realistic, complex model of the business firm.
d. provides an easy solution to complex business problems.

2 Consider a firm that employs some resources that are owned by the firm. When accounting
profit is zero, economic profit

1. must also eual zero.
!. is sure to be positive.
". must be negative and shareholder wealth is reduced.
=G
#. cannot be computed accurately, but the firm is breaking even nonetheless.

3 $uppose %arv, the owner&manager of %arv's (ot )ogs, earned *+!,,,, in revenue last
year. %arv's explicit costs of operation totaled *"-,,,,. %arv has a .achelor of $cience
degree in mechanical engineering and could be earning *",,,,, annually as mechanical
engineer.

a. %arv/s implicit cost of using owner&supplied resources is *"-,,,,.
!. %arv/s economic profit is *"-,,,,.
c. %arv'0 s implicit cost of using owner&supplied resources is *,.
d. %arv/s economic profit is *-,,,,.

- 1wners of a firm want the managers to make business decisions that will

a. maximize the value of the firm.
b. maximize expected profit in each period of operation.
c. maximize the market share of the firm.
d. both a and b are correct when revenue and cost conditions in one time period are independent
of revenues and costs in future time periods.

5 When a firm is a price&taking firm,

a. the price of the product it sells is determined by the intersection of the market demand and
supply curves for the product.
!. raising the price of the product above the market&determined price will cause sales to fall
nearly to zero.
c. many other firms produce a product that is identical to the output produced by the rest of the
firms in the industry.
d. all of the above

6 Economic profit is the best measure of a firm's performance because

a. normal profit is generally too difficult to measure.
b. economic profit fully accounts for all sources of revenue.
c. only explicit costs influence managerial decisions since, in general, only explicit costs can be
subtracted from revenue for the purposes of computing taxable profit.
d. the opportunity cost of using 233 resources is subtracted from total revenue.

( Which of the following is an example of an implicit cost for a firm4

a. the value of time worked by the owner for which the owner is paid a salary.
b. any wages and salaries paid to employed.
=F
c. forgone rent on property owned by firm.
d. all of the above

1 $t. Charles (ospital, located in an upper&income neighborhood of a large city, recently
received a restored mansion as a gift from an appreciative patient. 5he board of directors
decided to remodel the mansion and use it as recuperative uarters for patients willing to pay
a premium for luxurious accommodations. 5he cost to the hospital of using the mansion
includes

a. nothing because it was a gift.
b. how much the hospital pays for upkeep&&taxes, insurance, utilities, maintenance, etc.
c. how much the hospital would receive if it rented or sold the mansion.
d. both b and c

2 6ntil recently you worked as an accountant, earning *",,,,, annually. 5hen you inherited a
piece of commercial real estate bringing in *1!,,,, in rent annually. 7ou decided to leave
your 8ob and operate a video rental store in the office space you inherited.

2t the end of the first year, your books showed total revenues of *-,,,,, and total costs of
*",,,,, for video purchases, utilities, taxes, and supplies. What is the total cost of operating the
video store4

a. *-,,,,,
b. *#!,,,,
c. *",,,,,
d. none of the above

*0 Which of the following is a common mistake managers make4

a. 6sing marginal analysis to make output decisions.
!. %aximizing the value of the firm instead of maximizing the firm's profits.
c. 5reating implicit opportunity costs as part of the total costs of using resources.
d. 9ncreasing the rate of production in order to reduce unit costs of production.

** 2 group has chartered a bus to 2tlanta. 5he driver costs *!,,, the bus costs *:,,, and
parking in 2tlanta will be *;,. 7ou have already paid *+,, to reserve the bus and a
driver. 5he driver's fee is non&refundable, but the bus may be canceled a week in advance at
a charge of *+:. 2t *!, per ticket, at least how many people must buy tickets so that the trip
need not be canceled4

:. 1,
-. 1#
+. !-
<. #,

?/
*2 2 firm will maximize profit by producing that level of output at which

a. the additional revenue from the last unit sold exceeds the additional cost of the last unit by
the largest amount.
!. the additional revenue from the last unit sold euals the additional cost of the last unit.
c. total revenue exceeds total cost by the smallest amount.
d. total revenue euals total cost.
2 firm will maximize profit by producing that level of output at which
a. the additional revenue from the last unit sold euals the additional cost of the last
unit.
b. total revenue exceeds total cost by the largest amount.
c. total revenue euals total cost.
d. both a and b
*3 When marginal cost is greater than marginal benefit at the current activity level, the decision
maker can increase net benefit by decreasing the activity because

a. total benefit will rise by more than total cost will rise.
b. marginal cost is rising faster than marginal benefit is falling.
c. net benefit is upward sloping at this point.
d. total cost will fall by more than total benefit will fall.

