Microeconomics for MBAs

Second Edition

Richard B. McKenzie and Dwight R. Lee



Chapter-by-Chapter Self-Tests

Chapter 1. Microeconomics: a way of thinking about
business

1. Markets emerge when
a) participants have different desires.
b) participants strive to improve their welfare.
c) mutually advantageous interaction is possible
d) all of the above.

2. Scarcity exists because
a) human wants are limited.
b) human wants exceed human needs
c) people are unable to satisfy all of their wants.
d) resources are unlimited.

3. Which of the following are true about property rights?
a) Property rights extend the range of trades.
b) Conflict over resource use, or the potential for conflict, can be alleviated by the
development of property rights.
c) Property rights help make clear the relationship between the public and private sectors of
the economy.
d) Property rights encourage waste in the use of resources because they allow people to
destroy resources.
e) a, b and c.

Answer the next three questions based on the following production capabilities (in units
produced, not utils) for Fred and Harry

Coconuts Papayas
Fred 20 60
Harry 20 100

2

4. Which of the following statements is true?
a) Fred has an absolute advantage in the production in both goods.
b) Fred has a comparative advantage in the production of coconuts.
c) Harry has a comparative advantage in the production of coconuts.
d) Harry has an absolute advantage in the production of both goods.


5. The cost of producing
a) one papaya to Fred is three coconuts.
b) one coconut to Fred is three papayas.
c) one papaya to Harry is five coconuts.
d) one coconut to Harry is one and two-thirds papayas.

6. A mutually beneficial exchange rate between coconuts (C) and papayas (P) between Fred
and Harry would be:
a) 1C =2P
b) 1C=3P
c) 1C =4P
d) 1C =5P

7. A "tragedy of the commons" occurs when there is
a) "rivalry" in the use of a resources and property rights are assigned.
b) "rivalry" in the use of the resource and property rights are NOT assigned.
c) "underuse" of a resource and property rights are assigned.
d) "underuse of a resource and property rights are NOT assigned.

8. A Prisoners Dilemma is a situation in which both parties
a) have the correct incentive to cooperate even without communication.
b) have an incentive to defect from cooperation with the defections mutually beneficial.
c) have an incentive to defect from cooperation when cooperation would make both parties
better off.
d) would cooperate more frequently when allowed to communicate.
e) c and d


9. Which of the following statements is true concerning incentives?
a) Worker productivity can be increased through piece-rate pay systems.
b) Bonuses based on performance can increase managers' willingness to take on risky
investments.
c) Managers' time horizons can be lengthened by tying their compensation to the firm's
stock value and then requiring that they hold the firm's stock until a later date-for
example, retirement.
d) the firm's stock value and then requiring that they hold the firm's stock until a later date-
for example, retirement.
e) All of the above.

3

10. Chapter 1 covers a study on how a day-care center attempted to reduce the number of
times parents pick up their children late. The study found that charging a fine for late pickups
a) reduced the number of late pickups because of the monetary costs to parents of picking
up their children late.
b) reduced the number of late pickups because the late charge placed an additional "physic
cost" or "guilt-trip" on parents.
c) increased the number of late pickups possibly because parents considered the late fee to
be an acceptable cost of added baby sitting.
d) had no impact on the number of late pickups because the late fees were not sufficiently
large enough.


Answer Key, Chapter 1

1. d
2. c
3. e
4. b
5. b
6. c
7. b
8. e
9. e
10. c

4



Chapter 2. Principles of Rational behavior in society
and business

1. Present value is
a) the discounted value of future costs and benefits.
b) the inflated value of future costs and benefits.
c) the current value of future costs and benefits in the future.
d) the value of the current costs and benefits of what people consume today.
e) a and c

2. If the discount rate used to compute present values rises, the present value of future costs
and benefits will
a) increase.
b) decrease.
c) remain the same.
d) (Unknown; not enough information to say.)

3. The more risky future options or alternatives are,
a) the less rational people will necessarily be.
b) the more future values must be discounted to obtain their present values.
c) the greater their present values.
d) the greater their net values in the future.

4. A rational person will
a) never make mistakes in choices.
b) choose alternatives for which the expected present value is greater than the expected
value of the costs.
c) follow the Maslow Hierarchy of wants.
d) always choose those options, the future value of which is greater than the current costs.

5. Assume that studying economics and French are your only two activities. If you become
more efficient in learning economics but your efficiency in learning French remains
constant, then your ability to learn more economics
a) increases.
b) decreases.
c) remains the same.
d) Dont know (not enough information to say.)
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6. Assume that studying economics and French are your only two activities. If you become
more efficient in learning economics but your efficiency in learning French remains
constant, then your ability to learn more French
a) increases.
b) decreases.
c) remains the same.
d) Dont know (not enough information to say).

7. Rational behavior does NOT mean that people are
a) totally self-centered.
b) able to define their wants.
c) able to order their wants.
d) able to consistently choose among their ordered wants.

