Ec 205 Problem Sets 1-3

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  • 1/45 Questions

    The income elasticity of demand for furniture is 4. It follows that, other things being equal, a 7% increase in consumer income will

    • Increase the quantity of furniture purchased by 4%.
    • Decrease the quantity of furniture purchased by 28%.
    • Increase the quantity of furniture purchased by 28%.
    • Decrease consumer expenditure on furniture.
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Ec 205 Problem Sets 1-3 - Quiz
About This Quiz

This quiz titled 'EC 205 Problem Sets 1-3' assesses key economic principles through questions on corporate profits, implicit costs, economic profit calculation, business structures, and input variability. It's designed to test understanding of fundamental economics concepts relevant for students and professionals.

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  • 2. 

    The more substitutes there are for an item,

    • The higher the cost of the item will be

    • The less elastic the demand will be.

    • The more we need the item.

    • The more elastic the demand will be.

    Correct Answer
    A. The more elastic the demand will be.
    Explanation
    When there are more substitutes available for an item, it means that consumers have more options to choose from. This increases the price sensitivity of consumers, as they can easily switch to a substitute if the price of the item increases. As a result, the demand for the item becomes more elastic, meaning that a small change in price will lead to a larger change in the quantity demanded.

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  • 3. 

    Because of scarcity,

    • We can obtain more of any good or service we desire without sacrificing something of value.

    • We can use more resources for one purpose without sacrificing the amount used for other purposes.

    • We must sacrifice something of value to obtain more of any good or service we desire.

    • The opportunity cost of any good or service will always be zero.

    Correct Answer
    A. We must sacrifice something of value to obtain more of any good or service we desire.
  • 4. 

    Suppose you spend all your income on compact discs and hamburger dinners. The price of a compact disc is $10, and the price of a hamburger dinner is $5. It follows that the opportunity cost of a compact disc is

    • $5.

    • One hamburger dinner.

    • One-half of a hamburger dinner.

    • Two hamburger dinners.

    Correct Answer
    A. Two hamburger dinners.
    Explanation
    The opportunity cost of a compact disc is the value of the next best alternative that is forgone. In this scenario, if you choose to buy a compact disc, you are giving up the opportunity to buy hamburger dinners. Since the price of a compact disc is $10 and the price of a hamburger dinner is $5, you can buy two hamburger dinners with the same amount of money. Therefore, the opportunity cost of a compact disc is two hamburger dinners.

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  • 5. 

    Which of the following is an example of capital?

    • An oven used by a pizza parlor.

    • A shovel used by a farmer.

    • An oil tanker used by a petroleum company.

    • A delivery truck.

    • All of the above

    Correct Answer
    A. All of the above
    Explanation
    All of the options listed are examples of capital. Capital refers to the physical assets or resources that are used in the production of goods and services. In this case, an oven, shovel, oil tanker, and delivery truck are all examples of physical assets that are used by different industries for their production processes. Therefore, all of the options listed can be considered examples of capital.

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  • 6. 

    The table below shows how the marginal benefit of pizza dinners varies with the number consumed per month for Ralph. Dinners per Month Marginal Benefit 1 $8.00 2 $6.00 3 $4.00 4 $2.00 Suppose the price per pizza dinner is $8.99 and accurately reflects the marginal cost of the dinners to Ralph. Assuming that Ralph is rational,

    • He will not consume any pizza dinners this month

    • He will consume 6 pizza dinners this month

    • He will consume 4 pizza dinners this month.

    • He will consume 1 pizza dinner this month.

    • He will consume 3 pizza dinners this month

    Correct Answer
    A. He will not consume any pizza dinners this month
    Explanation
    Ralph will not consume any pizza dinners this month because the marginal benefit of each additional dinner decreases as the number of dinners consumed increases. The marginal benefit decreases from $8.00 to $6.00 to $4.00 to $2.00. Since the price per pizza dinner is $8.99 and accurately reflects the marginal cost, it is not worth it for Ralph to consume any pizza dinners as the marginal cost exceeds the marginal benefit. Therefore, he will not consume any pizza dinners this month.

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  • 7. 

    In recent years, production possibilities curve of China has been shifting out at a faster rate than any other nation in the world. Which of the following can best explain China’s rapid economic growth?

    • Slow growth in the labor force.

    • A low savings rate.

    • High inflation.

