BAM 040 CFE

Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. The curve which summarizes the total quantity producers are willing and able to produce at differing
prices is the:
a. market demand curve
b. consumer surplus curve
c. average cost curve
d. market supply curve
2. Suppose there is an increase in input prices. We would expect supply
a. to increase
b. to decrease
c. to remain unchanged
d. to either increase or decrease
3. Which of the following is an application of supply and demand analysis?
a. Understanding changing world economic conditions and their effects on prices
b. Evaluating the effects of government price controls on the agricultural industry
c. Determining how taxes affect aggregate consumption spending patterns
d. all of the above
4. As more firms enter an industry:
a. accounting profits increase.
b. economic profits decrease.
c. prices rise.
d. None of the statements associated with this question are correct
5. What is the marginal net benefit of producing the fourth unit?
No. Units Produced Total Revenue Total Costs
0 0 0
1 100 50
2 180 110
3 250 180
4 290 270
5 310 380

a. - 50
b. 0
c. 60
d. 40
6. If marginal costs exceed marginal benefits, then:
a. the firm ends up with a net loss.
b. the firm's average costs exceed average benefits.
c. the firm should decrease its production level.
d. none of the statements associated with this question are correct.
7. Which of the following can explain an increase in the demand for housing in retirement communities?
a. a drop in real estate prices
b. an increase in the population of the elderly
c. a drop in the average age of retirees
d. mandatory government legislation
8. Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. If aM is negative, then good y is:
(M stands for income)
a. a normal good
b. an inferior good
c. a complement
d. a substitute
9. Suppose that good X is a substitute for good Y. Then an increase in the price of good Y leads to
a. an increase in the demand for good x.
b. a decrease in the demand for good x.
c. a decrease in the supply of good x.
d. an increase in the supply of good x.
10. The demand function:
a. describes how much of good x will be purchased at the alternative price of good x, given all the
other variables being constant.
b. recognizes that the quantity of a good consumed depends on its price and demand shifters.
c. shows the relationship between the quantity demanded of x and variables other than its price.
d. does not include expectations
11. For a wood furniture manufacturer, an increase in the cost of lumber will cause the supply curve to:
a. become flatter.
b. become steeper.
c. shift to the left.
d. shift to the right.
12. Which of the following will result in a DECREASE in demand (i.e., a leftward shift of the demand curve)?
a. An increase in income, if the good is normal.
b. A decrease in the price of a complement to the good.
c. An increase in the price of a substitute for the good.
d. None of the above
13. If the price of this good is $20, what quantity will be demanded?

a. 5 units
b. 10 units
c. 15 units
d. 20 units
14. If the number of buyers in the market decreases, the
a. demand in the market will decrease
b. supply in the market will increase
c. demand in the market will increase.
d. supply in the market will decrease
15. According to the law of demand,
a. there is a positive relationship between quantity demanded and price
b. as the price rises, demand will shift to the left
c. there is a negative relationship between quantity demanded and price
d. as the price rises, demand will shift to the right
16. In Porter's Five Forces, the 'threat of new entrants' relates to:
a. Barriers to entry
b. Substitutes
c. Switching costs
d. Buyer power
17. A substitute product or service is:
a. A competitor's product or service.
b. An alternative way of meeting the same need.
c. A new entrant into the industry.
d. A less attractive way of meeting the same need.
18. The opportunity cost of any action is
a. all the possible alternatives forgone
b. the best alternative forgone.
c. the time required but not the monetary cost.
d. the monetary cost but not the time required.
19. The opportunity cost of an item is
a. what you give up to get that item.
b. always equal to the dollar value of the item.
c. always less than the dollar value of the item.
d. the number of hours needed to earn the money to buy it.
20. Which of the following is the best definition of managerial economics? Managerial economics is
a. a distinct field of economic theory.
b. a field that applies economic theory and the tools of decision science.
c. a field that combines economic theory and mathematics.
d. none of the above.
21. If Diane receives an increase in her pay, we would expect Diane’s demand for
a. each good to remain unchanged
b. for inferior goods to increase
c. for luxury goods to decrease.
d. for normal goods to increase.
