1. Oligopolists have an incentive to cheat on collusive agreements in order to:
A.avoid competitive practices.
B.restrain trade and hinder trade relationships.
C.increase their individual share of the joint profit.
A B C
C
Colluding restricts output and puts upward pressure on price, but cheating actually increases output and ultimately, if enough cheating occurs, puts downward pressure on the price. Colluders cheat to increase their share of the profits.
2. Which type of unemployment describes situations where qualified workers are not immediately matched with existing job openings?
A.Structural.
B.Cyclical.
C.Frictional.
A B C
C
Frictional unemployment will prevent qualified workers from being immediately matched with existing job openings. Two causes are imperfect information and the job search conducted by both employers and employees.
3. The demand for a given resource will most likely decrease if the prices of substitute resources and complementary resources, respectively: Prices of substitute resources Prices of complementary resources ①A. Increase Increase ②B. Increase Decrease ③C. Decrease Increase A. ①B. ②C. ③
A B C
C
A decrease in the price of a substitute resource would induce producers to use the substitute resource, reducing demand for the resource in question. An increase in the price of a complementary resource would decrease demand for both resources.
4. A practice whereby a seller charges different prices to different consumers of the same product or service is called:
A.price discrimination.
B.price competition.
C.fractional pricing.
A B C
A
Price discrimination is the practice of charging different consumers different prices for the same product or service.
5. When workers agree to forego leisure to undertake labor and receive wages, the term that is applied in labor supply economics is the:
A.substitution effect.
B.income effect.
C.marginal rate of substitution.
A B C
A
In labor supply economics, the term applied to the decision by workers to forego leisure and undertake labor for wages is the substitution effect.
6. In a CFA study seminar, the following comments were made: Comment 1: "In the short run, an increase in demand in a perfectly competitive industry will result in negative economic profit for some firms in the industry. " Comment 2: "In the long run, a permanent increase in demand in a perfectly competitive industry will result in zero economic profit for the firms in the industry. " Which of the following best describes the accuracy of these comments? Comment 1 Comment 2 ①A. Correct Correct ②B. Correct Incorrect ③C. Incorrect Correct A. ①B. ②C. ③
A B C
C
Comment 1 is incorrect because an increase in industry demand will increase equilibrium price and output. At the higher price, firms will earn positive economic profits in the short run because the higher price will exceed average total cost. Over the long run, however, new firms will enter the market to exploit the positive economic profits, causing prices to decline until all firms are again earning zero economic profit.
7. The kinked demand model assumes that at prices above the current price, the demand curve becomes:
A.more elastic because competitors will increase their prices.
B.less elastic because competitors will not increase their prices.
C.more elastic because competitors will not increase their prices.
A B C
C
The kinked demand model of oligopoly behavior assumes that a firm's competitors will not match a price increase, but will match the price of a competitor that offers a lower price. The result is a demand curve that is more elastic above the current price, but less elastic below it.
8. Junior economists Diane Foreman and Les Harlan are discussing the concepts of aggregate hours and real wage rates and how they relate to real GDP. They state the following: Foreman: Aggregate hours are a more accurate measure of total labor input than the number of people employed. Aggregate hours tend to be positively correlated with real GDP growth. Harlan: Real wage rates have not increased as much over time as the productivity of labor, but that is largely because a greater share of labor compensation now comes in the form of employer-paid benefits. Are Foreman and Harlan correct? Foreman Harlan ①A. Correct Correct ②B. Correct Incorrect ③C. Incorrect Correct A. ①B. ②C. ③
A B C
B
Foreman is correct. Unlike the various measures of the number of people employed, aggregate hours measure the effects of part-time work and overtime. Aggregate hours tend to increase during expansions and decrease in recessions. Harlan is incorrect. Employer-paid benefits are a component of "total labor compensation", which is the indicator used to measure real wage rates. When calculated this way, real wage rates have tended to fluctuate with the productivity of labor.
9. If the market demand for a product decreases in a competitive market, then the quantity supplied by an individual firm will:
A.decrease and firms will exit the market in the long run.
B.decrease and firms will enter the market in the long run.
C.increase and firms will enter the market in the long run.
A B C
A
If the market demand for a product decreases in a competitive market, then the quantity supplied by an individual firm will decrease and firms will exit the market in the long run because the price will be less than average total costs.
10. Which of the following is NOT a characteristic of the long-run industry supply curve?
A.The long-run supply curve is less elastic than the short run supply curve.
B.The long-run supply curve is flatter than the short-run supply curve.
C.In the long run, there will be a greater change of quantity supplied for a given price change, than in the short run.