8. In her study of successful nineteenth-century utopian communities, Rosebeth Kanter
found six commitment mechanisms distinguished the successful from the unsuccessful
utopias. Which of the following is NOT one of the commitment mechanisms?
a) Sacrifice of habits common to the outside world, such as the use of alcohol and tobacco
or, in some cases, sex
b) Assignment of all worldly goods to the community
c) Adoption of rules that would maximize the disruptive effects of relationships between
members and nonmembers
d) Collective sharing of all property and all communal work
e) Submission to public confession and criticism

9. Governments serve large groups of people on whom they impose taxes rather than ask for
voluntary contributions to finance public goods. Governments use forced taxation
because
a) public goods are not uniformly valued by all individuals.
b) public goods are mostly services.
c) large free rider problems are anticipated with voluntary contributions.
d) government contributions require taxes.

10. Free-rider behavior
a) is a type of shirking.
b) does not occur in small groups.
c) is less likely in small groups than large groups.
d) a and c.

11. The common interest theory of group behavior assumes that people are
a) motivated to do things because of their private interests
b) motivated by their shared values
c) motivated to do things because community enforcement of shared values
d) motivated by the size of the group

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12. The economic theory of groups
a) is based on rational economic persons.
b) looks at group membership as motivated by a common interest.
c) looks at group membership as a matter of costs versus benefits.
d) a and c.

13. The economic theory of groups predicts that small groups are likely to be more prevalent
and successful in achieving their goals than large groups because
a) large groups will have members with diverse interests.
b) large groups are hard for leaders to direct and control.
c) the free rider problem is less likely to occur in small groups than in large groups .
d) all of the above.

14. Under the economic theory of group behavior, in motivating people to action common
interests
a) are likely to be most effective in large groups.
b) are more effective in large groups as the members preferences are more diverse.
c) are likely to be more effective in small groups.
d) negate the economic theory of group behavior.

15. Competitors in a highly competitive market have an interest in restricting their collective
production in order to raise the market price. They don't restrict output because
a) of the free-rider problem
b) they don't share a common interest in hiking the market price.
c) a reduction in their collective production, if achieved, will not raise the market price.
d) a reduction in output, if achieved, will not raise their individual profits.

16. When the water reserves in Southern California substantially dwindle (from time to time)
because of a decrease in rainfall, state and local official often call on residents in the area
to conserve water. Which of the following would you expect to happen in response to
appeals for water conservation, if prices are not also raised?
a) Residents will solve the water shortage by curbing their consumption in various ways
because they have a common interest in having adequate water supplies in the future.
b) Water reserves will continue to dwindle but only at a slightly lower rate, if at all.
c) People will consume more water as they begin to worry that water reserves will be
depleted.
d) a and b.
e) b and c.

17. An economic purpose of leadership in a group is
a) expanding costs beyond benefits.
b) finding a strategy for preventing free riding.
c) non-existent.
d) is all cost and no benefits.

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18. Under the economic theory of groups, as the size of the group increases, free riding can
be expected to
a) increase.
b) decrease.
c) remain the same.
d) don't know (not enough information to say).

19. Workers will have a legitimate (perhaps legal) beef with managers who commit to not
snooping on employees in any way but who do snoop because
a) snooping is only a violation of trust that has no economic (or workplace) effect.
b) workers count on managers' commitment not to snoop and, as a consequence, accept
lower wages than otherwise.
c) workers count on managers' commitment not to snoop and are only concerned with the
issue of invasion of privacy that has no economic effect.
d) workers count on managers' commitment not to snoop and, as a consequence, accept
lower fringe benefits than they otherwise would have.
e) b and d


Answer Key, Chapter 2

1. a
2. b
3. b
4. b
5. a
6. a
7. a
8. c
9. c
10. d
11. b
12. d
13. d
14. c
15. a
16. e
17. b
18. a
19. e
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Chapter 3. Competitive product markets and firm
decisions

1. Competition
a) does not occur between buyers and sellers, but does occur among buyers and among
sellers.
b) is the process by which market participants, in pursuing their own interests, attempt to
outdo, outprice, outproduce, and outmaneuver each other.
c) stimulates the exchange of information.
d) can be described by all of the above.

2. . Which of the following is NOT a characteristic of the type of competitive markets
captured by supply and demand?
a) Many sellers produce an identical product.
b) Firms can increase their prices by restricting their production.
c) Firms have freedom of entry into the market.
d) No single firm can influence the market price.

3. According to the law of demand, an increase in the price of a good will
a) increase the quantity demanded.
b) decrease the quantity demanded.
c) increase demand.
d) decrease demand.

4. Which of the following will cause an increase in the demand for a product?

a) An increase in the number of producers
b) An increase in the number of consumers
c) A decrease in the price of a substitute product
d) Consumer expectations that the product will be more abundant in the near future

5. The supply curve is
a) downward sloping because of the substitution and income effects associated with a price
change.
b) downward sloping because a lower price will result in an increase in the quantity
demanded.
c) upward sloping because of the substitution and income effects on consumers associated
with a price change.
d) upward sloping because higher marginal (extra) costs result from increased production.

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6. Which of the following will cause an increase in the supply of a product?
a) An increase in wages that increases costs of production.
b) An increase in consumer incomes.
c) An advancement in technology that reduces costs of production.
d) An increase in the price of the good.

