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CLEP test MCQ - Demand Supply, Competition

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Dear Sir:

I am preparing for the Clep test and I am studying out of a book from the library. However, there are no answers so that I can see if I am on the right track. Can you please assist me witht he following questions?

1. If marginal cost is less than average cost, average cost must fall when more
units are produced. T F

2. The demand curve for a firm?s product is also the curve showing
a. total revenue
b. marginal revenue
c. average revenue
d. average profits

3. If marginal revenue and marginal cost are not equal, a firm can maximize its
profits by
a. increasing output if MR > MC
b. decreasing output if MC > MR
c. moving to the output where the slopes of TR and TC are equal
d. all the above are correct

4. Thomas Edison once complained that he was not making a profit selling light
bulbs because his factories were operating 25% below capacity. He estimated
that he could increase output 25% with a 2% increase in production cost. He
sold the additional 25% at a profit on the foreign market although at a price
below what he called the ?cost of production.? We can deduce that Edison really
meant
a. marginal cost was below average cost but less than marginal revenue
b. average cost was greater than variable cost, which exceeded marginal revenue.
c. variable cost exceeded fixed cost but was less than marginal revenue
d. marginal cost was above average cost but greater than marginal revenue

5. Most goods and services that American consumers buy are supplied by
a. oligopolies or monopolistic competitors
b. firms producing where price equals short-run average variable cost
c. firms operating in markets with homogeneous products
d. price takers.

6. To determine whether a market is perfectly competitive, economists examine
the
a. number of firms in the market
b. similarities among the products of the different firms in the market
c. ease of entry and exit by firms in the market
d. economists examine all of the above

7. The basic reason that perfect competition is an ideal of efficiency is that
in perfect competition, marginal revenue always equals
a. total revenue
b. average cost
c. price
d. marginal fixed cost

8. The short-run supply curve for a perfectly competitive firm is that part of
its marginal cost curve that lies above its average variable cost curve. T
F

9. A perfectly competitive firm's profit-maximizing output is 100 units. At
that output level, price = $60, short-run average fixed cost = $25 and
short-run average variable cost = $40. The firm
a. should shut down because it is losing $500
b. should stay open because if it closed down it would lose $4000, which is
more than it loses by staying open
c. should stay open because if it closed it would lose $2500, which is more
than it loses by staying open
d. should stay open because if it closed it would lose $6500, which is more
than it loses by staying open

10. In a perfectly competitive industry, if price is higher than long-run
average cost, we may be sure
a. long run equilibrium has not yet been reached
b. new firms will continue to enter the industry
c. the long-run industry supply curve will shift to the right
d. all the above answers are correct

11. The demand curve facing a monopoly firm is
a. horizontal at the market price
b. the same as the market demand curve for the monopolist's product
c. exactly twice as steep as the market demand curve for the good
d. perfectly inelastic at the market price

12. Which of the following will happen if a natural monopoly is broken up into
a number of smaller firms?
a. the price will fall
b. industry output will increase
c. production costs will increase
d. industry output will decrease

13.. A profit-maximizing monopolist will operate where
a. MR = MC and charge a price equal to marginal revenue
b. MR = MC and charge a price equal to marginal cost
c. MR = MC and charge a price corresponding to demand at that level of output
d. MC = MR and charge a price corresponding to average cost.

14. A profit-maximizing monopolist
a. is just as socially efficient as a perfectly competitive firm in
allocating resources to production since he, too, seeks the largest return on
his investment
b. produces an output level at which marginal utility is greater than marginal
cost
c. produces more output than a perfectly competitive industry
d. always produces in the inelastic region of his demand curve

15. So that, under monopoly
a. too small a share of society's resources is used to produce the monopolized
good
b. Adam Smith's invisible hand assures efficient resource allocation
c. Just the right share of society's resources is being used to produce the
monopolized good
d. MC > MU

16. Monopolistic competitors and perfect competitors are alike in
a. having horizontal demand curves
b. earning zero economic profit in the short run
c. earning zero economic profit in the long run
d. relying on advertising to attract buyers to their products

