1. Accounting profit is often an unsatisfactory performance measure from an economic point of view because it:
A.does not consider depreciation.
B.does not consider the opportunity costs of equity capital.
C.considers marginal costs rather than average costs.
A B C
B
Accounting profit is often an unsatisfactory performance measure from an economic point of view because accounting costs generally do not include the opportunity costs of equity capital. Accounting costs do reflect the cost of depreciation and taxes.
2. Which of the following statements regarding economic costs is most accurate?
A.Sunk costs involve setting aside payments to retire long-term debt.
B.In the long run, expected average marginal cost is the most relevant cost to the firm.
C.Fixed costs are not a consideration in the short run operating decision, but must be considered in the long run.
A B C
C
In the short run, the decision to operate is based on whether price covers average variable costs. In the long run, average fixed costs must be considered as well. Sunk costs are historical costs. Sinking funds are established to retire long-term debt. The marginal revenue from selling an additional unit of output must be at least as great as its marginal cost of production.
3. The law of diminishing returns states that for a given production process, as more and more of a resource (such as labor) are added, holding the quantities of other resources fixed:
A.cost declines at an increasing rate.
B.cost declines at a decreasing rate.
C.output increases at a decreasing rate.
A B C
C
The law of diminishing returns states that for a given production process, as more and more resources (such as labor) are added holding the quantities of other resources fixed, output in creases at a decreasing rate. This occurs because, at some point, adding more workers results in inefficiencies.
4. Which of the following describes a market for goods or services that operates outside the legal system, trading at prices that exceed legally imposed price ceilings?
A.An incidental market.
B.A black market.
C.A utilitarian market.
A B C
B
A black market is a market where trading takes place for legally prohibited goods or at prices that exceed legally imposed ceiling prices.
5. The free-rider problem, an obstacle to efficiency, is most likely associated with:
A.monopolies
B.public goods
C.subsidies and quotas
A B C
B
Explain how resources move to the most efficient allocation, the obstacles to achieve efficiency, and whether or not competitive markets use resources efficiently public goods can be consumed simultaneously by everyone and it is not in each person's interest to buy her or his share of a public good.
6. At a fixed level of capital, output increases as the quantity of labor increases, but at a decreasing rate. This phenomenon is an example of:
A.law of diminishing costs to labor.
B.law of diminishing returns to capital.
C.law of diminishing returns to labor.
A B C
C
The law of diminishing returns states that at some point, as more and more of a resource (e. g. , labor) is devoted to a production process, holding the quantity of other inputs constant, the output increases, but at a decreasing rate.
7. Generally speaking, when the Herfindahl-Hirschman Index (HHI) is calculated by summing the squared percentage market shares, how many largest firms data is used in a industry, supposing there is a large number of firms in the industry:
A.4
B.10
C.50
A B C
C
The Heffindahl-Hirschman Index (HHI) is calculated by summing the squared percentage market shares of the 50 largest firms in an industry (or all of the firms in the industry if there are less than 50). The HHI is very low in a highly competitive industry and increases to 10000 (=1002) for an industry with only one firm. An HHI between 1000 and 1800 is considered moderately competitive, while an HHI greater than 1800 indicates a market that is not competitive.
8. Gene Bawerk, an economics professor, is lecturing on the factors that influence the price elasticity of demand. He makes the following assertions: Statement 1: For most goods, demand is more elastic in the long run than the short run. Statement 2: Demand for a good becomes more elastic when a close substitute for it becomes available on the market. Are Bawerk's statements correct? Statement 1 Statement 2 ①A. Correct Incorrect ②B. Incorrect Correct ③C. Correct Correct A. ①B. ② C. ③
A B C
C
Both of these statements are accurate. Price elasticity for most goods is greater in the long run because individuals can make long-term decisions that require different quantities of the good, such as buying more fuel efficient vehicles to use less gasoline. Price elasticity is greater the better the available substitutes because an increase in price will lead more buyers to switch to the substitute products.