7. If there is an decrease in the price of a good A, which is a substitute for good B, then the
demand for good B will
a) increase.
b) decrease.
c) remain the same
d) (Unknown; not enough information to specify among these options.)

8. According to the standard model of demand and supply, if
a) the wage rate is above equilibrium, a shortage of labor will result.
b) the wage rate is below equilibrium, the quantity demanded of labor will exceed the
quantity supplied of labor.
c) there is a surplus of labor then wage rates rise.
d) the demand for labor increases, the wage rate will rise and the equilibrium quantity of
labor seeking and finding a job will fall.

9. A product improvement that is mutually beneficial to buyers and sellers
a) will cause market supply to increase by more than market demand
b) will cause market demand to increase by more than market supply
c) will cause the market supply to decrease and market demand to increase
d) will cause the market supply to increase and market demand to decrease

10. A twisted pay structure, as discussed in chapter 3,
a) is generally more difficult for a start-up company because of its lack of history in keeping
its promises of more pay later.
b) may not be able to fulfill the promise of overpayment to employees if the company faces
stiff competition in the future.
c) may be abandoned if the company is purchased by another firm who has no compulsion
to hold to the original owner's prior commitments.
d) all of the above.

11. Which of the following statements is true?
a) Mandatory retirement systems can be explained by the expected physical impairment of
workers as they age.
b) Mandatory retirement systems can be explained by the need to cutoff overpayment to
older workers.
c) The abolishment of mandatory retirement systems by Congress can create unexpected
gain in wealth by some older workers.
d) All of the above.

10

12. An increase in worker fringe benefits will
a) increase firm costs and reduce worker wages
b) reduce both firm costs and worker wages.
c) make workers better off at the expense of firms.
d) a and b
e) b and c


Answer Key, Chapter 3

1. d
2. b
3. b
4. b
5. d
6. c
7. b
8. b
9. c
10. d
11. d
12. a

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Chapter 4 Applications of the economic way of
thinking: domestic government and management
policies


1. If the market is competitive, the supply curve for a good has a positive slope, and an
excise tax is imposed on producers:
a) The excise tax is totally paid by consumers.
b) The excise tax is totally paid by producers.
c) The excise tax is paid partially by consumers and producers.
d) An excise tax does not increase the price of the good.

2. If an excise tax is imposed on a good in a competitive market, the after-tax price received
by the producer will
a) increase.
b) decrease.
c) remain the same.
d) (Unknown; not enough information to say.)

3. A price ceiling on the price of gasoline at service stations when the price of a barrel of oil
is going up on world oil markets can be expected to lead to
a) a market shortage of gasoline.
b) a market surplus of gasoline.
c) a reduction in the quantity demanded and an increase in quantity supplied.
d) an improvement in gasoline state services.

4. A price floor on the price of gasoline at service stations when the price of a barrel of oil
is going down on world oil markets can be expected to lead to
a) a market shortage of gasoline.
b) a market surplus of gasoline.
c) a reduction in the quantity demanded and an increase in quantity supplied.
d) a reduction in gasoline state services.

5. Consider a rent control on apartments that effectively lowers the rent of units below
market-clearing levels. Initially (before landlords can change the non-rent attributes of
rental apartments), the number of rental units on the market will
a) increase.
b) decrease.
c) remain the same.
d) (Unknown; not enough information to say.)

6. One of the initial effects (before employers can adjust the non-wage components of the
employment contract) of a minimum-wage law is
a) a reduction in quantity of labor demanded.
12

b) an increase in the number of people wanting to work at the minimum wage.
c) a surplus of workers and unemployment.
d) all of the above.

7. Secondary or long-run effects of minimum-wage laws (after employers have had a
chance to change the labor contract) can include
a) a reduction in the job training for those who remain employed.
b) an increase in work required of those remaining employed.
c) an increase in the non-wage benefits of employment.
d) a and b.

8. Consider a minimum wage that is imposed above the market equilibrium wage rate.
Consider also the consequences of the minimum-wage law after employers have had a
chance to adjust the non-wage components of the labor contract, implicit or explicit. In
the long run, we would expect the non-money forms of labor payments to

a) rise.
b) fall.
c) remain the same.
d) (Unknown; not enough information to say.)

9. A fringe benefit that workers and employers
a) will cause labor market supply to increase by more than labor market demand
b) will cause labor market demand to increase by more than labor market supply
c) will cause the labor market supply to decrease and labor market demand to increase
d) will cause the labor market supply to increase and labor market demand to decrease

From online Perspective for chapter 4:

10. Consider Maslow's approach to thinking about consumers buying various goods, as
embedded in "Maslow's Hierarchy." Consider the way economists think about
consumers buying various goods. Which of the following statements are true?

a) Maslow assumes diminishing marginal utility in consumption of various goods at various
levels of Maslows Hierarchy.
b) Economists assume that consumers satiate themselves in the consumption of given goods
before they move on to consume other goods.
c) Economists assume that relative prices of goods will determine the extent to which
consumers will satiate themselves with various goods.
d) Maslow assumes that relative prices of goods will determine the degree to which
consumers will satiate themselves with various goods before moving on to the next level
of consumption in the Maslow's Hierarchy.

