1. 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.
2. In the long run, if price is below average total cost (ATC), the firm will:
A.shut down.
B.keep running.
C.produce more.
A B C
A
If the price is below ATC then the firm is losing money. If the firm believes the price will never exceed ATC the only way to eliminate fixed costs is to go out of business.
3. Which of the following is the most likely result of a technological improvement in a perfectly competitive industry?
A.Individual firms' supply curves shift to the left.
B.The industry supply curve shifts to the right.
C.The costs for individual firms increase.
A B C
B
When individual firms implement technological change, their costs decline and their supply (cost) curve shifts to the right. At the lower costs, firms are willing to supply a given quantity at a reduced price. The lower cost structure for the individual firms shifts the industry supply curve to the right.
4. 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.
5. A firm in a perfectly competitive industry that seeks to maximize profit is most likely to continue production in the short run as long as which of the following conditions exists? Price is equal to or greater than :
A.average fixed cost.
B.average total cost.
C.average variable costs.
A B C
C
If a firm is covering its average variable costs, it will continue to operate in the short run since it is covering some portion of its fixed costs.
6. 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.
7. In the long run, a perfectly competitive firm will earn?
A.Small economic profits.
B.Large accounting profits.
C.Zero economic profits.
A B C
C
Zero economic profits means the firm is earning a normal rate of return and a positive accounting profit. Since perfectly competitive firms have no barriers to entry, economic profits cannot be positive in the long run because new competitors will enter the market place driving down economic profits to zero.
8. 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.
9. Which of the following types of unemployment is most likely to be associated with an economy in which many workers have been made obsolete by changing technology?
A.Cyclical.
B.Marginal.
C.Structural.
A B C
C
Structural unemployment results from changes in the basic characteristics of the economy, such as changes in technology or international competition, which typically require changes in skills needed to perform jobs.
10. When a firm is earning positive economic profits in a monopolistic competitive market, what will most likely occur?
A.New firms will enter driving down the economic profits to zero.
B.Losses will occur in the short run.
C.Price takers will be over run by price searchers.
A B C
A
New firms will enter a monopolistic competitive market with economic profits above zero and will absorb some market demand. This will shift the demand curve down to the point where price equals average total cost and there are zero economic profits.
11. 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.
12. In a natural monopoly:
A.one firm controls all natural resources.
B.the government reserves the industry sector dealing with natural resources for a few firms only.
C.the average total cost of production continually declines with increased output.
A B C
C
A monopoly situation in which the average total cost of production continually declines with increased output is called a natural monopoly.
13. Under perfect competition, a firm will be inclined to increase output as long as which of the following conditions exists?
A.Marginal revenue is greater than marginal cost.
B.Marginal cost is less than average cost.
C.Marginal revenue is positive.
A B C
A
A firm will continue to expand output as long as it is possible to earn an economic profit. In other words, a firm will expand output as long as marginal revenue is greater than marginal cost.
14. Suppose a price-taker firm produces baseball bats that sell at a price of $100 each. This firm's average total cost at the current level of production is $150 per bat, and the average fixed cost is $40 per bat. Which of the following statements is TRUE regarding this firm? They should:
A.shut down in the short run because their average total cost is greater than their price.
B.continue producing baseball bats because they are covering their fixed costs.
C.shut down in the short run because their average variable cost is greater than their price.
A B C
C
Variable costs = $150 (ATC) - $ 40 (AFC) = $110 (AVC). At a selling price of $100 the firm is not covering its variable costs and will have losses greater than its fixed costs if it stays in business.
15. 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.
16. 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.
17. 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.
18. 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.
19. 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.
20. In the short run, if price is below average total cost (ATC), the firm will:
A.keep running as long as it is covering its variable costs.
B.produce more.
C.raise prices.
A B C
A
In the short run, if the firm is covering its average variable costs and some of its fixed costs it will continue to operate as long as the situation is temporary.
21. At full employment:
A.structural unemployment is zero.
B.frictional unemployment is zero.
C.cyclical unemployment is zero.
A B C
C
When the economy is operating at less than full capacity, positive levels of cyclical unemployment will be present. At levels above full capacity negative cyclical unemployment will exist.
22. Which of the following most accurately describes the relationship between price (P), marginal cost (MC), and marginal revenue (MR) at the profit maximizing output level for a firm in a perfectly competitive industry?
A.P>MC=MR.
B.P=MC=MR.
C.P>MC<MR.
A B C
B
For a perfectly competitive firm, maximum profit occurs at the output level where marginal revenue equals marginal cost. And, since the demand curve faced by each firm in perfect competition is horizontal, marginal revenue is equal to price.