17. According to the excess capacity theorem, if every firm under monopolistic
competition expanded its output,
a. cost per unit of output would rise.
b. cost per unit of output would fall
c. MC and AC would remain unchanged
d. the industry would become less competitive

18. In oligopoly, we expect
a. frequent introduction of new or redesigned products
b. aggressive advertising campaigns
c. intense marketing research into the impact of price changes
d. all the above are correct

19. From economists? point of view, a multifirm cartel usually offers to society
a. all the cost benefits of large-scale production and none of the allocative
inefficiencies of monopoly
b. all the cost benefits of large-scale production and all the allocative
inefficiencies of monopoly
c. none of the cost benefits of large-scale production and none of the
allocative inefficiencies of monopoly
d. none of the cost benefits of large-scale production and all of the
allocative inefficiencies of monopoly

20. A firm now produces its sales-maximizing level of output. If the firm
increased its output by one unit, its marginal revenue would become
a. negative (minus)
b. smaller, but still positive
c. larger but still negative
d. larger but still positive

21. The maximin criterion can be defined as which of the following?
a. a firm seeks the maximum of the minimum payoffs to its various available
strategies
b. a firm seeks the minimum of the maximum losses among its various available
strategies
c. a firm seeks the maximum of the minimum losses to its various available
strategies
d. a firm seeks the maximum of the maximum gains of its various available
strategies

22. At any given airport, the airlines hold long-term leases for passenger
loading gates. New gates cannot be added without approval of the airlines.
Frequent flier programs are also common in the industry. It is, therefore, more
difficult for a new airline to enter a given airport (market). Such factors
(i) are called barriers to entry
(ii) tend to decrease the contestability of the air travel market
a. i and ii
b. i not ii
c. ii not i
d. neither i nor ii

23. An economy is judged to be efficient if
a. it is good at producing what people want
b. it produces things that people may not want but in the least wasteful way
c. it produces things that people want but maybe not in the least wasteful way
d. it is a free-market economy and not a command economy

24. In an ideally efficient free-market economy, MC and MU of a good are equal
to each other because
a, producers and consumers are free to communicate with each other
b. producers and consumers both respond to the same price for a good
c. consumers must accept the price set by producers
d. producers must accept the price set by consumers

25. An economist would say the price is too high for a certain good if
a. poor people could not afford to buy it
b. nobody could afford to buy it
c. the good?s price was above its marginal cost
d. it is an essential good and takes up a big share of people?s income

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Solution Preview

Hi See the attached document. The answers are in blue color.

The answers are in Blue color. Wherever required explanation is also given.

1. True. Example: say there are 100 units and we are producing 101st unit
Then AC101 = (AC100*100 + MC101)/101 Since MC101 < AC100 the AC101 will be less than AC100

2. c. average revenue - It gives the price per unit for that particular demand so it is also the average revenue curve

3. d. all the above are correct

4. a. marginal cost was below average cost but less than marginal revenue ...

Solution Summary

Answers 25 multiple choice questions on different topics of macroeconomics. These are commonly asked questions (part of CLEP test) which are quite helpful for students preparing for exams.

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See Also This Related BrainMass Solution

College Level Examination Program Study - Economics

I am studying for the CLEP. I found the attached questions on the net, but no answers to go with them.

1. Economics is a social science because it
a. rigorously and systematically examines human behavior
b. it not as scientific as physics
c. uses historical data instead of mathematical data
d. uses statistics instead of mathematics

2. The huge increase in the standard of living since the Industrial Revolution
a. means that societies and individuals now face no limitations
b. has not meant unlimited abundance for societies or persons
c. means that "opportunity cost" is now a meaningless concept
d. has made economics irrelevant.

3. If a decision maker uses marginal analysis, then the relevant costs are
a. the total cost of some particular activity or product.
b. the costs which do not change.
c. the profit from an activity or product.
d. the average costs of a particular activity or product.
e. the extra or additional costs of a particular activity or product

4. Graphs are highly useful in economics because of the way they
a. make easier the interpretation and analysis of data.
b. permit a person to easily see relationships between variables.
c. show an idea that might otherwise take many words.
d. all of the above.

