DemandandSupplyAnalysis TestID:7658823

Question#1of185 QuestionID:413500

Whichofthefollowingisleastlikelytobeanobstacletotheefficientallocationofresources?

A) Pricecontrols.

B) Technologicaladvancement.
C) Commonresources.

Explanation

Asopposedtobeinganobstacletoallocativeefficiency,technologicaladvancementrequiresaconstantreallocationofan
economy'sresourcestomoreefficientuses.

Question#2of185 QuestionID:413495

Whichofthefollowingstatementsismostaccuratewithrespecttotheeffectsoftaxesimposedongoodsandservices?

A) Thestatutoryincidencewillfallmoreheavilyonthebuyerifthesupplyisless
elasticrelativetodemand.

B) Theactualincidencewillfallmoreheavilyonthesellerifthesupplyislesselastic
relativetodemand.

C) Theactualincidencewillfallmoreheavilyonthebuyerifthedemandismoreelastic
relativetosupply.

Explanation

Whensupplyisrelativelyinelastic,changesinquantityaresmallforagivenchangeinprice,andalargershareofthetax
burdenthetaxincidencewillfallonthesellers.

Question#3of185 QuestionID:413592

Whichofthefollowingtwofactorsaremostlikelytobeconsideredvariableduringtheshortrun?

A) Laborandtechnology.

B) Laborandrawmaterials.

C) Rawmaterialsandtechnology.

Explanation

Ofthesetsoffactorslisted,thetwothataretypicallyconsideredvariableintheshortrunarelaborandrawmaterials.
Question#4of185 QuestionID:413558

Underwhichpairofconditionsisafactorofproductionleastlikelytoearneconomicrent?

Supplycurve Demandcurve

A) Perfectly
Perfectlyelastic
inelastic

B) Upwardsloping Downwardsloping

C) Perfectlyelastic Downwardsloping

Explanation

Ifthesupplyofaproductiveresourceisperfectlyelastic,itearnsnoeconomicrent.Elasticityofdemandisnotdirectlyrelated
toeconomicrent.

Question#5of185 QuestionID:413460

Acolumnistisdiscussinghowtheefficientquantityofoutputforagoodorserviceisdetermined.Thesetwostatementsappear
inhiscolumn:

Statement1:Theequilibriumquantityofproductionforagoodorservicecanbeconsideredefficientaslong
asthemarginalsocialbenefitofthatquantityisgreaterthanitsmarginalsocialcost.
Statement2:Subsidiesandquotastypicallyresultinproductionofagoodorserviceinquantitiesatwhichthe
marginalsocialcostexceedsthemarginalsocialbenefit.

Withrespecttothesestatements:

A) botharecorrect.
B) onlyoneiscorrect.

C) bothareincorrect.

Explanation

Statement1isincorrect.Theefficientquantityofoutputisthequantityatwhichthemarginalsocialbenefit(demand)isequal
tothemarginalsocialcost(supply).Statement2isalsoincorrect.Subsidiestypicallyleadtooverproduction,wherethe
marginalsocialcostatthequantityproducedisgreaterthanthemarginalsocialbenefit.Quotas,however,typicallylimit
productiontoalevelbelowequilibrium,suchthatthemarginalsocialbenefitatthequantityproducedisgreaterthanthe
marginalsocialcost.

Question#6of185 QuestionID:413509

Whichofthefollowingstatementsaboutpricefloorsandthelabormarketisleastaccurate?

A) Settingaminimumwageabovetheequilibriumwageratewillleadtoanexcess
supplyoflabor.
 B) Inthelongrun,effectivepricefloorsleadtoinefficienciesinproduction.
C) Ifapricefloorissetbelowtheequilibriumprice,thequantitydemandedwillexceed
thequantitysupplied.

Explanation

Ifapricefloorissetbelowtheequilibriumprice,itwillhavenoeffectonthequantitydemandedorsupplied.However,aprice
floor(minimumwageinthelabormarket)abovetheequilibriumprice(wagerateinthelabormarket)willcauseasurplusat
thefloorprice.Inefficienciesresultfromapricefloorbecauseproducerswilldivertresourcestosupplyalargerquantityofthe
good,butconsumerswilldemandasmallerquantityatthefloorprice.

Question#7of185 QuestionID:413576

Afirmrealizesthatitisproducingmorethantheprofitmaximizinglevelofoutputandmakesashortrundecisiontodecrease
itsoutput.Whichofthefirm'scostmeasuresisleastlikelytodecreaseasaresult?

A) Averagevariablecost.
B) Marginalcost.

C) Averagefixedcost.

Explanation

Ashortrundecreaseinoutputwillcauseafirm'saveragefixedcoststoincreasebecauseitsfixedcostsarespreadovera
smallernumberofunits.Intermsofcostcurves,averagefixedcostneverslopesupward,soadecreaseinoutputnever
reducesaveragefixedcosts.Theaveragevariablecost,averagetotalcost,andmarginalcostcurvesallhaveupwardsloping
componentsalongwhichalowerlevelofoutputwouldresultinalowercost.

Question#8of185 QuestionID:413602

Whichofthefollowingmostaccuratelydescribesthetypicalrelationshipbetweenmarginalproduct(MP)andaverageproduct
(AP)?Asthequantityoflaborincreases:

A) initially,AP>MP,thenAP=MP,thenAP<MP.

B) initially,AP=MP,thenAP>MP.
C) initially,AP<MP,thenAP=MP,thenAP>MP.

Explanation

MPintersectstheAPmaximumfromabove.MPisinitiallygreaterthanaverageproduct,andthenMPandAPintersect.
Beyondthisintersection,MPislessthanAP.(Hint:sketchthecurves.)

Question#9of185 QuestionID:413617

Thelawofdiminishingreturnsstatesthatforagivenproductionprocess,asmoreandmoreofaresource(suchaslabor)are
added,holdingthequantitiesofotherresourcesfixed:
 A) outputincreasesatadecreasingrate.

B) costdeclinesatadecreasingrate.
C) costdeclinesatanincreasingrate.

Explanation

Thelawofdiminishingreturnsstatesthatforagivenproductionprocess,asmoreandmoreresources(suchaslabor)are
addedholdingthequantitiesofotherresourcesfixed,outputincreasesatadecreasingrate.Thisoccursbecause,atsome
point,addingmoreworkersresultsininefficiencies.

Question#10of185 QuestionID:413538

Inthecontextofconsumerchoice,theconceptofutilitymeasures:

A) howoftenconsumersutilizespecificcombinationofgoods.

B) thetypesofgoodsandservicesthatconsumersdesiremostfrequently.
C) thesatisfactionconsumersreceivefromconsumingaspecificcombinationofgoods.

Explanation

Utilitytheoryexplainsconsumers'behaviorbasedontheirpreferencesforvariouscombinationsofgoods,intermsofthe
satisfactioneachcombinationprovides.

Question#11of185 QuestionID:413474

The"winner'scurse"isassociatedwithwhattypeofauction?

A) Ascendingpriceauction.

B) Commonvalueauction.
C) Privatevalueauction.

Explanation

Inacommonvalueauction,theassetbeingauctionedwillprovidethesamevaluetoanybidder,butthatvalueisunknownto
thebidders(forexample,anauctionofthemineralrightsonagiventractofland).The"winner'scurse"referstothefactthata
bidderwhomostoverestimatesthevalueoftheassetwillwintheauction.Bycontrast,inaprivatevalueauction,theasset
beingauctionedhasadifferentvaluetoeachbidder(forexample,anauctionofanantiqueautomobile),andeachbidderwill
bidonlyasmuchastheassetisworthtohim.AnascendingpriceorEnglishauctionisatechniquethatcanbeusedina
commonvalueauctionoraprivatevalueauction.

Question#12of185 QuestionID:413574

Whichofthefollowingstatementsregardingmarginalcosts(MC)andaveragevariablecosts(AVC)ismostaccurate?

A) MC=AVCwhenaveragetotalcostisatitsminimum.
 B) MC=AVCwhenAVCisatitsminimum.

C) MC=AveragetotalcostwhenAVCisatitsminimum.

Explanation

MC=AVCatminimumaveragevariablecost.MC=ATCatminimumaveragetotalcost.

Question#13of185 QuestionID:413567

Factorsofproductionforafirmleastlikelyinclude:

A) land.
B) technology.

C) capital.

Explanation

Factorsofproductionincludeland,labor,capital,andmaterials.Technologyistypicallyviewedasanexogenousfactorthat
affectstheproductivityoffactorsofproduction.

Question#14of185 QuestionID:413590

Whichofthefollowingfactorsofproductionisleastlikelytobefixedintheshortrun?

A) Plantsize.
B) Labor.

C) Technology.

Explanation

Laboristypicallyassumedtobevariableintheshortrun.

Question#15of185 QuestionID:413620

Whichofthefollowingconditionsismostlikelytoexistforatypicalproductionprocesswhenaverageproductisatits
maximum?

A) Averagevariablecostisataminimum.

B) Marginalproductisincreasing.

C) Marginalcostisataminimum.

Explanation

Whenaverageproductisatamaximum,averagevariablecostisataminimum.Atthecorrespondinglaborandoutputlevel,
marginalproductisdecreasingandmarginalcostisincreasing.
Question#16of185 QuestionID:413467

Ifquantitysupplied=28+7price,theslopeofthesupplycurveis:

A) 4.

B) 7.
C) 1/7.

Explanation

Thesupplycurveforthegoodisdeterminedbyinvertingthegivensupplyfunction,whichresultsin:price=1/7quantity
supplied+4.Theslopeofthiscurveis1/7.

Question#17of185 QuestionID:413503

Apriceceilingisonlyeffectiveifit:

A) issetbelowtheequilibriumprice.
B) issetabovetheequilibriumprice.

C) hasbeenineffectinoverarelativelyshorttime.

Explanation

Apriceceilingisonlyeffectiveifitislowerthantheequilibriumpricewithouttheceiling.Thisleadstoashortageasconsumers
wishtopurchaseaquantityofthegoodattheceilingpricewhichisgreaterthanthequantitysuppliedatthatprice.

Question#18of185 QuestionID:413596

Comparedtotheshortrunsupplycurve,thelongrunsupplycurveis:

A) flatter.
B) moreinelastic.
C) steeperslopingupwardtotheright.

Explanation

Thelongrunsupplycurveismoreelasticandflatterthantheshortrunsupplycurve.Inthelongrun,firmsinanindustrycan
adjusttheirproductionmethodsandscale.

Question#19of185 QuestionID:413493

Whenataxisimposedontheconsumptionofagood,whichofthefollowingtermsreferstowhobearstheburdenofthetax?

A) Consumersurplus.

B) Theincidenceofatax.
 C) Thedeadweightloss.

Explanation

Theincidenceofataxreferstohowtheburdenofataxisactuallysharedbetweenbuyersandsellers.Thedeadweightlossisthelossof
thegainsfromtradefromthelowerequilibriumquantitythatresultsfromthetax.Consumersurplusisthegainsfromtradethat
consumersaccruefromtheexistenceofthemarket.

Question#20of185 QuestionID:413541

Whichofthefollowingstatementsaboutindifferencecurvesismostaccurate?

A) Aconsumer'soptimalbundleofgoodsisthebundleatwhichtheindifference
curvesintersect.

B) Allbundlesofgoodsonanindifferencecurveprovideequalutilitytoaconsumer.
C) Onanyindifferencecurve,thebundlenearesttheoriginistheconsumer'sleast
preferredbundle.

Explanation

Anindifferencecurverepresentsallthebundlesoftwogoodsthatprovideequalutilitytoaparticularconsumer.Anybundleon
ahigherindifferencecurveispreferredtoanybundleonalowerindifferencecurve.Indifferencecurvescannotcrossifthe
consumer'spreferencesaretransitive(i.e.,logicallyconsistent).

Question#21of185 QuestionID:413475

AnassetisbeingsoldusingaVickreyauction.Fourbidderssubmitthebidsof$48,000,$51,000,$52,000,and$49,000.The
winningbidderwillpayapriceof:

A) $51,000.
B) $52,000.
C) $50,000.

Explanation

AVickreyauctionisalsoknownasasecondpricesealedbidauction.Thehighestbidderwinstheitembeingauctioned,but
paysthepricebidbythesecondhighestbidder.

Question#22of185 QuestionID:413517

Ifthepriceelasticityofdemandis2andthepriceoftheproductdecreasesby5%,thequantitydemandedwill:

A) increase5%.
B) decrease2%.

C) increase10%.
Explanation

Ifthepriceelasticityofdemandis2,andthepriceoftheproductdecreasesby5%,thequantitydemandedwillincrease10%.
Thevalue,2,indicatesthatthepercentageincreaseinthequantitydemandedwillbetwicethepercentagedecreaseinprice.

Question#23of185 QuestionID:413608

Theincreaseintotalrevenuefromsellingtheadditionaloutputofonemoreunitofaninputiscalledtheinput's:

A) marginalrevenue.
B) marginalrevenueproduct.

C) factorofproduction.

Explanation

Themarginalrevenueproductofaninputistheadditiontototalrevenuegainedbysellingtheadditionaloutputfrom
employingonemoreunitofthatinput.

Question#24of185 QuestionID:413529

Ifthepriceelasticityofdemandforagoodis4.0,thena10%increaseinpricewouldresultina:

A) 4%decreaseinthequantitydemanded.
B) 10%decreaseinthequantitydemanded.
C) 40%decreaseinthequantitydemanded.

Explanation

Priceelasticityofdemand=(%changeinQdemanded/%changeinprice).Giventhepriceelasticityofdemandandthe
percentagechangeinprice,wecansolveforthepercentagechangeinQdemanded.

Question#25of185 QuestionID:413506

Whichofthefollowingisleastlikelytobetheresultofaminimumwage?

A) Laborwillbesubstitutedforcapital.
B) Therewillbeanabundanceoflowskilledworkerswillingtowork.

C) Onthejobtrainingwillbecutback.

Explanation

Firmssubstitutecapitalforthe"expensive"laborandusemorethantheeconomicallyefficientamountofcapital.