A B C
A
The long-run supply curve is more elastic and flatter than the short-run supply curve. In the long-run, firms have greater flexibility to alter production scale and methods. All of the other items in this question are true for the long-run supply curve.
11. Which of the following is most likely to be considered a characteristic of an oligopolistic industry?
A.Few barriers to entry.
B.Few economies of scale.
C.A great deal of interdependence among firms.
A B C
C
An oligopolistic industry has a great deal of interdependence among firms. One firm's pricing decisions or advertising activities will affect the other firms' demand curves.
12. If an oligopoly is characterized by fierce competition, in long-run equilibrium the firms in the market will earn:
A.zero economic profits.
B.substantial economic losses.
C.substantial economic profits.
A B C
A
Free entry and exit implies zero profits in the long run.
13. The short-run supply curve for a price taker firm is the portion of the marginal:
A.cost (MC) curve below the average variable cost (AVC) curve.
B.cost (MC) curve above the average total cost (ATC) curve.
C.cost (MC) curve above the average variable cost (AVC) curve.
A B C
C
The short-run supply curve for a firm is its MC curve above the AVC curve. Price takers will produce where price (P) equals MC. At prices below the AVC curve the firm will not be able to remain in operation. The firm is earning a normal return where P is equal to the ATC curve. Above the ATC curve the firm is making economic profits and will continue to expand production along the MC curve.
14. Consider the following statements: Statement 1: "When oligopoly firms cheat on price fixing agreements, the resulting price and output quantity approaches that of perfect competition. " Statement 2: "Monopolistic competition is inefficient because a large deadweight loss from advertising and marketing costs is a characteristic of this form of competition. " Which of the following best describes the accuracy of these statements? Statement 1 Statement 2 ①A. Incorrect Correct ②B. Correct Incorrect ③C. Correct Correct A. ①B. ②C. ③
A B C
B
The efficiency of monopolistic competition is not clear. While increased opportunity cost is associated with the intensive marketing and advertising activities that are characteristic of monopolistic competition, consumers definitely benefit from these selling activities because they receive information that often enables them to make better purchasing decisions. Hence the advertising and marketing costs may be more than the efficient amount, but do not represent a deadweight loss.
15. Which of the following is least likely to be considered a reason why regulation of monopolies is not effective?
A.Regulators do not know the firm's cost structure.
B.Regulation shifts industry demand and increases prices.
C.Regulation reduces the incentive for firms to reduce costs.
A B C
B
Regulation is not associated with a shift in industry demand.
16. Which of the following statements is most accurate regarding monetarists? Monetarists believe that:
A.discretionary monetary policy is the best way to moderate fluctuations in prices and output.
B.steady, predictable money growth is the best monetary policy.
C.the Federal Reserve has very little power with the tools at their disposal.
A B C
B
Monetarists believe that the Fed's tools are powerful and should not be used to moderate fluctuations in prices and outputs. Thus, steady, predictable growth is the best monetary policy. They believe in the power of the money supply, not fiscal policy, to affect prices and outputs.
17. When economists are speaking of the labor-force participation rate, they are referring to which of the following? The labor-force participation rate is the percentage of the:
A.labor force who are new entrants ( less than one year of work experience).
B.working-age population who are not working but are actively looking for work.
C.working-age population who are either working or actively looking for work.
A B C
C
The labor-force participation rate is the percentage of the working-age population who are employed or actively seeking employment. The labor-force participation rate can be calculated as: (the labor force/working -age population) × 100.
18. According to the Keynesian view, an increase in which of the following would most likely decrease current aggregate demand?
A.Budget deficit.
B.Transfer payments.
C.Personal income tax rates.
A B C
C
According to the Keynesian view, an increase in personal income tax rates would decrease current aggregate demand. This is because the increased taxes would decrease personal disposable income. Increases in the other items listed as possible answers would increase (or at least not change) aggregate demand.
19. Consider a price fixing agreement between Spain and Italy that restricts cheese production such that maximum economic profit will be realized by both countries. The possible outcomes of the agreement are presented in the table below. Based on the Prisoners' dilemma framework, the most likely strategy followed by the two countries will be:
A.neither country will increase output.
B.Italy will decrease output; Spain will produce at the agreed level.
C.both countries will increase output.
A B C
C
The solution for the Prisoners' dilemma for each nation is arrived at as follows: Given that Italy complies with the agreement: Spain will get 7 billion if it complies, but 9 billion if it defaults. Therefore Spain should default. Given that Italy defaults: Spain will get 3 billion if it complies, but 5 billion if it defaults. Therefore Spain should default. Because Spain is better off in either case by defaulting, Spain will default. Italy will follow the same logic and reach the same conclusion.