9. ff the marginal benefit of the last unit of a good or service consumed was $25, the marginal benefit of the next unit consumed is most likely to be:
A.$25.
B.$24.
C.$26.
A B C
B
In most cases, the marginal benefit of a good or service decreases as the quantity consumed increases. So, $24 is the most likely answer. This principle is called decreasing marginal benefit.
10. Which of the following most accurately describes the shapes of the average variable cost (AVC) and average total cost (ATC) curves?
A.The AVC and ATC curves are both U-shaped.
B.The AVC and ATC curves both decrease initially, and then flatten.
C.The AVC curve is U-shaped whereas the ATC curve declines initially then flattens.
A B C
A
The AVC curve is U-shaped, declining at first due to efficiency, but eventually increasing due to diminishing returns. The AFC curve decreases as output increases, and eventually flattens out. The ATC is U-shape because it is the sum of the decreasing-to-flat AFC curve plus the U-shaped AVC + curve. ATC = AFC + AVC.
11. Which of the following conditions is most likely to exist for a typical production process when average product is at its maximum?
A.Marginal product is increasing.
B.Marginal product is at a minimum.
C.Average variable cost is at a minimum.
A B C
C
When average product is at a maximum, average variable cost is at a minimum. At the corresponding labor and output level, marginal product is decreasing and marginal cost is increasing
12. Alien Chen, CFA, stated that, for the typical company, accounting profit tends to be greater than economic profit because explicit costs are generally not included in calculating accounting profit. Is the analyst correct with respect to the: Relationship between accounting, profit and economic profit? Inclusion of explicit costs? ①A. No No ②B. No Yes ③C. Yes No
A.①
B.②
C.③
A B C
C
Accounting profits are generally higher than economic profits since implicit costs are generally ignored in calculating accounting profit.
13. Holding the quantity of labor constant, output increases as the quantity of capital increases, but at a decreasing rate. This phenomenon is most accurately described as:
A.diminishing marginal costs of capital.
B.diminishing marginal returns to labor.
C.diminishing marginal product of capital.
A B C
C
The marginal product of capital is the change in output divided by a unit change in capital, holding labor constant. Diminishing marginal product of capital means that at a constant level of labor, output increases as capital is added, but at a decreasing rate.
14. Assume that Rajesh Singh's income increased from $20000 per year to $30000 per year, and his demand for "store-brand" bread decreased from 80 loaves to 40 loaves per year. Which of the following most accurately describes Singh's income elasticity for store-brand bread?
A.Income elasticity is +1.00 and store-brand bread is a complimentary good.
B.Income elasticity is -0.60 and store-brand bread is an inferior good.
C.Income elasticity is -1.67 and store-brand bread is an inferior good.
A B C
C
Average income is ($20000+$30000)/2=$25000, so the percentage change in income is ($30000-$20000)/$25000=40.00%. The average quantity of bread demanded is (80+40)/ 2=60 loaves, so the percentage change in the quantity of bread demanded is (40-80)/60=-66.67%. Income elasticity of store-brand bread is - 66.67/40=-1.67. Since Singh's income elasticity of demand is negative, store-brand bread is an inferior good.
15. A candidate for public office has proposed a program of wealth transfers based on the principles of utilitarianism. In support of her proposal, she makes the following statements: Statement 1: "Increasing taxes on high income earners will cause them to work more hours to maintain their after-tax income, resulting in greater economic output. " Statement 2: "The government will need to hire people to manage and administer the wealth transfers. These new jobs will further expand economic output. " Are these statements correct or incorrect? Statement 1 Statement 2 ①A. Incorrect Correct ②B. Correct Incorrect ③C. Incorrect Incorrect
A.①
B.②
C.③
A B C
C
Both statements are incorrect. Increasing taxes on high income earners reduces their incentive to work, which results in less labor being supplied and lower economic output. The labor needed to administer wealth transfers must be diverted from other uses that provide value to consumers. This moves resources away from a productive use, which reduces economic output.