Question#26of185 QuestionID:413487
Theimpositionofataxonproducersbutnotonbuyersinamarketcurrentlyinequilibriumismostlikelytoincrease:

A) actualtaxincidenceonproducersbutnotonbuyers.
B) quantitysuppliedandpricepaidbybuyers.

C) pricepaidbybuyersandreducequantitydemanded.

Explanation

Theimpositionofataxonproducersislikelytoresultinanupwardshiftinthesupplycurve,areductionintheequilibrium
quantitysuppliedanddemanded,anincreaseinequilibriumprice,andanincreaseintaxespaidbybothsuppliersandbuyers.
Actualtaxincidencereferstotaxespaidandnotstatutorytaxes,thusactualtaxincidenceislikelytoriseonbothproducers
andbuyersasmarketpricesrise.

Question#27of185 QuestionID:413566

Marginalrevenueisequaltopriceforfirmsoperatinginwhichmarketstructure(s)?

A) Bothperfectcompetitionandimperfectcompetition.
B) Neitherperfectcompetitionnorimperfectcompetition.
C) Perfectcompetitiononly.

Explanation

Inperfectlycompetitivemarkets,firmscanselltheentirequantitytheyproduceatthemarketprice,somarginalrevenueis
equaltothemarketprice.Inimperfectcompetition,firmsarepricesearchersinthattheycanincreasetheirquantitysoldonly
bydecreasingthesellingpriceperunit.Asaresult,marginalrevenueislessthanprice.

Question#28of185 QuestionID:413573

Whichofthefollowingmostaccuratelydescribestheshapesoftheaveragevariablecost(AVC)andaveragetotalcost(ATC)
curves?

A) TheAVCandATCcurvesarebothUshaped.

B) TheAVCandATCcurvesbothdecreaseinitially,andthenflatten.
C) TheAVCcurveisUshapedwhereastheATCcurvedeclinesinitiallythenflattens.

Explanation

TheAVCcurveisUshaped,decliningatfirstduetoefficiency,buteventuallyincreasingduetodiminishingreturns.TheAFC
curvedecreasesasoutputincreases,andeventuallyflattensout.TheATCisUshapebecauseitisthesumofthe
decreasingtoflatAFCcurveplustheUshapedAVCcurve.ATC=AFC+AVC.

Question#29of185 QuestionID:413572

Whichofthefollowingmostaccuratelydescribestheshapeoftheaveragefixedcost(AFC)curve?TheAFCcurve:
 A) intersectsthemarginalcostcurveatthemarginalcostcurve'sminimum.

B) isalwaysbelowtheaveragevariablecostcurve.
C) becomesflatterasoutputincreases.

Explanation

TheAFCcurvedeclinesinitially,butasoutputincreasesitflattensbecauseafixedcostisbeingaveragedovermoreandmore
unitsofoutput.

Question#30of185 QuestionID:413507

Aminimumwagesetabovetheequilibriumminimumwagewillmostlikelyhavewhichofthefollowingeffects?

A) Therewillbeashortageofworkers.
B) Unemploymentwillrise.

C) Itwillhavenoeffects.

Explanation

Firmswillnotemployalltheworkerswhowanttoworkattheimposedhigherwage.Thosewhowanttoworkatthehigher
wagebutcannotfindjobswillbecountedasunemployed.

Question#31of185 QuestionID:413481

Inanunregulatedcompetitivemarket,whichofthefollowingconditionsmostaccuratelydescribestheconditionthatexists
whentheefficientquantityofagoodorserviceisproducedandconsumed?

A) Thesumofconsumersurplusandproducersurplusismaximized.
B) Consumersurplusequalsproducersurplus.

C) Producersurplusismaximized.

Explanation

Whentheefficientquantityisproduced,thesumoftheconsumersurplusandproducersurplusismaximized.

Question#32of185 QuestionID:413546

Ifaconsumer'sbudgetforpensandpencilsremainsstable,butthepriceofbothpensandpencilsdoubles,theslopeofthe
budgetlineismostlikelyto:

A) decreasebyhalf.

B) remainunchanged.
C) double.

Explanation
Theslopeofthebudgetlinereflectstherelativepriceoftwogoods.Ifthepriceofbothpensandpencilsdoubles,therelative
priceisunchangedandthustheslopeofthebudgetlinewillalsobeunchanged.

Question#33of185 QuestionID:413502

Whichofthefollowingmostaccuratelydescribessociety'sallocationofresourcestotheproductionofgoodswithexternal
costsorexternalbenefits,respectively?

A) Overallocationunderallocation.
B) Overallocationoverallocation.
C) Underallocationoverallocation.

Explanation

Externalcostsarecostsassociatedwiththeproductionofgoodswhicharenotentirelybornebyproducers.Theindustrial
pollutionoffishingwatersdecreasestheyieldtothefishingindustry.However,thelostrevenuetothefishingindustryisnot
consideredacosttothefirmsgeneratingthepollution.Theresultisanoverallocationofresourcestotheproductionofgoods
madebythefirmsgeneratingthepollution.

Externalbenefitsrefertobenefitsreceivedbythoseotherthanthebuyersofagood.Scenicgardensandfountainsbuiltby
privateenterprisesfortheirowninterestsareexamplesofgoodswithexternalbenefits.Sincethemarginalbenefittosocietyis
greaterthanthatofthemarginalcosttotheproducer,lessthantheefficientquantityisproduced.

Question#34of185 QuestionID:413501

Whichofthefollowingrelationshipsmostaccuratelydescribestheinefficiencyresultingfromgovernmentimposedproduction
quotas?

A) Marginalcostexceedsmarginalbenefitleadingtounderproduction.

B) Marginalbenefitexceedsmarginalcostleadingtounderproduction.

C) Marginalbenefitexceedsmarginalcostleadingtooverproduction.

Explanation

Governmentimposedquotasrestrictproductiontoalevelbelowthatwhichwouldoccurifmarginalbenefitequalsmarginal
cost.Thisrestrictedoutputquantityislessthantheequilibriumquantity,somarginalbenefitexceedsmarginalcost.

Question#35of185 QuestionID:413556

AdistinctionbetweenGiffengoodsandVeblengoodsisthat:

A) thesubstitutioneffectispositiveforaVeblengoodbutnegativeforaGiffen
good.

B) demandcurvesforGiffengoodsslopeupward,whiledemandcurvesforVeblen
goodsslopedownward.
 C) Giffengoodsareinferiorgoods,whileVeblengoodsarenotinferiorgoods.

Explanation

Giffengoodsareinferiorgoodsforwhichthequantitydemandeddecreaseswhenthepricedecreases,becausethenegative
incomeeffectislargerthanthepositivesubstitutioneffect.Veblengoodsaregoodsforwhichthequantitydemandincreases
whenthepriceincreases,suchasahighstatusgoodforwhichtheconsumergainsutilityfrombeingseentoconsumethe
good.GiffengoodsandVeblengoods,iftheyexist,havedemandcurvesthatslopeupwardoveratleastsomerangeof
prices.Thesubstitutioneffectispositiveforallgoods.

Question#36of185 QuestionID:413459

Thesupplyfunctionforagoodis:quantitysupplied=750+15price.Ifthisgoodhas10suppliers,thesupplycurveforthe
goodis:

A) price=1/150quantitysupplied+50.
B) quantitysupplied=7,500+150price.

C) price=1/15quantitysupplied+5.

Explanation

Thesupplyfunctionforthemarketis:quantitysupplied=7,500+150price.Togetthesupplycurve,wemustinvertthe
supplyfunction(i.e.,stateitintermsofprice).Solvingforprice,weget:price=1/150quantitysupplied+7,500/150,orprice
=50+1/150quantitysupplied.

Question#37of185 QuestionID:413512

Theeffectofapriceceilingsetabovetheequilibriumpriceismostaccuratelydescribedbywhichofthefollowingstatements?

A) Quantitydemandedwillexceedquantitysupplied.
B) Itwillhavenoeffectonequilibriumpriceandquantity.

C) Quantitysuppliedwillexceedquantitydemanded.

Explanation

Ifapriceceilingisabovetheequilibriumprice,itwillhavenoeffectonpriceorquantity.

Question#38of185 QuestionID:413554

AdecreaseinthepriceofGoodYcanresultinadecreaseofthequantityofGoodYdemandedbyconsumersifthe
substitutioneffect:

A) andtheincomeeffectarenegative.

B) isnegativeandlargerthanthepositiveincomeeffect.

C) ispositiveandtheincomeeffectisnegativeandlargerthanthesubstitutioneffect.
Explanation

IfthepriceofGoodYdecreases,thesubstitutioneffectwillhaveapositiveimpactonthequantitydemandedofGoodY.Thus,
theonlywaythatquantitydemandedofGoodYcandecreaseisifthereisanegativeincomeeffectthatisgreaterin
magnitudethanthesubstitutioneffecti.e.,ifGoodYisaGiffengood.

Question#39of185 QuestionID:413486

Thesupplyfunctionforagoodis:Quantity=180+3Price.Atanequilibriumpriceof150,producersurplusisclosestto:

A) 24,300.
B) 18,225.

C) 12,150.

Explanation

Producersurplusistheareaofthetriangle(onehalfbaseheight)formedbythesupplyfunction,theequilibriumprice,and
theverticalaxis.

Thesupplyfunctionintersectstheverticalaxisatthepriceatwhichquantitysuppliedequalszero:0=180+3P,P=60.Thus
theheightofthetriangleis15060=90.

Thequantitysuppliedattheequilibriumpriceof150is:180+3(150)=270.Thisisthebaseofthetriangle.

Theareaofthetriangleis1/290270=12,150,whichisproducersurplus.

Question#40of185 QuestionID:413618

Afirmuseslaborinputswithacostof$45perunitoflaborandamarginalproductof15unitsofoutput.Thefirmusescapital
inputswithacostof$60perunitofcapitalandamarginalproductof20unitsofoutput.Isthisfirmminimizingitscostperunit
ofoutput?

A) Yes.

B) No,thefirmshouldusemorecapitalandlesslabor.
C) No,thefirmshouldusemorelaborandlesscapital.

Explanation

Ifafirmisusingthecombinationofinputsthatminimizescosts,theratiosofeachinput'smarginalproducttoitscostare
equal.Forthisfirm,additionaloutputfromemployingonemoreunitoflaborcosts$45/15=$3perunit,whileadditional
outputfromemployingonemoreunitofcapitalcosts$60/20=$3perunit.Becausethesecostsperunitofeachinputare
equal,thefirmisusingthecombinationofinputsthatminimizescostsperunitofoutput.

Question#41of185 QuestionID:413518

Incomeelasticityisdefinedasthepercentagechangein:
 A) quantitydemandeddividedbythepercentagechangeinincome.
B) incomedividedbythepercentagechangeinthequantitydemanded.

C) quantitydemandeddividedbythepercentagechangeinthepriceoftheproduct.

Explanation

Incomeelasticityisdefinedasthepercentagechangeinquantitydemandeddividedbythepercentagechangeinincome.
Normalgoodshavepositivevaluesforincomeelasticity,andinferiorgoodshavenegativeincomeelasticity.

Question#42of185 QuestionID:413461

Partialequilibriumanalysisisleastlikelytoincludetheeffectof:

A) priceofagoodondemandforacomplement.

B) consumerincomeondemand.

C) consumertastesondemand.

Explanation

Partialequilibriumanalysisdoesnotconsidertheeffectofchangesintheequilibriumpriceofagoodonthemarketsforother
goods.Forexample,underpartialequilibriumanalysis,theeffectofachangeinthepriceofagoodonthedemandfora
complement,andtheresultingchangeintheequilibriumpriceofthecomplement,arenotconsidered.Thedemandfunction
foragoodassumesthepriceofacomplementisfixed.Ageneralequilibriumanalysiswouldincludethissecondaryeffectofa
changeinthepriceofagoodontheequilibriumpriceofacomplement.Consumerincomeandpreferencesareincludedinthe
demandfunctionforagoodunderpartialequilibriumanalysis.

Question#43of185 QuestionID:413525

Ifagoodhaselasticdemand,asmallpricedecreasewillcause:

A) nochangeinthequantitydemanded.

B) alargerincreaseinquantitydemanded.

C) alargerdecreaseinthequantitydemanded.

Explanation

Ifagoodhaselasticdemand,asmallpricedecreasewillcausealargerincreaseinthequantitydemanded.

Question#44of185 QuestionID:413571

Ifmarginalcostisabovetheaveragecost,whenyouproduceyournextunit:

A) averagecostwillincrease.

B) averagecostwilldecline.

C) averagecostwillbeflat.
Explanation

Ifmarginalcostisabovetheaveragecost,whenyouproduceyournextunit,averagecostwillincrease.Becausemarginalcostisthe
costofproducingthenextunit,andbecausethiscostisabovethefirm'saveragecostperunit,theaveragecostperunitmustincrease,
ifonlyslightly.Basedontheinformationprovidedinthequestion,thereisnowaytoknowwhatwillhappentothemarginalcostoffuture
unitsproduced.

Question#45of185 QuestionID:413565

Thedemandcurveforafirm'soutputisrepresentedbythefollowingtable:

Quantity 1 2 3 4 5
Priceperunit 12 11 10 9 8

Themarketstructureunderwhichthisfirmoperatesisleastlikely:

A) perfectcompetition.

B) oligopoly.

C) monopolisticcompetition.

Explanation

Thefirmfacesadownwardslopingdemandcurveandisthereforeapricesearcher.Afirmoperatingunderperfect
competitionisapricetaker.

Question#46of185 QuestionID:413447

InademandfunctionforGoodM,ifthepriceofasubstituteforGoodMdecreases,thequantitydemandedofGoodM:

A) increases.

B) decreases.

C) mayincreaseordecrease.

Explanation

Thepricecoefficientofasubstituteinademandfunctionispositive.Thismeansadecreaseinthepriceofasubstitutefora
goodwilldecreasethequantitydemandedofthatgood.

Question#47of185 QuestionID:413505

Thelongtermeffectsofapriceceilingonamarketareleastlikelytoinclude:

A) animprovementinqualitytooffsetthereductioninquantity.

B) discriminationbysellers.
C) anincreaseinwaitingtimestopurchase.
Explanation

Apriceceilingisapriceabovewhichproducerscannotsell,andisgenerallysetbelowthemarketequilibrium.Producersoften
respondbyreducingthequalityofgoodscommensuratewiththeirlowerimposedprice.