22. Which of the following is consistent with the law of demand?
a. A decrease in the price of a gallon of milk causes a decrease in the quantity of milk demanded.
b. An increase in the price of a soda causes a decrease in the quantity of soda demanded.
c. An increase in the price of a tape causes an increase in the quantity of tapes demanded.
d. A decrease in the price of juice causes no change in the quantity of juice demanded.
23. People come to expect that the price of a gallon of gasoline will rise next week. As a result,
a. next week's supply of gasoline decreases.
b. the price of a gallon of gasoline falls today.
c. today's supply of gasoline increases.
d. today's demand for gasoline increases.
24. Suppose that Bob gets 40 units of utility when he consumes 2 hot dogs and 3 sodas and he gets 40
units of utility when he consumes 3 hot dogs and 1 soda. Then,
a. Bob must like hot dogs more than soda.
b. Bob must like soda more than hot dogs.
 c. these two combinations of hot dogs and soda must lie on the same indifference curve.
d. these two combinations of hot dogs and soda must lie on the same budget line.
25. The vertical intercept of the individual’s budget line is equal to
a. the price of the good measured on the vertical axis divided by the individual’s income.
b. the price of the good measured on the horizontal axis divided by the individual’s income.
c. the individual’s income divided by the price of the good measured on the vertical axis.
d. the individual’s income divided by the price of the good measured on the horizontal axis.
26. Reb buys fishing lures and steaks. If his budget does not change and the price of a fishing lure
decreases, the maximum number of fishing lures he can purchase ________ and the maximum number
of steaks he can purchase ________.
a. increases; decreases
b. does not change; does not change
c. decreases; increases
d. increases; does not change
27. Juan's marginal utility from strawberries is 200 and his marginal utility from cream is 100. Juan spends
all his budget. The price of strawberries is $5 per pound and the price of cream is $5 per pint. To
maximize his utility, Juan should
a. buy less cream and more strawberries.
b. buy less cream and fewer strawberries.
c. buy more cream and fewer strawberries.
d. buy more cream and more strawberries.
28. Suppose that Misty likes pizza and hotdogs. If her marginal utility per dollar from pizza is 6 and from
hotdogs it is 5, Misty
a. could increase her total utility by buying more hotdogs and less pizza.
b. must obtain more income in order to reach her consumer equilibrium.
c. is maximizing her marginal utility.
d. could increase her total utility by buying more pizza and fewer hotdogs.
29. As a consumer moves away from the origin onto higher indifference curves, what happens?
a. The consumer reaches less preferred combinations of goods.
b. The consumer reaches more affordable combinations of goods.
c. The consumer reaches more preferred combinations of goods.
d. Nothing
30. The difference between a price increase and a decrease in income is that:
a. a decrease in income does not affect the slope of the budget line, while an increase in price
does change the slope.
b. a price increase does not affect the consumption of other goods, while a decrease in income
does.
c. a price increase will increase real income, while a decrease in income will increase real income.
d. None of the preceding statements is correct.
31. Assume that the price elasticity of demand is −2 for a certain firm's product. If the firm raises price, the
firm's managers can expect total revenue to:
a. decrease.
b. increase.
c. remain constant.
d. either increase or remain constant.
32. If apples have an own price elasticity of −1.2 we know the demand is:
a. unitary.
b. indeterminate.
c. elastic.
 d. inelastic.
33. The demand curve for a good is horizontal when it is:
a. a perfectly inelastic good.
b. a unitary elastic good.
c. a perfectly elastic good.
d. an inferior good.
34. The elasticity which shows the responsiveness of the demand for a good due to changes in the price of
a related good is the:
a. own price elasticity.
b. income elasticity.
c. log-linear elasticity.
d. cross-price elasticity.
35. If the cross-price elasticity between ketchup and hamburgers is −1.2, a 4 percent increase in the price
of ketchup will lead to a 4.8 percent:
a. drop in quantity demanded of ketchup.
b. drop in quantity demanded of hamburgers.
c. increase in quantity demanded of ketchup.
d. increase in quantity demanded of hamburgers.