5he uestions 1# and 1: refer to the following=

2n agency is having problems with personal phone calls made during working hours. Each
minute of a personal call costs the agency *,.:, in wasted wages. 5he agency decides to hire
operators to monitor calls in order to attain the optimal number of personal calls >minimize total
cost of personal calls?.

Number of
Operators
5otal minutes of
personal calls >per
hour?
, -,,
1 #<,
! #1,
" "+,
# ":,

*- 9f operators receive *!: an hour, how many operators should the agency hire4

a. ,
b. 1
c. !
d. "
e. #

?2
*5 What is the most the agency would be willing to pay the first operator4

a. *",,
b. *!#,
c. *1!,
d. none of the above

2nswer uestions 1- and 1+ using the following marginal benefit and marginal cost functions for
activity A=
MB @ 1,, 3 :A
MC @ !, A "A

*6 5he optimal level of A is

a. #,
!. ",
c. !,
d. 1,

*( 5he fifth unit of activity A will

a. increase net benefits by +:.
!. reduce net benefits by ":.
c. increase net benefits by #,.
d. decrease net benefits by #,.

*1 2 firm is deciding whether or not to close down its plant and modernize by installing new
technology. Which of the following should management ignore when making the decision4

a. (ow much the present plant cost
b. Cost of lost sales while the plant is closed
c. 2dded cost of the labor needed for the new plant
d. all of the above

5he uestions 1; and !, refer to the following=

2 clinic uses doctors and nurses optimally and is servicing the maximum number of patients
given a limited annual payroll. 5he last doctor hired treated 1,-,, extra patients in a year, while
the last nurse hired treated 1,,,, extra patients in a year.

*2 9f doctors make *#,,,,, a year, what do nurses make4

a. *!:,,,, a year
b. *!,,,,, a year
c. *1:,,,, a year
d. *1,,,,, a year
?6

20 9f doctors make *<,,,,, a year and nurses make *#,,,,, a year, then

a. the clinic could serve more patients by hiring more doctors and fewer nurses.
b. the clinic could serve more patients by hiring fewer doctors and more nurses.
c. the clinic is making the correct decision because doctors are more productive than nurses.
d. the clinic is not making the correct decision because the additional patients per dollar spent
on doctors is greater than the additional patients per dollar spent on nurses.

2* Whenever the additional revenue from the last unit of output exceeds the additional cost of
that unit, a profit&maximizing firm should

a. do nothing, the firm is making profits.
b. produce less in order to increase profits.
c. produce more in order to increase profits.
d. think about investing in another industry.

5he uestions !! and !" refer to the following=

2 manager in charge of new product development can hire engineers and market
researchers. 5he annual salary of an engineer is *",,,,, and that of a market researcher is
*!,,,,,. 5he marginal contribution of engineers and market researchers are
Engineers >E? %arket Besearchers >R?
Worker
2dditional
Cew Droducts Worker
2dditional
Cew Droducts
1
st
:, 1
st
",
!
nd
", !
nd
!:
"
rd
1: "
rd
!,
#
th
1, #
th
1:
:
th
< :
th
1,

22 9f the manager has an annual budget of *1!,,,,,, how should this budget be allocated in
order to maximize the number of new products developed4

a. (ire two engineers and one market researcher.
b. (ire two engineers and three market researchers.
c. (ire three engineers and two market researchers.
d. (ire three engineers and four market researchers.

23 9f the manager currently has two engineers and one market researcher, what must be true4

a. (e is making the correct decision because %D
/
@ %D
4
.
?8
b. (e is not making the correct decision because %D
/
ED
/
F %D
4
ED
4
.
c. Gewer new products will be developed if he hires fewer engineers and more market
researchers.
d. %ore new products will be developed if he hires fewer engineers and more market
researchers.

!# At age =/" Loe is considering quitting his Mob and going back for a college degree. 5e needs
two more years full-time. 'uition is <2/"/// per year. 5e earns <8/"/// per year. A college
degree would raise his annual income by <2/"/// per year. 5e will retire at age H/. 5is benefit of
a degree would be
a. 2/"///Jr.
!. *0,000 5 .
c. *0,000 5 .
d. *0,000 5 .
25. At age -0, 6oe is considering quitting his 7o! and going !ac$ for a coege degree. 8e needs two more years fu+time.
9uition is $*0,000 %er year. 8e earns $30,000 %er year. A coege degree woud raise his annua income !y $*0,000 %er year.
8e wi retire at age (0. 8is cost of going !ac$ to coege is
a. -0,000 5 .
!. 30,000 5 .
c. *0,000 5 .
d. 20,000 5 .

Answers to MC Problem 2
Chapter != )emand, $upply, and %arket Euilibrium


* Which of the following would shift the demand curve for gasoline in the current period to the
right4

1. a decrease in the price of gasoline
!. an increase in consumer income, assuming gasoline is a normal good
". an increase in the price of cars, a complement for gasoline
#. a decrease in the expected future price of gasoline

?=
2 $uppose that a decrease in the price of good H results in fewer units of good 7 being sold. 5his
implies that H and 7 are

:. complementary goods.
-. normal goods.
+. inferior goods.
<. substitute goods.