Question#48of185 QuestionID:413550

Withrespecttoutilitytheory,thesubstitutioneffectforadecreaseinthepriceofagood:

A) willincreaseconsumptionofthegood.
B) willdecreaseconsumptionofthegood.

C) mayincreaseordecreaseconsumptionofthegood.

Explanation

Inutilitytheory,ifthepriceofonegooddecreases,thesubstitutioneffectcausesconsumptionofthatgoodtoincrease.

Question#49of185 QuestionID:413521

Theprimaryfactorsthatinfluencethepriceelasticityofdemandforaproductare:

A) changesinconsumers'incomes,thetimesincethepricechangeoccurred,and
theavailabilityofsubstitutegoods.

B) theproportionsofconsumers'budgetsspentontheproduct,thesizeoftheshiftinthe
demandcurveforaproduct,andchangesinconsumers'priceexpectations.

C) theavailabilityofsubstitutegoods,thetimethathaselapsedsincethepriceofthe
goodchanged,andtheproportionsofconsumers'budgetsspentontheproduct.

Explanation

Thethreeprimaryfactorsinfluencingthepriceelasticityofdemandforagoodaretheavailabilityofsubstitutegoods,the
proportionsofconsumers'budgetsspentonthegood,andthetimesincethepricechange.Iftherearegoodsubstitutes,
whenthepriceofthegoodgoesup,somecustomerswillswitchtosubstitutegoods.Forgoodsthatrepresentarelatively
smallproportionofconsumers'budgets,achangeinpricewillhavelittleeffectonthequantitydemanded.Formostgoods,the
priceelasticityofdemandisgreaterinthelongrunthanintheshortrun.

Question#50of185 QuestionID:413530

Ifthepriceelasticityofdemandis1.5andachangeinthepriceoftheproductincreasesthequantitydemandedby4%,then
whatisthepercentchangeinprice?

A) 0.375%.

B) 2.667%.
C) +2.667%.
Explanation

Priceelasticityofdemandiscalculatedbydividingthepercentchangeinquantitydemandedbythepercentchangeinprice.
Thepercentchangeinpriceis,therefore,thepercentchangeinquantitydemandeddividedbythepriceelasticityofdemand=
4/1.5=2.667.

Becauseoftheinverserelationshipbetweenquantitydemandedandprice,thepriceelasticityisalwaysgoingtobenegative
althougheconomistsusuallyignorethenegativesignandjustusetheabsolutevalue.Toproperlypredictthepricechangea
negativesignneedstobeaddedtothepriceelasticitybeforethecalculationortotheanswerafterthecalculation.

Usingthelattercase,the2.667%willbecome2.667%,showingthatanincreaseinquantitydemandedof4%willcausea
decreaseinthepriceof2.667%whenthepriceelasticityis1.5(1.5).

Question#51of185 QuestionID:413484

Consumersurplusismostaccuratelydefinedasthedifferencebetweenthe:

A) valueconsumersarewillingtopayforanadditionalunitofgoodorserviceand
thecostofproducingtheadditionalunitofthegoodorservice.
B) pricethataconsumermustpayforanadditionalunitofagoodorserviceandthecost
ofproducingtheadditionalunitofthegoodorservice.
C) totalvalueconsumersplaceonthequantityofagoodpurchased,andthetotal
amounttheymustpayforthatquantity.

Explanation

Foranindividual,consumersurplusisdefinedasthesumofthedifferencesbetweenwhatthatindividualiswillingtopayfor
eachindividualunitofagoodorservicethatheorshepurchasesandtheamountthatheorsheactuallypaysforeachof
theseindividualunits.

Question#52of185 QuestionID:413612

Whichofthefollowingstatementsregardingdiminishingmarginalreturnsismostaccurate?

A) Asthequantityproducedrises,costsbegintoriseatadecreasingrate.

B) Asthequantityproducedrises,costsbegintoriseatanincreasingrate.

C) Thetotalcostcurvearchesdownward.

Explanation

Atproductionlevelsthatareconsistentwithdecreasingmarginalreturns,costswillincreaseatanincreasingrateasproductionrises.

Question#53of185 QuestionID:413579

Intheshortrun,ifpriceisbelowaveragetotalcost(ATC)thefirmwill:
 A) producemore.
B) keeprunningaslongasitiscoveringitsvariablecosts.

C) raiseprices.

Explanation

Intheshortrun,ifthefirmiscoveringitsaveragevariablecostsandsomeofitsfixedcostsitwillcontinuetooperateaslong
asthesituationistemporary.

Question#54of185 QuestionID:413498

Whichofthefollowingstatementsregardingdeadweightlossisleastaccurate?

A) Deadweightlossoccurswhenthequantitysupplieddoesnotmaximizethe
sumofconsumerandproducersurplus.
B) Deadweightlossfromunderproductionleadstoalossofproducersurplusbutnot
consumersurplus.
C) Anoverproductionofgoodscanleadtoareductioninconsumersurplus.

Explanation

Deadweightlossisthereductioninconsumerandproducersurplusduetounderproductionoroverproduction.

Question#55of185 QuestionID:413595

Thefactthatfirmscanmakemoreadjustmentstoproductionmethodsinthelongrungivesthefirm:

A) theabilitytoquicklyadjustoutput.
B) alongrunsupplycurvethatissteeperthanitsshortrunsupplycurve.

C) alongrunsupplycurvethatismoreelasticthanitsshortrunsupplycurve.

Explanation

Firmscanadjustthefixednatureoftheirproductioncostsinthelongrunthroughthepurchaseorsaleoffixedassets.
Therefore,itcostslesstoadjustoutputslowlyinresponsetoachangeindemand.Inthelongrun,therewillbeagreater
changeinthequantitysuppliedforagivenchangeinprice.Thisisbecauseinthelongrunfirmscanchangetheirproduction
capacity.

Question#56of185 QuestionID:413527

IfthepriceofWorldCupSoccerticketsincreasesfrom$40aticketto$50aticketandthequantitydemandedofticketsstays
thesame,demandfortheticketsis:

A) inelastic,butnotperfectlyinelastic.
 B) elastic,butnotperfectlyelastic.

C) perfectlyinelastic.

Explanation

Sincethequantityofticketsdemandedstayedthesameafterthepricechanged,thedemandcurvewouldhavetobevertical
whichisaperfectlyinelasticdemandcurve.

Question#57of185 QuestionID:413463

Anunstablemarketequilibriumresultswhen:

A) pricesaboveorbelowequilibriumdrivethepriceawayfromequilibrium.

B) thesupplycurveislesssteeplyslopedthanthedemandcurve.

C) apriceaboveequilibriumresultsinexcesssupply.

Explanation

Anequilibriumisunstableifapriceaboveequilibriumresultsinexcessdemandorapricebelowequilibriumresultsinexcess
supply,becauseinthesesituationscompetitiveforceswoulddrivethepriceawayfromitsequilibriumlevelinsteadoftowardit.
Thiswouldbethecaseifthesupplycurveforagoodwasbothdownwardslopingandlesssteeplyslopedthanthedemand
curve.Anormal,upwardslopingsupplycurveofanysteepnessresultsinastableequilibriumatthepriceandquantitywhereit
intersectsthedemandcurve.

Question#58of185 QuestionID:413582

Afirmoperatingunderimperfectcompetitionwillmaximizeprofitsbyproducingadditionalunitsuntil:

A) totalrevenueisatitsmaximum.

B) marginalrevenueexceedsmarginalcosts.
C) marginalrevenueequalsmarginalcosts.

Explanation

Underperfectcompetitionorimperfectcompetition,afirmwillmaximizeprofitsattheoutputquantityatwhichmarginal
revenueequalsmarginalcost.

Question#59of185 QuestionID:413577

Afirminaperfectlycompetitiveindustrythatseekstomaximizeprofitismostlikelytocontinueproductionintheshortrunas
longwhichofthefollowingconditionsexists?Priceisequaltoorgreaterthan:

A) marginalcost.

B) averagevariablecosts.
C) averagefixedcost.
Explanation

Ifafirmiscoveringitsaveragevariablecosts,itwillcontinuetooperateintheshortrunsinceitiscoveringsomeportionofits
fixedcosts.

Question#60of185 QuestionID:413619

Whichofthefollowingmostaccuratelydescribestherelationshipbetweenmarginalcost(MC),averagevariablecost(AVC),
marginalproduct(MP),andaverageproduct(AP)?

A) WhenMP>AP,MC>AVC.
B) WhenMP=AP,MC>AVC.

C) WhenMP=AP,MC=AVC.

Explanation

AtsomeoutputlevelQandcorrespondinglaborinputL,MC=AVCandMP=AP.AtQandL,AVCisatitsminimumandAPis
atitsmaximum.Hint:drawthecurves.

Question#61of185 QuestionID:434234

Thegraphoftwolongrunaveragetotalcost(LRATC)curvesforatypicalcompanyappearsbelow.

Basedonthisgraph,whichofthefollowingstatementsisleastaccurate?

A) AtpointL,thecompanyisexperiencingeconomiesofscale.

B) TheidealplantsizeisindicatedbypointM.

C) TheuseofimprovedtechnologymayhavecausedthecompanytomovefromLRATC1to
LRATC2.

Explanation

TheuseofimprovedtechnologywouldlikelyresultindecreasedcostsandadownwardshiftintheLRATC.AnupwardshiftintheLRATC
curvemayresultfromincreasedtaxes,increasedresourceprices,ornewgovernmentregulations,astheseactionslikelyincreasecosts.

Theotherstatementsaretrue.Note:AtpointH,thefirmisexperiencingdiseconomiesofscale.

Question#62of185 QuestionID:485762
Ifthereareonlytwogoodsandeachoftheirpricesdouble,theslopeofaconsumer'sbudgetlineismostlikelyto:

A) decreasebyhalf.

B) remainunchanged.
C) double.

Explanation

Theslopeofthebudgetlinereflectstherelativepriceofthetwogoods.Ifthepriceofbothgoodsdoubles,theirrelativepriceis
unchangedandthustheslopeofthebudgetlinewillalsobeunchanged.

Question#63of185 QuestionID:413542

Foraconsumerwithagivenlevelofincome,abudgetconstraintisbestdescribedas:

A) allaffordablecombinationsoftwogoodstheconsumercouldpurchase.
B) thelargestcombinationsoftwogoodsthatwouldprovideequalutilitytotheconsumer.

C) thecombinationsoftwogoodsthatexhaustaconsumer'sincome.

Explanation

Abudgetconstraintorbudgetlinerepresentsthecombinationsoftwogoodsthatexhaustaconsumer'sincome.Combinations
onabudgetlinearenotassumedtoprovidethesameutilitytotheconsumer.Thesetofallaffordablecombinationsoftwo
goodsisbestdescribedasanopportunityset.

Question#64of185 QuestionID:413593

Whichofthefollowingstatementsabouttheshortrunandlongrundecisiontimeframesismostaccurate?

A) Intheshortrun,technologyofproductionisvariable.
B) Inthelongrun,afirmcanadjustitsinputquantities,productionmethods,andplant
size.
C) Inthelongrun,quantitiesofsomeresourcesarefixed.

Explanation

Intheshortrun,quantitiesofsomeresources,includingtechnologyofproduction,arefixed.Typically,economiststreatlabor
andrawmaterialsasvariable,holdingplantsize,theamountofcapitalequipment,andtechnologyconstant.Inthelongrun,
allfactorsofproductionareassumedtobevariable.

Question#65of185 QuestionID:413562

Whichofthefollowingmostcompletelydescribesopportunitycosts?

A) Opportunitycostsincludeimplicitandexplicitcosts.

B) Opportunitycostsincludeonlyexplicitcosts.
 C) Opportunitycostsincludeonlyimplicitcosts.

Explanation

Opportunitycostsincludeimplicitandexplicitcosts.Normalprofitistheopportunitycostofowners'time,resources,and
expertise.

Question#66of185 QuestionID:413513

Whichofthefollowingisleastlikelytobethelongruneffectofapriceceilingthatissetbelowtheequilibriumprice?

A) Sellerstakebribes.

B) Sellersimprovequality.

C) Consumershavetowaittomakepurchases.

Explanation

Underpriceceilings,sellersmayreducethequalityofgoodstoalevelthatreflectstheimposedceilingprice.

Question#67of185 QuestionID:413445

Themarketforlaborisbestdescribedasa:

A) servicesmarket.
B) factormarket.

C) goodsmarket.

Explanation

Whilesomepartofthelabormarketisdedicatedtoprovidingservices,laborisgenerallyviewedasafactorofproduction.

Question#68of185 QuestionID:413462

Anequilibriumisunstableifthesupplycurveslopesdownwardand:

A) islesssteeplyslopedthanthedemandcurve.

B) isparalleltothedemandcurve.

C) ismoresteeplyslopedthanthedemandcurve.

Explanation

Ifasupplycurveslopesdownwardandislesssteeplyslopedthanthedemandcurve,pricesaboveorbelowequilibriumwill
tendtogetfurtherfromequilibrium,whichmeanstheequilibriumisunstable.Adownwardslopingsupplycurvemoresteeply
slopedthanthedemandcurvewouldresultinastableequilibrium.Adownwardslopingsupplycurveparalleltothedemand
curvewouldnotresultinanyequilibriumquantityorprice.
Question#69of185 QuestionID:413473

ThefollowingtablelistsbidsforTreasurysecurities.Atotalof$11billioninsecuritiesaretobeauctionedusingasingleprice
auction.Inaddition,thereare$2billioninnoncompetitivebids.

Bidder DiscountRate FaceValue($billions)

V 4.93% 5
W 4.88% 4
X 4.73% 2
Y 4.49% 3
Z 4.35% 6

Whichcompetitivebidderswillwinthesecurities?

A) BiddersYandZ.

B) BiddersV,W,andX.
C) BiddersVandW.

