Multiple Choice

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

1. The phenomenon of scarcity stems from the fact that

a. most economies’ production methods are not very good.
b. in most economies, wealthy people consume disproportionate quantities of goods and services.
c. governments restrict production of too many goods and services.
d. resources are limited.

2. The terms equality and efficiency are similar in that they both refer to benefits to society. However
they are different in that
a. equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from
scarce resources.
b. equality refers to maximizing benefits from scarce resources and efficiency refers to uniform distribution
of those benefits.
c. equality refers to everyone facing identical tradeoffs and efficiency refers to the opportunity cost of the
benefits.
d. equality refers to the opportunity cost of the benefits and efficiency refers to everyone facing identical
tradeoffs.

3. It costs a furniture company $8,750 to produce 25 tables. The company’s total cost will be $9,125 if it
produces a 26th table. If the company produces 26 tables, then
a. its average cost is greater than its marginal cost.
b. its average cost and its marginal cost are equal.
c. its average cost is less than its marginal cost.
d. This cannot be determined from the information given.

4. In the simple circular-flow diagram, who buys the factors of production?

a. households only
b. firms only
c. both households and firms
d. neither households nor firms

5. In the simple circular flow diagram, the flow of money from the markets for goods and services to the
firms is called
a. spending.
b. revenue.
c. income.
d. wages, rent, and profit.

6. When an economy is operating inside its production possibilities frontier, we know that
a. there are unused resources or inefficiencies in the economy.
b. all of the economy’s resources are fully employed.
c. economic growth would have to occur in order for the economy to move to a point on the frontier.
d. in order to produce more of one good, the economy would have to give up some of the other good.

7. Which of the following trade-offs does the production possibilities frontier illustrate?
a. If an economy wants to increase efficiency in production, then it must sacrifice equality in consumption.
b. Once an economy has reached the efficient points on its production possibilities frontier, the only way of
getting more of one good is to get less of the other.
c. For an economy to consume more of one good, it must stop consuming the other good entirely.
d. For an economy to produce and consume goods, it must sacrifice environmental quality.

Figure 2-4

8. Refer to Figure 2-4. This economy has the ability to produce at

which point(s)?

a. Q, R, T, U
b. R, T, U
c. R, U
d. T

9. Which of the following characteristics is required for a perfectly competitive market?

a. The goods offered for sale are exactly the same.
b. There are so many buyers and sellers that no single buyer or seller has any influence over the market price.
c. It is difficult for new sellers to enter the market.
d. Both a and b are correct.

Table 4-2

Abby’s Brandi’s Carrie’s DeeDee’s

Quantity Quantity Quantity Quantity
Price Demanded Demanded Demanded Demanded
$12 2 1 3 4
$10 4 4 4 5
 $8 6 7 5 6
$6 8 8 4 7
$4 10 9 3 8
$2 12 10 2 9

10. Refer to Table 4-2. Whose demand does not obey the law of demand?
a. Abby’s
b. Brandi’s
c. Carrie’s
d. DeeDee’s

Figure 4-8
11. Refer to Figure 4-8. Suppose the figure shows the
market demand for laptop computers. Suppose the price of
wireless printers, a complementary good, decreases. Which
of the following changes would occur?

a. a movement along D2 from point A to point B

b. a movement along D2 from point B to point A
c. a shift from D1 to D2
d. a shift from D2 to D1

12. Assume Leo buys coffee beans in a competitive market. It follows that
a. Leo has a limited number of sellers from which to buy coffee beans.
b. Leo will negotiate with sellers whenever he buys coffee beans.
c. Leo can influence the price of coffee beans if he buys a large quantity of them.
d. None of the above is correct.

13. Assume the market for tennis balls is perfectly competitive. When one tennis ball producer exits the
market,
a. the price of tennis balls increases.
b. the price of tennis balls decreases.
c. the price of tennis balls does not change.
d. there is no longer a market for tennis balls.
Figure 4-18
14. Refer to Figure 4-18. At what price would there be an
excess supply of 200 units of the good?
a. $15
b. $20
c. $30
d. $35

Figure 4-25
The graph below pertains to the supply of paper to
colleges and universities.

15. Refer to Figure 4-25. All else equal, an increase in the use
of laptop computers for note-taking would cause a move
from
a. x to y.
b. y to x.
c. SA to SB.
d. SB to SA.

16. Refer to Figure 4-25. All else equal, an increase in the price of the pulp used in the paper production
process would cause a move from
a. x to y.
b. y to x.
c. SA to SB.
d. SB to SA.