23. 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.
24. If a profit maximizing firm finds that its marginal revenue exceeds its marginal cost, it should:
A.increase output if it is a price taker, but not if it is a price searcher.
B.decrease output, regardless of whether it is a price taker or a price searcher.
C.increase output, regardless of whether it is a price taker or a price searcher.
A B C
C
Any firm will maximize profits by producing the output where MR = MC.
25. Which of the following most accurately describes the Monetarist school of macroeconomic thought in relation to aggregate demand and aggregate supply? Monetarists believe that the money supply should be:
A.Increased during inflationary periods and reduced during recessionary periods.
B.Increased by a constant rate annually.
C.Reduced during inflationary periods and increased during recessionary periods.
A B C
B
Monetarists believe that to keep aggregate demand stable and growing, the central bank should follow a policy of steady and predictable increases in the money supply. Furthermore, monetarists believe that recessions are caused by inappropriate decreases in the money supply and that recessions can be persistent because money wage rates are downward sticky.
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. Unemployment can be divided into the following three categories:
A.Frictional, seasonal, cyclical.
B.Structural, seasonal, technical.
C.Frictional, cyclical, structural.
A B C
C
Unemployment can be divided into frictional, cyclical, or structural unemployment.
28. Which of the following is least accurate regarding product development and marketing for firms under monopolistic competition?
A.Firms that bring new and innovative products to the market face relatively more elastic demand curves than their competitors.
B.Relative to other types of competition, product innovation is critical to the pursuit of economic profits.
C.Advertising is necessary to communicate the uniqueness of the firm's products relative to its competitors.
A B C
A
Firms under monopolistic competition face less elastic demand curves when they introduce new and innovative products. This enables them to increase price and earn economic profits. However, close substitutes and imitations will eventually erode the economic profit from a new product. So, firms must constantly seek innovative product features that make their products relatively more desirable than their competitors.
29. Which of the following is a characteristic of perfect competition?
A.There are a few sellers.
B.The products of different firms are sold at different prices.
C.There are no barriers to entry into the market.
A B C
C
The only true statement listed in the question is that, under perfect competition there are no barriers to entry into the market. Each of the other possible answers is not a characteristic of perfect competition. While the competitors can earn positive economic profits in the short-run, they cannot earn long term economic profits due to ease of entry and exit.
30. Which of the following is most likely to occur in the short run if there is an unanticipated decrease in aggregate demand due to a reduction in business and consumer optimism?
A.An increase in the rate of unemployment.
B.An increase in real GDP.
C.A higher rate of inflation.
A B C
A
If business and consumer optimism wanes, consumers will spend less and defer current consumption and save more of their disposable income. With reduced product demand, businesses will reduce their capital expenditures and investments. These actions will lead businesses to reduce their number of employees, thereby increasing the rate of unemployment. Moreover, current output will decrease and the price level will fall.
31. Which of the following regarding monopolistic competition is TRUE?
A.Zero barriers to entry and exit exist.
B.The demand curve for an individual firm is a straight horizontal line.
C.Each firm produces a differentiated product.
A B C
C
Other characteristics of monopolistic competition (also known as competitive price searcher markets) are: a large number of independent sellers, low barriers to entry, and an elastic downward sloping demand curve.
32. An increase in the expected rate of inflation is most likely to cause aggregate demand and short-run aggregate supply to: Aggregate demand Short-run aggregate supply ①A. Increase Increase ②B. Increase Decrease ③C. Decrease Increase A. ① B. ②C. ③
A B C
B
Increasing inflation expectations lead to higher money wage rates, which causes a decrease in short-run aggregate supply (SAS curve shifts to the left). Higher expected inflation will also encourage consumers to make purchases sooner than they otherwise would have, which increases aggregate demand (shifts the AD curve to the right).
33. The steeper a firm's marginal revenue product curve for a given resource, the:
A.more elastic the firm's demand curve for the resource.
B.less elastic the firm's demand curve for the resource.
C.higher the mobility of the resource.
A B C
B
The marginal revenue product curve of a resource for a given firm will directly determine the firm's demand curve for the resource. If the marginal revenue curve for a resource is steep, then the demand curve for the resource will be steep. Resource mobility is not determined by its MRP.
34. Which of the following is NOT a characteristic of perfect competition?
A.The products produced within a given market are homogenous.
B.The demand curve for an individual firm is a vertical line.
C.The size of each firm is small relative to the size of the overall market.