Explanation

With$2billioninnoncompetitivebids(willaccepttheauctionprice),only$9billionwillbeauctionedinthemodifiedDutch
auctionformat.Thebidsareprovidedintermsofdiscountrates,indicatingtheyieldthatthebidderiswillingtoaccept.The
lowertheyield,thehighertheprice.Thus,the$6billionfromBidderZisthefirstacceptedbid.The$3billionfromBidderYis
thesecondandfinalbidaccepted,atadiscountrateof4.49%,whichwillbetheyieldthatbothYandZwillreceiveandwill
correspondtoasinglepricetheyeachpay.

Question#70of185 QuestionID:413585

Afirmcandetermineitsprofitmaximizingquantityofoutputbyproducinguptothequantityatwhich:

A) marginalrevenueequalsmarginalcost.

B) totalrevenueequalstotalcost.

C) averagerevenueequalsaveragetotalcost.

Explanation

Attheprofitmaximizingquantityofoutput,marginalrevenueequalsmarginalcost.Thequantityforwhichtotalrevenueequals
totalcost,oraveragerevenueequalsaveragetotalcost,isthefirm'sbreakevenpoint.

Question#71of185 QuestionID:413492

Whenataxonagoodorserviceisimposedontheproducersofthegoodorservice,the:

A) supplywilldecrease,buttheincidenceofthetaxfallsonbothbuyersand
sellers.

B) supplywilldecrease,buttheincidenceofthetaxfallsonthesellersonly.
 C) demandwilldecrease,buttheincidenceofthetaxfallsonbothbuyersandsellers.

Explanation

Whenataxisimposedontheproducersofagoodorservice,theywillreducesupplyatanygivenlevelormarketprice,
becausetheyreceivethemarketpriceminusthetax.However,theincidenceofthetax,meaninghowitscostisshared,falls
onboththebuyersandthesellers,dependingupontherelativeelasticitiesofsupplyanddemand.

Question#72of185 QuestionID:413557

Aworkerismostlikelytoearneconomicrentwhenthemarginalrevenueproduct(MRP)fromherlaborandthesupplycurve
forhertypeoflaborexhibitwhichofthefollowingcharacteristics?

MRP Supplycurve

A) High Lesselastic

B) Low Lesselastic

C) High Moreelastic

Explanation

Economicrentisthedifferencebetweenthepricepaidforaresourceanditsopportunitycostinitsnexthighestvalued
employment.Toearneconomicrent,aworkermustgenerateahighmarginalrevenueproduct.Thelesselasticitssupply
curve,themoreofthewageiseconomicrent.Popularentertainersandprofessionalathletes,forexample,earneconomicrent
becausetheirservicesarevaluedmuchmorehighlyinthoseoccupations(highMRP)thantheywouldbeintheirnextbest
alternative,andveryfewpeoplepossesstheirspecificskills(inelasticsupply).

Question#73of185 QuestionID:413448

Accordingtothelawofdemand,asthepriceofagoodincreases,thequantitydemandedofthatgood:

A) increases.
B) decreases.

C) doesnotchange.

Explanation

Thelawofdemandstatesthatanincreaseinthepriceofagoodwillcausethequantitydemandedtodecrease.

Question#74of185 QuestionID:413508

Aminimumwageisanexampleofwhichofthefollowing?

A) Rentcontrols.

B) Apriceceiling.
 C) Apricefloor.

Explanation

Aminimumwageisanexampleofapricefloor.

Question#75of185 QuestionID:413514

Whichofthefollowingmostaccuratelydescribestheimpactofapriceceilingsetbelowtheequilibriumpriceforagoodanda
minimumwagesetabovetheequilibriumwage,respectively?

A) Surplusincreasedunemployment.

B) Shortageincreasedunemployment.

C) Shortagedecreasedunemployment.

Explanation

Aceilingthatisbelowtheequilibriumpriceforagoodwillresultinashortagecharacterizedbyaquantitydemandedthatis
greaterthanthequantitysupplied.Aminimumwageleadstoincreasedunemploymentasfirmstendtosubstitutecapitalfor
labor.Eventhoughthereareoftenalargenumberofunemployedlowskilledworkerswhomaybewillingtoworkatawage
lowerthantheminimumwage,firmscannotlegallyhirethem.

Question#76of185 QuestionID:413580

JohnKlementisasoybeanfarmerwhoharvests125,000bushelsofsoybeansannually.Klement'sfixedcostsare$200,000
andhisvariablecostsare$5perbushel.Soybeansarecurrentlypricedat$5.35perbushel.Basedonhisestimates,Klement
seessoybeanpricesbeingrelativelystableforthenexttwoyears,thenincreasingto$7.00perbushelduetoincreased
demandfromJapan.WhatactionshouldKlementtake?Klementshould:

A) continueoperatinghisbusinessasusual.

B) shutdownfortwoyearsandthenrestarthisbusiness.
C) cuthisproductionby50%forthenexttwoyearsandthenresumefullproduction.

Explanation

SinceKlementissellingsoybeans,acommoncommodity,heisapricetakerandthereforecannotadjusttheprice.Heshould
continueoperatinghisbusinessasnormalasheiscurrentlycoveringvariablecostsandpartoffixedcosts.Intwoyearsfrom
now,hewillbeabletocoverbothfixedandvariablecostsandbeabletomakeasubstantialprofit.

Question#77of185 QuestionID:413491

Theactualincidenceofataximposedonbuyersorsellersismostaccuratelydefinedas:

A) theproportionofthetaxburdenbornebybuyersandsellers.

B) theamountoftaxtimestheequilibriumquantity.
 C) thepartylegallyresponsibleforpayingthetax.

Explanation

Taxrevenueistheamountofataxtimestheequilibriumquantity.Statutorytaxincidencereferstowhoislegallyresponsible
forpayingatax.Actualtaxincidencerepresentstheextenttowhichbuyersbearthecostofthetaxthroughahigherpricepaid
andsellersbearthecostthroughalowerpricereceived.

Question#78of185 QuestionID:413615

Basedontheconceptofdiminishingreturns,asthequantityofoutputincreases,theshortrunmarginalcostsofproduction
eventually:

A) riseatadecreasingrate.

B) fallatadecreasingrate.
C) riseatanincreasingrate.

Explanation

Thelawofdiminishingreturnsstatesthatasmorevariableresourcesareaproductionprocesscombinedwithafixedinput,
outputwilleventuallyincreaseatadecreasingrate.Intheshortrun,asthequantityproducedrises,costsriseatanincreasing
rate.

Question#79of185 QuestionID:413599

Typically,theshortrunmarginalproductcurveforaninputusedinproduction:

A) decreasesproportionatelytooutput.

B) increasesinitially,reachesapeak,andthendeclines.
C) increasesproportionatelytooutput.

Explanation

Themarginalproductcurveforaninputtypicallyincreasesinitially,reachesapeakatsomepoint,andthendecreases
(marginalcostincreases)asadditionalunitsoftheinputareused,holdingthequantitiesofotherfactorsconstant.

Question#80of185 QuestionID:413609

Arethefollowingtwostatementsaboutthemarginalrevenueproduct(MRP)ofafactorofproductionaccurate?

Statement1:Inapricetakermarket,theMRPofaninputisthemarginalproductoftheinputmultipliedbythepriceofthe
outputitgenerates.

Statement2:Ifwecompareanytwoproductiveinputs,theonewiththehigherMRPwillearngreatereconomicrent.

Statement1 Statement2
 A) Correct Correct

B) Correct Incorrect

C) Incorrect Correct

Explanation

Statement1iscorrect.MRPistheadditiontototalrevenuefromsellingtheoutputgeneratedbyonemoreunitofinput.Ina
pricetakermarket(i.e.,perfectcompetition),marginalrevenueisequaltoprice.Therefore,theMRPisthemarginalproductof
theinputtimestheoutputprice.Statement2isincorrect.Theextenttowhichafactorofproductionearnseconomicrent
dependsontheshapeofitssupplycurve.AninputwithahighMRPmightearnverylittleeconomicrentifthesupplyofthe
inputishighlyelastic.AninputwitharelativelylowerMRPcanearnsignificanteconomicrentifitssupplyishighlyinelastic.

Question#81of185 QuestionID:413604

Afirmshouldcontinueaddingtoitscapitaluntilthemarginalrevenueproductofcapitalis:

A) equaltothemarginalrevenueproductoflabor.

B) equaltothecostofcapital.

C) greaterthanthecostofcapital.

Explanation

Afirmshouldcontinuetoacceptcapitalprojectsuntilthemarginalrevenueproductofcapital(thevalueadded)isequaltothe
costofcapital.Priortothispoint,thefirmgainsfromeachunitofcapitaladded.

Question#82of185 QuestionID:413553

Agoodforwhichconsumersexhibitanegativeincomeeffectthatissmallerthanthesubstitutioneffectismostaccurately
describedasa(n):

A) Veblengood.

B) inferiorgood.

C) Giffengood.

Explanation

Foraninferiorgoodtheincomeeffectisnegative.AGiffengoodisaninferiorgoodforwhichthenegativeincomeeffectis
largerthanthepositivesubstitutioneffect,resultinginadecreaseinconsumptioninresponsetoadecreaseinprice.AVeblen
goodisnotaninferiorgood,butratheragoodthatprovidesmoreutilitytoaconsumeratahigherpricethanitprovidesata
lowerpricebecausethestatusbenefitsofownershiparegreaterathigherprices.

Question#83of185 QuestionID:413455

Ashiftalongthedemandcurveforagoodismostlikelytoresultfromachangein:
 A) thepriceofthegood.

B) thepriceofarelatedgood.

C) consumers'income.

Explanation

Demandcurvesillustratethenegativerelationshipbetweenpriceandquantitydemanded.Achangeinthepriceofthegood
representsashiftalongademandcurve.Changesinincomeorthepricesofrelatedgoods(complementsorsubstitutes)
representshiftsofthedemandcurve(i.e.,changesinthequantitydemandedateachprice).

Question#84of185 QuestionID:413496

Whichofthefollowingisthemostlikelyeffectofaquotaonwheat?

A) Marginalcostswillbegreaterthanmarginalbenefit.

B) Thesupplycurvewillshiftdownward.

C) Nothingifthequotaissetabovetheequilibriumquantity.

Explanation

Aquotadoesnotcausethesupplycurvetoshift.Theequilibriumquantitywilldecreasetothequotaamount.Marginalcostwill
belessthanmarginalbenefit,leadingtoadeadweightlossfromunderproduction.

Question#85of185 QuestionID:413575

Whichofthefollowingmostaccuratelydescribestherelationshipbetweentheaveragetotalcost(ATC)curveandtheaverage
variablecost(AVC)curve?TheverticaldistancebetweentheATCandAVCcurves:

A) increasesandthendecreasesasoutputincreases.

B) decreasesasoutputincreases.

C) increasesasoutputincreases.

Explanation

TheverticaldistancebetweentheATCcurveandAVCcostcurveisaveragefixedcost,whichdecreasesasoutputincreases
becausemoreoutputisaveragedoverthesamecost.

Question#86of185 QuestionID:413485

Thedemandfunctionforagoodis:Quantity=6005ownprice.Atanequilibriumpriceof30,consumersurplusisclosest
to:

A) 36,000.

B) 20,250.

C) 450.
Explanation

Consumersurplusistheareaofthetriangle(onehalfbaseheight)formedbythedemandfunction,theequilibriumprice,
andtheverticalaxis.

Thedemandfunctionintersectstheverticalaxisatthepriceatwhichquantitydemandedequalszero:0=6005P,P=120.
Thustheheightofthetriangleis12030=90.

Thequantitydemandedattheequilibriumpriceof30is:6005(30)=450.Thisisthebaseofthetriangle.

Theareaofthetriangleis1/290450=20,250,whichisconsumersurplus.

Question#87of185 QuestionID:413458

Ifachangeinconsumertastescausesapermanentdownwardshiftindemandforhats,buttherearenochangesinthecost
ofinputstoproductionofhats,themostlikelymarketresponsewouldbe:

A) ashortrunshiftinthesupplycurve,causingadeclineinthepriceofhats.

B) nochangeinthepriceofhatsbecausethecostsofproductionhavenotchanged.

C) ashorttermmovementalongthesupplycurvetoalowerequilibriumprice,anda
longrunshiftinsupply.

Explanation

Ifthecostsofproductiondonotchange,thesupplycurveforhatswillnotshiftintheshortruninresponsetoadecreasein
demand.Instead,therewillbeamovementalongthesupplycurvetoanew,lower,equilibriumprice,followedbyalongrun
shiftinthesupplycurveasproducersexitthebusiness.

Question#88of185 QuestionID:413613

Atafixedlevelofcapital,outputincreasesasthequantityoflaborincreases,butatadecreasingrate.Thisphenomenonisan
exampleof:

A) lawofdiminishingreturnstolabor.

B) lawofdiminishingreturnstocapital.

C) lawofdiminishingcoststolabor.

Explanation

Thelawofdiminishingreturnsstatesthatatsomepoint,asmoreandmoreofaresource(e.g.,labor)isdevotedtoa
productionprocess,holdingthequantityofotherinputsconstant,theoutputincreases,butatadecreasingrate.

Question#89of185 QuestionID:413480

Producersurplusisbestdefinedasthe:
 A) numberofunitsbywhichthesupplyisgreaterthanthequantitydemandedby
consumers.

B) amountbywhichthepriceofthenextunitofagoodexceedstheconsumer'smarginal
benefitfromthegood.

C) sumofthedifferencesbetweenthepriceofeachunitofagoodanditsopportunity
cost.

Explanation

Thesumofthedifferencesbetweenpriceandopportunitycostisproducersurplus.

Question#90of185 QuestionID:413570

Marginalcostismostaccuratelydefinedasthe:

A) costthataconsumermustincurtoconsumeanadditionalunitofagoodor
service.
B) valueofthegoodorservicethataconsumermustforegoinordertoconsumean
additionalunitofagoodorservice.
C) costofproducingonemoreunitofagoodorservice.

Explanation

Marginalcostisthecostofproducingonemoreunitofoutput.

Question#91of185 QuestionID:413490

Whichofthefollowingstatementsaboutataximposedonbuyersorsuppliersismostaccurate?

A) Ifdemandislesselasticthansupply,consumerswillbearahigherproportion
ofthetaxthansuppliers.
B) Ifdemandislesselasticthansupply,consumerswillbearalowerproportionofthetax
thansuppliers.
C) Theproportionofthetaxisborneequallybyconsumersandsuppliers,regardlessof
supplyanddemandelasticity.