13

Answer Key, Chapter 4

1. c
2. b
3. a
4. b
5. b
6. d
7. d
8. b
9. d
10. c
14


Chapter 5. Applications of the economic way of
thinking: international and environmental economics

1. if a country has a comparative in textiles, international trade will cause its
a) its domestic demand for textiles to increase
b) its domestic price of textiles to increase
c) its total production of textiles to increase
d) Sales of textiles in the domestic market to decrease
e) all of the above

2. The importation of a product will cause
a) the domestic supply of the product to increase
b) the domestic price of the product to decrease
c) the domestic production of the good to decrease
d) all of the above

3. A tariff on an imported product will cause the domestic price of the good to
a) increase
b) decrease
c) remain the same
d) (Unknown, not enough information to say)

4. A tariff on an imported product will cause the domestic production of the good to
a) increase
b) decrease
c) remain the same
d) (Unknown, not enough information to say)

5. A tariff on an imported product will cause total domestic sales of the good the good to
a) increase
b) decrease
c) remain the same
d) (unknown, not enough information to say)

6. A depreciation of the dollar on international money market will cause imports into the
United States to
a) increase
b) decrease
c) remains the same
d) (unknown, not enough information to say)

15

7. If producers are allowed to externalize some of their costs, there will be
a) overproduction of the good
b) underpricing of the good
c) a market inefficiency
d) all of the above

8. For an external cost good or service
a) we get more of the product after the costs are internalized.
b) the supply curve needs to be shifted to the right.
c) the demand curve needs to be shifted to the right.
d) we will have to pay a higher price after the costs are internalized.
e) we will have to pay a lower price after the costs are internalized.

9. After external benefits have been taken into account in a market, then the good or
service's
a) price will be higher and the amount bought and sold will be lower.
b) price will be higher and the amount bought and sold will be greater.
c) price will be lower and the amount bought and sold will be lower.
d) price will be lower and the amount bought and sold will be greater.
e) none of the above.

10. Selling rights to pollute is a more efficient means of reducing pollution than setting
pollution standards because
a) Firms with low costs of abating pollution will tend to buy the pollution rights
b) Firms with high costs of abating pollution will tend to buy the pollution rights
c) Firms with high costs of abating pollution will be forced to curb their pollution
d) Firms with low costs of abating pollution will tend to abate their pollution


From online Reading 5.1

Answer the next three questions based on the following production capabilities (in units
produced, not utils) for China and the United States

Textiles Aircraft

China 100 50

United 150 100

11. Which of the following statements is true?
a) China has an absolute advantage in the production of both goods.
b) China has a comparative advantage in the production of textiles.
c) The United States has a comparative advantage in the production of textiles.
d) The United States an absolute advantage only in the production of aircraft.

16

12. The cost of producing
a) one aircraft papaya to China is three coconuts.
b) one aircraft to China is two textiles.
c) one aircraft to the United States is two-thirds textiles.
d) one aircraft to the United States one and a half textiles.
e) all of the above


13. A mutually beneficial exchange rate between textiles (T) and aircraft (A) between China
and the United States:
a) 1A =2T
b) 1A =1.5T
c) 1A =3T
d) 1A =1.75T
e) 1A =1.25T

Answer Key, Chapter 5

1. e
2. d
3. a
4. a
5. b
6. b
7. d
8. d
9. b
10. b
11. b
12. e
13. d

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Chapter 6. Consumer choice and demand in
traditional and network markets

1. Assume MU
x
=1,000 utils, P
x
=$50, MU
y
=250 and P
y
=$20. This consumer
a) should buy less of X and less of Y.
b) should buy more of X and less of Y.
c) is in equilibrium.
d) should buy more of X and more of Y.
e) should buy more of X because MU
x
>MU
y
.

2. If MU
x
/p
x
>MU
y
/P
y
, then the consumer
a) should buy less of X and more of Y.
b) is in equilibrium.
c) should buy less of X and less of Y.
d) should buy more of X and more of Y.
e) should buy more of X and less of Y.

3. If an elasticity coefficient of demand is greater than 1, this means that
a) the product has a unitary elastic demand.
b) the product has an elastic demand.
c) total revenue (or, total consumer expenditures) will rise if price rises.
d) the product has an inelastic demand.

4. To calculate an elasticity coefficient of demand, we need to
a) divide the percentage change in the price by the percentage change in the quantity
demanded.
b) multiply the percentage change in the quantity demanded by the percentage change in the
price.
c) know the slope of the demand curve.
d) multiply the percentage change in the price by the percentage change in the quantity
demanded.
e) divide the percentage change in the quantity demanded by the percentage change in the
price.

5. If total revenue falls as price rises, then the demand for the product
a) is elastic.
b) is unitary elastic.
c) is inelastic.
d) has a slope greater than 1.
e) is upward sloping.

18

6.If a liquor store decides to raise the price of its beer in order to finance the construction of a
new building, then the owner is assuming that the
a) percentage increase in the price of beer will cause a smaller percentage decrease in the
quantity
demanded.
b) percentage increase in the price of beer will cause a greater percentage decrease in the
quantity demanded.
c) demand for his or her beer is elastic.
d) percentage increase in the price of beer will cause an equal percentage decrease in the
quantity demanded.
e) demand for his or her beer is unitary elastic.