A B C
B
Under perfect competition individual firms have no control over price resulting in a demand schedule that is perfectly elastic or horizontal.
35. Hay farmers are in a perfectly competitive market. Assume that each acre of land produces 100 bushels of hay. The marginal revenue product of an acre of land is then:
A.(price of hay per bushel)/100.
B.price of hay per bushel.
C.100 × (price of hay per bushel).
A B C
C
The marginal revenue product of an input is the extra revenue generated by an additional unit of that input, which is an acre of land in this case. If the firm is a price taker, then the additional output from the additional input does not change the price of the final good. Thus, the marginal revenue product is simply the extra output times the price of the output.
36. Cyclical unemployment is closely associated with:
A.long-term economic growth.
B.fluctuations in the natural rate of unemployment.
C.short-run fluctuations in the economy.
A B C
C
Cyclical unemployment is caused by a change in the general level of economic productivity and occurs when the economy is not operating at full employment. Like a recession, cyclical unemployment is a short-run phenomenon. Frictional and structural unemployment exist even when the economy is operating a full employment, and thus are considered long-run types of unemployment.
37. Which of the following is least accurate with regard to advertising for firms operating under monopolistic competition?
A.The increase to average total costs associated with advertising increases as output increases.
B.Advertising expenses are high relative to perfect competition and monopoly.
C.Advertising is necessary to communicate the unique features of a firm's products.
A B C
A
Advertising expenses are high for firms in monopolistic competition. Not only because firms need to inform consumers about the unique features of a firm's products, but also to create or increase a perception of differences between products that are actually quite, similar. Advertising costs increase average total costs, but the increase to average total cost attributable to advertising decreases as output increases because more fixed advertising dollars are being averaged over a larger quantity. If advertising increases output (sales) significantly, it can actually decrease a firm's average total cost if there are economies of scale.
38. Price discrimination is most accurately defined by which of the following? Price discrimination is the practice of charging different consumers different prices for:
A.similar products that have identical per-unit production costs.
B.products that have identical price elasticities of demand.
C.the same product or service.
A B C
C
Price discrimination is the practice of charging different consumers different prices for the same product or service. Examples include different prices for airline tickets based on whether a Saturday-night stay is involved and different prices for movie tickets based on age.
39. There are four main barriers to entry. Which of the following is NOT a barrier to entry?
A.Patents.
B.Resource Control.
C.Allocative Efficiency.
A B C
C
The other barriers to entry are government licensing and legal barriers such as utilities are given the exclusive right to supply electricity in certain areas.
40. A profit maximizing firm will expand output as long as marginal revenue is:
A.less than marginal cost.
B.greater than marginal cost.
C.less than average variable cost.
A B C
B
A purely competitive firm will tend to expand its output so long as the market price (marginal revenue) is greater than marginal cost. In the short term and long term, profit is maximized when P = MC.
41. 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.
42. Which type of unemployment describes a situation where workers who have been laid off due to economic changes and they are unable to find work due to a lack of education or the necessary skills to move into another available job?
A.Structural.
B.Frictional.
C.Cyclical.
A B C
A
Structural unemployment is due to structural changes in the economy that eliminate some jobs while generating job openings for which unemployed workers are not qualified. Cyclical unemployment is when the economy is operating at less than full capacity.
43. What is the relationship between price and marginal revenue for a price searcher?
A.Marginal revenue > price.
B.Marginal revenue < price.
C.Marginal revenue = price.
A B C
B
For a price searcher, demand is downward sloping, marginal revenue is less than price since price must be reduced to sell additional units of output.
44. Which of the following employment measures is most closely related to the level of real GDP?
A.Labor force participation ratio.
B.Number of employed.
C.Aggregate hours.
A B C
C
Aggregate hours measure the total amount of labor performed in the economy. This measure captures changes in the number of people working and the effects of part-time work and overtime. Aggregate hours are related more closely to the level of real GDP than any of the other employment measures listed.
45. Which of the following is the most accurate definition of the unemployment rate? The unemployment rate is the number of:
A.unemployed individuals divided by the number of employed individuals.
B.unemployed individuals divided by the total labor force.
C.unemployed individuals divided by the number of individuals employed plus the number of people in retirement.
A B C
B
The unemployment rate of a country is the percentage of people in the labor force who are unemployed. It is calculated as: unemployment rate = (number of unemployed/labor force) × 100. The labor force includes those individuals who are employed or are actively seeking employment.
46. In the dominant firm model of oligopoly, it is least likely that one firm:
A.is the innovation leader in product development.
B.has a significant cost advantage over its competitors.
C.produces a relatively large share of the industry's production.