20. The current annual inflation rate, as measured by using the Consumer Price Index (CPI), is best defined as:
A.increase in the CPI from a year ago.
B.percentage change in the CPI from its base period.
C.percentage change in the CPI from a year ago.
A B C
C
The inflation rate is the percentage change in the price index from a year earlier.
21. Which of the following changes would most likely decrease a firm's demand for labor?
A.Technological improvement in the firm's production process.
B.Decrease in the price of the firm's product.
C.Increase in the price of a productive input that is a substitute for labor.
A B C
B
If the price of the firm's product decreases, its marginal revenue, and therefore the marginal revenue product of its inputs, will also decrease. This will decrease the firm's demand for labor. The other choices describe events that would be likely to increase the firm's demand for labor.
22. An economist is developing a regression model of real GDP as a function of labor input. She needs to select a time series that represents the total amount of labor performed in a year. Which of the following is the most appropriate indicator of total labor performed that she can use for this model?
A.Aggregate hours.
B.Average workweek.
C.Number of employed.
A B C
A
Aggregate hours measures the total number of hours worked in a year by all employed people. Aggregate hours takes account of both the level of employment and the average workweek, making it superior to either of those measures as an indicator of total labor performed. Total labor compensation is a measure of real wage rates that includes wages, salaries, and employer-paid benefits.
23. In perfectly competitive constant-cost industries and perfectly competitive increasing-cost industries, respectively, what is the most likely long-run effect of a permanent increase in demand? ncreasing-cost industry Constant-cost industry ①A. price decreases price decreases ②B. price decreases price remains unchanged ③C. price remains unchanged price decreases A. ① B. ②C. ③
A B C
B
In the case of constant-cost industries, the long-run supply curve is perfectly elastic or horizontal. Therefore, a permanent increase in demand would have no effect on the price in the long run. In the case of an increasing-cost industry, the long-run supply curve slopes upward and a permanent increase in demand would result in :an increase in the price.
24. The effects on the aggregate demand curve of an increase in expected future incomes and of an increase in the money supply, respectively are most likely: Increase in expected incomes Increase in money supply ①A. Increase Increase ②B. Increase Decrease ③C. Decrease Increase A. ①B. ②C. ③
A B C
A
An increase in expected future incomes will cause consumers to increase current expenditures (reduce current savings) in anticipation of the higher future incomes. An increase in the money supply will tend to decrease interest rates which will lead to increased consumer spending on durable goods and increased investment by businesses (both effects increase aggregate demand).
25. Characteristics of monopolistic competition include all of the following EXCEPT:
A.differentiated products.
B.high barriers to entry.
C.large numbers of independent sellers.
A B C
B
Monopolistic competition has low barriers to entry.
26. Which of the following factors is least likely to affect the supply of labor?
A.Wages offered.
B.The aggregate requirement for labor.
C.The size of the adult population.
A B C
B
Wages, the size of the adult population ( i. e. the available labor force) , and the accumulation of capital are all factors that affect the supply of labor. The aggregate requirement for labor is a demand issue that will ultimately help to determine the equilibrium level of wages and quantities offered.
27. Which of the following statements about a monopolist is most accurate? A monopolist will:
A.earn economic profits in all situations.
B.maximize the average profit per unit sold.
C.sell at the output level where marginal revenue equals marginal cost.
A B C
C
Like all price searchers, monopolists will expand output until marginal revenue equals marginal cost. Monopolists do not charge the highest possible price which would be the price resulting in only one sale. A monopolist seeks to maximize profit, not price
28. The decision whether to add capital equipment to the production process should be based on:
A.future value, using the cost of financial capital as a benchmark.
B.present value, using the marginal revenue product of capital as a benchmark.
C.present value, using the cost of financial capital as a benchmark.
A B C
C
The marginal revenue product of capital is the prospective gain from adding capital to the production process. Since these gains occur many years into the future, they must be discounted at the cost of financial capital to obtain a present value. It is this present value that is compared with the cost of the project to determine whether or not the project should be accepted.
29. Which of the following statements regarding the supply of labor is least accurate?
A.The income effect of a wage increase is to decrease the amount of labor supplied.
B.Capital goods that increase productivity in the home can affect the supply of labor positively.
C.Other things equal, an increase in the wage rate will lead to an increase in the amount of labor an individual will supply.