Explanation

Ifdemandislesselasticthansupply,consumerswillbearahigherproportionofthetaxthansuppliers.Ifsupplyislesselastic
thandemand,supplierswillbearahigherproportionofthetaxthanconsumers.

Question#92of185 QuestionID:413482

Equilibriuminaperfectlycompetitivemarketresultsinaquantityforwhichthe:

A) consumerandproducersurplusesareequal.
 B) producersurplusequalszero.

C) sumofconsumerandproducersurplusesismaximized.

Explanation

Inacompetitivemarket,theequilibriumquantityistheoneforwhichthesumoftheconsumerandproducersurplusesis
maximized.

Question#93of185 QuestionID:413539

Theassumptionthatconsumersprefermoreofagoodtolessisbestdescribedastheconditionof:

A) completepreferences.

B) utilitymaximization.

C) nonsatiation.

Explanation

Theconditionofnonsatiationspecifiesthatmoreconsumptionispreferredtolessconsumptionofagood.

Question#94of185 QuestionID:413519

Ifthepriceelasticityofalineardemandcurveis1atthecurrentprice,anincreaseinpricewillleadto:

A) adecreaseintotalrevenue.

B) nochangeintotalrevenue.

C) anincreaseintotalrevenue.

Explanation

Onalineardemandcurve,demandiselasticatpricesabovethepointofunitaryelasticity,soapriceincreasewilldecrease
totalrevenue.

Question#95of185 QuestionID:460641

HanoverIndustrialoperatesafactoryinParis,whichproducesgoodsatamarginalcostabovemarginalrevenue,anda
factoryinMunich,whichproducesidenticalgoodsatamarginalcostlessthanmarginalrevenue.Tomaximizeprofits,
Hanovershouldmostlikely:

A) decreaseoutputattheParisfactoryandincreaseoutputattheMunichfactory.

B) decreaseoutputatbothfactories.

C) increaseoutputattheParisfactoryanddecreaseoutputattheMunichfactory.

Explanation

SincetheMunichplantisgeneratingrevenuesgreaterthancostsandtheParisplantisnot,Hanovershouldincreaseoutputat
theMunichplantandreduceoutputattheParisplant.

Question#96of185 QuestionID:413483

Producersurplusismostaccuratelydefinedasthe:

A) differencebetweentheopportunitycostofproducingthelastunitofagoodorservice
andthepricereceivedforthatunit.

B) sumofthedifferencesbetweenthepricereceivedforeachunitofgood
producedandtheopportunitycostofeachunit.

C) sumofthedifferencesbetweenthemarginalbenefitandthemarginalcostforeach
unitofgoodproducedandconsumedoverthetotalnumberofunitsproducedand
consumed.

Explanation

Producersurplusisthesumofthedifferencesbetweenthepricereceivedforeachunitofgoodproducedandtheopportunity
costofeachunit,forthetotalunitsproduced.Producersurplusresultswhenthemarketpriceforagoodorserviceexceeds
themarginalcostproducingit.

Question#97of185 QuestionID:413569

Holdingotherinputquantitiesconstant,whichofafirm'sfactorsofproductionmostlikelyexhibitdiminishingmarginal
productivityasthefirmusesanincreasingquantityoftheinput(s)?

A) Laboronly.

B) Capitalonly.

C) Bothlaborandcapital.

Explanation

Bothlaborandcapitalinputsexhibitdiminishingmarginalproductivityasinputquantitiesincrease,holdingotherinput
quantitiesconstant.

Question#98of185 QuestionID:413611

Holdingthequantityoflaborconstant,outputincreasesasthequantityofcapitalincreases,butatadecreasingrate.This
phenomenonismostaccuratelydescribedas:

A) diminishingmarginalproductofcapital.

B) diminishingmarginalcostsofcapital.

C) diminishingaveragereturnstocapital.

Explanation

Themarginalproductofcapitalisthechangeinoutputdividedbyaunitchangeincapital,holdinglaborconstant.Diminishing
marginalproductofcapitalmeansthatataconstantleveloflabor,outputincreasesascapitalisadded,butatadecreasing
rate.

Question#99of185 QuestionID:413499

Whichofthefollowingisleastaccurateregardingobstaclestotheefficientallocationofresourcesinacompetitivemarket?

A) Quotasresultinproductionoflessthantheefficientquantityofthegood.

B) Subsidiesleadtoproductionofmorethantheefficientquantityofthegood.

C) Publicgoods,suchasnationaldefense,tendtobeoverproducedbecausetheycan
beconsumedbyeveryonewhethertheypayforthegoodsornot.

Explanation

Publicgoodscanbeconsumedbyeverymemberofasociety,regardlessofwhethertheypaidforthemornot.Ina
competitivemarketforpublicgoods,fewergoodsthantheefficientquantitywouldbeproducedbecauseitisnotineach
person'sinteresttopaytheirshareofthecost.

Question#100of185 QuestionID:413477

Whichofthefollowingstatementsmostaccuratelydescribeswhatwilloccurinanunrestrictedeconomywhentasteschange
sothatmarginalbenefitexceedsmarginalcostatthecurrentquantityproducedandsoldofagoodorservice?

A) Thequantityofothergoodsandservicesproducedwillincrease.

B) Thequantityconsumedwilldecrease.

C) Thequantityofthegoodorserviceproducedwillincrease.

Explanation

Inanunrestrictedeconomy,theefficientquantityistheoneforwhichthemarginalbenefitequalsthemarginalcost.When
marginalbenefitisgreaterthanmarginalcostatagivenquantity,producerswillproducemoresinceconsumersarewillingto
paymorethanthecostofproduction.

Question#101of185 QuestionID:413531

Ifthepriceelasticityofdemandis1.5andthepriceoftheproductincreases2%,thequantitydemandedwill:

A) decreaseapproximately1.5%.

B) decreaseapproximately0.75%.

C) decreaseapproximately3%.

Explanation

Ifthepriceelasticityofdemandis1.5,andyouincreasethepriceoftheproduct2%,thequantitydemandedwilldecrease
approximately3%.Whenthepriceelasticityisnegative,itmeansthatpriceanddemandmoveinoppositedirections.Givena
pricedecrease,demandwillincreaseandviceversa.Theabsolutevalue,1.5,indicatesthatdemandwillmoveoneandahalf
timesasmuchasprice.

Question#102of185 QuestionID:413552

Whichofthefollowingismostlikelytocauseadecreaseintheconsumptionofagoodinresponsetoadeclineinthepriceof
thegood?

A) Incomeeffect.

B) Lawofdemand.

C) Substitutioneffect.

Explanation

Theincomeeffectcanbenegativeifthegoodisaninferiorgood.Thesubstitutioneffectisalwayspositiveandwillcause
consumptionofagoodtoincreaseifthepricedeclines.Thelawofdemandassumesthatadecreaseinthepriceofagoodwill
causeanincreaseinthequantitydemanded.

Question#103of185 QuestionID:413454

Themostlikelycauseforashiftinthesupplycurveforcoffeeisachangeinthe:

A) priceoftea.

B) wagesofcoffeeharvesters.

C) priceofcoffee.

Explanation

Thesupplycurveshiftsinresponsetoachangeinthecostofinputs,suchasthewagesforcoffeeharvesters.Achangeinthe
priceoftheproductisamovementalongthesupplycurve,notashiftinthecurve.Achangeinthepriceofasubstitutewould
morelikelyinfluencethedemandcurve,notthesupplycurve.

Question#104of185 QuestionID:413564

Thedemandcurveforafirm'soutputisrepresentedbythefollowingtable:

Quantity 1 2 3 4 5 6 7 8
Priceperunit 11 10 9 8 7 6 5 4

Atwhatquantityofoutputistotalrevenuemaximized?

A) 7.
B) 6.

C) 8.

Explanation

Quantity 1 2 3 4 5 6 7 8
 Priceperunit 11 10 9 8 7 6 5 4
Totalrevenue=P
11 20 27 32 35 36 35 32
Q

Totalrevenueismaximizedat6unitsofoutput.

Question#105of185 QuestionID:413469

Giventhesupplyfunction,Qs=600+80P,thedemandfunction,Qd=150070P,andanequilibriumpriceof14,the
amountofexcesssupplyordemandatapriceof17is:

A) excessdemandof520.
B) excessdemandof480.

C) excesssupplyof450.

Explanation

Pluginthepriceof17andsolveforquantitysuppliedandquantitydemanded:

Qs=600+80(17)Qs=760
Qd=150070(17)Qd=310

Atapriceof17,quantitysuppliedisgreaterthanquantitydemanded.Excesssupply=760310=450.

Question#106of185 QuestionID:413536

GeneBawerk,aneconomicsprofessor,islecturingonthefactorsthatinfluencethepriceelasticityofdemand.Hemakesthe
followingassertions:

Statement1:Formostgoods,demandismoreelasticinthelongrunthantheshortrun.
Statement2:Demandforagoodbecomesmoreelasticwhenaclosesubstituteforitbecomesavailableon
themarket.

WithrespecttoBawerk'sstatements:

A) onlystatement2iscorrect.

B) onlystatement1iscorrect.

C) botharecorrect.

Explanation

Bothofthesestatementsareaccurate.Priceelasticityformostgoodsisgreaterinthelongrunbecauseindividualscanmake
longtermdecisionsthatrequiredifferentquantitiesofthegood,suchasbuyingmorefuelefficientvehiclestouseless
gasoline.Priceelasticityisgreaterthebettertheavailablesubstitutesbecauseanincreaseinpricewillleadmorebuyersto
switchtothesubstituteproducts.
Question#107of185 QuestionID:413537

Thedemandforaproducttendstobepriceinelasticif:

A) fewgoodcomplementsfortheproductareavailable.

B) peoplespendalargeshareoftheirincomeontheproduct.

C) fewgoodsubstitutesfortheproductareavailable.

Explanation

Ifalargepricechangeresultsinasmallchangeinquantitydemanded,demandisinelastic.Cigarettesareanexampleofa
goodwithinelasticdemand.

Question#108of185 QuestionID:413479

Ifaconsumeriswillingtopay$20forashirtbutonlyhastopay$16,the$4differenceis:

A) consumerdeficit.

B) consumersurplus.

C) producersurplus.

Explanation

Ifaconsumeriswillingtopay$20forashirtbutonlypays$16fortheshirt,the$4differenceisconsumersurplus.The
consumersurplusplusthemarketpriceequalsthetotalvalueoftheproducttotheconsumer.

Question#109of185 QuestionID:413524

Ifquantitydemandedincreases15%whenthepricedrops1%,demandforthisgood:

A) elastic,butnotperfectlyelastic.

B) inelastic,butnotperfectlyinelastic.

C) perfectlyelastic.

Explanation

Wheneverquantitydemandedforagoodchangesbyagreaterpercentagethanprice,thepriceelasticityofdemandwillbe
greaterthan1.0anddemandfortheproductisconsideredtobeelastic.

Question#110of185 QuestionID:413543

Whenmodelingconsumerdecisionmaking,indifferencecurves:

A) representconsumptionbundlesthathaveequaltotalutilitytotheconsumer.

B) representthesetofaffordableconsumptionbundles.

C) reflectanincreasingmarginalrateofsubstitution.
Explanation

Indifferencecurvesreflectconsumptionbundlesthathavethesametotalutilitytotheconsumer,whetherornottheyare
affordable.Indifferencecurvesreflectadiminishingmarginalrateofsubstitution.

Question#111of185 QuestionID:413456

Apriceforagoodabovetheequilibriumpricewillresultinasituationof:

A) excesssupply.

B) excessdemand.
C) underproduction.

Explanation

Atpricesaboveequilibrium,suppliersarewillingtoproduceagreaterquantitythanbuyersarewillingtopurchase.Thisisan
excesssupplycondition.Competitionamongsuppliersleadstodownwardpressureonpricesuntilthemarketreaches
equilibriumpriceandquantity.

Question#112of185 QuestionID:413520

Ifquantitydemandedincreases20%whenthepricedrops2%,thisgoodexhibits:

A) inelastic,butnotperfectlyinelastic,demand.

B) elastic,butnotperfectlyelastic,demand.
C) perfectlyinelasticdemand.

Explanation

Ifquantitydemandedincreases20%whenthepricedrops2%,thisgoodexhibitselasticdemand.Wheneverdemandchanges
byagreaterpercentagethanprice,demandisconsideredtobeelastic.

Question#113of185 QuestionID:413587

Whichofthefollowingmostaccuratelydescribeseconomiesofscale?Economiesofscale:

A) occurwhenlongrununitcostsfallasoutputincreases.
B) aredependentonshortrunaveragecosts.

C) increaseatadecreasingrate.

Explanation

Economiesofscaleoccurwhenthepercentageincreaseinoutputisgreaterthanthepercentageincreaseinthecostofall
inputs.Economiesofscaleoccurovertherangewherethelongrunaveragecostcurveslopesdownward.
Question#114of185 QuestionID:413516

Thecrosspriceelasticityofdemandforasubstitutegoodandtheincomeelasticityforaninferiorgoodare:

Income
Crosselasticity
elasticity

A) >0 <0

B) <0 <0

C) <0 >0

Explanation

Thecrosspriceelasticityofsubstitutesispositive,andtheincomeelasticityofaninferiorgoodisnegative.

Question#115of185 QuestionID:413494

Thedecreaseinproductionandtradeasaresultofataxiscalled:

A) totaltaxincidence.

B) statutoryincidence.

C) deadweightloss.

Explanation

Whentheequilibriumquantityforaproductorserviceisreducedastheresultofatax,thisiscalledthedeadweightloss.This
representstheloss,intermsofproductionandtrade,thatresultsfromthepresenceofthetax.

Question#116of185 QuestionID:413591

Theshortrunisbestdefinedas:

A) theperiodforwhichthequantitiesofallfactorsofproductionarefixed.

B) thetimeframewithinwhichworkingcapitaldecisionscannotbealtered.
C) theperiodforwhichthequantitiesofsomeresourceinputsarefixed.