16. Which of the following statements regarding marginal costs (MC) and average variable costs (AVC) is most accurate?
A.MC = AVC when AVC is at its minimum.
B.MC ＜ AVC when AVC is at its minimum.
C.MC = Average total cost when AVC is at its minimum.
A B C
A
MC = AVC at minimum average variable cost. MC = ATC at minimum average total cost.
17. According to the law of diminishing returns, doubling the number of salespeople for a firm will most likely result in:
A.doubling the total sales of the firm.
B.more than doubling the total sales of the firm as a result of economies of scale.
C.increasing the total sales of the firm and reducing the average sales per salesperson.
A B C
C
The law of diminishing returns states that as more of a resource is added to a production process, holding other resource use constant, increases in output will eventually decrease. Therefore, as more salespeople are added they will generate more sales at a decreasing rate. Total sales will increase and the average sales per salesperson will decrease.
18. Which of the following organizational structures usually has the lowest cost of raising external capital?
A.Proprietorships.
B.Partnerships.
C.Corporations.
A B C
C
Relative to proprietorships and partnerships, external capital is more readily available to and less expensive for corporations.
19. Which of the following most accurately describes the relationship between the average total cost (ATC) curve and the average variable cost (AVC) curve? The vertical distance between the ATC and AVC curves:
A.decreases as output increases.
B.increases as output increases.
C.remains constant as output increases.
A B C
A
The vertical distance between the ATC curve and AVC cost curve is average fixed cost, which decreases as output increases because more output is averaged over the same cost.
20. Which of the following is least likely to be an obstacle to the efficient allocation of resources?
A.Price controls.
B.Taxes.
C.Technological advancement.
A B C
C
As opposed to being an obstacle to allocative efficiency, technological advancement requires a constant reallocation of an economy's resources to more efficient uses.
21. Assume that the supply of ethanol is relatively more elastic than the demand for ethanol. Compared to an initial competitive equilibrium in the market for ethanol, the imposition of a per-gallon tax on producers of ethanol will most likely:
A.decrease producer surplus by the total amount of tax collected.
B.decrease producer surplus by less than it reduces consumer surplus.
C.decrease the sum of consumer and producer surplus by the amount of tax collected.
A B C
B
Regardless of whether a tax is imposed on suppliers or consumers, the relative burden of the tax to each depends on the relative elasticity's of supply and demand. Since demand is relatively less elastic than supply, the burden of the tax will be greater on consumers than on producers. These burdens are equivalent to decreases in producer and consumer surpluses. Total consumer and producer surpluses will be reduced by the amount of the resulting deadweight loss in addition to the total amount of tax collected.
22. If the admission price for a rock concert is raised from $25 to $30, causing ticket sales to drop from 60000 to 40000, the price elasticity of demand for tickets is:
A.-0.25.
B.-0.50.
C.-2.20.
A B C
C
Price elasticity = (percentage change in quantity)/( percentage change in price). Use average value in calculating the percentage change in quantity and price. (-20/50)/(5/27.50)=-0.4/0.1818=-2.20
23. Consider the following two final consumer goods: Good W requires the inputs of raw material R and intermediate goods S and T. Good X requires the inputs of raw material R and intermediate goods U and V. If demand for Good W increases and demand for Good X decreases, which of the following out comes is least likely?
A.Some of raw material R will be diverted away from the producers of Good X.
B.The price of Good U will decrease and the price of Good S will increase.
C.More resources will be devoted to producing Good W and less to producing Good T.
A B C
C
If demand for Good W increases and demand for Good X decreases, the market will allocate more resources to producing Good W and the goods that go into producing Good W (that is, Good S and Good T) , and less to producing Good X and the goods that go into producing Good X (that is, Good U and Good V). Changes in the relative prices of all these goods are the signal that tells their producers where to direct resources. Prices will increase for goods W, S and T while prices decrease for Goods X, U and V.