7. When a good or service involves network effects,

a) a consumer's benefit depends on how many other consumers are using the goods or
service.
b) the demand curve decreases with income.
c) producers may drop the initial price to the point of incurring loses to build the network
and increase future demand.
d) a and c.
e) all of the above

8. The greater the network effects associated with given reductions in the initial price,

a) the greater the elasticity of the long-run demand for the network good.
b) the lower the elasticity of the long-run demand for the network good.
c) the greater the inelasticity of the long-run demand for the network good.
d) None of the above.

9. The more addictive a good is,

a) the more elastic the long-run demand will be.
b) the more inelastic the long-run demand will be.
c) the less elastic the long-run demand will be.
d) the more unitary elastic the long-run demand will be.
e) none of the above.


19

From Reading 6.1

10. Assume a firm wants to hire a worker who would have to move from an area
where the cost of housing is exactly one-half the cost of housing in the
firms area. Assume that all other prices of goods and services are the same
and that there are offsetting benefits in the two areas. If the firm increases
the workers salary to exactly compensate for the higher housing costs,
which means that the work will be able to buy the same house in both areas,
if the worker takes the job, he or she can be expected to
a) replicate his house in the new area.
b) buy a smaller house in the new area.
c) buy a larger house in the new area.
d) dont know (not enough information to say from the analysis developed in
the chapter)

Answer Key, Chapter 6

1. b
2. e
3. b
4. e
5. a
6. a
7. d
8. a
9. a
10. b
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Chapter 7. Production Costs and the theory of the
firm

1. Implicit cost is
a) a forgone opportunity and does not involve a money payment.
b) easily measured.
c) the same as explicit cost.
d) total cost minus sunk cost.

2. Sunk cost
a) has already been incurred or paid.
b) is not reflected in a firm's profit and loss statement.
c) is irrelevant to current and future discussions.
d) a and c.

3. Marginal cost is
a) the additional cost of an additional unit of output.
b) the inverse marginal product
c) the cost of only the first unit of production.
d) all of the above

4. The marginal cost curve first slopes down and then up because of
a) initial diminishing marginal returns from additional labor input and then increasing
marginal returns from additional labor input.
b) initial increasing marginal returns from additional labor input and then decreasing
marginal returns from additional labor input.
c) initial benefits from specialization of labor and then diminishing marginal returns from
labor.
d) a and c.
e) b and c.

5. The law of diminishing marginal returns states that
a) as additional units of labor are added to a fixed quantity of another resource, there is
some output level beyond which total output will begin to diminish.
b) as additional units of labor are added to a fixed quantity of another resource, there is
some output level beyond which the additional output will begin to diminish.
c) as additional units of labor are added to a growing quantity of another resource, there is
some output level beyond which total output will begin to diminish.
d) as additional units of labor are added to a growing quantity of another resource, there is
some output beyond which marginal output will begin to diminish.

21

6. When diminishing marginal returns sets in, marginal cost
a) increases.
b)decreases
c) remains the same.
d) (Unknown; not enough information to say.)

7.Assume that an airplane was bought last year for $1 million and that the plane can be
flown for only ten years during which it will have no resale value and after which it will have
no scrap value and your annual operating costs will be $300,000 every year. You discover
this year that your annual operating revenues will be $360,000 (exclusive of the purchase
price of the plane) for all remaining years of the planes life. Again, the plane cannot now be
sold. You should
a) immediately halt operations of the plane because you are losing $60,000 a year.
b) immediately halt operations of the plane because you are losing $160,000 a year
c) immediately halt operations of the plane because you are losing $40,000 a year.
d) continue operating the plane so long as your operating costs are lower than your
operating revenues and you cant resale the plane for more than the difference in the
planes remaining life.

8. If a firm is producing 17 units and the marginal cost of an 18th unit is $10, and the price it
can receive for each unit sold is $11, then
a) the firm should decrease its output.
b) the profit of the 18th unit produced would be $11.
c) the firm should produce the 18th unit because marginal cost exceeds marginal revenue.
d) the firm should produce the 18th unit because marginal revenue exceeds marginal cost.
e) the total revenue of 17 units is $170.

9. A firm will maximize profits by producing
a) an output in which marginal product is maximized.
b) an output in which marginal revenue exceeds marginal cost.
c) the output in which marginal cost is minimized.
d) the maximum amount possible.
e) an output in which marginal revenue equals marginal cost.

10. Ronald Coase argued that firms exist because
a) they reduce transaction costs.
b) resources are not scarce.
c) people are more productive when they work with others.
d) people will take lower pay to boss others.
e) people will take lower pay to be told what to do by their bosses..

11. The agency problem
a) only relates to real estate agencies.
b) results because of the difficulties principals have controlling their agents.
c) is easily solved in government but not in business.
d) is more a theoretical problem than a real problem.
22


12. Turning the entire economy into one large firm is a bad idea because it
a) would eliminate all internal coordination costs.
b) would lead to large inefficiencies because of the high costs of internal management.
c) there would be no profit opportunities.
d) all of the above.