Explanation

Theshortrunistypicallydefinedastheperiodforwhichthequantitiesofsome,butnotall,resourcesarefixed.Working
capitalisthedifferencebetweenafirm'scurrentassetsandcurrentliabilitiesandconsistsofitems(suchascash)thatthefirm
canadjustintheshortrun.

Question#117of185 QuestionID:413450

Otherthingsequal,anincreaseinthepriceofagoodwillincrease:
 A) neitherquantitysuppliednorquantitydemanded.
B) quantitydemanded.

C) quantitysupplied.

Explanation

Producersofagoodaretypicallywillingtosupplyagreaterquantityofagoodwhenitspriceincreases.

Question#118of185 QuestionID:413533

Incomeelasticityisdefinedasthe:

A) changeinquantitydemandeddividedbythechangeinincome.

B) percentagechangeinincomedividedbythepercentagechangeinthequantity
demanded.

C) percentagechangeinthequantitydemandeddividedbythepercentagechangein
income.

Explanation

Incomeelasticityisdefinedasthepercentagechangeinquantitydemandeddividedbythepercentagechangeinincome.
Normalgoodshavepositivevaluesforincomeelasticityandinferiorgoodshavenegativeincomeelasticities.

Question#119of185 QuestionID:434232

Priceelasticityofdemandismostaccuratelydefinedasthechangein:

A) quantitydemandedinresponsetoachangeinincome.
B) marketpriceinresponsetoachangeinthequantitydemanded.

C) quantitydemandedinresponsetoachangeinmarketprice.

Explanation

Question#120of185 QuestionID:413581

Supposeapricetakerfirmproducesbaseballbatsthatsellatapriceof$100each.Thisfirm'saveragetotalcostatthe
currentlevelofproductionis$150perbat,andtheaveragefixedcostis$40perbat.Whichofthefollowingstatementsismost
accurateregardingthisfirm?Theyshould:

A) shutdownintheshortrunbecausetheiraveragevariablecostisgreaterthan
theirprice.

B) shutdownintheshortrunbecausetheiraveragetotalcostisgreaterthantheirprice.
 C) continueproducingbaseballbatsbecausetheyarecoveringtheirfixedcosts.

Explanation

Variablecosts=$150(ATC)$40(AFC)=$110(AVC).Atasellingpriceof$100thefirmisnotcoveringitsvariablecostsand
willhavelossesgreaterthanitsfixedcostsifitstaysinbusiness.

Question#121of185 QuestionID:413561

Whichofthefollowingmostaccuratelydescribeseconomicprofit?Economicprofitsarezerowhen:

A) totalrevenueequalsthesumofallopportunitycosts.
B) impliedrentalratesequalforgoneinterest.

C) implicitcostsequalexplicitcosts.

Explanation

Economicprofitarezerowhentotalrevenuesarejustequaltothesumofallopportunitycosts,whichincludesallimplicitand
explicitcosts.

Question#122of185 QuestionID:413528

Ifthedemandcurveforagivenproductisastraightline,thisindicatesthat:

A) elasticityisconstantalongthedemandcurve.
B) demandisunitelastic.

C) demandismoreelasticathigherprices.

Explanation

Elasticitieswillbegreater(inabsolutevalue)athigherprices.

Question#123of185 QuestionID:413549

Withrespecttoutilitytheory,theincomeeffectforadecreaseinthepriceofagood:

A) willincreaseconsumptionofthegood.

B) willdecreaseconsumptionofthegood.

C) mayincreaseordecreaseconsumptionofthegood.

Explanation

Theincomeeffectforadecreaseinpricemaybepositive(foranormalgood)ornegative(foraninferiorgood).Therefore,the
incomeeffectfromapricedecreasemaybetoincreaseordecreaseconsumptionofagood.
Question#124of185 QuestionID:413607

Marginalrevenueproductisbestdefinedasthe:

A) additionaloutputthatresultsfromemployingonemoreunitofaproductive
input.

B) gainintotalrevenuefromsellingonemoreunitofoutput.

C) additiontototalrevenuefromsellingtheadditionaloutputfromusingonemoreunitof
aninput.

Explanation

Themarginalrevenueproductistheadditiontototalrevenuefromsellingtheadditionaloutputthatonemoreunitofaninput
canproduce.Theadditionaloutputthatresultsfromemployingonemoreunitofaproductiveinputisthemarginalproduct.
Thegainintotalrevenuefromsellingonemoreunitofoutputisthemarginalrevenue.Amarginalrevenueproductexistsfor
anylevelofoutputitisnotlimitedtothelevelatwhichmarginalrevenueequalsmarginalcost.

Question#125of185 QuestionID:413594

Whichofthefollowingstatementsaboutsupplycurvesisleastaccurate?The:

A) supplycurveforthemarketistypicallymoreelasticovertheshortrunthanthe
longrun.

B) longrunsupplycurvefordecreasingcostindustriesslopesdownwardtotheright.

C) longrunsupplycurveforconstantcostindustriesishorizontal.

Explanation

Thesupplycurveforproductsistypicallymoreelasticoveralongertimeperiodthanoverashorterperiod.

Question#126of185 QuestionID:413504

Thegovernmentimposesataxonagood.Therelativeamountsofthetaxthateacheconomicactorinthemarketplaysis
calledthe:

A) deadweightloss.

B) statutorytax.

C) taxincidence.

Explanation

Thisisthedefinitionoftheincidenceofatax.Itisdeterminedbytheshapeofthesupplyanddemandcurves,notuponwhom
thetaxisimposedlegally(thestatutoryincidenceofthetax).

Question#127of185 QuestionID:413551
Whenthepriceofagooddecreases,howdotheincomeeffectandthesubstitutioneffectchangethequantitydemandedof
thegood?

A) Thesubstitutioneffectincreasesthequantitydemanded,buttheincomeeffect
mayincreaseordecreasethequantitydemanded.

B) Boththeincomeeffectandthesubstitutioneffectincreasethequantitydemanded.

C) Theincomeeffectincreasesthequantityconsumed,butthesubstitutioneffectmay
increaseordecreasethequantitydemanded.

Explanation

Thesubstitutioneffectisashiftinconsumptiontowardalargerquantityofagoodthatdecreasesinprice.Adecreaseinthe
priceofagoodalsohasanincomeeffectbecausetheoldbundlecostsless.Theincomeeffectmayresultinconsumptionofa
largerorsmallerquantityofthegoodthathasdecreasedinprice,dependingonwhetheritisanormalgoodoraninferior
good.

Question#128of185 QuestionID:413605

Thequantityoflaborthataprofitmaximizingfirmwillemploy,holdingotherinputfactorsconstant,isthelevelatwhich:

A) themarginalrevenueproductoflaborisequaltothewagerate.

B) onemoreunitoflaborwouldcostlessthanthevalueofitsadditionaloutput.

C) themarginalproductoflaborisequaltothemarginalcostoflabor.

Explanation

Foranyproductiveinput,includinglabor,aprofitmaximizingfirmwillemployadditionalunitsoftheinputuntilitsmarginal
revenueproductisequaltoitsprice(thewagerateisthepriceoflabor).Ifonemoreunitoflaborwouldcostlessthanthe
valueofitsadditionaloutput,thefirmwillincreaseprofitsbyaddingthatunit.Marginalproductismeasuredinunitsofoutput
andcannotbecompareddirectlytomarginalcost,whichismeasuredinunitsofmoney.

Question#129of185 QuestionID:413466

Twentyfirmsinaregion'sgravelmarkethaveidenticalsupplyfunctionsofQS=2,000+25P.Themarketsupplycurve
(inversesupplyfunction)is:

A) P=0.002QS+80

B) P=0.04QS+80
C) QS=40,000+500P

Explanation

Theaggregatesupplyfunctionis:
QS=20(2,000)+20(25)P
QS=40,000+500P

Themarketsupplycurve(inversesupplyfunction)is:
500P=QS+40,000
P=(1/500)QS+(40,000/500)
P=0.002QS+80

Question#130of185 QuestionID:413589

Whichofthefollowingisleastaccuratewithregardtothelongrunandtheshortrun?

A) Longruncostcurvespertaintoplantsofdifferentsizes.
B) Inthelongrun,allcostsarevariable.

C) Intheshortrun,onlyplantsizeisfixed.

Explanation

Intheshortrun,laborismajorvariablecost.Plantsize,inadditiontotechnologyandequipment,arefixed.

Question#131of185 QuestionID:413472

Thedemandfunctionfortextbooksisgivenby1002P,andthesupplyfunctionisgivenby2P10.Atapriceof30,the
market:

A) hasexcesssupplyof10.

B) hasexcessdemandof10.
C) isinequilibriumwithquantitysuppliedanddemandedequalto45.

Explanation

Atapriceof30,quantitydemanded=1002(30)=40,andquantitysupplied=2(30)10=50.Excesssupply=5040=
10.

Question#132of185 QuestionID:413443

Forwhichofthefollowingitemswouldthemarketbebestcharacterizedasafactormarket?

A) Crudeoil.
B) Beer.
C) Clothing.

Explanation

Crudeoilismostoftenpurchasedasafactorofproductionforothergoods,suchasgasoline.Becausebeerandclothingare
primarilypurchasedbyconsumersasfinishedgoods,themarketsforthesegoodsarebestcharacterizedasproductmarkets.

Question#133of185 QuestionID:413515

Agoodismostlikelytodemonstratehigherpriceelasticityofdemand:
 A) ifitrepresentsasmallportionoftheconsumer'sbudget,thanifitrepresentsa
largeportion.

B) whentherearefewsubstitutesforthegood,thanwhentherearemanygood
substitutes.
C) inthelongrunthantheshortrun.

Explanation

Agoodislikelytoshowahighpriceelasticityofdemandwhentherearegoodsubstitutes,itrepresentsalargeproportionof
consumerspending,andinthelongrunasconsumersmakechangesthattaketimetoimplementinresponsetoprice
changesforthegood.

Question#134of185 QuestionID:472408

Assumethatfortheaverageconsumer,thequantitydemandedforgasolineincreasesfrom15gallonsperweekto20gallons
perweekresponsetoapricedecreasefrom$2.90pergallonto$2.46pergallon.Theelasticityofdemandforgasolineis
closestto:

A) 1.65
B) 1.74

C) 1.86

Explanation

Elasticityofdemandisthepercentchangeinquantitydemandeddividedbythepercentchangeinprice,wherethepercent
changesarecalculatedbydividingthechangeinvaluebytheaveragevalue.Thepercentchangeinquantitydemandedis(20
15)/[(20+15)/2]=28.57%.Thepercentchangeinpriceis(2.462.90)/[(2.90+2.46)/2]=16.42%.Thus,elasticity=
28.57%/16.42%=1.74.

Question#135of185 QuestionID:413442

Marketsforproducedgoodsthatareusedintheproductionoffinishedgoodsarebestdescribedas:

A) capitalmarkets.
B) intermediategoodsmarkets.
C) servicemarkets.

Explanation

Intermediategoodsareusedintheproductionoffinishedgoods.Servicesarefinishedgoodsandcapitalmarketsreferto
marketswherefirmsraisemoney.

Question#136of185 QuestionID:413614
Accordingtothelawofdiminishingreturns,doublingthenumberofsalespeopleforafirmwillmostlikelyresultin:

A) decreasingthetotalsalesofthefirmasaresultofcompetitionamongst
salespeople.
B) increasingthetotalsalesofthefirmandreducingtheaveragesalespersalesperson.

C) doublingthetotalsalesofthefirm.

Explanation

Thelawofdiminishingreturnsstatesthatasmoreofaresourceisaddedtoaproductionprocess,holdingotherresourceuse
constant,increasesinoutputwilleventuallydecrease.Therefore,asmoresalespeopleareaddedtheywillgeneratemore
salesatadecreasingrate.Totalsaleswillincreaseandtheaveragesalespersalespersonwilldecrease.

Question#137of185 QuestionID:413457

ThedemandfunctionforagoodisQD=2000125PanditssupplyfunctionisQS=400+75P.Atapriceof$10,themarket
forthisgoodexhibits:

A) excesssupply.
B) anequilibrium.
C) excessdemand.

Explanation

AtP=$10,QD=2000125(10)=750andQS=400+75(10)=350.Quantitydemandedisgreaterthanquantitysupplied
atthisprice,sothemarketexhibitsexcessdemand.

Question#138of185 QuestionID:413578

Inthelongrun,ifpriceisbelowaveragetotalcost(ATC)thefirmwill:

A) shutdown.

B) keeprunning.
C) coveritsvariablecosts.

Explanation

IfthepriceisbelowATCthenthefirmislosingmoney.IfthefirmbelievesthepricewillneverexceedATCtheonlywayto
eliminatefixedcostsistogooutofbusiness.

Question#139of185 QuestionID:472407

George'sApplianceCentersellsbigscreentelevisions.Whenthepriceofonemodelwasreducedfrom$2,450to$2,275,
monthlydemandincreasedfrom175to211units.Theelasticityofdemandisclosestto:
 A) 2.14

B) 2.53
C) 1.69

Explanation

Arcelasticityofdemand=Percentchangeinquantitydemanded/percentchangeinprice
Percentchangeinquantity=(211175)/[(211+175)/2]=0.187
Percentchangeinprice=(2,2752,450)/[(2,275+2,450)/2]=0.074
Arcelasticityofdemand=0.187/0.074=2.53

Question#140of185 QuestionID:413606

Ashopforemandeterminesthatanemployeewouldproducetwomoreunitsofoutputifheworkedoneadditionalhour.The
productcurrentlysellsfor$15.00perunitandthefirmisapricetaker.Whichofthefollowingchoicesmostaccurately
describestherelationshipbetweenthemarginalrevenue(MR)andmarginalrevenueproduct(MRP)fromtheadditionalhour
oflaborinput?

A) MRP=MR.
B) MR=$15andMRP<MR.

C) MRP>MR.

Explanation

Bydefinition,theMRistheadditiontototalrevenuefromsellingonemoreunitofoutput.TheMRPistherevenuefromselling
themarginalproduct,whichinthisexampleistwounits.ThereforetheMRPmustbegreaterthantheMR.

Question#141of185 QuestionID:413511

Ifapriceceilingisabovetheequilibriumpriceinagivenmarket,itseffectwillmostlikelybe:

A) asurplus.