24. The problem associated with managers making decisions that benefit themselves at the expense of stockholders is called the:
A.shirking problem.
B.productivity problem.
C.principal-agent problem.
A B C
C
Managers act as agents for stockholders. When managers make decisions that benefit themselves at the cost of stockholders, the problem is referred to as a principal-agent problem.
25. For markets with perfectly elastic supply and perfectly inelastic supply, respectively, the introduction of a tax will most likely result in: Markets with perfectly elastic supply Markets with perfectly inelastic supply ①A. A price increase, and the seller bears the tax A price increase, and the buyer bears the tax ②B. A price increase, and supply remains the same No change in price, and the buyer bears the tax ③C. A price increase, and the buyer bears the tax No change in price, and the seller bears the tax
A.①
B.②
C.③
A B C
C
Because in markets with perfectly elastic supply, price increases as a result of tax and the seller passes on the tax burden to buyers. In markets with perfectly inelastic supply, sellers maintain the same supply and price but absorb the tax b.
26. The demand for labor will be less elastic:
A.at lower wage rates than at higher wage rates.
B.in the long run than in the short run.
C.the less labor intensive the production process.
A B C
C
Demand for labor will be less elastic, other things equal, when the production process is less labor intensive. Labor demand is more elastic at low wage rates than at high wage rates, and more elastic in the long run because producers can adjust their mix of labor and capital inputs.
27. The law of diminishing marginal returns explains:
A.the shape of the long-run average cost curves.
B.the upward sloping portion of the short-run marginal cost curve.
C.the initial decrease in the short-run average costs.
A B C
B
The law of diminishing returns states that at some point, as more of a resource is used in a production process, holding other inputs constant, output increases at a decreasing rate. This accounts for the upward slope of the SRMC curve beyond that point. Returns to scale determine the shape of the long-run cost curves.
28. Antonio Conti consumes 2 pounds of beef per week when beef is $4.50 per pound and 3 pounds of chicken when chicken sells for $ 3.50 per pound. If the price of chicken increases to $ 4.00 per pound, Conti's consumption of beef increases to 2.5 pounds per week. Which of the following most accurately describes Conti's cross elasticity of demand for beef versus chicken? The cross elasticity of demand for:
A.beef relative to chicken is +1.67 and beef and chicken are complimentary goods.
B.beef relative to chicken is +1.67 and beef and chicken are substitutes.
C.chicken relative to beef is +1.75 and beef and chicken are substitutes.
A B C
B
The average quantity of beef demanded is (2.0+2.5)/2=2.25 pounds, so the percentage change in the quantity of beef demanded is (2.5-2.0)/2.25=22.22%. The average price of chicken is ($3.50+$4.00)/2=$3.75 per pound, so the percentage change in the price of chicken ($4.00-$3.50)/$3.75=13.33%. The cross elasticity of demand for beef relative to the price of chicken is 22.2/13.3=1.67. Since the cross elasticity is positive, chicken and beef are substitutes for Conti.
29. Which of the following relationships most accurately describes the inefficiency resulting from government imposed production quotas?
A.Marginal benefit exceeds marginal cost leading to underproduction.
B.Marginal benefit exceeds marginal cost leading to overproduction.
C.Marginal cost exceeds marginal benefit leading to overproduction.
A B C
A
Government imposed quotas restrict production to a level below that which would occur if marginal benefit equals marginal cost. This restricted output quantity is less than the equilibrium quantity, so marginal benefit exceeds marginal cost.
30. Given the following possibilities, which one results in an increase in total consumer expenditures?
A.demand is unitary elastic and price falls.
B.demand is elastic and price rises.
C.demand is inelastic and price rises.
A B C
C
Total expenditures and price elasticity of demand: When demand is inelastic, the percentage change in unit sales is less than the percentage change in price. An increase in price leads to an increase in total expenditure on the good. The opposite is also true.
31. At the equilibrium levels of output and price in a competitive industry without taxes:
A.consumer surplus is maximized.