17. Which of the following would not shift the demand curve for mp3 players?
a. a decrease in the price of mp3 players
b. a fad that makes mp3 players more popular among 12-25 year olds
c. an increase in the price of digital music downloads, a complement for mp3 players
d. a decrease in the price of satellite radio, a substitute for mp3 players

18. For a good that is a necessity,

a. quantity demanded tends to respond substantially to a change in price.
b. demand tends to be inelastic.
c. the law of demand does not apply.
d. All of the above are correct.
Figure 5-1
19. Refer to Figure 5-1. Between point A and point B,
price elasticity of demand is equal to
a. 0.33.
b. 0.67.
c. 1.5
d. 2.67.

20. Elasticity of demand is closely related to the slope of the demand curve. The less responsive buyers
are to a change in price, the
a. steeper the demand curve will be.
b. flatter the demand curve will be.
c. further to the right the demand curve will sit.
d. closer to the vertical axis the demand curve will sit.

21. If the demand for textbooks is inelastic, then an increase in the price of textbooks will
a. increase total revenue of textbook sellers.
b. decrease total revenue of textbook sellers.
c. not change total revenue of textbook sellers.
d. There is not enough information to answer this question.

Scenario 5-4
The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are
considered to be normal goods by a majority of consumers. Suppose that a large income tax increase
decreases the demand for both goods by 10%.
22. The equilibrium quantity will
a. increase in both the aged cheddar cheese and bread markets.
b. increase in the aged cheddar cheese market and decrease in the bread market.
c. decrease in the aged cheddar cheese market and increase in the bread market.
d. decrease in both the aged cheddar cheese and bread markets.

23. Refer to Scenario 5-4. The change in equilibrium quantity will be

a. greater in the aged cheddar cheese market than in the bread market.
b. greater in the bread market than in the aged cheddar cheese market.
c. the same in the aged cheddar cheese and bread markets.
d. Any of the above could be correct.

Figure 6-2
24. Refer to Figure 6-2. The price ceiling
a. is binding.
b. causes a shortage.
c. causes the quantity demanded to exceed the quantity
supplied.
d. All of the above are correct.

Figure 6-11
25. Refer to Figure 6-11. If the government imposes a
price ceiling at $6, it would be
a. binding if market demand is Demand A or Demand
B.
b. non-binding if market demand is Demand A or
Demand B.
c. binding if market demand is Demand A and non-
binding if market demand is Demand B.
d. non-binding if market demand is Demand A and
binding if market demand is Demand B.

26. Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor
of $3 per tube.As a result of the price floor,
a. quantity demanded decreases.
b. quantity supplied increases.
c. there is a surplus.
d. All of the above are correct.

Table 7-3
The only four consumers in a market have the following willingness to pay for a good:
Buyer Willingness to Pay
Carlos $15
Quilana $25
Wilbur $35
Ming-la $45
27. Refer to Table 7-3. If the price is $20, then consumer surplus in the market is
a. $20, and Wilbur and Ming-la purchase the good.
b. $45, and Carlos and Quilana purchase the good.
c. $45, and Quilana, Wilbur, and Ming-la purchase the good.
d. $55, and Carlos, Wilbur, and Ming-la purchase the good.

28. Refer to Table 7-3. Who experiences the largest loss of consumer surplus when the price of the
good increases from $20 to $22?
a. Quilana
b. Wilbur
c. Ming-la
d. All three buyers experience the same loss of consumer surplus.

Figure 7-11
29. Refer to Figure 7-11. If the supply curve is S, the demand
curve is D, and the equilibrium price is $100, what is the
producer surplus?
a. $625
b. $1,250
c. $2,500
d. $5,000

30. In a market, the marginal buyer is the buyer

a. whose willingness to pay is higher than that of all other buyers and potential buyers.
b. whose willingness to pay is lower than that of all other buyers and potential buyers.
c. who is willing to buy exactly one unit of the good.
d. who would be the first to leave the market if the price were any higher.

31. Consumer surplus is the

a. amount of a good consumers get without paying anything.
b. amount a consumer pays minus the amount the consumer is willing to pay.
c. amount a consumer is willing to pay minus the amount the consumer actually pays.
d. value of a good to a consumer.