    • A high rate of investment.

    Correct Answer
    A. A high rate of investment.
    Explanation
    China's rapid economic growth can be best explained by a high rate of investment. This means that China has been investing a significant amount of money into its economy, which has led to increased production and productivity. This investment has allowed China to expand its production possibilities and shift its production possibilities curve out at a faster rate than any other nation. By investing in infrastructure, technology, and human capital, China has been able to stimulate economic growth and increase its overall output.

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  • 8. 
    The data provided in the table below show how the marginal benefit and marginal cost of attending concerts varies with the number attended per year for John. Assuming John is rational, how many concerts will he attend per year?    Concerts Attended (per year)   Marginal Benefit (dollars)   Marginal Cost (dollars) 1   100   30 2   75   30 3   40   30 4   20   30 5   10   30 - ProProfs

    The data provided in the table below show how the marginal benefit and marginal cost of attending concerts varies with the number attended per year for John. Assuming John is rational, how many concerts will he attend per year?    Concerts Attended (per year)   Marginal Benefit (dollars)   Marginal Cost (dollars) 1   100   30 2   75   30 3   40   30 4   20   30 5   10   30

    • 2

    • 5

    • 3

    • 4

    • 1

    Correct Answer
    A. 3
    Explanation
    Based on the table, the marginal benefit of attending concerts decreases as the number of concerts attended increases, while the marginal cost remains constant at $30. John is rational, meaning he will continue attending concerts as long as the marginal benefit is greater than or equal to the marginal cost. Looking at the table, the marginal benefit is greater than the marginal cost for the first three concerts (100 > 30, 75 > 30, 40 > 30), but it becomes less than the marginal cost for the fourth and fifth concerts (20 < 30, 10 < 30). Therefore, John will attend 3 concerts per year.

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  • 9. 

    The figure above shows the long-run average cost (AC) curve for a firm that produces radios as well as four short-run average cost curves. Each of the short-run average cost curves corresponds to a different-sized plant--AC1 is associated with Plant 1 AC2 is associated with Plant 2 etc. Which plant is optimal if the firm is going to produce 2500 radios per week?

    • Plant 1

    • Plant 2

    • Plant 3

    • Plant 4

    Correct Answer
    A. Plant 2
  • 10. 

    The cross-elasticity of demand between JVC VCRs and the price of Sony VCRs is likely to be

    • Zero.

    • A positive number.

    • A negative number less than -1.

    • A negative number between zero and -1.

    Correct Answer
    A. A positive number.
    Explanation
    The cross-elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. In this case, the cross-elasticity of demand between JVC VCRs and the price of Sony VCRs is likely to be a positive number because they are substitute goods. When the price of Sony VCRs increases, consumers are more likely to switch to buying JVC VCRs, leading to an increase in the quantity demanded of JVC VCRs. Therefore, the cross-elasticity of demand is positive, indicating a direct relationship between the price of Sony VCRs and the quantity demanded of JVC VCRs.

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  • 11. 

    Which of the following is assumed when constructing a production possibilities curve?

    • The quantity of economic resources available during the year is fixed.

    • Technology is constantly changing.

    • The quality of economic resources is constantly changing.

    • Production is unaffected by changes in technology.

    Correct Answer
    A. The quantity of economic resources available during the year is fixed.
    Explanation
    When constructing a production possibilities curve, it is assumed that the quantity of economic resources available during the year is fixed. This means that the amount of land, labor, capital, and entrepreneurship available for production remains constant. This assumption allows economists to analyze the trade-offs and opportunity costs involved in producing different combinations of goods and services. By assuming a fixed quantity of resources, the production possibilities curve represents the maximum potential output that can be achieved given the available resources and technology.

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  • 12. 

    Before the November 13, 1993, Florida State vs. Notre Dame football game, the price of a ticket to the game was below the equilibrium price. A price below the market equilibrium price results in

    • Insufficient demand for tickets.

    • A shortage of tickets.

    • Excess supply.

    • Rationing by the government.

    • A surplus of tickets

    Correct Answer
    A. A shortage of tickets.
    Explanation
    When the price of a ticket to the game is below the equilibrium price, it means that the price is set lower than what the market is willing to pay. This creates a situation where there is insufficient demand for tickets at that price. As a result, there will be a shortage of tickets because the quantity demanded exceeds the quantity supplied.