B.producer surplus is maximized.
C.the sum of producer and consumer surplus is maximized.
A B C
C
At competitive equilibrium the sum of consumer and producer surplus is at its maximum level Neither consumer nor producer surplus is necessarily at a maximum at the equilibrium output and price. Which surplus is larger or smaller depends on the elasticity of supply and demand.
32. Under which type of market structure are the production and pricing alternatives of a firm most affected by the decisions of its competitors?
A.Monopoly.
B.Perfect competition.
C.Oligopoly.
A B C
C
An oligopoly market structure is characterized by a small number of firms producing similar or differentiated products, with a high degree of interdependence among competitors. Each firm's optimal price and output are strongly affected by the pricing and output decisions of its competitors.
33. The type of business organization that can survive the death of an owner and subjects its owners to unlimited liability is a:
A.sole proprietorship.
B.partnership.
C.closely held corporation.
A B C
B
A partnership can continue after the death of a partner, and all partners are jointly and severally liable for the debts of the partnership. A sole proprietor has unlimited liability but there is no separate business entity to survive the proprietor.
34. The demand for a product tends to be price inelastic if:
A.few good complements for the product are available.
B.few good substitutes for the product are available.
C.people spend a large share of their income on the product.
A B C
B
If a large price change results in a small change in quantity demanded, demand is inelastic. Cigarettes are an example of a good with inelastic demand.
35. If the price of a candy bar increases from $ 0.50 to $ 0.55 and the quantity demanded decreases from 267 to 235, the price elasticity of demand is:
A.-1.23.
B.1.23.
C.-1.34.
A B C
C
Price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price, using the average value of the variable in the computations. The percent change in quantity demanded is (235-267)/[(235+267)/2]=-0.127 or -12.7%. The percent change in price is = (0.55-0.50)/[(0.55+0.50)/21=0.095 or 9.5%. The price elasticity of demand is -12.7/9.5=-1.34.
36. Based on the concept of diminishing returns, as the quantity of output increases, the short-run marginal costs of production eventually:
A.rise at a decreasing rate.
B.rise at an increasing rate.
C.fall at an increasing rate.
A B C
B
The law of diminishing returns states that as more variable resources are a production process combined with a fixed input, output will eventually increase at a decreasing rate. In the short run, as the quantity produced rises, costs rise at an increasing rate.
37. Assume that output increased from 1550 to 1850 units per day as a result of increasing labor from 200 to 210 workers. The marginal product of labor is closest to:
A.1.55 units per day per worker.
B.30 units per day per worker.
C.1.25 units per day per worker.
A B C
B
Marginal product is the additional output per additional unit of an input (labor). Since output changed by 300 units and labor changed by 10 workers, the marginal product is 300/10=30 units per day per worker.
38. Which of the following most accurately describes elasticity of supply? Elasticity of supply is the percentage change in the quantity supplied divided by the percentage change in:
A.price and it equals zero when supply is perfectly elastic.
B.price and it equals zero when supply is perfectly inelastic.
C.quantity demanded and it equals infinity when supply is perfectly inelastic.
A B C
B
Elasticity of supply equals zero when the supply curve is vertical, indicating perfectly inelastic supply.
39. The effect of a price ceiling set above the equilibrium price is most accurately described by which of the following statements?
A.It will have no effect on equilibrium price and quantity.
B.It will affect equilibrium price, but not equilibrium quantity.
C.Quantity demanded will exceed quantity supplied.
A B C
A
If a price ceiling is above the equilibrium price, it will have no effect on price or quantity.
40. Which of the following organizational structures is subject to double taxation?
A.Corporations.
B.Proprietorships.
C.Partnerships.
A B C
A
Corporations must pay taxes on the firm's profits and the shareholders must pay on profits distributed as dividends.
41. In the short run, the average product of labor:
A.is initially declining but must increase at some point.
B.is upward sloping if the firm is experiencing diminishing marginal returns to labor.