5. Table A {see attached} gives data points relating a variable X (measured on the horizontal axis) to a variable Y (measured on the vertical axis) so that, for example, when the value of X = 3, the value of Y = ?

6. Suppose that a curve has a slope equal to zero at some point A. To the right of point A, the curve may
a. have a positive slope.
b. have a negative slope
c. be a straight line.
d. all the above are correct.

7. The opportunity cost to you of an action is
a. how much you must pay for the opportunity to take the action
b. the value to you of the next best action you could have taken
c. the cost to society of giving you the opportunity to take the action
d. the dollar cost to you of taking the action

8. How are the slope of a production possibilities frontier and the opportunity cost of the goods related?
a. the slope is a graphical picture of the cost of increasing output of both goods.
b. the slope is a graphical measure of the growth rate of the economy.
c. the slope is a graphical representation of the cost of reducing unemployment.
d. the slope is a graphical picture of the rate of trade-off between the goods.

9. Suppose a society produces only guns and butter. When it uses all its resources for the production of guns and operates efficiently, it can produce 240 guns per year. We also know that its ppf is bowed out from the origin. In order to produce 20 tons of butter, this society must reduce gun production to 200 guns per year. Suppose this society were to increase butter production to 40 tons per year. Then, operating efficiently, it would produce
A. Exactly 160 guns per year.
B. Less than 160 guns per year.
C. More than 160 guns per year.
D. Still 200 guns per year if it is operating efficiently.
E. Both (C) and (D) are correct.

10. Assuming that productive resources are specialized, the opportunity cost of an item increases as production of it rises. Therefore, we expect that firms will produce more if
a. the price increases.
b. the price decreases
c. the opportunity cost is greater than the price.
d. government asks firms to produce more.
e. income of buyers increases.

11. From the date given in Table A {see attachment}, the opportunity cost of increased cotton in moving from A to B is
a. 16 units of corn
b. 31 units of corn
c. 15 units of corn
d. 4 units of corn
e. I unit of corn

12. The demand curve for a typical good has a negative slope because
a. some consumers switch to this good as the price falls.
b. consumer incomes rise as the price rises.
c. the good has less "snob appeal" as its price falls.
d. the good is more profitable for producers as the price rises.

13. Some medical authorities announced in the late 1980's that an acne medicine named Retin-A also had
previously unknown wrinkle-reducing properties. An economist would expect to find that after this announcement, the price of Retin-A _______and the quantity sold _________.
a. rose; fell
b. rose; rose
c. fell; fell
d. fell; rose

14. Elaine values the utility of her first cup of coffee at $1; a second cup, $.75; and a third cup, $.50.If Elaine drinks 3 cups of coffee for breakfast, her total utility is equal to
a. $.50, the value of her lst cup of coffee
b. $1.00, the value of her first cup
c. $2.25
d. $1.50

15. When the price of a good rises, we can expect
a. marginal utility of the last unit purchased will fall
b. marginal utility of the last unit purchased will rise
c. marginal utility of the last unit purchased will not change
d. purchases to rise because of the increased marginal utility

16. Consumer's surplus is a measure of
a. how much less than his income a consumer spends on goods.
b. how much more value a consumer receives from his purchases than he has to pay for them.
c. how much a consumer's marginal utility differs from his total utility.
d. how much a change in price leads a consumer to substitute other goods.

17. Winston raises and sells 100,000 genetically identical rats for scientific experiments each year. Because feed prices have risen, Winston had to raise his price from $1.00 to $1.50
per rat. As a result, sales fell to 80,000 rats per year. The price elasticity for rats is
a. 0.22
b. 0.28
c. 0.55
d. 2.0

18. Tele-Com, Inc., the nation's largest cable TV company, tested the effect of a price reduction for the Disney Channel. It lowered the price from $10.75 to $7.95 and found that the number of customers and its total revenue from the Disney Channel rose greatly. this means
a. the demand curve for the Disney Channel shifted to the right.
b. the supply curve of the Disney Channel shifted to the left.
c. the demand for the Disney Channel is elastic in this price range.
d. the demand for the Disney Channel is highly inelastic in this price range.