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  • 13. 

    The price elasticity of demand for Bart Simpson watches is -3. A 5% increase in the price of the watches will cause the quantity demanded to

    • Decrease by 3%.

    • Decrease by 5%.

    • Increase.

    • Decrease by 15%.

    Correct Answer
    A. Decrease by 15%.
    Explanation
    The price elasticity of demand for Bart Simpson watches being -3 indicates that the demand for these watches is relatively elastic. This means that a small increase in price will result in a proportionately larger decrease in quantity demanded. Therefore, a 5% increase in price will cause the quantity demanded to decrease by 15%, as the elasticity coefficient (-3) indicates a 3:1 ratio between price and quantity changes.

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  • 14. 

    Which of the following can increase the opportunity cost of attending college for students?

    • An increase in wages paid to workers without college degrees

    • An increase in wages paid to workers with college degrees

    • A decrease in the costs of room and board for college students

    • A decrease in wages paid to workers without college degrees

    Correct Answer
    A. An increase in wages paid to workers without college degrees
    Explanation
    An increase in wages paid to workers without college degrees can increase the opportunity cost of attending college for students. This is because if the wages for workers without college degrees increase, it may make it more financially attractive for students to enter the workforce directly instead of investing time and money in obtaining a college degree. As a result, the opportunity cost of attending college, which includes the potential earnings that could be gained from working instead, would also increase.

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  • 15. 

    Suppose an economy produces only pizza and jeans. If some resources are specialized in the production of either pizzas or jeans,

    • The opportunity cost of additional units of pizza will decrease as more pizza is produced.

    • The opportunity cost of additional units of pizza will be constant.

    • The opportunity cost of additional units of pizza will increase as more pizza is produced.

    • The production possibilities curve for the economy will be a straight line.

    Correct Answer
    A. The opportunity cost of additional units of pizza will increase as more pizza is produced.
    Explanation
    When resources are specialized in the production of either pizzas or jeans, the opportunity cost of producing additional units of pizza will increase as more pizza is produced. This is because resources that were initially better suited for pizza production will be diverted to jeans production, resulting in a decrease in pizza production efficiency. As a result, more and more resources will need to be allocated to pizza production to produce the same amount, leading to an increase in the opportunity cost of producing additional units of pizza.

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  • 16. 

    An individual's ability to increase the consumption of two goods ___________ when the price of one or both goods ___________.

    • Does not change, increases

    • Decreases, increases

    • Decreases, decreases

    • Increases, increases

    • Increases, does not change

    Correct Answer
    A. Decreases, increases
    Explanation
    When the price of one or both goods increases, an individual's ability to increase the consumption of the goods decreases. This is because as the price of goods increases, it becomes more expensive to purchase them, which may limit the individual's ability to afford and consume more of the goods. Therefore, the correct answer is "decreases, increases".

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  • 17. 

    In the long run,

    • Only some inputs are variable.

    • The firm is confined to a plant of a given size.

    • All inputs are variable.

    • There are no variable inputs.

    Correct Answer
    A. All inputs are variable.
    Explanation
    In the long run, all inputs are variable. This means that the firm has the flexibility to adjust and change all of its inputs, such as labor, capital, and raw materials, in order to optimize its production and minimize costs. Unlike the short run, where some inputs are fixed and cannot be easily changed, the long run allows the firm to make adjustments to all factors of production to adapt to changing market conditions and improve efficiency.

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  • 18. 
    The graph shows the demand for and supply of labor hours by teenagers in the U.S. If the minimum wage is increased from $4.25 to $6.00 per hour, the result will be - ProProfs

    The graph shows the demand for and supply of labor hours by teenagers in the U.S. If the minimum wage is increased from $4.25 to $6.00 per hour, the result will be

    • No change in labor hours supplied by teenagers or demanded by employers of teenagers.

    • A shortage of teenaged workers.

    • A decrease in labor hours supplied by teenagers, along with an increase in labor hours demanded by employers of teenagers.

    • An increase in labor hours supplied by teenagers, along with a decrease in labor hours demanded by employers of teenagers.