36. If the income elasticity for lobster is 0.4, a 40 percent increase in income will lead to a:
a. 10 percent drop in demand for lobster.
b. 16 percent increase in demand for lobster.
c. 20 percent increase in demand for lobster.
d. 4 percent increase in demand for lobster.
37. If the price of pork chops falls from $8 to $6, and this leads to an increase in demand for apple sauce
from 100 to 140 jars, what is the cross-price elasticity of apple sauce and pork chops at a pork chop
price of $6?
a. −1.17
b. 2.71
c. 0.42
d. −0.86
38. Suppose you produce wooden desks, and government legislation protecting the spotted owl has made
it more expensive for you to purchase wood. What do you expect to happen to the equilibrium price
and quantity of wooden desks?
a. Price and quantity will increase.
b. Price will increase but quantity will decrease.
c. Price and quantity will decrease.
d. Price will decrease but quantity will increase.
39. Producer surplus is the:
a. area above the supply curve but below the demand curve.
b. area above the supply curve but below the market price of the good.
c. minimum amount required by a producer for producing the good.
d. maximum amount a producer can collect from consumers.
40. Competitive market equilibrium:
a. is determined by the intersection of the market demand and supply curves.
b. implies that quantity supplied is sufficiently larger than quantity demanded.
c. is determined by the intersection of the excess demand and excess supply curves.
d. implies that quantity demanded is sufficiently larger than quantity supplied.
41. The minimum wage:
a. is an example of a price floor.
 b. leads to an increase in the number of people employed in unskilled jobs.
c. leads to a decrease in the number of people employed in skilled jobs.
d. causes an increase in social welfare.
42. Graphically, an increase in the number of vegetarians will cause the demand curve for tofu (a meat
substitute) to:
a. shift rightward.
b. shift leftward.
c. become flatter.
d. become steeper.
43. Consider a market characterized by the following inverse demand and supply functions: P X = 10 − 2QX
and PX = 2 + 2QX. An $8 per unit price floor will result in a:
a. shortage of 1 unit
b. surplus of 2 units.
c. shortage of 3 units.
d. surplus of 3 units.
44. Which of the following statements is true?
[Statement 1] The demand for inferior good increases when the income increases.
[Statement 2] The tendency in most markets is for price to deviate away from equilibrium, and for
quantity to remain in equilibrium most of the time.
a. Statement 1
b. Statement 2
c. Both Statements are true.
d. None of the Statements is true.
45. Which of the following statements is true?
[Statement 1] When supply and demand both increases, equilibrium price will always increase.
[Statement 2] An increase in supply, accompanied by an increase in demand always leads to an
increase in equilibrium quantity.
a. Statement 1
b. Statement 2
c. Both Statements are true.
d. None of the Statements is true.
46. Which of the following statements is true?
[Statement 1] A price ceiling is an imposed price above equilibrium price.
[Statement 2] When the income of an individual increases and his consumption for a product xyz
decreases, this product is said to be a normal good.
a. Statement 1
b. Statement 2
c. Both Statements are true.
d. None of the Statements is true.
47. Which of the following statements is true?
[Statement 1] If the resulting price elasticity of demand is greater than 1 then the product is said to
have an elastic demand
[Statement 2] When the demand for product x decreases as the price of product y increases, the said
products are considered as substitutes.
a. Statement 1
b. Statement 2
c. Both Statements are true.
d. None of the Statements is true.
48. Which of the following statements is true?
 [Statement 1] High definition televisions sets can be considered a luxury good.
[Statement 2] Artificial shortage can happen if supplier or sellers will hoard the supply of the product.
a. Statement 1
b. Statement 2
c. Both Statements are true.
d. None of the Statements is true.
49. Which of the following is NOT a pure public good?
a. Clean air
b. National defense
c. Telephones
d. All of the statements associated with this question are pure public goods.
50. When firms have an incentive to exit a competitive market, their exit will
a. necessarily raise the costs of firms that remain in the market.
b. lower market price.
c. reduce demand for the product.
d. raise profits for firms that remain in the market.