A B C
C
The effect of an increased wage on the amount of labor an individual will supply will depend on the relative strength of the income and substitution effects. The substitution effect leads to an increase in labor supplied as less leisure is consumed because its opportunity cost is increased. The income effect leads to less labor supplied as the wage increase and resulting higher income leads to greater consumption of leisure (less hours of labor supplied). For example, with a wage increase to $1,000 per hour, some workers will choose to reduce the number of hours they work, rather than increase them.
30. Which of the following statements is least accurate with regard to the efficiency of monopolistic competition ?
A.Consumers benefit from brand name promotion and advertising.
B.Promotion and advertising enable consumers to make more informed decisions.
C.Monopolistic competition is at least as efficient as perfect competition.
A B C
C
The efficiency of monopolistic competition is unclear. Consumers may make better purchasing decisions due to the information content of brand name promotion and advertising. However, there are those that argue that the increased cost of advertising and sales is not justified by the benefits of these activities and represent inefficient use of resources.
31. The demand curves faced by monopolistic competitors is:
A.inelastic due to the availability of many complementary goods.
B.elastic due to the availability of many close substitutes.
C.flat due to the allocative efficiency of price searcher markets.
A B C
B
The demand for products from monopolistic competitors is elastic due to the availability of many close substitutes. If a firm increases its product price, it will lose customers to firms selling substitute products.
32. Consider the following statements: Statement 1: "A natural monopoly exists when economies of scale are so pronounced that all of an industry's demand should be supplied by one firm. " Statement 2: "Monopoly is characterized by a single seller of a distinct product for which no good substitutes exist. " Statement 3: "Average cost pricing is a form of regulation that is intended to force monopolists to reduce output to the point where the monopolist's average total cost curve intersects its marginal cost curve. " Which of the following best describes the accuracy of these statements? Statement 1 Statement 2 Statement 3 ①A. Incorrect Correct Incorrect ②B. Correct Incorrect Correct ③C. Correct Correct Incorrect A. ①B. ②C. ③
A B C
C
Statement 3 is incorrect because average cost pricing attempts to force the monopolist to produce where the average total cost curve intersects the demand curve and to charge a price equal to ATC.
33. At a recent symposium, "The Great Economic Debate of the Decade" several panelists were asked to state their opinions on aggregate demand and aggregate supply. Panelist 1 stated that he believed shifts in both aggregate demand and aggregate supply were driven primarily by changes in technology over time. Panelist 2 stated that she believed the focus of economic policy should be to directly increase aggregate demand by increasing the money supply or through fiscal policy. The views of Panelist 1 and Panelist 2 would best be described as which economic school of thought? Panelist 1 Panelist 2 ①A. Monetarist Classical ②B. Keynesian New Keynesian ③C. Classical Keynesian A. ①B. ②C. ③
A B C
C
The classical economists believe that shifts in both aggregate demand and aggregate supply are primarily driven by changes in technology over time. Keynesian economists believe that aggregate demand can be increased through monetary policy (increasing the money supply ) or through fiscal policy (increasing government spending, decreasing taxes, or both). They do not focus on aggregate supply. Monetarists believe that the main factor leading to business cycles and deviations from full-employment equilibrium is monetary policy.
34. If the economy is in short-run equilibrium above the full-employment level of output, what is the most likely adjustment that will restore the economy to long-run equilibrium?
A.Money wages and resource prices will increase.
B.The price level for final goods and services will decrease.
C.Long-run aggregate supply will increase.
A B C
A
Because we assume money wages and resource prices to be constant in the short run, the economy can be in short-run equilibrium but long-run disequilibrium. Changes in money wages and resource prices are the factor that adjusts output back toward long-run equilibrium. If short-run equilibrium is above the full-employment level, aggregate demand has grown faster than long-run aggregate supply, so the price level has increased. With money wages constant in the short run, the rising price level has reduced workers' real wages. As a result they will increase their wage demands. As producers increase the money wages they pay (note that our focus now changes from the short run to the long run), their costs increase, and they will supply less output at each price level. This represents a decrease in short-run aggregate supply (a shift left to a new SAS curve) and a move along the aggregate demand curve, increasing the price level further and reducing output to its full-employment level.
35. Rajiv Moulin, an economist at the Central Bank of New Delhi , was asked to calculate a consumer price index (CPI). He was provided the data below for a basket of goods for a recent one-year period:
Category
Quantity
Price in base period
Current price
Pizza
300
2.00
2.50
Milk
150
3.00
3.50
Bread
500
2.25
3.00
S0da
200
2.00
3.00
What is the CPI in the current period if the base period CPI is 100?
A.131.
B.106.
C.252.