    Correct Answer
    A. An increase in labor hours supplied by teenagers, along with a decrease in labor hours demanded by employers of teenagers.
    Explanation
    If the minimum wage is increased from $4.25 to $6.00 per hour, it would lead to an increase in labor hours supplied by teenagers because they would be incentivized to work more due to the higher wage. On the other hand, employers of teenagers would demand fewer labor hours because the higher wage would increase their labor costs. Therefore, the result would be an increase in labor hours supplied by teenagers and a decrease in labor hours demanded by employers of teenagers.

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  • 19. 

    The portion of corporate profits that's passed on to stockholders is called

    • Economic profit.

    • Retained earnings.

    • Net income.

    • Interest payments.

    • Dividends.

    Correct Answer
    A. Dividends.
    Explanation
    Dividends are the portion of corporate profits that is distributed to stockholders. This is a form of return on investment for the shareholders. Economic profit refers to the total revenue minus both explicit and implicit costs. Retained earnings are the profits that are reinvested back into the company. Net income is the total revenue minus all expenses. Interest payments are the payments made to lenders for borrowing money.

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  • 20. 
    Refer to the budget line in the figure. If the price of milk is $2 per gallon, what is the price of a loaf of bread? - ProProfs

    Refer to the budget line in the figure. If the price of milk is $2 per gallon, what is the price of a loaf of bread?

    • $1.25

    • 50 cents

    • $2

    • $1.50

    • $1

    Correct Answer
    A. $1
    Explanation
    Based on the budget line in the figure, the price of milk is $2 per gallon. The budget line represents the different combinations of goods that can be purchased with a given budget. Since the price of milk is $2, and the budget line intersects with the point representing the purchase of a loaf of bread, we can conclude that the price of a loaf of bread is $1.

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  • 21. 

    Gilligan runs a local coconut processing plant. Gilligan notices that the marginal product of labor for his plant is currently negative. This means

    • Total output will increase if Gilligan increases the amount of labor used

    • Total output will remain unchanged if Gilligan increases the amount of labor used

    • Total output will remain unchanged if Gilligan reduces the amount of labor used

    • Total output will increase if Gilligan reduces the amount of labor used.

    Correct Answer
    A. Total output will increase if Gilligan reduces the amount of labor used.
    Explanation
    If the marginal product of labor is currently negative, it means that each additional unit of labor is decreasing the total output. Therefore, if Gilligan reduces the amount of labor used, the negative impact of each additional unit of labor will be reduced, leading to an increase in total output.

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  • 22. 

    Suppose you operate a factory producing lawn mowers. Your current level of output is 500 lawn mowers per week. Your weekly variable cost is $40,000. If your total cost is $50,000 per month,

    • Average variable cost of production is $100.

    • Average fixed cost of production is $80.

    • Average variable cost of production is $80.

    • Average cost of production is $80.

    Correct Answer
    A. Average variable cost of production is $80.
    Explanation
    The average variable cost of production is calculated by dividing the total variable cost by the level of output. In this case, the weekly variable cost is $40,000 and the level of output is 500 lawn mowers per week. Dividing $40,000 by 500 gives us an average variable cost of $80 per lawn mower.

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  • 23. 

    Which of the following is a measure of average variable cost?

    • Average cost − average fixed cost

    • (Cumulative sum of marginal cost)/Output

    • (Total cost − fixed cost)/Output

    • (Price of the variable input)/(Average product of the variable input)

    • All of the above.

    Correct Answer
    A. All of the above.
    Explanation
    The correct answer is "All of the above" because each of the options provided in the question is a measure of average variable cost. Average cost minus average fixed cost represents the average variable cost per unit of output after subtracting the average fixed cost. The cumulative sum of marginal cost divided by output gives the average variable cost by summing up the marginal costs and dividing by the output. Total cost minus fixed cost divided by output also gives the average variable cost per unit of output. Finally, the price of the variable input divided by the average product of the variable input gives the average variable cost. Therefore, all of these options are measures of average variable cost.

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  • 24. 

    A rent control law is passed in the city of Portland. If the equilibrium rent for a one-bedroom apartment is $550 per month,

    • There will be a shortage of one-bedroom apartments if the rent ceiling is $550 per month.

    • There will be a surplus of one-bedroom apartments if the rent ceiling exceeds $550 per month.

    • There will be a shortage of one-bedroom apartments if the rent ceiling exceeds $550 per month.

    • There will be a shortage of one-bedroom apartments if the rent ceiling is below $550 per month.