A B C
A
The dominant firm mode1 of oligopoly is based on the assumption that one firm has a significant cost advantage which allows it to set the price in the market and control a relatively large share of the industry's production and sales. It does not assume that the firm will be the innovation leader in product development. In fact, being more innovative is one of the factors that allow smaller competitors that work at a cost disadvantage to survive.
47. Which of the following will cause an increase in the demand for labor?
A.An increase in the labor supply.
B.A decrease in labor productivity.
C.An increase in the demand for the final good or service.
A B C
C
The demand for labor is a derived demand. When the demand for the final good or service increases, the price of that final good or service increases. That increase in price will lead to the firm employing more of the resources used in production at each resource price, including labor.
48. The demand curve for a firm in a perfectly competitive market is:
A.upward sloping.
B.vertical.
C.horizontal.
A B C
C
In a market of perfect competition an individual firm's demand schedule is perfectly elastic (horizontal).
49. When incomes in foreign countries increase, aggregate demand in the U.S. is likely to:
A.Increase because foreign consumers will tend to buy more U.S. export goods.
B.Decrease because U.s. interest rates will tend to increase.
C.Increase because U.S. interest rates will tend to decrease.
A B C
A
When incomes in foreign countries increase, it is unlikely to have a direct effect on interest rates in the U.S. However, increased foreign income is likely to result in greater foreign purchases of U.S. exports. Thus, aggregate demand in the U.S. is likely to increase.
50. The short-run supply curve to a firm operating under perfect competition is most accurately described as the segment of the:
A.marginal cost curve below the average total cost curve.
B.average total cost curve above the marginal cost curve.
C.marginal cost curve above the average variable cost curve.
A B C
C
The short-run supply curve for a firm under perfect competition is the segment of its marginal cost (MC) curve above the average variable cost (AVC) curve.
51. Which of the following most accurately describes a market structure that has one seller of a specific, well-defined product that has no good substitutes?
A.Oligopoly.
B.Monopoly.
C.Monopolistic competition.
A B C
B
A monopoly is characterized by one seller, a specific and well-defined product for which there is no good substitutes, and high barriers to entry.
52. When smaller amounts of additional labor are supplied in response to increases in the wages offered, this is known as the:
A.substitution effect.
B.income effect.
C.marginal rate of substitution.
A B C
B
The income effect results in smaller additions to the labor supply as wages increase. Like any good, income received in the form of wages has a decreasing marginal utility. When the point is reached at which the utility received is equal to the marginal cost of leisure foregone, the maximum amount of labor that will be offered is reached.
53. When producers expend resources to establish monopoly power in a market, this is called:
A.surplus allocation.
B.resource rationalization.
C.rent seeking.
A B C
C
When producers expend resources and time in an effort to establish a monopoly position, this behavior is described as rent seeking.
54. The most likely effects of the imposition of an effective increase in the minimum wage include:
A.an increase in the real wage, gains in efficiency, and a decrease in inflation.
B.increased unemployment, and excess supply of labor at the new wage rate, and a decrease in economic efficiency.
C.a reduction in non-monetary labor benefits, excess demand for labor, and a shortage of highly skilled workers.
A B C
B
At a minimum wage above the equilibrium wage, there will be an excess supply of workers. Firms substitute other productive resources for labor and use more than the economically efficient amount of capital. The result is increased unemployment and a decrease in economic efficiency. Firms may decrease the quality or quantity of the non-monetary benefits they previously offered to workers.
55. A firm operating under perfect competition will experience economic losses when which of the following conditions exists?
A.Marginal revenue is greater than average total cost.
B.Market price is less than average total cost.
C.Marginal cost = average total cost = marginal revenue = price.
A B C
B
Under perfect competition, a firm will experience economic losses when its selling price is less than average total cost.
56. An oligopoly is characterized by all of the following EXCEPT:
A.large economies of scale.
B.significant barriers to entry.
C.a large number of sellers.
A B C
C
Oligopolies consist of a small number of sellers. Their products may be either similar or differentiated.
57. Which of the following is not one of the steps in calculating the Consumer Price Index (CPI)?
A.Adjust the observed prices of goods and services for quality changes and new goods.
B.Select a CPI basket based on the goods and services a typical household purchases.
C.Conduct periodic surveys of goods and services prices.
A B C
A
The three stages in calculating the CPI are: (1) Select the CPI basket. (2) Conduct a monthly price survey. (3) Calculate the CPI relative to the base period. The effects of new goods and quality changes lead to biases that cause the CPI to overstate the inflation rate.