3 Which of the following would lead to a )ECBE2$E in the demand for tennis balls4

a. 2n increase in the price of tennis balls
!. 2 decrease in the price of tennis rackets
c. 2n increase in the cost of producing tennis balls
d. 2 decrease in average household income when tennis balls are a normal good
e. Cone of the above

- When $onoma Iineyards reduces the price of its Cabernet $auvignon from *1: a bottle to *1!
a bottle, the result is an increase in

a. the demand for this wine.
!. the supply of this wine.
c. the uantity of this wine demanded.
d. the uantity of this wine supplied.

6se the following general linear demand relation to answer uestions : through <=

J
d
@ -<, K ;D A ,.,,-% K #D
4

where M is income and D
4
is the price of a related good, R.

5 Grom this relation it is apparent that the good is=

a. an inferior good
!. a substitute for good R
c. a normal good
d. a complement for good R
e. both c and d

6 9f % @ *1:,,,, and D
4
@ *!,, the demand function is

a. D @ -;, K ;J
d
.
!. J
d
@ -;, K ;D.
c. J
d
@ -<, K ;D.
d. D @ -<, K ;J
d
.
e. J
d
@ <,, K 1;D.

??
( 9f % @ *1:,,,, and D
4
@ *!, and the supply function is J
s
@ ", A "D, euilibrium price and
uantity are, respectively,

F. P @ *:: and Q @ 1;:.
2/. P @ *- and Q @ "<.
22. P @ *1! and Q @ !,,.
26. P @ *:, and Q @ 1+,.
28. P @ *#, and Q @ !:,.

1 9f M @ *1:,,,, and D
4
@ *!, and the supply function is J
s
@ ", A "D, then, when the price of
the good is *-,,

1#. there is a shortage of -, units of the good.
1:. there is euilibrium in the market.
1-. there is a surplus of -, units of the good.
1+. the uantities demanded and supplied are indeterminate.

2 $uppose that the market for salad dressing is in euilibrium. 5hen the price of lettuce
rises. What will happen4

1<. 5he price of salad dressing will rise.
1;. 5he supply of salad dressing will decrease.
!,. 5he demand for salad dressing will decrease.
!1. 5he uantity demanded of salad dressing will increase.

*0 $uppose that the market for engagement rings is in euilibrium. 5hen political unrest in $outh
2frica shuts down the diamond mines there. $outh 2frica is the world/s primary supplier of
diamonds. What will happen4

!!. 5he euilibrium uantity of engagement rings will decrease.
!". 5he euilibrium price of engagement rings will decrease.
!#. 5he demand for engagement rings will decrease.
!:. 5he supply of engagement rings will increase.

** 9n which of the following cases will the effect on euilibrium output be indeterminate >i.e.,
depend on the magnitudes of the shifts in supply and demand?4

a. )emand increases and supply increases
!. )emand decreases and supply decreases
c. )emand decreases and supply increases
d. )emand remains constant and supply increases

*2 We observe that the euilibrium price of coffee falls and the euilibrium uantity falls. Which of
the following best fits the observed data4

!-. an increase in demand with supply constant.
?D
!+. an increase in demand coupled with a decrease in supply.
!<. an increase in demand coupled with an increase in supply
!;. a decrease in demand with supply constant.

6se the following demand and supply functions to answer the next two uestions.

)emand= Jd @ ;,, K -,D
$upply= Js @ & !,, A :,D

*3 Euilibrium price and output are

a. D @ *+ and J @ #<,.
!. D @ *1, and J @ ",,.
c. D @ *!, and J @ 1:,.
d. D @ *1,, and J @ :,",,.
e. none of the above

*- 9f the price is currently *11, there is a

a. surplus of 11, units.
!. shortage of !#, units.
c. surplus of ":, units.
d. shortage of +,, units.
e. none of the above

*5 With a given supply curve, a decrease in demand leads to

a. a decrease in euilibrium price and an increase in euilibrium uantity.
b. an increase in euilibrium price and a decrease in euilibrium uantity.
c. a decrease in euilibrium price and a decrease in euilibrium uantity.
d. no change in price and a decrease in euilibrium uantity.
e. none of the above

*6 $uppose that more people want 1range .owl tickets than the number of tickets
available. Which of the following statements is correct4

a. 5here is a shortage of 1range .owl tickets at the box office price.
b. 5he box office price is higher than the euilibrium price for 1range .owl tickets.
c. 9f the box office price were raised, the excess demand for 1range .owl tickets would
decrease.
d. both a and c