    Correct Answer
    A. There will be a shortage of one-bedroom apartments if the rent ceiling is below $550 per month.
    Explanation
    If the equilibrium rent for a one-bedroom apartment is $550 per month and a rent control law is passed with a rent ceiling below $550 per month, it means that the maximum amount landlords can charge for rent is below the equilibrium price. This will result in a shortage of one-bedroom apartments because landlords will not be willing to supply as many apartments at the lower rent price. The demand for apartments at the lower price will exceed the supply available, leading to a shortage.

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  • 25. 

    Paola receives an allowance of $300 per month from her father, which she uses to buy gasoline for her car and to buy cassette tapes. Suppose the price of gasoline doubles while the price of cassette tapes and her allowance remain the same. This implies that

    • The opportunity cost of cassette tapes for Paola will decrease.

    • There will be no effect on the opportunity cost of cassette tapes for Paola

    • The opportunity cost of cassette tapes for Paola will increase.

    • The opportunity cost of gasoline will decrease.

    Correct Answer
    A. The opportunity cost of cassette tapes for Paola will decrease.
    Explanation
    If the price of gasoline doubles while the price of cassette tapes and Paola's allowance remain the same, it means that Paola will have to spend more money on gasoline and will have less money left to spend on cassette tapes. Therefore, the opportunity cost of cassette tapes for Paola will decrease because she will have to give up fewer cassette tapes in order to purchase gasoline.

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  • 26. 

    If the price elasticity of demand for car tags is zero for all prices, the demand curve is

    • Vertical.

    • Horizontal.

    • Linear, with a slope of zero.

    • Hyperbolic.

    Correct Answer
    A. Vertical.
    Explanation
    If the price elasticity of demand for car tags is zero for all prices, it means that the quantity demanded does not change regardless of the price. This indicates a perfectly inelastic demand, where consumers are not responsive to changes in price. In this case, the demand curve would be vertical, as the quantity demanded remains constant along the vertical axis regardless of price changes.

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  • 27. 

    Suppose a nation produces only two goods--bread and computers. Currently, resources are being used to produce 10,000 computers and 5 million loaves of bread each year. If productive efficiency prevails in this nation this year,

    • It is possible to increase the production of bread to 6 million loaves without reducing the number of computers produced during the year.

    • It is possible to increase the production of bread to 6 million loaves per year, only by reducing the number of computers produced.

    • It must be operating at a point within its production possibilities curve

    • It is possible to increase the number of computers produced to 15,000 per year, while still producing 5 million loaves of bread per year.

    Correct Answer
    A. It is possible to increase the production of bread to 6 million loaves per year, only by reducing the number of computers produced.
    Explanation
    If the nation is currently at a point of productive efficiency, it means that it is already producing the maximum output possible with its given resources. Therefore, in order to increase the production of bread to 6 million loaves per year, the nation would have to reallocate some of its resources from producing computers to producing bread. This would result in a reduction in the number of computers produced. Therefore, the correct answer is that it is possible to increase the production of bread to 6 million loaves per year, only by reducing the number of computers produced.

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  • 28. 

    A firm is producing 100 units of output at a total cost of $400. The firm's average variable cost is $3 per unit. What is the firm's fixed cost?

    • $1

    • $100

    • $300

    • $150

    Correct Answer
    A. $100
    Explanation
    The firm's fixed cost can be calculated by subtracting the average variable cost per unit from the total cost. In this case, the average variable cost is $3 per unit and the total cost is $400. Since the firm is producing 100 units, the total variable cost is $300 (100 units x $3 per unit). Therefore, the fixed cost is $400 - $300 = $100.

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  • 29. 

    The only variable input used in producing bicycles in a small factory is labor. Currently, 4 workers are employed. Each works 40 hours per week and is paid $10 per hour. If fixed cost is $2,000 per week and total output is 10 bicycles per week,

    • Average fixed cost is $200.

    • Average variable cost is $160

    • Average cost is $360.

    • All of the above

    Correct Answer
    A. All of the above
    Explanation
    The given answer "All of the above" is correct because it includes all three statements about average fixed cost, average variable cost, and average cost. The average fixed cost is calculated by dividing the fixed cost ($2,000) by the total output (10 bicycles), resulting in $200. The average variable cost is calculated by dividing the total variable cost (total labor cost, which is 4 workers x 40 hours x $10 per hour) by the total output (10 bicycles), resulting in $160. Finally, the average cost is the sum of the average fixed cost and the average variable cost, which is $200 + $160 = $360. Therefore, all three statements are correct.