13. Efficient firm size can be thought of as
a) determined by a balance between external coordinating costs against internal
coordinating costs.
b) impossible to achieve.
c) easily achieved.
d) of no practical importance since all firms are efficient when there is competition, no
matter what their size.

14. If market transaction costs decline, everything else remaining equal, the firm will
a) firms will produce more inputs in house.
b) firms will decline in size.
c) become more profitable in the long run.
d) firms will become less profitable in the long run

15. If the cost of monitoring employees goes down, everything else held constant, firm sizes
will tend to
a) increase.
b) decrease.
c) remain the same.
d) (unknown; not enough information to say.)

16. If advancement in computer and telephony technologies cause external coordinating costs
to go down by more than they cause internal coordinating costs to go down, then firm
sizes will tend to
a) increase.
b) decrease.
c) remain the same.
d) (Unknown; not enough information to say.)

17. Firms can minimize or control hold-up problems by
e) buying equipment and routing it to the suppliers.
f) buying an input from several suppliers.
g) buying an input from only one supplier.
h) a and b.

23

From online Reading 7.2

18. Which of the following is NOT a reason for expanding a business organization through
franchising?
a) To lower agency costs.
b) To minimize opportunistic behavior.
c) To reduce capital costs.
d) To make sure that only the lowest cost inputs are used.

From online Reading 7.3

19. Medical Savings Accounts can be counted on to

a) reduce firms health insurance costs because they reduce workers healthcare benefits.
b) increase worker gains from remaining healthy.
c) reduce workers costs from unhealthy behavior.
d) Reduce workers healthcare costs by making workers residual claimants from healthy
behaviors.
e) b) and d)


Answer Key, Chapter 7

1. a
2. d
3. a
4. e
5. b
6. a
7. d
8. d
9. e
10. a
11. b
12. b
13. a
14. b
15. a
16. b
17. d
18. c
19. e
24


Chapter 8. Production in the short run and long run

1. Variable costs are those costs that in the short run
a) rise with production.
b) remain constant as production rises.
c) decrease with output.
d) (Unknown; not enough information to say.)

2. Fixed costs are costs that
a) do vary with output in the short run.
b) do not vary with output in the short run.
c) are constant in the long run.
d) always decrease with scale economies in the long run.


3. Average fixed cost in the short run is
a) total cost divided by quantity.
b) total variable cost divided by quantity.
c) average total cost minus average variable cost.
d) average total cost minus marginal cost.

4. If short-run marginal cost is initially declining due to the benefits of specialization of
labor, the average variable cost will
a) decline and be below marginal cost at the initial output levels.
b) decline and be the same as marginal cost at the initial output levels.
c) decline and be above marginal cost at the initial output levels.
d) rise and be below marginal cost at the initial output levels.
e) rise and be above marginal cost at the initial output levels.

5. If short-run marginal cost initially falls due to the benefits of specialization of labor but
then begins to rise as a consequence of diminishing returns, it follows that as marginal cost
initially rises, average variable cost will
a) initially continue to decline.
b) initially turn upward.
c) initially remain constant.
d) (Unknown; not enough information to say.)

25

6. The short-run marginal cost curve will intersect
a) the minimum of the short-run average variable, average fixed, and average total cost
curves.
b) the minimum of the short-run average variable and average total cost curves.
c) the minimum of the average variable cost curve but not the minimum of the average total
cost curve.
d) the minimum of the average total cost curve but not the minimum of the average variable
cost curve.

7. The vertical distance between the short-run average total cost curve and the short-run
average variable cost curve equals
a) marginal cost.
b) average marginal cost.
c) average fixed cost.
d) none of the above.

8. When economies of scale are realized from the expansion of plant and equipment and all
other resources, then long-run marginal cost will be
a) below the long-run average cost and the long-run average fixed cost curve.
b) below the long-run average total cost but above the long-run average fixed cost curve.
c) equal to the long-run average total cost but above the long-run average fixed cost.
d) below the long-run average cost and will fall more rapidly than long-run average cost.

9.If the amount of debt a firm takes on rises while owner equity remains constant, the firm's
changing capital structure will tend to cause managers to take on
a) more risk.
b) less risk.
c) the same amount of risk (the firm's debt/equity ratio does not affect risk).
d) none of the above.

10.If a firm increases its debt-to-equity ratio, everything else constant, the interest rate it pays
on additional debt will
a) increase.
b) decrease
c) remain the same.
d) (Unknown; not enough information to say.)

Answer Key, Chapter 8

1. b
2. b
3. c
4. c
5. a
6. b
7. c
26

8. d
9. a
10. a
27

Chapter 9. Firm production under idealized
competitive conditions

1. Perfect competition is a market structure in which
a) there are numerous producers.
b) there are zero entry barriers.
c) producers are price takers.
d) all producers produce the same product.
e) all of the above.

2. Monopolistic competition
a)is a market structure made up of a number of producers with modest barrier to entry.
b) is a market structure made up of a few producers whose pricing and production decisions
are interdependent.
c)is a special type of natural monopoly.
d)involves fewer firms than an oligopoly.

3.The production rule for maximizing profits is that in the short and long run a firm should
produce where
a) average cost is minimized.
b) marginal revenue equals marginal cost.
c) marginal cost equals minimum average total cost.
d) marginal revenue equals price.