*( 9f a demand curve goes through the point D @ *- and J
d
@ #,,, then

a. *- is the highest price consumers will pay for #,, units.
!. *- is the lowest price consumers can be charged to induce them to buy #,, units.
?H
c. #,, units are the most consumers will buy if price is *-.
d. consumers will buy more than #,, if price is *-.
e. both a and c

*1 9f a supply curve goes through the point P @ *1, and J
s
@ "!,, then

a. *1, is the highest price that will induce firms to supply "!, units.
b. *1, is the lowest price that will induce firms to supply "!, units.
c. at a price higher than *1, there will be a surplus.
d. at a price lower than *1, there will be a shortage.
e. both c and d

*2 5he change in price that results from a leftward shift of the supply curve will be greater if

a. the demand curve is relatively steep than if the demand curve is relatively flat.
!. the demand curve is relatively flat than if the demand curve is relatively steep.
c. the demand curve is horizontal than if the demand curve is vertical.
d. the demand curve is horizontal than if the demand curve is downward sloping.

20 7esterday/s newspaper reported the results of a study indicating that people who eat more
bananas are more attractive to the opposite sex. What do you expect to happen to the market
price and uantity of bananas4

a. price will decrease, uantity will decrease
b. price will decrease, uantity will increase
c. price will increase, uantity will decrease
d. price will increase, uantity will increase

2* 9f the market price of eggs rises at the same time as the market uantity of eggs purchased
decreases, this could have been caused by

a. an increase in demand with no change in supply.
b. a decrease in supply with no change in demand.
c. an increase in supply and an increase in demand.
d. an increase in supply and a decrease in demand.

22 2ssuming neither supply or demand curves is horizontal, in which of the following cases must
price always fall4

a. )emand increases and supply increases.
b. )emand decreases and supply decreases.
c. $upply increases and demand remains constant.
d. )emand decreases and supply increases.
e. .oth c and d

?G
23 .ecause bagels and cream cheese are often eaten together, they are complements. $uppose
we observe that both the euilibrium price of cream cheese and the euilibrium uantity of
bagels have risen. Which of the following explanations is consistent with these changes in the
bagels and cream cheese markets4

",. Drice of milk increased.
"1. Drice of milk decreased.
"!. Drice of flour increased.
"". Drice of flour decreased.

6se the following figure to answer uestions !# and !:=

2- 3et demand remain constant at DL an increase in wages causes firms to be willing and able to
sell 1:, fewer units at each price than they were before the wage increase.

a. 5he new euilibrium price and uantity will be P @ *- and Q @ 1:,.
!. 5he new euilibrium price and uantity will be P @ *- and Q @ #,,.
c. 5he new euilibrium price and uantity will be P @ *+ and Q @ !:,.
d. 5he new euilibrium price and uantity will be P @ *< and Q @ ",,.

25 3et supply remain constant at SL a decrease in income causes consumers to be willing and
able to purchase 1:, fewer units at each price than they were previously.

a. 5he new euilibrium price and uantity will be P @ *- and Q @ 1:,.
!. 5he new euilibrium price and uantity will be P @ *: and Q @ 1:,.
c. 5he new euilibrium price and uantity will be P @ *+ and Q @ !:,.
d. 5he new euilibrium price and uantity will be P @ *: and Q @ !,,.

Answers to MC Problem 3
Chapter -= Elasticity and )emand

* Which of the following is likely to have the most price inelastic demand4

a. mint&flavored toothpaste
!. toothpaste
c. Colgate mint&flavored toothpaste
d. a generic mint&flavored toothpaste

2 Gor a good that is a luxury, demand
?F

a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.

3 5here are very few, if any, good substitutes for motor oil. 5herefore,

a. the demand for motor oil would tend to be inelastic.
b. the demand for motor oil would tend to be elastic.
c. the demand for motor oil would tend to respond strongly to changes in prices of other
goods.
d. the supply of motor oil would tend to respond strongly to changes in people's tastes for
large cars relative to their tastes for small cars.

- Which of the following statements is correct4

a. 5he demand for flat&screen computer monitors is more elastic than the demand for
monitors in general.
b. 5he demand for grandfather clocks is more elastic than the demand for clocks in general.
c. 5he demand for cardboard is more elastic over a long period of time than over a short
period of time.
d. 2ll of the above are correct.

5 9f the price elasticity of demand for a good is ,.<, then which of the following events is
consistent with a # percent decrease in the uantity of the good demanded4

a. a ,.! percent increase in the price of the good
b. a ".! percent increase in the price of the good
c. a #.< percent increase in the price of the good
d. a : percent increase in the price of the good

6 Gor a particular good, a ! percent increase in price causes a 1! percent decrease in uantity
demanded. Which of the following statements is most likely applicable to this good4

a. 5here are no close substitutes for this good.
b. 5he good is a luxury.
c. 5he market for the good is broadly defined.
d. 5he relevant time horizon is short.