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  • 30. 

    Price Quantity Demanded $5 400 $4 500 $3 600 $2 700 What is the elasticity of demand between the prices of $3 and $2?

    • -7/9

    • -2/3

    • -5/13

    • -6/5

    Correct Answer
    A. -5/13
    Explanation
    The elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. In this case, the price has decreased from $3 to $2, which is a 33.33% decrease. The quantity demanded has increased from 600 to 700, which is a 16.67% increase. Therefore, the elasticity of demand is (16.67%)/(33.33%) = -0.5, which is equivalent to -5/13.

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  • 31. 

    Unlimited liability is a characteristic of

    • Partnerships.

    • Sole proprietorships.

    • Corporations.

    • Sole proprietorships and partnerships.

    Correct Answer
    A. Sole proprietorships and partnerships.
    Explanation
    Unlimited liability is a characteristic of sole proprietorships and partnerships. In these business structures, the owners are personally liable for all debts and obligations of the business. This means that if the business cannot pay its debts, the owners' personal assets can be used to satisfy those debts. This is different from corporations, where the owners' liability is limited to the amount of their investment in the company.

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  • 32. 

    Number of Workers Employed Marginal Product of Labor (Per Week) (Pairs of Shoes Per Week) 0 - 1 30 2 40 3 20 4 -10 5 -20 The table above shows the marginal product of labor for a shoe manufacturer. At what point does the law of diminishing marginal returns set in?

    • After the first worker is hired.

    • After the fourth worker is hired.

    • After the third worker is hired.

    • After the second worker is hired.

    Correct Answer
    A. After the second worker is hired.
    Explanation
    The law of diminishing marginal returns sets in after the second worker is hired because the marginal product of labor decreases from 40 pairs of shoes per week for the second worker to 20 pairs of shoes per week for the third worker. This indicates that each additional worker contributes less to the total output, which is a characteristic of the law of diminishing marginal returns.

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  • 33. 

    Economies of scale occur if a firm's

    • Average cost increases as the firm expands its plant.

    • Long-run average cost curve is horizontal.

    • Long-run average cost decreases as the firm increases its output by expanding its plant and equipment.

    • Long-run average cost curve is upward-sloping.

    Correct Answer
    A. Long-run average cost decreases as the firm increases its output by expanding its plant and equipment.
    Explanation
    Economies of scale occur when a firm's long-run average cost decreases as it increases its output by expanding its plant and equipment. This means that as the firm grows and produces more, it experiences cost savings and efficiency gains, leading to lower average costs. This can happen due to factors such as specialization, bulk purchasing, and technological advancements. As a result, the firm can enjoy cost advantages and potentially higher profits as it expands its operations.

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  • 34. 

    If price in the market for dinosaur bones is below its equilibrium level,

    • Price will increase and quantity demanded will decrease

    • Price will increase, causing an increase in supply.

    • Price and quantity demanded will both increase

    • Price will decrease, causing a decrease in supply.

    Correct Answer
    A. Price will increase and quantity demanded will decrease
    Explanation
    If the price in the market for dinosaur bones is below its equilibrium level, it means that the price is lower than what buyers are willing to pay. As a result, there will be excess demand for dinosaur bones, and sellers will have the incentive to increase the price. This increase in price will lead to a decrease in the quantity demanded, as buyers will be less willing to purchase at the higher price. Therefore, the correct answer is that the price will increase and the quantity demanded will decrease.

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  • 35. 

    As a result of a government guarantee of $2.50 per gallon for milk--no matter how much milk is produced--more farmers enter this market until the new supply curve equals S2. As a result of this development

    • The milk surplus will increase to 7.6 billion gallons

    • Taxpayers will pay an extra $6.25 billion to dairy farmers.

    • The real equilibrium price of milk will be $.63.

    • All of the above.

    • None of the above.

    Correct Answer
    A. All of the above.
    Explanation
    The government guarantee of $2.50 per gallon for milk encourages more farmers to enter the market, leading to an increase in milk supply. This increase in supply will result in a milk surplus of 7.6 billion gallons. Additionally, since the government guarantee requires taxpayers to pay the guaranteed price, an increase in milk production will lead to taxpayers paying an extra $6.25 billion to dairy farmers. Finally, with the increase in milk supply and surplus, the equilibrium price of milk will decrease to $.63. Therefore, all of the statements mentioned in the options are correct.

