Microeconomics 101 Part II Quiz

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Microeconomics 101 Part II Quiz - Quiz

Welcome to the Microeconomics 101 Part II Quiz. You can be a complete novice or the most experience person in a particular field of work or study, and a helpful quiz on that topic will still benefit you, whether it’s to add to your knowledge or simply to reinforce it. Today, we’ll be taking a look at the subject of microeconomics and seeing just how much you can tell us about how it all works. Think you can achieve full marks? Let’s find out!


Questions and Answers
  • 1. 

    The idea in economics that “there is no free lunch” means that:

    • A.

      Businesses would lose money if they offered free lunches

    • B.

      The thought of a free lunch is often better than the reality of consuming it

    • C.

      There are always opportunity costs when scarce resources are used to prepare lunches

    • D.

      Businesses use free lunches to attract customers but this advertising practice is costly

    Correct Answer
    A. Businesses would lose money if they offered free lunches
    Explanation
    The idea in economics that "there is no free lunch" means that there are always opportunity costs when scarce resources are used to prepare lunches. This implies that even if a business offers free lunches, they would still have to incur costs such as ingredients, labor, and overhead expenses. Therefore, businesses would lose money if they offered free lunches.

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  • 2. 

    As a result of a decrease in the price of hamburger, producers reduce the supply of hamburger. This is an illustration of:

    • A.

      A shift in the supply curve due to the price effect

    • B.

      Changing production in response to resource cost changes

    • C.

      The desire of producers to restrict supply to maximize their profits

    • D.

      A movement along the supply curve

    Correct Answer
    D. A movement along the supply curve
    Explanation
    This scenario describes a movement along the supply curve. When the price of hamburger decreases, producers respond by reducing the supply of hamburger. This is because they are willing to supply less at a lower price. A movement along the supply curve occurs when there is a change in quantity supplied due to a change in price, while all other factors remain constant.

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  • 3. 

    Which of the following is most likely to cause an increase (shift) in the supply curve for cell phones?

    • A.

      A decrease in the rates charged by cell phone companies for using cell phones

    • B.

      An elimination of tariffs on imported cell phones

    • C.

      Manufacturers of cell phones decide to raise the price of cell phones

    • D.

      A decrease in the rates charged by companies that provide “land line” services

    Correct Answer
    B. An elimination of tariffs on imported cell phones
    Explanation
    An elimination of tariffs on imported cell phones is most likely to cause an increase in the supply curve for cell phones. Tariffs are taxes imposed on imported goods, which increase the cost of importing and therefore decrease the supply of imported goods. By eliminating tariffs on imported cell phones, the cost of importing them would decrease, leading to an increase in the supply of cell phones available in the market. This would cause a shift in the supply curve to the right, indicating an increase in the quantity supplied at each price level.

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  • 4. 

    In which range of the demand schedule below is demand price elastic?
    • Price   Quantity Demanded
    • $7                   200
    • 5                     300
    • 3                     400
    • 1                     500
    • 0                     600

    • A.

      $0-$1

    • B.

      $1-$3

    • C.

      $3-$5

    • D.

      $5-$7

    Correct Answer
    D. $5-$7
    Explanation
    Demand price elasticity measures the responsiveness of quantity demanded to a change in price. In the given demand schedule, the quantity demanded decreases from 600 to 500 as the price increases from $1 to $3, indicating an elastic response. However, the quantity demanded remains constant at 500 as the price increases from $3 to $5, suggesting an inelastic response. Finally, the quantity demanded decreases from 500 to 400 as the price increases from $5 to $7, indicating an elastic response. Therefore, the range of the demand schedule where demand price is elastic is between $5 and $7.

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  • 5. 

    A remote island nation is discovered, and on this island the cross elasticity of demand for coconut milk and fruit punch is 1.0. This indicates that these two goods are:

    • A.

      Normal

    • B.

      Inferior

    • C.

      Complements

    • D.

      Substitutes

    Correct Answer
    D. Substitutes
    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, since the cross elasticity of demand for coconut milk and fruit punch is positive and equal to 1.0, it indicates that these two goods are substitutes. This means that when the price of coconut milk increases, consumers will likely switch to buying more fruit punch instead, as they are considered interchangeable to some extent.

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  • 6. 

    The main determinant of elasticity of supply is the:

    • A.

      Number of close substitutes for the product available to consumers.

    • B.

      Amount of time the producer has to adjust inputs in response to a change in product price.

    • C.

      Extent to which the product is a necessity.

    • D.

      Number of uses for the product.