C.is at A maximum where it intersects the marginal product of labor curve.
A B C
C
In the short run, the average product of labor curve is first increasing and then decreasing as diminishing marginal returns to that factor take effect. In the short run, the marginal product of labor is first increasing and then decreasing when diminishing marginal returns take effect. The marginal product of labor curve will be above the average product of labor curve initially, and, at some point, will intersect the average product curve at its maximum. When the total product of labor begins to increase at a decreasing rate, the average product of labor will be decreasing.
42. Which of the following most accurately describes the relationship between marginal cost (MC), average variable cost (AVC), marginal product (MP), and average product (AP)?
A.When MP＜AP, MC＜AVC.
B.When MP＞AP, MC＞AVC.
C.When MP=AP, MC=AVC.
A B C
C
At some output level Q and corresponding labor input L, MC = AVC and MP = AP. At Q and L, AVC is at its minimum and AP is at its maximum. (Hint: draw the curves).
43. Two ways in which economic activity may be coordinated include:
A.market coordination and structural coordination.
B.firm coordination and structural coordination.
C.market coordination and firm coordination.
A B C
C
Firm coordination occurs when a firm produces its product using resources within the firm. Market coordination occurs when resources outside the firm are used for example a firm may have other companies produce the components of their product (outsourcing) and the firm then assembles these outsourced components in-house.
44. An individual sees her income rise from $ 80000 to $ 88000, and along with it, her consumption of macaroni has decreased from eight dozen packages per year to six dozen packages per year. Which of the following is closest to the income elasticity of her demand for macaroni, and should macaroni be classified as a normal good or an inferior good? Income elasticity Type of good ①A. -3.0 Inferior ②B. -3.0 Normal ③C. -0.33 Inferior A. ① B. ②C. ③
A B C
A
An inferior good is one that experiences a decline in demand when income rises.
45. The minimum supply price, the lowest price at which a producer is willing to supply an additional unit of a good, is:
A.less than the marginal revenue for the additional unit.
B.the price at which producer surplus is maximized.
C.the marginal cost of producing the additional unit.
A B C
C
The minimum supply price that producers must receive if they are to produce an additional unit of output is the opportunity cost of producing that unit, i.e. the marginal cost. The marginal cost curve is the short-run supply curve for the good.
46. New disposal fees for toxic chemicals used in producing plastic house plants have increased production costs by $ 0.28 per plant for all manufacturers in the industry. The most likely effects on the industry supply curve and total producers' surplus in the market for plastic house plants are: Industry supply Producers' surplus ①A. shifts left increases ②B. shifts left decreases ③C. shifts right decreases
A.①
B.②
C.③
A B C
B
An increase in production costs will decrease industry supply and the supply curve will shift to the left(less quantity supplied at each price). Assuming a downward sloping industry demand curve and no other change in the costs of production, the increase in per-unit cost will decrease producers' surplus in the plastic plant industry.
47. Assume that for the average consumer, the quantity demanded for jeans increases from 5 to 7 pairs per year in response to a price decrease from $ 29 to $ 24 per pair. The price elasticity and relative elasticity of demand for jeans is best described by which of the following? Price elasticity of demand Relative elasticity ①A. -1.77 Relatively inelastic ②B. -2.32 Relatively elastic ③C. -1.77 Relatively elastic
A.①
B.②
C.③
A B C
C
The percentage change in quantity demanded is (7-5)/[(7+5)/2]=33.33 % and the percentage change in price is (24-29)/[(24+29)/2]=-18.87%. Thus, price elasticity =33.33%/(-18.87%)=-1.77. A good is considered to be elastic if the absolute value of price elasticity is greater than 1. In this case, the absolute value of the price elasticity of demand for jeans is 1.77, so the price elasticity for jeans is relatively elastic.
48. Which of the following is least likely to affect the elasticity of supply for a good?
A.The time frame for making the supply decision.