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  • 36. 

    Suppose a new government provision is enacted in the U.S. that increases government spending of health benefits, providing tax-financed, long-term nursing home care to the growing population of people over the age of 65. If the U.S. is experiencing productive efficiency, the new benefits

    • Can be provided without any sacrifice of other goods and services.

    • Will involve sacrifice of other goods and services

    • Will require a reallocation of resources from the production of other goods and services to the production of health services for the elderly.

    • Will involve sacrifice of other goods and services and require a reallocation of resources from the production of other goods and services to the production of health services for the elderly.

    Correct Answer
    A. Will involve sacrifice of other goods and services and require a reallocation of resources from the production of other goods and services to the production of health services for the elderly.
    Explanation
    If the U.S. is experiencing productive efficiency, it means that the country is already producing goods and services at the maximum possible output given its resources and technology. Therefore, any increase in government spending on health benefits, specifically long-term nursing home care for the elderly, would require a reallocation of resources from the production of other goods and services. This reallocation would involve sacrificing the production of those other goods and services in order to provide the new health benefits. Hence, the correct answer is that the new benefits will involve sacrifice of other goods and services and require a reallocation of resources.

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  • 37. 
    An increase in the size of the economy's labor force is illustrated by graph - ProProfs

    An increase in the size of the economy's labor force is illustrated by graph

    • A

    • B

    • C

    • D

    Correct Answer
    A. A
    Explanation
    The correct answer is A because an increase in the size of the economy's labor force would result in a rightward shift of the labor supply curve. Graph A shows a rightward shift of the labor supply curve, indicating an increase in the size of the labor force. Graphs B, C, and D do not show any shift in the labor supply curve, so they do not represent an increase in the size of the labor force.

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  • 38. 

    At a current level of production of 10,000 per day in its Garner plant, the marginal cost of producing a Jess Jones Sausage is 50 cents. If the average cost of production is 40 cents, at that level of production,

    • The average cost of production will decline if output is increased above 10,000 sausages per day

    • The average cost of production will remain 40 cents if output is increased above 10,000 sausages per day.

    • The average fixed cost of production will increase if output is increased above 10,000 sausages per day

    • The average cost of production will increase if output is increased above 10,000 sausages per day.

    Correct Answer
    A. The average cost of production will increase if output is increased above 10,000 sausages per day.
    Explanation
    The given information states that at a current level of production of 10,000 sausages per day, the marginal cost of production is 50 cents and the average cost of production is 40 cents. This implies that the cost of producing each additional sausage (marginal cost) is higher than the average cost of production. Therefore, if output is increased above 10,000 sausages per day, the average cost of production will increase because the additional sausages will be produced at a higher cost than the average cost.

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  • 39. 

    John is president of a small corporation. At the end of the year, his accountant calculates the following costs attributable to the business. Payroll for wages and salaries: $100,000 Interest paid to banks: $40,000 Depreciation on equipment: $80,000 Supplies, utilities: $50,000 The equity of the corporation, a measure of the value of its assets less debt, is estimated to be $200,000. John forgoes a return of 10% per year by keeping the equity in the corporation. If the corporation takes in revenue of $500,000 this year, its economic profit is

    • $490,000.

    • $290,000.

    • $230,000

    • $210,000.

    Correct Answer
    A. $210,000.
    Explanation
    The economic profit of the corporation is calculated by subtracting all costs, including the opportunity cost of keeping the equity in the corporation, from the revenue. The costs attributable to the business are $100,000 (payroll), $40,000 (interest), $80,000 (depreciation), and $50,000 (supplies/utilities), totaling $270,000. The opportunity cost of keeping the equity in the corporation is $200,000 * 10% = $20,000. Subtracting the costs and opportunity cost from the revenue ($500,000 - $270,000 - $20,000) gives an economic profit of $210,000.

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  • 40. 

    Suppose the market equilibrium price of lumber increases while, at the same time, the market equilibrium quantity sold declines. Which of the following is the most likely explanation for the change in the market equilibrium price and quantity?

    • A decrease in the demand for lumber combined with an increase in the supply of lumber.