19. When the marginal revenue product of an input is greater than its price,
a. the producer should expand use of that input.
b. the price of the input will automatically fall in a free market.
c. the producer should reduce use of that input.
d. the producer is using just the right quantity of that input.

20. The firm can calculate all points on its total _cost_ curve if it knows
a. its production function.
b. the price of inputs and of output.
c. its production function and the prices of inputs.
d. its average cost at its optimal output level.

21. At a given level of wheat output, one more unit of labor would produce 10 extra bushels and one more unit of seed would produce 30 extra bushels. A unit of labor costs $6 and a unit of seed costs $12. The farmer should
a. produce more wheat.
c. buy more seed and less labor.
b. buy only seed.
d. buy less seed and more labor.

22. A firm is currently operating with an optimal (least-cost) combination of inputs. Suddenly the price of one input rises (relative to the other). The firm should
a. buy less of that input and more of the other, now cheaper, input
b. change its input mix so that the marginal physical product of the input whose price has risen falls and the marginal physical product of the other input rises
c. buy less of whichever input now has the highest money price and more of the other input
d. reduce its output

23. In arriving at the quantity of output and price of its product, a company
a. chooses either output or price, and consumer demand determines the other
b. has no control over either quantity or price
c. makes two decisions by setting both optimal quantity and optimal price
d. generally leaves both quantity and price decisions to consumers.

24. At any output level where average cost is greater than marginal cost,
a. average cost is rising
c. marginal cost is rising
b. average cost is falling
d. marginal cost is falling

25. If at an output of 1,000 units, a firm has average variable cost per unit of $3, average fixed cost per unit of $1.50, and it is selling its output at $7 per unit, total profit is
a. $7,000
b. $2,500
c. $1,500
d. $250

26. If marginal revenue and marginal cost are not equal, profit can be maximized by
a. increasing output if MR is greater than MC
b. decreasing output if MC is greater than MR
c. moving to the output level where the slopes of the TR and TC are equal
d. all the above are correct

27. Most products that American consumers buy are supplied by
a. oligopolies or monopolistic competitors.
b. firms producing where price equals short-run average variable cost.
c. firms operating in markets with homogeneous products.
d. price takers.

28. Economists study perfect competition
a. because so many markets are perfectly competitive.
b. because it accurately describes much of real-world economies.
c. to establish a benchmark or standard by which to measure the performance of the economy.
d. all the above are correct.

29. In perfect competition, the firm's marginal revenue always equals
a. total revenue
c. average cost
b. price
d. marginal fixed cost

30. At a perfectly competitive firm's short-run equilibrium level of output,
a. P = MR = MC
b. P = MR, but MR does not equal MC
c. P = MC, but MR oes not equal MC
d. MR = MC and MR is less than P

31. A firm can stay in business while taking a loss in the short run as long as it covers its
a. fixed costs
c. fixed and variable costs
b. variable costs
d. a firm can never stay in business when it experiences losses

32. The market for a perfectly competitive industry clears at a price of $3, while the minimum long run average cost for all firms in the industry is $2.50. In the long run then, we would expect an increase in
a. each firm's output
c. each firm's profit
b. the number of firms
d. each firm's average cost

33. The marginal revenue curve for a monopolist is
a. always below the demand curve.
c. usually below the demand curve.
b. always above the demand curve.
d. always above the average revenue curve.

34. A monopolist will operate where
a. MR = MC and charge a price equal to marginal revenue.
b. MR = MC and charge a price equal to marginal cost.
c. MR = MC and charge a price corresponding to demand at that level of output.
d. MC = MR and charge a price corresponding to average cost.