( 2s we move downward and to the right along a linear, downward&sloping demand curve,

a. slope and elasticity both remain constant.
b. slope changes but elasticity remains constant.
c. slope and elasticity both change.
d. slope remains constant but elasticity changes.
D/

1 Which of the following will C15 affect the elasticity of demand for a product4

a. the number of substitutes
b. how long consumers have to adapt to price changes
c. the cost of producing the product
d. the percentage of the consumer's budget spent on the product
e. all of the above will affect the elasticity of demand for a product

2 5he cross&price elasticity of demand between goods X and Y

1. measures the responsiveness of the uantity of X demanded to changes in the
price of Y.
!. is the percentage change in the price of Y divided by the percentage change in
the uantity of X demanded.
". is greater than zero if X and Y are substitutes.
#. both a and c
:. all of the above

*0 %arginal revenue

a. is the change in total revenue when output increases by one unit.
b. is always greater than zero.
c. measures the slope of the total revenue curve.
d. both a and c
e. all of the above

** When the price of corn dogs is *,.:,, 1,,,,, corn dogs are demanded. When the price of
corn dogs is *1.!,, :,,,, are demanded. What is the interval >or arc? price elasticity of
demand for corn dogs4

a. 3,.#,
!. 3,.<1
c. 31.!,
d. 31.#,

*2 9f the price elasticity of )I) recorders is 3,." and price increases !,M, what happens to the
uantity of )I) recorders demanded4

-. uantity decreases by !-M
+. uantity decreases by -M
<. uantity increases by 1:M
;. uantity increases by !1M

*3 5he demand for heart surgery is price inelastic. $o it follows that

D2
1,. the percentage change in price is less than the resulting percentage change in
uantity demanded.
11. if the price of heart surgery increases, total expenditure by consumers on heart
surgery will rise.
1!. changes in price do not affect the number of operations demanded.
1". both a and b
1#. all of the above

*- 9f the price elasticity of demand for (arley&)avidson motorcycles is 31.! and uantity
demanded increases by !#M, price must have

a. decreased by !,M.
b. increased by !,M.
c. decreased by !<.<M.
d. decreased by ,.,:M.

*5 Which of the following would tend to )ECBE2$E the elasticity of demand for good X4

a. 5he cost of producing X decreases.
b. $everal firms which used to produce substitutes for X go out of business.
c. Consumers begin spending a smaller percentage of their income on X.
d. both b and c
e. all of the above

*6 E1 is demand elasticity for %inutemaid orange 8uice, E
2
is demand elasticity for all orange 8uice,
and E
3
is demand elasticity for all fruit drinks. 5hen

a. NE
*
N F NE
2
N F NE
3
N
b. NE
2
N F NE
3
N F NE
*
N
c. NE
3
N F NE
*
N F NE
2
N
d. NE
3
N F NE
2
N F NE
*
N

*( 5he demand for good X will be more elastic than the demand for good Y when

a. good X has fewer substitutes than good Y.
b. good X accounts for a larger percentage of a typical consumer/s budget than good Y.
c. consumers have more time to ad8ust to a change in the price of good X than they have
time to ad8ust to a change in the price of good Y.
d. both b and c
e. all of the above

*1 5he fact that the cross&price elasticity of natural gas with respect to the price of fuel oil is ,.#
implies that

a. natural gas and fuel oil are substitutes.
b. natural gas is a normal good.
D6
c. the uantity of natural gas demanded will decrease by 1.-M when the price of fuel oil
decreases by #M.
d. both a and c

*2 5otal revenue increased for a firm operating in the elastic range of its demand curve. Which of
the following statements is correct4

a. 5he firm must have raised price.
b. 5he firm must have lowered price.
c. Juantity demanded must have increased.
d. both a and c
e. both b and c

20 When demand is elastic,

a. marginal revenue is negative.
b. the percentage change in price exceeds the percentage change in uantity.
c. an increase in price causes total revenue to rise.
d. both b and c
e. none of the above

2* When marginal revenue is zero,

a. P O MB.
b. P @ MR.
c. a small increase in price causes no change in total revenue.
d. a small decrease in price causes no change in total revenue.
e. both c and d

22 Perry drives up to a gas station. .efore looking at the price, he places an order and says, Q9'd
like *1, of gas.RO spanF What is 6erry:s %rice easticity of demand ;in a!soute #aue<=

1:. ,
1-. ,.:
1+. 1
1<. 9nfinity >i.e., perfectly elastic?


23 >f the demand cur#e for comic !oo$s is e"%ressed as & ' *0,000,), then demand has a unitary easticity

a. ony when % ' *0,000.
!. ony when % ' *00.
c. aways.
d. ne#er.

D8
2- >f an increase in income resuts in a rightward %arae shift of the demand cur#e, then at any gi#en
%rice, the %rice easticity of demand wi ha#e

a. increased in a!soute terms.
!. decreased in a!soute terms.
c. remained unchanged.
d. increased, decreased or stayed the same. >t cannot !e determined.