    • An increase in the demand for lumber combined with an increase in the supply of lumber.

    • A decrease in the supply of lumber.

    • An increase in the demand for lumber.

    Correct Answer
    A. A decrease in the supply of lumber.
    Explanation
    The most likely explanation for the increase in market equilibrium price and decrease in quantity sold is a decrease in the supply of lumber. When the supply of lumber decreases, there is less quantity available in the market, leading to an increase in price. Additionally, the decrease in supply also results in a decrease in the quantity sold as there is less supply to meet the demand. This explanation is supported by the fact that the question states that the market equilibrium price increases while the quantity sold declines.

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  • 41. 

    If the supply of steel is perfectly elastic, an increase in the demand for steel will

    • Decrease total revenue taken in by steel producers.

    • Increase the price of steel, but have no effect on quantity supplied.

    • Increase the quantity of steel supplied, but have no effect on the price

    • Have no effect on the price or the quantity supplied.

    Correct Answer
    A. Increase the quantity of steel supplied, but have no effect on the price
    Explanation
    If the supply of steel is perfectly elastic, it means that producers can increase the quantity supplied without any change in price. Therefore, an increase in the demand for steel will lead to an increase in the quantity of steel supplied, but it will not affect the price. This is because the producers can easily adjust their production to meet the increased demand without needing to change the price.

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  • 42. 

    Implicit costs are equal to

    • Total revenues less total costs.

    • Accounting costs less imputed costs

    • Opportunity costs of owner-supplied resources.

    • Imputed costs plus explicit costs.

    • Opportunity costs of owner-supplied resources plus accounting costs.

    Correct Answer
    A. Opportunity costs of owner-supplied resources.
    Explanation
    Implicit costs refer to the opportunity costs of using resources that are owned by the business owner themselves. These costs are not recorded in the accounting books but represent the value of the resources that could have been used in an alternative way. Therefore, the correct answer is "opportunity costs of owner-supplied resources."

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  • 43. 

    If marginal cost is less than average cost, at current levels of production,

    • Total cost is decreasing.

    • Average cost is decreasing with output.

    • Average cost is increasing with output.

    • Average cost is at a minimum.

    Correct Answer
    A. Average cost is decreasing with output.
    Explanation
    When the marginal cost is less than the average cost, it means that the cost of producing an additional unit is lower than the average cost of producing all units. This suggests that the average cost will decrease as more units are produced. This is because the additional units being produced are adding less to the total cost compared to the previous units, resulting in a decrease in the average cost. Therefore, the correct answer is that the average cost is decreasing with output.

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  • 44. 

    A per-unit tax will be paid entirely by consumers if

    • Demand is perfectly inelastic.

    • Demand is elastic

    • Supply is perfectly elastic

    • Demand is perfectly inelastic or supply is perfectly elastic.

    • Demand is elastic or inelastic

    Correct Answer
    A. Demand is perfectly inelastic or supply is perfectly elastic.
    Explanation
    If demand is perfectly inelastic, it means that consumers are not responsive to changes in price. Therefore, if a per-unit tax is imposed, the consumers will have to bear the entire burden of the tax as they are unable to shift the burden to the producers by reducing their quantity demanded. On the other hand, if supply is perfectly elastic, it means that producers are very responsive to changes in price and can easily increase their quantity supplied without increasing the price. In this case, the burden of the tax will also fall entirely on the consumers as producers can simply increase their quantity supplied without increasing the price to compensate for the tax.

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  • 45. 

    A recession hits the U.S., and there's a decrease in the demand for labor. Assuming nothing else changes in labor markets and the labor market achieves a new equilibrium in response to the decrease in demand,

    • Wages will fall and the quantity of labor supplied will decrease

    • Employment will increase.

    • Wages will fall and the quantity of labor supplied will increase.

    • There will be a surplus of workers.

    • There will be a shortage of workers.

    Correct Answer
    A. Wages will fall and the quantity of labor supplied will decrease
    Explanation
    In response to the decrease in demand for labor, wages will fall because there will be fewer job opportunities available. This decrease in wages will discourage workers from supplying their labor, leading to a decrease in the quantity of labor supplied. Therefore, the correct answer is that wages will fall and the quantity of labor supplied will decrease.

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Quiz Review Timeline (Updated): Mar 17, 2023 +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

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  • Mar 17, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Sep 27, 2011
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