B) ashortage.

C) nothing.

Explanation

Aceilingisonlyeffectiveifitisbelowtheequilibriumprice.Ifitisabovetheequilibriumprice,thenitshouldhavenoeffect.Iftheceiling
isbelowtheequilibriumprice,itwillproduceashortage.Insuchacase,suppliersdonotproduceasmuchasconsumerswishtobuyat
theceilingprice.

Question#142of185 QuestionID:413510

Newlegislationsettingapriceceilingwillmostlikelycause:
 A) adecreaseindemand.
B) amarketshortage.

C) amarketsurplus.

Explanation

Priceceilingsrestricttheproducerfromincreasingthesellingprice.Thelowerpricewillstimulatedemandbyconsumersat
thislowerprice.However,sinceproducerswillnotbeabletoincreasepricethereislittleincentiveforthemtoincreasesupply.
Hence,productionandsupplywillbelimitedatthepriceceilingleadingtoamarketshortage.

Question#143of185 QuestionID:413476

WhichofthefollowingstatementsbestdescribestheprincipaldifferencebetweenaVickreyauctionandothertypesofsealed
bidauctions?

A) InaVickreyauction,thewinnerpaysthepricebidbythesecondhighest
bidder.

B) AVickreyauctiondoesnotusesealedbids.
C) InaVickreyauction,thewinnerpaysthereservationprice.

Explanation

AVickreyauctionisasecondpricesealedbidauction,inwhichthewinnerpaysthepricebidbythesecondhighestbidder.
Thereservationpriceisthehighestpricethatabidderiswillingtopay.Inasecondpricesealedbidauction,abidder'soptimal
strategyistobidhisreservationprice.Becausehepaysthesecondhighestbid,thewinnerpayslessthanhisreservation
price.

Question#144of185 QuestionID:413488

Anexampleofapriceflooris:

A) ataxonceramictile.
B) aminimumpriceformilk.

C) rentcontrol.

Explanation

Apricefloorisaminimumonthepricethatsupplierscancharge.Suchfloorswereoncecommoninagriculturalmarkets.

Question#145of185 QuestionID:413526

Whendemandforagoodisinelastic,ahigherpricewill:

A) failtoreducethequantitydemandedforthegood.

B) leadtoanincreaseintotalexpendituresforthegood.
 C) havenoimpactonthedemandforthegood.

Explanation

Whendemandisrelativelyinelastic,consumersdonotreducetheirquantitydemandedverymuchwhenthepriceincreases.
Thatis,agivenpercentageincreaseinpriceresultsinasmallerpercentagereductioninquantitydemanded.Thus,total
expendituresonthegoodincrease."Failtoreducethequantitydemandedforthegood"isinaccuratebecausethatwouldonly
betrueifdemandwasperfectlyinelastic.

Question#146of185 QuestionID:413544

Aconsumer'sincomeis
1,000.IfthepriceofGoodMis
25andthepriceofGoodNis
30,thisconsumer'sbudgetlinemost
likelyincludesabundleof:

A) 24unitsofGoodMand13unitsofGoodN.
B) 26unitsofGoodMand12unitsofGoodN.
C) 22unitsofGoodMand15unitsofGoodN.

Explanation

Thebudgetlineincludesbundlesoftwogoodsthatjustexhaustaconsumer'sincome.Forabundleof22unitsofGoodMand
15unitsofGoodN,
2522+
3015=
1,000,whichisthisconsumer'sincome.Abundleof24unitsofGoodMand13units
ofGoodNdoesnotexhaustthisconsumer'sincomeandliesbelowthebudgetline:
2524+
3013=
990.Abundleof26
unitsofGoodMand12unitsofGoodNisunaffordabletothisconsumerandliesabovetheconsumer'sbudgetline:
2526+
3012=
1,010.

Question#147of185 QuestionID:413545

Aconsumerhasincomeof$100.IfthepriceofGoodLis$5andthepriceofGoodMis$10,whichofthefollowingbundlesof
GoodLandGoodMisoutsidetheconsumer'sbudgetconstraint?

A) 11unitsofGoodLand4unitsofGoodM.

B) 8unitsofGoodLand6unitsofGoodM.
C) 5unitsofGoodLand8unitsofGoodM.

Explanation

Abundleofgoodsthatliesoutsideaconsumer'sbudgetconstraintisunaffordabletothatconsumer.Thecostof5unitsof
GoodLand8unitsofGoodMis5$5+8$10=$105,whichismorethantheconsumer'sincome.Thecostof8unitsof
GoodLand6unitsofGoodMis8$5+6$10=$100.Thecostof11unitsofGoodLand4unitsofGoodMis11$5+4
$10=$95.Bothofthesebundlesarewithintheconsumer'sbudgetconstraint.

Question#148of185 QuestionID:485763

Underperfectcompetition,themarketshortrunsupplycurveisthe:
 A) sumofthequantitiesateachpricealongtheaveragetotalcostcurveforall
firmsinagivenindustry.

B) sumofthequantitiesateachpricealongthemarginalcostcurvesforallfirmsina
givenindustry.
C) averageofthequantitiesateachpricealongthemarginalcostcurveforallfirmsina
givenindustry.

Explanation

Theshortrunmarketsupplycurveisthehorizontalsumofthemarginalcostcurvesforallfirmsinagivenindustry.Itisthe
sumofallquantitiesfromallfirmsateachpricealongeachfirm'smarginalcostcurve.

Question#149of185 QuestionID:413563

Thedemandcurveforafirm'soutputisrepresentedbythefollowingtable:

Quantity 1 2 3 4 5
Priceperunit 12 11 10 9 8

Marginalrevenueforthefourthunitofoutputis:

A) 36.
B) 6.
C) 9.

Explanation

Unit1:Totalrevenue=112=12marginalrevenue=120=12.
Unit2:Totalrevenue=211=22marginalrevenue=2212=10.
Unit3:Totalrevenue=310=30marginalrevenue=3022=8.
Unit4:Totalrevenue=49=36marginalrevenue=3630=6.

Question#150of185 QuestionID:413547

Theequilibriumbundleofgoodsforaconsumeristhebundlethat:

A) isatthehighestpointontheconsumer'sbudgetline.

B) providesthemostutilitytotheconsumer.
C) istangenttothebudgetlineonthehighestattainableindifferencecurve.

Explanation

Theequilibriumbundleofgoodsisthebundleatwhichaconsumer'shighestattainableindifferencecurveistangenttothe
consumer'sbudgetline.Thisbundleprovidesmoreutilitytotheconsumerthananyotheraffordablebundle.Bundleson
higherindifferencecurveswouldprovidemoreutilitytotheconsumer,butthosebundlesareunaffordablegiventhe
consumer'sbudgetconstraint.
Question#151of185 QuestionID:413464

Astablemarketequilibriumisbestdescribedasoneinwhich:

A) excesssupplydrivespriceslowerandexcessdemanddrivespriceshigher.

B) thecurrentmarketpriceequalstheequilibriumprice.
C) thesupplycurveislesssteeplyslopedthanthedemandcurve.

Explanation

Stablemarketequilibriaaredefinedasthoseinwhichexcesssupplytendstodrivepriceslowerandexcessdemandtendsto
drivepriceshigher.Unstableequilibriaarecharacterizedbyadownwardslopingsupplycurvethatislesssteeplyslopedthan
thedemandcurve,sothatexcesssupplytendstodrivepricesupandexcessdemandtendstodrivepricesdown(further
awayfromtheequilibriumvalue).Thecurrentmarketpriceandtheequilibriumpricecanbeequalineitherstableorunstable
equilibria.

Question#152of185 QuestionID:413588

Theupwardslopingsegmentofalongrunaveragetotalcostcurverepresentstheexistenceof:

A) economiesofscale.
B) diseconomiesofscale.

C) efficienciesofscale.

Explanation

Diseconomiesofscaleoccuralongtheupwardslopingsegmentofthelongrunaveragetotalcostcurvewherecostsriseas
outputincreases.Theflatportionatthebottomofthelongrunaveragetotalcostscurverepresentsconstantreturnstoscale.

Question#153of185 QuestionID:413522

Ifagoodhaselasticdemand,asmallpercentagepriceincreasewillcause:

A) alargerpercentagedecreaseinthequantitydemanded.

B) alargerpercentageincreaseinthequantitydemanded.
C) asmallerpercentageincreaseinthequantitydemanded.

Explanation

Ifagoodhaselasticdemand,asmallpriceincreasewillcausealargerdecreaseinthequantitydemanded.Demandiselastic
whenthepercentagechangeinquantitydemandedislargerthanthepercentagechangeinprice.

Question#154of185 QuestionID:413497

Whichofthefollowingisleastlikelytobeconsideredanobstacletotheefficientallocationofaneconomy'sresources?
 A) Changesinconsumertastes.
B) Rentcontrols.
C) Taxes.

Explanation

Pricecontrolsandtaxesareobstaclestoallocativeefficiency.Rentcontrolsandminimumwagesareexamplesofprice
controls.Asopposedtobeingobstaclestotheefficientallocationofresources,changesinconsumertastesleadtothe
reallocationofsociety'sresources,producingadifferentmixofgoodsorservicesthatprovideincreasedbenefits.

Question#155of185 QuestionID:413468

Themarketforradiosconsistsof100consumers,eachofwhomhasthedemandfunction:

QDradio=40.4Pradio+0.0025Income+0.25Pnewspaper0.005Pbatteries

Atcurrentaverageprices,aradiocosts10,anewspapercosts1,andbatteriescost2.Averageincomeis1,000.The
marketdemandcurveforradiosismostaccuratelydescribedas:

A) 40040Pradio+0.25Income+25Pnewspaper0.5Pbatteries.

B) 67440Pradio.
C) 16.850.025QDradio.

Explanation

Aggregatingtheindividualdemandfunctionsintothemarketdemandfunctionweget:

QDradio=100(40.4Pradio+0.0025Income+0.25Pnewspaper0.005Pbatteries)

QDradio=40040Pradio+0.25Income+25Pnewspaper0.5Pbatteries

Substitutingaveragevaluesforallvariablesexceptpriceweget:

QDradio=40040Pradio+0.25(1,000)+25(1)0.5(2)

QDradio=40040Pradio+250+251

QDradio=67440Pradio

40Pradio=674QDradio

Solvingforpricegivesusthedemandcurve:

Pradio=16.850.025QDradio

Question#156of185 QuestionID:413584

Profitismaximizedatthequantityofoutputforwhichmarginalrevenueequalsmarginalcostunder:

A) perfectcompetition,butnotunderimperfectcompetition.
B) imperfectcompetition,butnotunderperfectcompetition.
 C) bothperfectcompetitionandimperfectcompetition.

Explanation

Allfirms,regardlessofmarketstructure,maximizeprofitattheoutputquantityforwhichmarginalrevenueequalsmarginal
cost.

Question#157of185 QuestionID:413489

Whichofthefollowingisthemostlikelyeffectofasubsidyinthemarketforcorn?

A) Thesupplycurveforcornwillshifttotheright.
B) Marginalcostswillbelessthanmarginalbenefit.

C) Theequilibriumquantityofcornwilldecrease.

Explanation

Asubsidycausesashiftrightwardinthesupplycurve(increaseinsupplyatagivenpricelevel)bytheamountofthesubsidy.
Theequilibriumquantitywillincreaseandthepricepaidbybuyerswilldecrease.Marginalcostwillexceedmarginalbenefit
andadeadweightlosswillresultfromoverproduction.

Question#158of185 QuestionID:413453

Withrespecttoademandcurveforanormalgood,anincreaseinconsumerincomesismostlikelytocause:

A) anincrease(shifttotheright)inthedemandcurve.
B) agreaterequilibriumquantitybutnoshiftinthedemandcurve.
C) adecrease(shifttotheleft)inthedemandcurve.

Explanation

Anincreaseinincomeswillincreasequantitydemandedateverypricelevel,whichwecanrepresentasashiftofademand
curvetotheright.Werepresentachangeinprice,holdingotherthingsequal,asmovementalongademandcurve.

Question#159of185 QuestionID:413449

Otherthingsequal,adecreaseinthepriceofagoodwill:

A) decreasethequantitydemanded.
B) notaffectthequantitydemanded.

C) increasethequantitydemanded.

Explanation

Otherthingsequal,consumersdemandagreaterquantityofagoodatalowerpricethantheydemandatahigherprice.
Question#160of185 QuestionID:413616

Thelawofdiminishingreturnsstatesthatatsomepointas:

A) lessofaresourcearedevotedtoproduction,holdingthequantityofother
inputsconstant,theoutputwilldecrease,butatanincreasingrate.

B) moreofaresourceisdevotedtoproduction,holdingthequantityofotherinputs
constant,atsomepointoutputwillbegintodecrease.
C) moreofaresourceisdevotedtoproduction,holdingthequantityofotherinputs
constant,theoutputwillincrease,butatadecreasingrate.

Explanation

Atlowlevelsofoutput,increasingmarginalreturnswillexistcorrespondingtothedownwardslopingportionofthemarginal
costcurve.Asmarginalcostsbegintoincreasediminishingmarginalreturnswilloccur.

Question#161of185 QuestionID:413478

Producersurplusisbestdescribedasthe:

A) excessquantitysuppliedrelativetoquantitydemanded.
B) amountbywhichpriceexceedsthecashcostofproduction.

C) excessofpriceovertheopportunitycostofproduction.

Explanation

Producersurplusisdefinedastheexcessofpriceovertheopportunitycost,notthecashcost,ofproduction.Excessquantity
suppliedrelativetoquantitydemandedrepresentsasurplusofthegoodinthemarket,butisnotreferredtoasproducer
surplus.

Question#162of185 QuestionID:413603

Assumethatoutputincreasedfrom1,550to1,850unitsperdayasaresultofincreasinglaborfrom200to210workers.The
marginalproductoflaborisclosestto:

A) 1.25unitsperdayperworker.

B) 1.55unitsperdayperworker.
C) 30unitsperdayperworker.

Explanation

Marginalproductistheadditionaloutputperadditionalunitofaninput(labor).Sinceoutputchangedby300unitsandlabor
changedby10workers,themarginalproductis300/10=30unitsperdayperworker.