4.If perfectly competitive firms have positively sloped short-run marginal cost curves,
a) a decrease in product price will cause a reduction in the output of individual firms.
b) a decrease in product price will cause an increase in the output of individual firms.
c) a decrease in product price will not affect the production of firms in the industry but will
cause firms to move into the industry.
d) the industry supply is unaffected by the marginal cost curves because marginal cost does
not include fixed costs.

5. When perfectly competitive firms make short-run economic profits,
a) firms in the industry will expand their scale of production in the short run.
b) firms in the industry will face competition from new entrants.
c) in the short run firms in the industry will reduce production to the minimum of the average
total cost curve so that they can increase profits even more.
d) firms will expand production until price equals average total cost.

28

6. The "innovator's dilemma" refers to the problem of what a firm should do in face of
a) the relative certainty of short-run (and maybe long-run) profits from established product
lines versus the relative uncertainty of long-run profits from new product lines.
b) the relative uncertainty of profits from a variety of new product ventures.
c) firms' interest in having a flexible corporate culture that allows for the undertaking of a
variety of new ventures.
d) Firm's not knowing whether to close down when faced with the prospect of long-run
losses or to try new product lines.


Use these figures to answer the following two questions.


7. This firm will maximize profits if it is given the market price of
a) P
1
and produces q
4
.
b) P
3
and produces q
1
.
c) P
2
and produces q
4
.
d) P
2
and produces q
3
.
e) P
3
and produces q
4
.

8. If the price facing the firm is P
3
, then the firm's fixed cost is given by the area
a) P
1
P
3
ce.
b) P
2
P
3
cd.
c) OP
1
eq
4
.
d) P
1
P
2
de.
e) none of the above.

29

9. Teams should be used when
a) workers can produce more when they work together than when they work apart.
b) managers can monitor team production at low costs.
c) workers can individually affect the team outcomes.
d) all of the above.

10. According to the text, an effective team is
a) any group of associated workers.
b) any group of workers designated as a team.
c) any group of workers whose collective production is greater than the sum of the
production of individual members working apart from the team.
d) a large group of workers who have a say in what is produced.

Answer Key, Chapter 9

1. e
2. a
3. b
4. a
5. b
6. a
7. e
8. d
9. d
10. c
30

Chapter 10. Monopoly power and firm pricing
decisions

1. A monopoly's marginal revenue curve is
a) downward sloping and the same as the product demand curve.
b) downward sloping and below the product demand curve.
c) downward sloping and above the product demand curve.
d) downward sloping with the same slope as the product demand curve.

2. Monopoly power
a) is limited by the monopolys economic profits attracting new market entrants with
substitutes.
b) may yield above normal profits.
c) tends to be dissipated over time with technological developments.
d) all of the above.

3. A monopoly's ability to raise its price is
a) unchecked, which means it can charge any price the monopolist wants.
b) restricted by both market demand and the cost of production.
c) restricted only by market demand considerations.
d) restricted only by the cost of production.

4. A monopoly can control the price it charges by
a) by controlling market supply.
b) controlling market demand.
c) controlling the cost of production.
d) none of the above.

5. The case of the QWERTY keyboard has been cited as a grand example of
a) a monopoly.
b) switching costs.
c) lock-in.
d) a and c.
e) b and c.

31

Use this figure to answer the following three questions.

Assume the firm is a monopoly.

6. A perfectly price-discriminating monopolist will produce an output of
a) Q
1
and charge a price of P
4
and above.
b) Q
2
and charge a price of P
1
and below.
c) Q
2
and charge a price of P
1
and above.
d) Q
2
and charge a price of P
3
and above.
e) Q
3
and charge a price of P
2
and above.

7. If fixed costs were to rise for this monopolist, then
a) the marginal cost curve would shift up.
b) the output level would decrease.
c) demand would fall.
d) the price would rise.
e) none of the above.

8. The dead-weight loss of this monopoly is area
a) abf.
b) Q
2
dfQ
3
.
c) cdfe.
d) Q
1
bfQ
3
.
e) cfe.

9. Under the theory of a durable-good monopoly, the monopolist will charge a price
a) at the intersection of supply and demand
b) equal to the competitive price
c) that will be efficient
d. all of the above
32


10. Stores have after-Christmas sales because
a) the demand for goods before Christmas is more elastic than the demand goods after
Christmas.
b) they demand for goods before Christmas is less elastic than the demand for goods after
Christmas.
c) they have made mistakes in estimating before-Christmas demand and have excess
inventories.
d) a and c.
e) b and c.

11. Stores give customers quantity discounts because
a) customers who buy in quantity have a greater incentive to price search and, as a
consequence, have more elastic demands.
b) customers who buy in quantity have a less incentive to price search and, as a
consequence, have more elastic demands.
c) customers who buy in quantity have a greater incentive to price search and, as a
consequence, have more inelastic demands.
d) customers who buy in quantity have an impaired incentive to price search and, as a
consequence, have more elastic demands.


