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Economics: Demand & Supply, Opportunity Cost and Firms

1.) Positive economics:
a. deals with subjective value judgments about "what ought to be."
b. will make the economy positively better off.
c. is the exact opposite of negative economics.
d. deals with how the economy does in fact work.

2.) The opportunity cost of changing your decision on what to major in college is highest
a. before you have earned any of the credits needed to obtain the major you initially chose.
b. after you have officially declared a major.
c. after you have earned ½ of the credits to obtain the major you initially chose.
d. after you have completed your major and received your diploma.

3) Which of the following statements correctly distinguishes capitalism from socialism?
a. In capitalism, "what to produce" is determined by consumer demand; in socialism, by free market forces.
b. In capitalism, "how to produce" is determined by businesspeople's desire to minimize cost and maximize profits; in socialism, it is determined to a much greater degree by government.
c. There is more freedom of enterprise in socialism than in capitalism.
d. Capitalism still exists while socialism does not exist in any form anymore.

4) An increase in demand:
a. causes the demand curve to shift to the left.
b. means consumers are willing and able to buy more at any price.
c. creates a surplus at the original price.
d. could be caused by an increase in the price of a complementary good.

5) Which of the following would cause an increase in the demand for a good?
a. A decrease in price.
b. An increase in consumer tastes for the good.
c. A decrease in the price of a substitute good.
d. Consumers expect the price of the good to fall in the near future.

6) Compared to last year, fewer oranges are being bought and the selling price has decreased. This could have been caused by:
a. an increase in demand.
b. an increase in supply.
c. a decrease in demand.
d. a decrease in supply.

7) Rent control:
a. is an example of a price floor.
b. will cause a shortage of rental-occupied housing.
c. will cause the quantity supplied to exceed the quantity demanded.
d. is a price set above equilibrium by government.

8) As the manager of a hotel, you want to increase occupancies by 6 percent. It has been determined that the price elasticity of demand for rooms in your hotel is 0.5. This information implies:
a. the demand for rooms in your hotel is elastic.
b. if you lower your rates by 12 percent, then you will increase occupancies by 6 percent.
c. if you lower your rates, your total revenue will rise.
d. there must be many substitutes for your hotel services.

9) Paulo is deciding where to spend his spring vacation. A trip to the Cancun will give him 4,000 units of satisfaction and cost $600. A trip to Fort Lauderdale will give him 3,000 units of satisfaction and cost him $425. Paulo will most likely do best going to:
a. Cancun because his total pleasure will be greatest.
b. Fort Lauderdale because it is cheapest.
c. Cancun because his pleasure per dollar will be greatest.
d. Fort Lauderdale because his pleasure per dollar will be greatest.
10) A business owner makes 600 items by hand in 200 hours. She could have earned $30 an hour working for someone else. If the item sells for $40 each, and the explicit costs total $8,000, then:
a. total revenue equals $8,000.
b. implicit costs equal $6,000.
c. the accounting profits equal $10,000.
d. the economic profit equals $16,000.

11) Which of the following does not characterize perfect competition?
a. Competitive firms sell an identical product.
b. There are so many firms selling output in the market that no one individual firm has the ability to control the market price.
c. Economic profits cannot be earned in the long run.
d. The demand curve facing the competitive firm is downward sloping.

12) In a market, factor prices do not increase as industry output increases. Economists call this market:
a. a constant-cost industry.
b. an increasing-cost industry.
c. a decreasing-cost industry.
d. a capital-intensive industry.

13) A significant difference between a monopolist and a competitive firm is that:
a. a monopoly is a price taker, whereas a competitive firm is a price maker.
b. the monopolist faces the market demand curve which is downward sloping, whereas the competitive firm's demand curve is perfectly inelastic at the market price.
c. the monopoly's marginal revenue curve is downward sloping and lies below its demand curve, whereas the competitive firm's marginal revenue curve is vertical.
d. a monopolist possesses barriers to entry into its market, whereas the competitive firm has no such barriers to entry.

14) Patents:
a. serve the public interest in that it is more efficient for a single supplier to supply the market than for many suppliers to do so.
b. are illegal if the owner of the patent charges the public a high price.
c. create monopolies.
d. discourage inventors from thinking up new products.

15) Kellogg's, the breakfast-food people, comprises one of four corporations that control about 92 percent of its market for breakfast food. Kellogg's would be considered:
a. a perfect competitor.
b. a monopolist.
c. an oligopolist.
d. to be engaged in monopolistic competition.