Question#163of185 QuestionID:413444
Aninternalcombustionengineisbestdescribedasa(n):

A) finishedgood.
B) intermediategood.

C) factorofproduction.

Explanation

Enginesaremostlikelytobeconsideredintermediategoodsbecausetheyareusedintheproductionofsuchfinishedgoods
asmotorvehicles.Theyareunlikelytobeconsideredfinishedgoods,eventhoughconsumersmightoccasionallypurchase
them,becausetheirprimaryuseisintheproductionofothergoodsthataredrivenbyengines.

Question#164of185 QuestionID:413548

Givenachoicebetweenconsumingorangesandbeans,aconsumer'sequilibriumbundleofgoodsismostlikelyto:

A) haveequalquantitiesoforangesandbeanstomaintainequilibrium.

B) representthemostpreferredaffordablecombinationoforangesandbeans.
C) lieontheconsumer'shighestindifferencecurve.

Explanation

Aconsumer'sequilibriumbundleofgoodsrepresentsthehighestindifferencecurvethatistangenttoherbudgetlineof
affordablebundles.Theconsumerhashigherindifferencecurvesthanthis,buttheyconsistofunaffordablebundles.The
equilibriumbundledoesnotnecessarilyreflectequalquantitiesofthetwogoods.

Question#165of185 QuestionID:413465

Aprice"bubble"ismostlikelytoresultfrom:

A) increasesininputpricesthatdecreasesupply.
B) increasesinpricethatincreaseexpectedfutureprices.

C) asignificantincreaseconsumers'preferenceforagood.

Explanation

Pricebubblescanresultwhenpriceincreasesinthecurrentperiodincreaseexpectedfutureprices,whichcausesfurther
increasesincurrentprices.Atsomepointpricesbecomeunsustainablyhigh,thebubblebursts,andpricefallssharply.

Question#166of185 QuestionID:413446

Aninternalcombustionengineisbestdescribedasa(n):

A) factorofproduction.

B) intermediategood.
C) finishedgood.
Explanation

Enginesaremostlikelytobeconsideredintermediategoodsbecausetheyareusedintheproductionofsuchfinishedgoods
asmotorvehicles.Theyareunlikelytobeconsideredfinishedgoods,eventhoughconsumersmightoccasionallypurchase
them,becausetheirprimaryuseisintheproductionofothergoodsthataredrivenbyengines.

Question#167of185 QuestionID:413560

Whichofthefollowingisanexampleofanimplicitcost?

A) Rent.
B) Theopportunitycostofafirm'sequitycapital.

C) Laborsalaries.

Explanation

Implicitcostsincludetheopportunitycostofafirm'sequity.Explicitcostsaremeasurablecashflowsforoperatingexpenses.

Question#168of185 QuestionID:413451

Asupplyfunctionforleathershoesismostlikelytoinclude:

A) Averageincomeforallworkers.

B) Averagehourlywageforleatherworkers.
C) Priceofplasticshoes.

Explanation

Asupplyfunctionwilldependonthepriceofinputstoproductionofleathershoes,suchaswagesforleatherworkers.A
demandfunctionforleathershoeswilllikelydependon,amongotherfactors,thepriceofplasticshoes(asubstitute)and
averageincomeofallworkers(whowouldbeconsumersofshoes).

Question#169of185 QuestionID:413523

Foralineardemandcurve,atthepricewhereelasticityis2.0,reducingpriceswill:

A) increasetotalrevenueandwearenotatthepointofmaximumtotalrevenue.
B) decreasetotalrevenueandwearenotatthepointofmaximumtotalrevenue.

C) increasetotalrevenueandweareatthepointofmaximumtotalrevenue.

Explanation

Ifthepriceelasticityofdemandis2.0,thisindicatesthatthepercentagechangeinquantitydemandedistwicethepercentage
changeinprice.Thus,adecreaseinpricewillbemorethanoffsetbytheincreaseinquantity,andtotalrevenuewillincrease.
Wearenotatthepointofmaximumtotalrevenuewhichiswhereelasticityis1.0thepointofunitelasticdemand.
Question#170of185 QuestionID:413568

Afirm'sfactorsofproductionleastlikelyinclude:

A) finishedgoods.

B) rawmaterials.
C) manufacturedinputs.

Explanation

Factorsofproductionareresourcesafirmusestoproduceitsoutput,includingland,plantandequipment,labor,raw
materials,andmanufacturedinputs(intermediategoods).

Question#171of185 QuestionID:413583

Afirmoperatingunderperfectcompetitionwillmaximizeprofitsbyproducingadditionalunitsuntil:

A) priceequalsmarginalcost.
B) marginalrevenueexceedsmarginalcost.

C) totalrevenueisatitsmaximum.

Explanation

Firmsoperatingunderanymarketstructuremaximizeprofitsattheoutputquantityatwhichmarginalrevenueequalsmarginal
cost.Marginalrevenueequalspriceunderperfectcompetition.Thisisnotnecessarilythequantityatwhichtotalrevenueis
maximized.Ifmarginalrevenueexceedsmarginalcost,producingagreaterquantitywillincreaseprofits.

Question#172of185 QuestionID:413470

Thedemandandsupplyfunctionsforagoodareasfollows:
Quantitydemanded=1204price
Quantitysupplied=90+6price

Giventhesefunctions,excesssupplyisequalto:

A) 30atapriceof20.
B) 60atapriceof25.

C) 90atapriceof30.

Explanation

Tocalculateexcesssupplyorexcessdemand,substituteeachgivenpriceintothesupplyanddemandfunctions,then
determinethedifferencebetweenquantitysuppliedandquantitydemanded.

Price=20:QD=1204(20)=40QS=90+6(20)=30excessdemand=4030=10.
Price=25:QD=1204(25)=20QS=90+6(25)=60excesssupply=6020=40.
Price=30:QD=1204(30)=0QS=90+6(30)=90excesssupply=900=90.

Question#173of185 QuestionID:413600

Ifthelastunitofinputincreasestotalproductweknowthatthemarginalproductofthatinputis:

A) falling.

B) positive.
C) increasing.

Explanation

Aslongasmarginalproductispositive,totalproductwillincrease.Wewouldneedmoreinformationtodeterminewhether
marginalproductisfallingorincreasing.

Question#174of185 QuestionID:413540

EarlHakkimisindifferentbetweenconsuming10DVDsand5booksorconsuming8DVDsand6books.Theconditionofnon
satiationinutilitytheorypredictsthat:

A) Hakkimwouldalsobeindifferenttoconsuming6DVDsand7books.
B) bookshavetwiceasmuchutilityforHakkimasDVDs.

C) Hakkimwouldprefertoconsume11DVDsand5books.

Explanation

Theconditionofnonsatiationreferstotheassumptionthatconsumingmoreispreferabletoconsumingless.Thismeans
Hakkimwouldprefer11DVDsand5booksto10DVDsand5books.BecauseHakkimisindifferentbetween10DVDsand5
booksor8DVDsand6books,andprefers11DVDsand5booksto10DVDsand5books,wecanassumehealsoprefers
(getsmoreutilityfrom)11DVDsand5booksversus8DVDsand6books.Althoughtheotherstatementsmayormaynotbe
true,theydonotreflecttheconditionofnonsatiation.

Question#175of185 QuestionID:413555

Agoodisconsideredaninferiorgoodifitexhibitsanegative:

A) substitutioneffect.

B) incomeeffect.
C) elasticityofdemand.

Explanation

Theincomeeffectisnegativeforaninferiorgood.Anincreaseinincomeresultsinadecreaseinthequantitydemanded.
Question#176of185 QuestionID:413532

Whenhouseholdincomesgodownandthequantityofaproductdemandedgoesup,theproductis:

A) anecessity.

B) aninferiorgood.

C) anormalgood.

Explanation

Whenhouseholdincomesgodownandthequantitydemandedofaproductgoesup,theproductisaninferiorgood.Inferiorgoodsinclude
thingslikebustravelandmargarine.

Question#177of185 QuestionID:413601

Whichofthefollowingmostaccuratelydescribestheconditionthattypicallyexistswhenmarginalproductisatamaximum?

A) Averagevariablecostisataminimum.
B) Averageproductisataminimum.

C) Marginalcostisataminimum.

Explanation

Marginalproductisatamaximumwhenmarginalcostisataminimum.Atthecorrespondinglaborandoutputlevels,average
variablecostisdecreasingandaverageproductinincreasing.

Question#178of185 QuestionID:434233

Thepercentchangeindemandforagooddividedbythepercentchangeinthepriceofanothergoodisknownasthe:

A) incomeelasticityofdemand.

B) crosspriceelasticityofdemand.
C) priceelasticityofdemand.

Explanation

Question#179of185 QuestionID:413610

Afirmistryingtodeterminetheoptimalamountoflabortoemployinitsproductionprocess.Eachunitoflaborforthisprocess
coststhefirm$35.Apartialtableofthefirm'sshortrunoutputestimatesappearsbelow:

Laborinput, Marginal Total Marginal Marginal

units product product revenue revenueproduct

4 8 22 $10 $80
 5 7 29 $9 $63

6 6 35 $9 $54

7 4 39 $8 $32

8 2 41 $8 $16

9+ 0 41

Whichofthefollowingisleastlikelytobeaccurate?Thisfirm:

A) willproduce35unitsoftheproduct.
B) willemploythe7thunitoflabor.

C) experiencesdiminishingmarginalreturnsfromlaborovertheentirerangeshown.

Explanation

AprofitmaximizingfirmwillemployadditionalunitsoflaboraslongastheMRPoflaborisgreaterthanthecostofan
additionalunitoflabor.At7unitsoflaborinput,MRP=$32,whichislessthanthe$35costofoneunitoflabor.Thereforethe
firmwillnotemploythe7thunitoflaborandwillproduce35unitsofoutput.Marginalproductisdecreasingaslaborinput
increases,sothefirmisexperiencingdiminishingmarginalreturnsfromlabor.

Question#180of185 QuestionID:413597

Whichofthefollowingmostaccuratelydescribestherelationshipbetweentheslopeofafirm'slongrunaveragetotalcost
(LRATC)curveandscaleeconomies?

Downwardsloping Upwardsloping
segmentofLRATC segmentofLRATC

A) Diseconomiesofscale Economiesofscale

B) Economiesofscale Economiesofscale

C) Economiesofscale Diseconomiesofscale

Explanation

ThedownwardslopingsegmentoftheLRATCcostcurvecoverstheoutputrangewhereeconomiesofscaleexistbecause
perunitcostsdecreaseasoutputincreases.TheupwardslopingsegmentoftheLRATCcurveiswherediseconomiesofscale
arepresentbecausecostsriseasoutputincreases.

Question#181of185 QuestionID:413471

Thedemandandsupplycurvesforagoodareasfollows:
Price=5quantitydemanded+200
Price=3quantitysupplied+40

Whichofthefollowingstatementsaboutthesecurvesismostaccurate?
 A) Theequilibriumquantityis100.
B) Atapriceof70,excesssupplyis16.

C) Atapriceof130,excesssupplyis16.

Explanation

Attheequilibriumprice,quantitysuppliedequalsquantitydemanded:
3Q+40=5Q+200
8Q=160
Q=20,whichistheequilibriumquantity.

P=3(20)+40=100or,P=5(20)+200=100.Theequilibriumpriceis100.

Becauseapricebelow100resultsinexcessdemand,wecanruleouttheanswerchoice"Atapriceof70,excesssupplyis
16"andchoosethecorrectanswerwithnofurthercalculations.

Atapriceof130:
130=5QD+200
5QD=70
QD=14

130=3QS+40
3QS=90
QS=30

Excesssupplyatapriceof130=QSQD=3014=16.

Atapriceof70:
70=5QD+200
5QD=130
QD=26

70=3QS+40
3QS=30
QS=10

Excessdemandatapriceof70=QDQS=2610=16.

Question#182of185 QuestionID:485761

Astateenactsa$4,000pervehicletaxoneachvehiclepurchasedinthestate.Analysisshowsthatthesupplycurveis
inelasticandthedemandcurveiselastic.Ifthestateimposesthetaxonthepurchaser,theactualburdenwillbeborne:

A) primarilybytheconsumers.

B) primarilybytheproducers.
C) equallybyconsumersandproducers.

Explanation

Theactualburdenofthetaxdependsontherelativeelasticitiesofthesupplyanddemandcurves.Withademandcurvethat
ismoreelasticthanthesupplycurve,sellers(producers)bearmoreoftheactualtaxburden.
Question#183of185 QuestionID:413586

Afirmthatisexperiencingdiseconomiesofscaleshould:

A) shutdowninthelongrun.
B) decreaseitsplantsize.

C) decreaseoutputintheshortrun.

Explanation

Ifafirmisexperiencingdiseconomiesofscale,itshoulddecreaseitsplantsizetotheefficientscale,whichisthesizethat
minimizeslongrunaveragetotalcost.Plantsizecanbeadjustedinthelongrunbutnotintheshortrun.

Question#184of185 QuestionID:413559

HazelGreen,CFA,earned$90,000lastyearworkingasaderivativesanalyst.Sheisalsoaskilledwebpagedesigner.Green
couldearn$70,000peryearinthatoccupation,whichshehasdeterminedishernexthighestpayingalternative.The
differencebetweenGreen'sincomeasaderivativesanalystandherpotentialincomeasawebpagedesignerisbest
describedas:

A) economicrent.
B) marginalrevenueproduct.
C) opportunitycost.

Explanation

Economicrenttoaworkeristhedifferencebetweenwhatsheearnsandwhatshecouldearninhernexthighestpaying
alternativeemployment.Herpotentialearningsinhernexthighestvaluedemploymentisheropportunitycost.Marginal
revenueproduct(MRP)istherevenuefromsellingtheoutputofoneadditionalunitofaninput.AhighMRPmakesitpossible
foraworkertoearneconomicrent.

Question#185of185 QuestionID:413452

Ifthepriceofagoodincreases,themarketdemandcurveforthegood:

A) doesnotshift.

B) decreases(shiftstotheleft).
C) increases(shiftstotheright).

Explanation

Apricechangecausesmovementalongthedemandcurvetoadifferentequilibriumquantity,butdoesnotshiftthedemand
curve.