25 9he mar$et demand for wheat is ) ' *00 ? 2& @ *&
!
, where ) is the quantity demanded of wheat, & is
the %rice of wheat, and &
!
is the %rice of !arey. 9he cross %rice easticity of demand for wheat with
res%ect to !arey

a. is negati#e.
!. suggests that wheat and !arey are com%ements.
c. equas *.
d. cannot !e cacuated from 7ust the information %ro#ided.

Answers to MC Problem 4
Chapter <= Droduction and Cost in the $hort Bun
Chapter ;= Droduction and Cost in the 3ong Bun
5he correct answers are marked red.
* 2 short&run production function assumes that

a. the level of output is fixed.
!. at least one input is a fixed input.
c. all inputs are fixed inputs.
d. both a and b
e. both b and c

5he next ! uestions refer to the following=

2mount of total output produced from various combinations of labor and capital.

6nits of Capital
1 ! "

6nits
of
3abo
r
1
!
"
#
:
<,
1<,
!+,
"#,
";,
1,,
!!,
"",
#!,
#;,
1!,
!-,
";,
:,,
:;,
D=
- #1, :", -:,

2 9f capital is fixed at two units, what is the marginal product of the fourth unit of labor4

a. -,
b. <,
c. 1,,
d. #!,
e. none of the above

3 9f labor is fixed at three units, how much does the third unit of capital add to total output4

a. -,
!. <,
c. 11,
d. 1",
e. none of the above

- 9f average product is increasing, then marginal product

1. must be greater than average product.
!. must be less than average product.
". must be increasing.
#. cannot be decreasing.
:. both a and c

5 $uppose that you run a house&painting company and currently have ! workers painting a total
of # houses per month. 9f you hire a third worker, - houses can be painted per month. 9f you
hire a fourth worker, ; houses can be painted, and a fifth and sixth worker will increase the
number of houses painted to 1" and 1:, respectively. )iminishing returns

a. set in when the fourth worker is hired.
b. set in when the fifth worker is hired.
c. set in when the sixth worker is hired.
d. have not yet set in because output is still increasing.

6 5he marginal product of labor

-. measures how output changes as the wage rate changes.
+. is less than the average product of labor when the average product of labor is
decreasing.
<. is negative when adding another unit of labor decreases output.
;. both a and b
1,. both b and c

5he next # uestions refer to the following=
D?



Outpu
t

Total
Cost
Total
i!"d
Cost
Total
#ariabl"
Cost
A$"rag"
i!"d
Cost
A$"rag"
#ariabl"
Cost
A$"rag"
Total
Cost

Marginal
Cost
1,,
!,,
",,
#,,

:-,
SSSSS
SSSSS
SSSSS
SSSSS
SSSSS
SSSSS
SSSSS
-,
SSSSS
SSSSS
SSSSS
SSSSS
SSSSS
SSSSS
SSSSS
SSSSS
SSSSS
#.,,
SSSSS
SSSSS
SSSSS
SSSSS
+.,,
SSSSS
#.,,
SSSSS
SSSSS

( What is the total fixed cost when #,, units of output are produced4

a. *:,,
!. *!,,,
c. *":,,
d. *:,,,
e. none of the above

1 What is average total cost when !,, units of output are produced4

a. *!.",
!. *!.:,
c. *#.,,
d. *#.<,
e. none of the above

2 What is average fixed cost when ",, units of output are produced4

a. *,.-,
b. *".,,
c. *1-,
d. *:,,
e. none of the above

*0 What is the marginal cost of the !:,th unit of output4

a. *,.1#
b. *!.#,
c. *#.,,
d. *+.#,
e. none of the above

** %arginal cost

a. measures how total cost changes when input prices change.
DD
b. measures how total cost changes when one more unit of output is produced.
c. is less than average cost when average cost is decreasing.
d. both a and b
e. both b and c

*2 2 firm is currently producing 1, units of outputL marginal cost is *!# and average total cost is
*- at this level of output. 5he average total cost at ; units of output is=

a. *#
b. *:
c. *-
d. *<
e. none of the above

5he next ! uestions refer to the following=

$uppose a firm is hiring !, workers at a wage rate of *-,. 5he average product of labor is ",,
the last worker added 1! units of output, and total fixed cost is *",-,,.

*3 What is marginal cost4

a. *.!,
b. *:
c. *!#,
d. *+!,
e. none of the above

*- What is average total cost4

a. *!
b. *<
c. *-,,
d. *1<,,
e. none of the above

*5 $hort&run average cost is

a. always greater than long&run average cost.
b. always less than long&run average cost.
c. less than short&run marginal cost when short&run marginal cost is decreasing.
d. both a and c
e. none of the above

*6 When marginal cost is rising, average variable cost

a. must be rising.
DH
b. must be falling.
c. must be constant.
d. could be rising or falling.