32. A tax on a good

a. raises the price that buyers effectively pay and raises the price that sellers effectively receive.
b. raises the price that buyers effectively pay and lowers the price that sellers effectively receive.
c. lowers the price that buyers effectively pay and raises the price that sellers effectively receive.
d. lowers the price that buyers effectively pay and lowers the price that sellers effectively receive

33. Taxes cause deadweight losses because taxes

a. reduce the sum of producer and consumer surpluses by more than the amount of tax revenue.
b. prevent buyers and sellers from realizing some of the gains from trade.
c. cause marginal buyers and marginal sellers to leave the market, causing the quantity sold to fall.
d. All of the above are correct.

Figure 8-12
34. Refer to Figure 8-12. Suppose a $3 per-unit tax is placed
on this good. The per-unit burden of the tax on buyers is
a. $1.
b. $2.
c. $3.
d. $4.

35. When a country is on the downward-sloping side of the

Laffer curves, a cut in the tax rate will
a. decrease tax revenue and decrease the deadweight loss.
b. decrease tax revenue and increase the deadweight loss.
c. increase tax revenue and decrease the deadweight loss.
d. increase tax revenue and increase the deadweight loss.

36. When the nation of Duxembourg allows trade and becomes an importer of software,
a. residents of Duxembourg who produce software become worse off; residents of Duxembourg who buy
software become better off; and the economic well-being of Duxembourg rises.
b. residents of Duxembourg who produce software become worse off; residents of Duxembourg who buy
software become better off; and the economic well-being of Duxembourg falls.
c. residents of Duxembourg who produce software become better off; residents of Duxembourg who buy
software become worse off; and the economic well-being of Duxembourg rises.
d. residents of Duxembourg who produce software become better off; residents of Duxembourg who buy
software become worse off; and the economic well-being of Duxembourg falls.

Scenario 13-11
Walter builds birdhouses. He spends $5 on the materials for each birdhouse. He can build one in 30
minutes. He is semi-retired but earns $8 per hour at the local hardware store. He can sell a birdhouse for
$20 each.
37. Refer to Scenario 13-11. An economist would calculate the total cost for one birdhouse to be
a. $5.
b. $8.
c. $9.
d. $13.

Table 13-2
Number of Total Marginal
Workers Output Product
0 0 --
1 300
2 500
3 600
4 650
38. Refer to Table 13-2. What is the marginal product of the first worker?
a. 300 units
b. 200 units
c. 100 units
d. 50 units

Figure 13-9
The figure below depicts average total cost
functions for a firm that produces automobiles.

39. Refer to Figure 13-9. Which curve represents the

long-run average total cost?
a. ATCA
b. ATCB
c. ATCC
d. ATCD

40. Refer to Figure 13-9. The firm experiences economies of scale at which output levels?
a. output levels less than M
b. output levels between M and N
c. output levels greater than N
d. All of the above are correct as long as the firm is operating in the long run.

41. Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the market for
butter is generally considered to be competitive, LML does not
a. choose the quantity of butter to produce.
b. set marginal revenue equal to marginal cost to maximize profit.
c. have any fixed costs of production.
d. choose the price at which it sells its butter.

Figure 14-2
Suppose a firm operating in a competitive market has the following cost curves:
42. Refer to Figure 14-2. If the market price is Pa, in the short
run the firm will earn
a. positive economic profits.
b. negative economic profits but will try to remain open.
c. negative economic profits and will shut down.
d. zero economic profits.

Scenario 14-2
Assume a perfectly competitive firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's
marginal cost equals $20 and its average total cost equals $25. The firm sells its output for $30 per unit.
43. Refer to Scenario 14-2. To maximize its profit, the firm should
a. increase its output.
b. continue to produce 1,000 units.
c. decrease its output but continue to produce.
d. shut down.

44. Refer to Scenario 14-2. At Q = 999, the firm's total costs equal
a. $24,970.
b. $24,975.
c. $24,980.
d. $25,025.

45. Microsoft faces very little competition from other firms for its Windows software. Why isn’t the price
of the software $1,000 per copy?
a. because the government would not allow such a high price
b. because stockholders would not allow such a high price
c. because the company would sell so few copies that they
would earn higher profits by selling at a lower price
d. All of the above are correct.

Figure 15-20
46. Refer to Figure 15-20. The consumer surplus at the monopolist’s profit maximizing price is
a. $450.
b. $900.
c. $1,350.
d. $2,025.