    Correct Answer
    B. Amount of time the producer has to adjust inputs in response to a change in product price.
    Explanation
    The elasticity of supply refers to the responsiveness of the quantity supplied to a change in price. The amount of time the producer has to adjust inputs in response to a change in product price is the main determinant of elasticity of supply. When producers have more time to adjust their production processes and allocate resources, they are more likely to be able to increase or decrease the quantity supplied in response to price changes. Therefore, the elasticity of supply is higher when producers have more time to adjust inputs.

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  • 7. 

    The supply of product X is elastic if the price of X rises by:

    • A.

      5 percent and quantity supplied rises by 7 percent

    • B.

      8 percent and quantity supplied rises by 8 percent

    • C.

      10 percent and quantity supplied remains the same

    • D.

      7 percent and quantity supplied rises by 5 percent

    Correct Answer
    A. 5 percent and quantity supplied rises by 7 percent
    Explanation
    This answer is correct because it demonstrates the concept of elasticity of supply. When the price of a product rises by 5 percent and the quantity supplied rises by 7 percent, it indicates that the supply of the product is responsive to changes in price. This responsiveness is characteristic of an elastic supply, where a small change in price leads to a relatively larger change in quantity supplied.

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  • 8. 

    A necessary and sufficient condition for a rational consumer to be in equilibrium is that the marginal utility:

    • A.

      Of all products he or she consumes is zero

    • B.

      Of all products he or she consumes is positive

    • C.

      Is the same for all products bought

    • D.

      Per dollar last spent is the same for all products consumed

    Correct Answer
    D. Per dollar last spent is the same for all products consumed
    Explanation
    In order for a rational consumer to be in equilibrium, the marginal utility per dollar last spent must be the same for all products consumed. This means that the consumer is allocating their budget in such a way that the additional satisfaction or utility gained from the last dollar spent on each product is equal. This ensures that the consumer is maximizing their overall utility and is not overspending on any particular product.

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  • 9. 

    The long-run supply curve would be upsloping in:

    • A.

      An increasing-cost industry

    • B.

      A decreasing-cost industry

    • C.

      A constant-cost industry

    • D.

      A variable-cost industry

    Correct Answer
    A. An increasing-cost industry
    Explanation
    In an increasing-cost industry, the cost of production increases as the industry expands. This is typically due to limited resources or increasing input prices. As a result, firms in this industry will require higher prices to cover their increasing costs and make a profit. This leads to an upsloping long-run supply curve, as the quantity supplied by firms increases as prices rise.

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  • 10. 

    A natural monopoly occurs when:

    • A.

      Long-run average total costs decline continuously through the full range of market demand

    • B.

      A firm owns or controls all the resources essential to production

    • C.

      Long-run average costs rise continuously as output is increased

    • D.

      Maximum economies of scale are obtained at relatively low levels of output

    Correct Answer
    A. Long-run average total costs decline continuously through the full range of market demand
    Explanation
    A natural monopoly occurs when long-run average total costs decline continuously through the full range of market demand. This means that as the firm produces more and more output, their average costs decrease. This is typically due to economies of scale, where the firm can take advantage of lower costs per unit as they increase their production. As a result, this firm can produce at a lower cost compared to any potential competitors, making it more efficient and dominant in the market.

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  • 11. 

    Which of the following actions would definitely be in violation of anti-trust laws?

    • A.

      If there are 5 firms in an industry characterized as an Oligopoly, and the leaders of the firms meet and agree to take turns as the low bidder on government contract opportunities

    • B.

      All the firms in an industry are found to be charging the same price for their products

    • C.

      In an industry the Herfindahl index score is 1500, and one of the firms has a 50% market share, each of the firm decides to pursue a strategy that is lower price based on their expectation that the other firms will not change their prices

    • D.

      Mergers in an industry result in a decline in the number of competitive firms and a 4 firm concentration ratio of 80%

    Correct Answer
    A. If there are 5 firms in an industry characterized as an Oligopoly, and the leaders of the firms meet and agree to take turns as the low bidder on government contract opportunities
    Explanation
    This action would definitely be in violation of anti-trust laws because it involves collusion and price-fixing among competitors. By agreeing to take turns as the low bidder, the firms are effectively eliminating competition and manipulating the bidding process, which goes against the principles of fair competition and anti-trust regulations.

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  • 12. 

    Prices are likely to be more rigid (less likely to fluctuate):

    • A.

      In oligopoly

    • B.

      In monopolistic competition

    • C.

      Where product demand is inelastic

    • D.