*( 2 sofa manufacturer currently is using :, workers and ", machines to produce :,,,, sofas a
day. 5he wage rate is *!,, and the rental rate for a machine is *1,,,,. 2t these input levels,
another worker adds !,, sofas, while another machine adds :,, sofas. 2ssuming that the
marginal product of labor is constant between #: and :, workers and the marginal product of
capital is constant between ", and "1 machines, if the firm uses #: workers and "1
machines instead, then its

a. cost will be unchanged, and its output will decrease by :,, units.
b. cost will be unchanged, and its output will increase by ",, units.
c. cost will be unchanged, and its output will increase by :,, units.
d. output will be unchanged, and its cost will decrease by *<,,.
e. none of the above

*1 2 dry cleaner currently has 1, workers and # machines. 5he workers/ wage rate is *",, per
worker and the rental rate for a machine is *:,,. 5he last worker added -,, units to total
output and the last machine also added -,, units to total output. 2ssuming that the marginal
product of labor is constant between 1, and 11 workers and the marginal product of capital is
constant between " and # machines, if the dry cleaner uses 11 workers and " machines
instead, then

a. cost will be unchanged and output will increase by ",, units.
b. cost will be unchanged and output will decrease by !,, units.
c. output will be unchanged and cost will decrease by *:,,.
d. output will be unchanged and cost will decrease by *!,,.
e. none of the above

*2 2 firm is using :,, units of labor and 1,, units of capital to produce 1,, units of output. 5he
price of labor is *: per unit and the price of capital is *!, per unit. 2t these input levels,
another unit of labor adds :, units of output, while another unit of capital adds #,, units of
output. 5he firm could increase output by

a. 1, units by spending *1 more on capital and *1 less on labor.
b. 1, units by spending *1 more on labor and *1 less on capital.
c. ":, units by spending *1 more on capital and *1 less on labor.
d. ":, units by spending *1 more on labor and *1 less on capital.
e. none of the above

20 7ou overhear a businessman say= 0We want to be big because there are economies
associated with bigness.0 What he means is that

a. total cost decreases as more is produced.
b. long&run average cost decreases as more is produced.
DG
c. marginal cost decreases as more is produced.
d. total fixed cost decreases as more is produced.

2* )iseconomies of scale

a. exist when fixed cost increases as output increases.
!. exist when long3run average cost increases as output increases.
c. result eventually as the firm uses more and more labor with a fixed capital stock.
d. both a and b
e. all of the above

22 9f a firm is producing the level of output at which long3run average cost euals long3run
marginal cost, then

a. long3run marginal cost is at its minimum point.
b. long3run average cost is at its minimum point.
c. long3run total cost is at its minimum point.
d. both a and b
e. all of the above

23 9f a firm is producing the level of output at which short3run average cost euals long3run
average cost, then

a. the firm has chosen the cost3minimizing combination of inputs to produce this level of
output.
b. with a fixed amount of capital, short3run average cost is greater than long3run average
cost at any other level of output.
c. the firm has chosen the profit&maximizing level of output.
d. both a and b
e. all of the above

2- Economies of scale exist when

a. total cost decreases as output increases.
b. long&run average cost decreases as output increases.
c. marginal cost decreases as output increases.
d. fixed cost decreases as output increases.

25 9f there are no fixed costs in the long run, how can it be said that economies of scale arise
from spreading fixed costs over more units of output4

11. Economies of scale is a short run phenomenon, and so diminishing returns is
the root cause of scale economies.
1!. 9t is the cost of uasi&fixed inputs that gets spread over more units of output
and drives down average cost in the long run.
1". 2verage fixed costs decline continuously as output rises.
DF
1#. 3ong&run average cost falls because all fixed costs are sunk.
*5.
'he nterior Nepartment recently announced that it will increase the entrance fees at
Eellowstone &ational )ark in order to increase park re!enues. 'he nterior
Nepartment must belie!e that
a. park goers are !ery responsi!e to price changes.
b. the demand for park ser!ices is elastic.
c. the percentage increase in fees will be greater than the percentage decrease in the
number of park !isitors.
d. demand is unitary elastic" and thus the number of !isitors will &$' decrease.

6 Which of the following will &$' affect the elasticity of demand for a product?
a. the number of substitutes
b. how long consumers ha!e to adapt to price changes
c. the cost of producing the product
d. the percentage of the consumer3s budget spent on the product
e. all of the abo!e will affect the elasticity of demand for a product

8 'he cross-price elasticity of demand between goods O and E
a. measures the responsi!eness of the quantity of O demanded to changes in the
price of E.
b. is the percentage change in the price of E di!ided by the percentage change in the
quantity of O demanded.
H/
c. is greater than 7ero if O and E are substitutes.
d. both a and c
e. all of the abo!e
= %arginal re!enue
a. is the change in total re!enue when output increases by one unit.
b. is always greater than 7ero.
c. measures the slope of the total re!enue cur!e.
d. both a and c
e. all of the abo!e


'he next 6 questions refer to the following table showing a demand schedule(

)rice Quantity Nemanded
<6// 2///
2?/ 2=//
2// 2G//
#hapter D( E4AC'#'E A&N NE%A&N

? f price falls from <6// to <2?/" what is the elasticity of demand o!er this range?
H2
a. /.D6?
b. 2./
c. 2.2H
d. 6.?
e. 8./

D As output increases from 2"/// to 2"=// what is marginal re!enue?
a. <6?
b. <?/
c. ,<=//
d. <6?
e. <H?