Answer Key, Chapter 10

1. b
2. d
3. b
4. a
5. e
6. e
7. e
8. a
9. d
10. b
11. a
33

Chapter 11. Firm strategy under imperfectly
competitive market conditions

1. The monopolistically competitive firm has a more elastic demand curve than the
monopolist
a) because of competition from other firms.
b) because of more productive resources.
c) because the market price is arbitrary.
d) because of lower costs

2. Oligopoly theory
a) deals well with the long run.
b) focuses on price interdependence.
c) never uses game theory.
d) is fully developed.

3. Cartels
a) can be modeled with prisoner's dilemma games.
b) tend to be unstable.
c) cannot involve firms in multiple countries.
d) a and b.

4. A cartel selling a new network good
a) would operate the same way as any other cartel/
b) would never exist since a supplier of a network good could not benefit from forming a
cartel.
c) would charge a lower initial price than a cartel of non-network good.
d) is an impossibility.

5. Under monopolist competition, short-run economic profits will lead in the long run to
a) no entry of new firms because of high entry barriers.
b) entry of more firms but a contraction of total market output in the product category.
c) entry of new firms and an increase in the prices charged by all producers.
d) entry of new firms and a reduction in the prices charged by all firms.

6. In the long run a monopolistis competitor will tend to produce where
a) price equals average cost.
b) marginal revenue equals marginal cost.
c) price equals marginal revenue.
d) all of the above.
e) a and b.

7. An oligopolist that is a price leader in a market with a number of other much smaller
producers gets its demand curve by taking
34

a) the difference between its own market demand curve from the aggregate supply curve of
all other producers.
b) the difference between it own demand curve and the demand curves of all other smaller
firms in the industry.
c) the difference between the aggregate demand facing all smaller producers and their
aggregate supply curve above the intersection of their aggregate supply and demand
curves.
d) the difference between the aggregate demand facing all smaller producers and their
aggregate supply curve below the intersection of their aggregate supply and demand
curves.

8. From economic theory, corporate takeovers can occur because firms
a) operate inefficiently.
b) have not controlled principal-agent problems.
c) use too little debt in financing their business ventures.
d) all of the above.

9. Highly leverage takeovers reduce which of the following problems?
a) Misuse of free cash flow.
b) Risk taking.
c) Monopoly pricing problems.
d) Underutilization of perks by managers.

10. As a firm uses more debt, bondholders have to be concerned that firms will
a) take more risky ventures.
b) shy away from taking risky projects.
c) will succumb to the winners curse problem when bidding for assets.
d) all of the above.
e) a and c.

Answer Key, Chapter 11

1. a
2. b
3. d
4. c
5. d
6. e
7. d
8. d
9. a
10. e
35

Chapter 12. Competitive and monopsonistic labor
markets

1. The two major determinants of the firm's demand for labor are:
a) the marginal product of the labor and the competitors' wages.
b) the average product of labor and the competitors' wages.
c) the marginal product of the labor and the price of the firm's product.
d) the average product of labor and the price of the firm' product.

2. If the price a firm can charge for its product rises (everything else remains constant), its
demand for labor will
a) increase.
b) decrease.
c) remain the same.
d) (Unknown; not enough information to say.)

3. If a firm's labor productivity decreases (everything else remains constant), its demand for
labor will
a) increase.
b) decrease.
c) remain the same.
d) (Unknown; not enough information to say.)

4. If workers' opportunity cost goes up (everything else remains constant), the supply curve
of labor will
a) increase.
b) decrease.
c) remain the same.
d) (Unknown; not enough information to say.)

5. If workers' wage rate rises (everything else remains constant), the supply curve of labor
will
a) increase.
b) decrease.
c) remain the same.
d) (Unknown; not enough information to say.)

6. If workers' receive more fringe benefits that they value (everything else remains constant),
the supply curve of labor will
a) increase.
b) decrease.
c)remain the same.
d) (Unknown; not enough information to say.)

36

7.If in highly competitive labor markets work-related risks that workers must bear increase
while worker productivity decreases (everything else held constant), what will happen to the
equilibrium quantity of labor hired?
a) Increase.
b) Decrease.
c) Remain the same.
d) (Unknown; not enough information to say.)

8.A monopsony's marginal cost of labor curve is
a) the same as the labor supply curve.
b) above the labor supply curve with a greater slope than the labor supply curve.
c) above the labor supply curve with a lower slope than the labor supply curve.
d) below the labor supply curve with a greater slope than the labor supply curve.
d) below the labor supply curve with a lower slope than the labor supply curve.

9.In a monopsony labor market, the employer hires labor until the
a) marginal value of the last unit of labor equals the marginal cost of the last unit of labor.
b) wage rate paid equals the marginal cost of the last unit of labor.
c) wage rate paid equals the competitive market wage rate.
d) wage rate paid equals the average productivity.

From the online Perspective for the chapter:

11. Professor have tenure while business people dont because
a) professors have more PhDs.
b) professors are more distinguished than business people.
c) professors operate in universities that are labor-managed while businesses have top-down
management.
d) professors need tenure protection to promote academic freedom and need protections from
external and internal political and religious forces.
e) c and d.

Answer Key, Chapter 12

1. c
2. a
3. b
4. b
5. c
6. a
7. b
8. b
9. a
10. e