Figure 15-9

47. Refer to Figure 15-9. To maximize its profit, a

monopolist would choose which of the following
outcomes?
a. 100 units of output and a price of $20 per unit
b. 100 units of output and a price of $40 per unit
c. 150 units of output and a price of $30 per unit
d. 200 units of output and a price of $40 per unit

Figure 16-5

48. Refer to Figure 16-5. Which of the graphs

depicts a short-run equilibrium that will
encourage the entry of other firms into a
monopolistically competitive industry?
a. panel a
b. panel b
c. panel c
d. panel d

49. Refer to Figure 16-5. Panel b is consistent

with a firm in a monopolistically competitive
market that is
a. not in long-run equilibrium.
b. in long-run equilibrium.
c. producing its efficient scale of output.
d. earning a positive economic profit.

Figure 16-13
50. Refer to Figure 16-13. Which of the following areas
represents the profit for this profit maximizing
monopolistically competitive firm?
a. BCHG
b. BCIJ
c. GHIJ
d. 0BCL

Figure 16-4

51. Refer to Figure 16-4. The firm in this figure is

monopolistically competitive. This firm
a. is operating in the long run.
b. is earning a short-run economic profit.
c. is incurring a short-run loss.
d. The answer cannot be determined from the information given.

52. Refer to Figure 16-4. At the profit-maximizing, or loss-

minimizing, output level, the firm in this figure has total costs of approximately
a. $12,000.
b. $18,000.
c. $21,000.
d. $24,000.

53. As a group, oligopolists would always earn the highest profit if they would
a. produce the perfectly competitive quantity of output.
b. produce more than the perfectly competitive quantity of output.
c. charge the same price that a monopolist would charge if the market were a monopoly.
d. operate according to their own individual self-interests.

Table 17-17
This table shows a game played between two firms, Firm A and Firm B. In this game each firm must
decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as
(Profit for Firm A, Profit for Firm B).

Firm B

Q=2 Q=3

Q=2 (10, 10) (8, 12)

Firm A
Q=3 (12, 8) (6, 6)

54. Refer to Table 17-17. In this game,

a. neither player has a dominant strategy.
b. both players have a dominant strategy.
c. Firm A has a dominant strategy, but Firm B does not have a dominant strategy.
d. Firm B has a dominant strategy, but Firm A does not have a dominant strategy.

Table 17-24
Two firms are considering going out of business and selling their assets. Each considers what happens if
the other goes out of business. The payoff matrix below shows the net gain or loss to each firm.

Firm A

Stays in business Sells business

A gains $9 million A gains $7 million

Stays in business
B gains $7million B gains $15 million
Firm B
A gains $15 million A gains $1 million
Sells business
B gains $8 million B gains $3 million

55. Refer to Table 17-24. What is the Nash equilibrium?

a. A and B both stay in business
b. A stays in business, B sells
c. B stays in business, A sells
d. Both A and B sell
56. The profit-maximizing rule for a firm in a monopolistically competitive market is to always select the
quantity at which
a. marginal revenue is equal to marginal cost.
b. average total cost is equal to marginal revenue.
c. average total cost is equal to price.
d. average revenue exceeds average total cost.

57. Which of the following is not a characteristic of a monopoly?

a. the seller has market power
b. one seller
c. free entry and exit
d. a product without close substitutes

58. When a single firm can supply a product to an entire market at a lower cost than could two or more
firms, the industry is called a
a. resource industry.
b. exclusive industry.
c. government monopoly.
d. natural monopoly.

59. A special kind of imperfectly competitive market that has only two firms is called
a. a two-tier competitive structure.
b. an incidental monopoly.
c. a doublet.
d. a duopoly.

60. An agreement among firms in a market about quantities to produce or prices to charge is called
a. collusion.
b. Nash equilibrium
c. dominant strategy.
d. behavioral economics.

61. The fundamental source of monopoly power is

a. barriers to entry.
b. profit.
c. decreasing average total cost.
d. a product without close substitutes.

62. What is the shape of the monopolist’s marginal revenue curve?

a. a downward-sloping line that is identical to the demand curve
b. a downward-sloping line that lies below the demand curve
c. a horizontal line that is identical to the demand curve
d. a horizontal line that lies below the demand curve

63. Which of the following is a characteristic of a competitive market?

a. There are many buyers but few sellers.
b. Many firms have market power because they own patents.
c. Buyers and sellers are price takers..
d. Firms sell differentiated products.

64. In a perfectly competitive market,

a. no one seller can influence the price of the product.
b. price exceeds marginal revenue for each unit sold.
c. average revenue exceeds marginal revenue for each unit sold.
d. All of the above are correct.

65. Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal
revenue of $8. What would be the firm's total revenue if it instead produced and sold 4 units of output?
a. $4
b. $8
c. $32
d. $64