B.The uniqueness of production inputs.
C.The relative amount of income spent on the good.
A B C
C
Elasticity of supply is influenced by the time frame within which the supply decision is made and the ability to make substitutions between productive resources. Unique inputs do not have good substitutes. The relative amount of income spent on a good is a determinant of the price elasticity of demand.
49. The law of diminishing returns states that at some point:
A.as less of a resource are devoted to production, holding the quantity of other inputs constant, the output will decrease, but at an increasing rate.
B.as more of a resource is devoted to production, holding the quantity of other inputs constant, the output will increase, but at a decreasing rate.
C.as more of a resource is devoted to production, holding the quantity of other inputs constant, at some point output will begin to decrease.
A B C
B
At low levels of output, increasing marginal returns will exist corresponding to the downward sloping portion of the marginal cost curve. As marginal costs begin to increase diminishing marginal returns will occur.
50. The cash price consumers pay for a product is most likely to increase as the result of a:
A.government subsidy to product producers.
B.quota on how much of the product can be produced.
C.new law imposing high penalties for sales of the product.
A B C
C
A subsidy will increase supply and decrease the price to consumers. A quota may or may not increase the price to consumers depending on if it is above or below the current equilibrium output. A new law imposing penalties for consuming the product will decrease demand and decrease the equilibrium price. A new law imposing high penalties for selling the product will decrease supply, leading to a higher equilibrium price.
51. Which of the following most accurately reflects the concept that competitive markets allocate resources fairly as long as the same rules apply to all participants?
A.Utilitarianism.
B.The symmetry principle.
C.The fairness principle.
A B C
B
The symmetry principle holds that people in similar situations should be treated similarly. It implies that the market allocates resources fairly if the rules of economic allocation are fair.
52. In a competitive market, the gains to society are maximized under which of the conditions described below? Marginal Benefit Marginal Cost Producer Surplus Consumer Surplus ①A. $1.25 $1.00 $25 $25 ②B. $1.50 $1.50 $45 $30 ③C. $2.50 $2.50 $35 $35
A.①
B.②
C.③
A B C
B
In a competitive market, the efficient equilibrium quantity produced is the quantity where marginal benefit equals marginal cost and the sum of consumer and producer surplus is maximized.
53. The Zaxon Company produces one product and labor is the only variable resource in the production process. In the short run, Zaxon faces a horizontal demand curve at $20 per unit. The average product of labor in the short run is given in the following table:
Resouce Units
Average Product of Labor
1
25
2
22.5
3
20
4
17.5
If the price of each unit of labor (worker-days) is $ 350, and only whole units can be employed, how many units of labor will Zaxon employ?
A.1.
B.2.
C.3.
A B C
B
Average Product Total Product Marginal Product
Resource Units Marginal Revenue Product
25 25 25
22.5 45 20
20 60 15
17.5 70 10
1 500=25×$20
2 400=20×$20
3 300=15×$20
4 200=10×$20
The short-run demand curve for a resource is its marginal revenue produce schedule. The price of a resource unit must be less than or equal to the MRP. Since the resource price is $ 350 per unit, the company will employ 2 units in production because MRP of $ 499 ＞ resource cost of $ 350. For a price taker MR = P.
54. If the price of product X increases from $2.00 per unit to $ 2.25 per unit, the demand will decrease from 7.5 million units to 6.7 million units. What is the price elasticity of demand for the product, and is the demand for the product elastic or inelastic?
A.-1.04; elastic.
B.-0.96; elastic.
C.-0.96; inelastic.
A B C
C
The percent changes are generally calculated relative to the midpoint of the change. Demand for the good is inelastic since, ignoring the sign, the price elasticity is ＜1.
55. Costs included in the determination of a company's economic profit that are most likely to be included in that company's accounting costs are:
A.explicit costs.
B.implicit costs.
C.opportunity costs associated with labor provided by the company's owners.
A B C
A
Explicit costs involve payments by a company to purchase productive resources.
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