H f the price elasticity of NKN recorders is /.8 and price increases 6/U" what
happens to the
quantity of NKN recorders demanded?
a. quantity decreases by 6DU
b. quantity decreases by DU
c. quantity increases by 2?U
d. quantity increases by 62U
H6

G 'he demand for good O will be more elastic than the demand for good E when
a. good O has fewer substitutes than good E.
b. good O accounts for a larger percentage of a typical consumerAs budget than good
E.
c. consumers ha!e more time to adMust to a change in the price of good O than they
ha!e
time to adMust to a change in the price of good E.
d. both b and c
e. all of the abo!e
'hen next 6 questions refer to the following figure(

/ 8"///
?
2 /
2 ?
6 /
)rice :dollars;
Q uantity
N
2"/// 6"/// ="///
H8
)
Q


F When price is <2? and quantity demanded is 2"///" what is the point elasticity of
demand?
a. 8
b. 2J8
c. 2
d. ?
e. 6J8

2/ When price is <2/ and quantity demanded is 6"///" what is the point elasticity of
demand?
a. 8
b. 2J8
c. 2
d. ?
e. 6J8

'he market demand cur!e for a gi!en good shifts when there is a change in any of
the following factors EO#E)'
H=
a. the price of the good.
b. the le!el of consumersA income.
c. the prices of goods related in consumption.
d. the tastes of consumers.

6 f input prices increase" all else equal"
a. quantity supplied will decrease.
b. supply will increase.
c. supply will decrease.
d. demand will decrease.

8 When Conoma Kineyards reduces the price of its #abernet Cau!ignon from <2? a
bottle to <26 a
bottle" the result is an increase in
a. the demand for this wine.
b. the supply of this wine.
c. the quantity of this wine demanded.
d. the quantity of this wine supplied.

= When the a!erage price of !ideocassette recorders :K#+s; fall" the result is
a. an increase in supply of K#+s.
H?
b. an increase in the quantity of K#+s supplied.
c. an increase in the quantity of K#+s demanded.
d. a decrease in the quantity of K#+s demanded.

Qse the following general linear demand relation to answer questions(


Qd DG/ F) /.//D% =)+ where % is income and )+ is the price of a related good" +.
? Brom this relation it is apparent that the good is(
a. an inferior good
b. a substitute for good +
c. a normal good
d. a complement for good +
e. both c and d
D f % * <2?"/// and )+ * <6/ and the supply function is Qs 8/ 8)" equilibrium price
and
quantity are" respecti!ely"
a. ) * <?? and Q * 2F?.
b. ) * <D and Q * 8G.
c. ) * <26 and Q * 6//.
d. ) * <?/ and Q * 2H/.
HD
e. ) * <=/ and Q * 6?/.
H f % * <2?"/// and )+* <6/ and the supply function is" Qs 8/ 8)" then" when the
price of the good is <=/"
a. there is equilibrium in the market.
b. there is a shortage of 2G/ units of the good.
c. there is a surplus of 2G/ units of the good.
d. there is a shortage of G/ units of the good.

G Ccientists ha!e de!eloped a bacterium that they belie!e will lower the free7ing point
of
agricultural products. 'his inno!ation could sa!e farmers <2 billion a year in crops
now lost to
frost damage. f this technology becomes widely used" what will happen to the
equilibrium price
and quantity in" for example" the potato market?
a. price will decrease" quantity will decrease
b. price will decrease" quantity will increase
c. price will increase" quantity will decrease
d. price will increase" quantity will increase
e. 'he change in equilibrium price and quantity is indeterminate.

F With a gi!en supply cur!e" a decrease in demand leads to
HH
a. a decrease in equilibrium price and an increase in equilibrium quantity.
b. an increase in equilibrium price and a decrease in equilibrium quantity.
c. a decrease in equilibrium price and a decrease in equilibrium quantity.
d. no change in price and a decrease in equilibrium quantity.
e. none of the abo!e
2/ f the market price of eggs rises at the same time as the market quantity of eggs
purchased
decreases" this could ha!e been caused by
a. an increase in demand with no change in supply.
b. a decrease in supply with no change in demand.
c. an increase in supply and an increase in demand.
d. an increase in supply and a decrease in demand.


HG