      None of the above

    Correct Answer
    A. In oligopoly
    Explanation
    In oligopoly, prices are likely to be more rigid because there are only a few firms in the market, and they have significant control over the pricing decisions. Due to the limited competition, these firms tend to engage in price fixing or collusion to maintain stable prices and avoid price wars. This lack of price flexibility is beneficial for the firms as it helps them maintain their market share and profitability.

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  • 13. 

    Refer to the above game theory matrix where the numerical data show the profits resulting from alternative combinations of advertising strategies for Ajax and Acme. Ajax’s profits are shown in the upper right part of each cell; Acme’s profits are shown in the lower left. If the two firm engage in collusion, the most likely outcome of the game is cell: Ajax's Advertising Stragy                Large Budget             Small Budget Large            A.                               B. Budget      $800/800                   $1200/600 Small            C.                               D. Budget      $600/1200                 $1000/1000

    • A.

      A.

    • B.

      B.

    • C.

      C.

    • D.

      D.

    Correct Answer
    D. D.
    Explanation
    If the two firms engage in collusion, the most likely outcome of the game is cell D. In this cell, Ajax chooses a small budget for advertising while Acme chooses a large budget. This results in Ajax earning $600 in profits and Acme earning $1200 in profits. This outcome is the most likely because it provides the highest combined profits for both firms compared to the other cells.

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  • 14. 

    Monopolistic competition resembles pure competition because:

    • A.

      Both market structures emphasize non-price competition

    • B.

      In both instances firms will operate at the minimum point on their long-run average total cost curves

    • C.

      Both entail the production of differentiated products

    • D.

      In both instances barriers to entry are either weak or nonexistent

    Correct Answer
    D. In both instances barriers to entry are either weak or nonexistent
    Explanation
    Monopolistic competition resembles pure competition because both market structures have weak or nonexistent barriers to entry. In both cases, new firms can easily enter the market without facing significant obstacles. This leads to a large number of firms operating in the market, promoting competition and preventing any single firm from having significant market power. As a result, both monopolistic competition and pure competition are characterized by a relatively level playing field and the potential for new firms to enter and compete in the market.

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  • 15. 

    Compared to a purely competitive firm in long-run equilibrium, the monopolistic competitor has a:

    • A.

      Lower price and lower output

    • B.

      Higher price and lower output

    • C.

      Higher price and higher output

    • D.

      Price and output that may be higher or lower

    Correct Answer
    B. Higher price and lower output
    Explanation
    In a monopolistic competition, firms have some degree of market power and can differentiate their products. This allows them to charge higher prices compared to purely competitive firms. However, due to competition from other firms, they have to lower their output in order to maintain market share. Therefore, the monopolistic competitor will have a higher price and lower output compared to a purely competitive firm in long-run equilibrium.

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  • 16. 

    Under the kinked demand curve model of oligopoly, which of the following is true:

    • A.

      The firms are in violation of the Sherman Antitrust Act

    • B.

      If the marginal cost of one of the firms rises sufficiently, it may raise its price

    • C.

      All of the firms agree to keep prices rigid to avoid competition

    • D.

      All of the above

    Correct Answer
    B. If the marginal cost of one of the firms rises sufficiently, it may raise its price
    Explanation
    Under the kinked demand curve model of oligopoly, firms are not in violation of the Sherman Antitrust Act because this model does not involve collusion or anti-competitive behavior. Instead, it suggests that firms in an oligopoly market face a demand curve with a kink at the current price level, indicating that rival firms are likely to match price decreases but not price increases. Therefore, if the marginal cost of one firm rises sufficiently, it may choose to raise its price without fear of losing market share to competitors.

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  • 17. 

    Assume that a restaurant is hiring labor in an amount such that the marginal resource cost of the last worker is $10 and the marginal revenue product for the last worker hired is $12. On the basis of this information we can say that:

    • A.

      Profits will be increased by hiring fewer workers

    • B.

      Profits will be increased by hiring more workers

    • C.

      Marginal revenue product must exceed average revenue product

    • D.

      The restaurant is maximizing profits

    Correct Answer
    B. Profits will be increased by hiring more workers
    Explanation
    Based on the information given, we can conclude that the marginal revenue product (MRP) of the last worker hired is higher than the marginal resource cost (MRC) of that worker. This indicates that the additional revenue generated by hiring the last worker is greater than the cost of hiring that worker. Therefore, hiring more workers will increase profits for the restaurant.

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  • 18. 

    Suppose that the production of wheat requires two inputs, labor and fertilizer. The price of labor is $4.50 and the price of fertilizer is $3.00. A farmer is currently employing the inputs such that the marginal product of labor is 11 and the marginal product of fertilizer is 8. If the farmer wants to minimize his costs, he should:

    • A.