51. As the degree of product differentiation increases among the products sold in a monopolistically
competitive industry, which of the following occurs?
a. The cost of production falls.
b. The amount of marketing expenditures decreases for each firm.
c. The demand curve for each seller's product becomes more horizontal.
d. Each seller's demand becomes more inelastic
52. Recently in a small city, building contractors lobbied the city council to pass a law requiring all people
working on residential dwellings be licensed by the city. Why would the contractors lobby for this
requirement?
a. to reduce the cost of building dwellings
b. There is no good explanation for this type of lobbying.
c. to guarantee that work on dwellings is of high quality
d. to create a legal barrier to entry
53. The presence of government in the market leads to:
a. benefits at no cost to society.
b. rent seeking.
c. externalities.
d. adverse selection.
54. Which of the following explains why big business typically spends more on rent-seeking activities than
consumers?
a. Lobbying is a public good to consumers.
b. Lobbying is a public good to businesses.
c. Labor unions in the involved firms.
d. Lobbying is a public good to businesses and labor unions in the involved firms.
55. Rent seeking:
a. involves resources paid to politicians to enhance one group at the expense of another.
b. results in less monopoly power.
c. results in externalities.
d. None of the statements are correct.
56. In the absence of price regulation, a monopolist:
a. charges a price below MR.
b. charges a price above MC.
c. charges a price equal to MR.
 d. charges a price above MC and equal to MR.
57. If the absolute value of the own price elasticity of steak is 0.4, a decrease in price will lead to:
a. a reduction in total revenue.
b. an increase in total revenue.
c. no change in total revenue.
d. None of the preceding statements is correct.
58. Demand is more inelastic in the short term because consumers:
a. are impatient.
b. have no time to find available substitutes.
c. are present-oriented.
d. None of the preceding statements is correct.
59. If a consumer's income decreases, what will happen to the budget line?
a. It will shift outward.
b. It will become steeper.
c. It will become flatter.
d. It will shift inward.
60. Some individuals choose to undertake risky prospects while others choose safer ones because they
have different:
a. degrees of transitivity.
b. marginal rates of substitution between risk and reward.
c. income elasticities.
d. marginal utilities.
61. Suppose the production function is given by Q = 3K + 4L. What is the average product of capital when 5
units of capital and 10 units of labor are employed?
a. 3
b. 4
c. 11
d. 45
62. If a firm's production function is Leontief and the wage rate goes up, the:
a. firm must use more labor in order to minimize the cost of producing a given level of output.
b. firm must use more capital in order to minimize the cost of producing a given level of output.
c. firm must use less labor in order to minimize the cost of producing a given level of output.
d. cost minimizing combination of capital and labor does not change
63. Isoquants are normally drawn with a convex shape because:
a. inputs are perfectly substitutable.
b. inputs are perfectly complementary.
c. inputs are not perfectly substitutable.
d. inputs are not perfectly complementary
64. In order to minimize the cost of producing a given level of output, a firm manager should use more
inputs when:
a. that input’s price rises.
b. that input’s price falls.
c. that input’s price remains the same.
d. the prices of other inputs fall.
65. Which cost measures the pollution cost to society?
a. Internal cost
b. External cost
c. Social cost
d. External cost and social cost
66. Which of the following statements is NOT true in the presence of externalities?
a. Social marginal cost equals the sum of internal and external marginal costs.
b. A competitive industry generally produces more than a monopoly.
c. A competitive industry always produces more than the socially efficient level of output.
d. A monopoly always produces more than the socially efficient level of output.
67. If a firm has been proven liable for a false ad, it has to:
a. terminate the false ad.
b. recall any product with the false claim on it.
c. compensate more than the damage it has caused.
d. All of the statements associated with this question are correct.
68. As additional consumers obtain the benefits of a pure public good, such as national defense, the
benefits to the existing consumers will:
a. decrease.
b. increase.
c. stay the same.
d. increase in the short run, but decrease in the long run.
69. In producing the efficient amount of a public good, government should take into account:
a. only the demand from high-demand consumers.
b. only the demand from low-demand consumers.
c. the vertical sum of all individual inverse demand curves.
d. the horizontal sum of all individual inverse demand curves.
70. The main purpose of antitrust policy is to:
a. reduce market power.
b. control negative externalities.
c. help make information easily obtainable for producers and consumers.
d. All of the statements associated with this question are correct.