16) Ruby's Beauty College of Omaha, Nebraska, is one of many local beauty colleges, each specializing in different haircutting techniques. Ruby's Beauty College would be considered:
a. a perfect competitor.
b. a monopolist.
c. an oligopolist.
d. a monopolistic competitor.

17) Regarding the four market models:
a. the majority of firms in the U.S. operate within perfectly competitive markets.
b. a major barrier to entry into a monopolistically competitive market environment is a potential competitor's ability to differentiate its product from existing firms.
c. a four-firm concentration ratio of 65 tells us that the top four firms in the industry produce 35 percent of the industry's output.
d. in all four models, firms maximize profits (or minimize losses) by producing that output in which marginal revenue equals average total cost.

18) Regarding real-world markets:
a. the threat of a corporate takeover puts competitive pressures on a firm and may cause it to become more efficient.
b. monopolies always charge the highest price market demand allows.
c. most real-world production is undertaken by owner-operated businesses, not corporations.
d. the net effect of restricting entry into markets is to decrease supplier's income.

19) An increase in the demand for labor could be caused by:
a. a decrease in the productivity of workers.
b. a decrease in the price of the product.
c. a decrease in the demand for the product produced by workers.
d. an increase in the price of a substitute input like capital (machines).

20) Regarding mergers:
a. a conglomerate merger is the combination of two firms in the same industry.
b. a vertical merger occurs when two companies in the same industry merge.
c. when a firm merges with the supplier of one of its inputs, a horizontal merger has taken place.
d. economies of scope can be achieved when one firm has marketing expertise that can be applied to the other firm following the merger.

21) Regarding the labor market:
a. a monopsony employer will hire more workers and pay a higher wage than if it were hiring workers under perfectly competitive labor market conditions.
b. an increase in the demand for a product will likely lead to a decrease in the demand for the workers employed in producing the product.
c. the demand for an input is called derived demand because it arises from the demand for the output that the input is used to produce.
d. downsizing has been a result of outsourcing and an increase in X-inefficiency.

22) When negative externalities exist in the production of a good, then the:
a. good is underproduced at the free market equilibrium.
b. marginal social cost of producing the good equals the marginal cost borne by the firm.
c. marginal cost of producing the good equals the marginal cost borne by the firm plus the marginal external cost resulting from the production of the good.
d. the marginal social cost of the good is less than the price that exists in the free market.

23) If a positive externality exists from the consumption of a good:
a. the marginal social benefit is equal to the marginal social cost at the free market equilibrium.
b. government should tax the good.
c. the marginal social benefit is greater than the market price.
d. then there are undesirable social consequences associated with the good.

24) An example of a positive externality is:
a. second-hand smoke.
b. water pollution.
c. education.
d. junker cars parked in a nice neighborhood.

25) A price-support program:
a. that is set above the long-term average price level will likely accumulate surpluses over time.
b. is an example of government intervention in a market to set prices below equilibrium.
c. creates shortages and lower prices for consumers.
d. benefits taxpayers and consumers but hurts farmers.

26) Economists are cynical about the 1996 farm price-support reforms because:
a. three of the programs which most sharply limit production (peanut, sugar, and dairy programs) were eliminated.
b. both direct price supports and indirect price support systems were eliminated.
c. to "compensate" farmers for the elimination of direct price supports, the government gave direct grants to farmers that cost taxpayers more than the old price support system.
d. even if times become difficult for farmers, there was little chance of a reversal of this policy.

27) If the goal of government is to raise revenue, it is most effective when:
a. demand is elastic.
b. supply is elastic.
c. supply is inelastic.
d. demand is unit elastic.

28) If the goal of government is to change behavior, it is most effective when:
a. demand is elastic.
b. supply is inelastic.
c. demand is inelastic.
d. demand is unit elastic.

29) Suppose that in country A, the opportunity cost of producing 1 bushel of barley is 2 bushels of soybeans. In country B, the opportunity cost of producing 1 bushel of barley is 4 bushels of soybeans. Then:
a. country A has a comparative advantage in the production of soybeans.
b. trade is not possible between these two countries.
c. country A should specialize in the production of barley while country B should specialize in the production of soybeans.
d. country B should specialize in the production of barley.

30) Regarding tariffs and quotas:
a. domestic producers prefer quotas to tariffs because the quota raises the price of an imported good and tariffs do not.
b. quotas on imported automobiles cost jobs in the U.S. automobile industry, but result in lower prices for consumers.
c. a quota is a quantity limitation on imported goods but a tariff is a tax on imported goods.
d. governments prefer quotas to tariffs because quotas provide additional tax revenues to government.

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