A B C
A
To calculate the CPI for this basket in the current period, calculate the cost of the basket of goods for the base period, then calculate the cost of the basket of goods for the current period. Then divide the cost of the basket in the current period by the cost of the basket in the base period and multiply the answer by 100. This is shown below:
Base period
Pizza
300 × 2.00 =
600
Milk
150 × 3.00 =
450
Bread
500 × 2.25 =
1125
Soda
200 × 2.00 =
400
Cost of CPI basket
2575
Current period
Pizza
300 × 2.50 =
750
Milk
150 × 3.50 =
525
Bread
500 × 3.00 =
1500
Soda
200 × 3.00 =
6O0
Cost of CPI basket
3375
CPI (current) = 3375/2575 × 100 = 131.07.
36. Which of the following is NOT a characteristic of an oligopoly?
A.There are few sellers.
B.High barriers to entry.
C.Relatively small economies of scale.
A B C
C
Oligopolies have large economies of scale and interdependence among competitors.
37. A competitive firm will tend to expand its output as long as marginal:
A.revenue is greater than marginal cost.
B.revenue is greater than the average cost.
C.cost is less than average cost.
A B C
A
All firms will continue to expand production until marginal revenue = marginal cost.
38. An oligopolistic firm:
A.will consider the potential response of its rivals when making business decisions.
B.is likely to be formed when the minimum-cost output is only a small portion of the market output.
C.is likely to be formed when barriers to entry are low.
A B C
A
Oligopolists are highly dependent upon the actions of their rivals when making business decisions. Price determination in the auto industry is a good example. Automakers tend to play "follow the leader" and announce price increases in close synchronization. They are not working explicitly together, but the actions of one producer have a large impact on the others when products are differentiated, quality may be a competitive strategy.
39. Consider the following statements: Statement 1: "The sum of consumer and producer surpluses is maximized under both monopoly and perfect competition. " Statement 2: "All else being equal, a monopolist that practices price discrimination will be more allocatively efficient than a single-price monopolist. " Which of the following best describes the accuracy of these statements? Statement 1 Statement 2 ①A. Incorrect Correct ②B. Correct Correct ③C. Correct Incorrect A. ①B. ②C. ③
A B C
A
Statement 1 is incorrect because the sum of consumer and producer surpluses is maximized under perfect competition when marginal benefit and marginal cost are equal, or equivalently, where the marginal cost curve intersects the demand curve. Monopolies, however, produce a quantity that is less than the quantity where marginal cost equals marginal benefit, so the sum of producer and consumer surpluses is not maximized.
40. In the long-run, a firm operating under perfect competition will:
A.generate zero economic profit.
B.face a vertical demand curve.
C.become a price-searcher.
A B C
A
A firm operating under conditions of perfect competition will generate zero economic profit in the long run. Firms may generate economic profits in the short run, but due to the lack of entry barriers, new competitors will enter the market and prices will adjust downward until economic profits become zero.
41. Which of the following characteristic of perfect competition explains why firms in perfect competition are referred to as price takers?
A.Each firm is small relative to the total market.
B.The demand curve is horizontal for firms in perfect competition.
C.There are many independent firms.
A B C
B
Firms under perfect competition face horizontal (perfectly elastic) demand curves. They can sell all of their output at the prevailing market price, but they will sell nothing if they set their output price above the market price. They are price takers because they have to "take" the market price as a given.
42. Given the following information for a country, what is the labor force participation rate?
Total civilian population 16 and over
210
Those not in the labor force
50
Unemployed
8
Employed
152
A.95%.
B.72%.
C.76%.
A B C
C
Labor force participation rate = (population of persons 16 or older who are employed or seeking employment) / ( civilian population 16 or older) Labor force participation rate = (8+152)/210=76%.
43. The consumer price index tends to:
A.overstate the inflation rate, because its market basket is fixed and does not consider that consumers will substitute away from goods that have risen dramatically in price.
B.overstate the inflation rate because its market basket is variable and takes into consideration that consumers will substitute away from goods that have risen dramatically in price.
C.understate the inflation rate because its market basket is fixed and does not consider that consumers will substitute away from goods that have risen dramatically in price.
A B C
A
The CPI uses a relatively small market basket and tends to overstate the inflation rate because it does not consider that consumers will substitute away from goods that have risen dramatically in price.
44. If the market demand for a product increases in a competitive market, then in the short run the quantity supplied by an individual firm will:
A.decrease and the firm will generate economic profits.
B.increase and the firm will generate economic profits.
C.increase and the firm will generate economic losses.
A B C
B
If the market demand for a product increases in a competitive market, then both price and quantity supplied by an individual firm will increase and the firm will generate economic profits in the short run because price will be greater than average total costs.
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