35. A profit-maximizing monopolist
a. is just as socially efficient as a perfectly competitive firm in allocating resources to production since he, too, seeks the largest return on his investment
b. produces an output level at which marginal utility is greater than marginal cost
c. produces more output than a perfectly competitive industry
d. always produces in the inelastic region of his demand curve

36. Monopolistic competitors and perfect competitors are alike in
a. having horizontal demand curves
b. earning zero economic profit in the long run
c. earning zero economic profit in the short run
d. relying on advertising to attract buyers to their products

37. In oligopoly, you would expect
a. frequent introduction of new products or redesigned products.
b. aggressive advertising campaigns
c. intense market research into the impact of price changes.
d.alloftheabove.

38. Cartels are relatively rare because
a. they are illegal in some countries, including the U.S.
b. members find it difficult to agree on key decisions
c. members frequently have an incentive to cheat on the cartel agreement
d. all the above are correct.

39. In the attachment is shown the payoff matrix of firm A for three different strategies: A1; A2; A3, and the potential retaliatory responses of firm B (B1, B2, B3).
If firm A uses the maximin criterion, which strategy will it choose?
a. A1
b. A2
c. A3

40. Oligopolistic firms that practice sales revenue maximization will produce
a. more and charge a lower price than a profit maximizer
b. less and charge a higher price than a profit maximizer
c. more and charge more than a profit maximizer
d. less and charge less than a profit maximizer

41. Prices are effective in accomplishing the three coordination tasks faced by an economy because
a. they convey information about which goods are scarce and which are plentiful.
b. economies based on price systems are more flexible in responding to consumer wants than centrally planned economies.
c. economies based on price systems are more likely than centrally planned economies to minimize the cost of producing society's output(if they are reasonably competitive).
d. all of the above are correct.&#12288;&#12288;&#12288;&#12288;&#12288;&#12288;&#12288;&#12288;&#12288;&#12288;&#12288;&#12288;&#12288;&#12288;

42. In the long run,
a. both monopolists and perfectly competitive firms produce at minimum long-run average total cost
b. a monopolist will leave its industry if it is earning zero economic profit
c. a monopolist will always charge a higher price than he charges in the short run
d. consumers surplus is smaller if an industry is a monopoly than if it is perfectly competitive

43. An economist would say the price is too high for a certain good if, and only if
a. poor people could not afford to buy it.
b. nobody could afford to buy it.
c. the price was above marginal cost.
d. it is an essential service and consumes a large share of income.

44. It is true of externalities that they
a. are always detrimental.
b. occur when all costs, private and social, are included in the cost of production.
c. are always beneficial.
d. cause the free market (price) system to misallocate resources.

45. The key explanation for the large amount of waterway pollution is
a. including in production all costs involving use of the waterway.
b. that there are private costs but no costs to society.
c. that waterways are not private property and so can be used by anyone free of charge.
d. that waterways are subject to the market's normal control processes.

46. Governments can most effectively encourage the efficient level of production of a good that causes a beneficial externality by
a. increasing demand at every price for the good.
b. subsidizing the production of the good.
c. taxing the production of the good.
d. putting a price ceiling on the good.

47. The cable and subscription TV business has the problem of "signal theft"." People use illegal receivers to capture the company's signal without paying. Enforcement of the company's property right is very expensive. This problem exists because TV signals are basically
a. economic goods
c. depletable goods
b. invisible goods
d. public goods

48. Rent-seeking is the term given
a. to an attempt by firms to create a profitable monopoly even though resources may be wasted in the process.
b. to filing a lawsuit, which wastes resources, in the hope of obtaining monetary gain or a strategic market position.
c. to attempts by firms to obtain profits without contributing to production.
d. all the above are correct.

49. Most innovations in the world economy come from
a. many different industries in a few countries
b a few industries in many different countries
c. many different industries in manydifferent countries
d. a few industries in a few countries

50. We cannot rely on the free market to devote enough resources to innovation because innovation
a. generates (produces) negative externalities
b. is only done by monopolies
c. generates positive or beneficial externalities
d. will never be done by private companies
e. is always paid for by the government

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