      Use more labor and less fertilizer

    • B.

      Use more fertilizer and less labor

    • C.

      Use more labor and more fertilizer

    • D.

      Continue using the same amounts of each input

    Correct Answer
    B. Use more fertilizer and less labor
    Explanation
    The farmer should use more fertilizer and less labor because the marginal product of fertilizer (8) is lower than the marginal product of labor (11). This means that the farmer is getting more output per unit of labor compared to fertilizer. By using more fertilizer and less labor, the farmer can increase their output while minimizing costs, as the price of labor ($4.50) is higher than the price of fertilizer ($3.00).

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  • 19. 

    In pure competition, a profit-maximizing firm will equate the marginal revenue product of labor with the:

    • A.

      Marginal resource cost of labor

    • B.

      Profits produced by the employment of an extra worker

    • C.

      Cost of producing one extra unit of output

    • D.

      Price received from selling one extra unit of output

    Correct Answer
    A. Marginal resource cost of labor
    Explanation
    In pure competition, a profit-maximizing firm will equate the marginal revenue product of labor with the marginal resource cost of labor. This means that the firm will hire additional workers as long as the marginal revenue product of labor is greater than or equal to the marginal resource cost of labor. This ensures that the firm is maximizing its profits by efficiently allocating its resources. The other options, such as profits produced by the employment of an extra worker, cost of producing one extra unit of output, and price received from selling one extra unit of output, are not directly related to the decision-making process of a profit-maximizing firm in pure competition.

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  • 20. 

    Other things equal, the monopsonistic employer will pay a:

    • A.

      Lower wage rate and hire fewer workers than will a purely competitive employer

    • B.

      Higher wage rate but hire fewer workers than will a purely competitive employer

    • C.

      Lower wage rate but hire a larger number of workers than will a purely competitive employer

    • D.

      Higher wage rate and hire a larger number of workers than will a purely competitive employer

    Correct Answer
    A. Lower wage rate and hire fewer workers than will a purely competitive employer
    Explanation
    In a monopsonistic labor market, there is only one employer who has the power to set wages. Due to this market power, the monopsonistic employer can pay a lower wage rate compared to a purely competitive employer. Additionally, the monopsonistic employer will also hire fewer workers because they have the ability to control the labor market and can choose to hire only a limited number of workers at the lower wage rate.

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  • 21. 

    Which of the following is most associated with the demand-enhancement union model?

    • A.

      Reducing the price of inputs that are substitutes for union workers

    • B.

      Lobbying for increases in public expenditures on the product it is producing

    • C.

      Restricting the number of workers allowed to work in the industry

    • D.

      Increasing the price of products that are complements for the one it is producing

    Correct Answer
    B. Lobbying for increases in public expenditures on the product it is producing
    Explanation
    The demand-enhancement union model is most associated with lobbying for increases in public expenditures on the product it is producing. This model focuses on increasing the demand for the product through various means, such as government spending. By advocating for higher public expenditures on the product, the union aims to create more demand, which can lead to increased production and employment opportunities for its members. This strategy is based on the belief that increased government spending will stimulate the economy and benefit both the union and its workers.

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  • 22. 

    Refer to the above diagram. If this labor market is monopsonistic, the wage rate and level of employment respectively will be:

    • A.

      D and E

    • B.

      C and F

    • C.

      B and F

    • D.

      A and F

    Correct Answer
    D. A and F
    Explanation
    In a monopsonistic labor market, there is only one buyer of labor, giving the buyer market power to set the wage rate. The buyer will hire less labor than in a perfectly competitive market, resulting in a lower level of employment. Therefore, the correct answer is A and F, which indicates a lower wage rate (A) and a lower level of employment (F) in a monopsonistic labor market.

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  • 23. 

    The Gini ratio:

    • A.

      Measures the relative extent of poverty in a nation

    • B.

      Compares the income of persons, households, or households at the 90th percentile of the income distribution to the income at the 10th percentile

    • C.

      Is a numerical measure of the extent of income inequality in a nation

    • D.

      None of the above

    Correct Answer
    C. Is a numerical measure of the extent of income inequality in a nation
    Explanation
    The Gini ratio is a numerical measure of the extent of income inequality in a nation. It compares the income of persons, households, or households at the 90th percentile of the income distribution to the income at the 10th percentile. This ratio provides a standardized way to quantify income inequality, with higher values indicating greater inequality. It is widely used by economists and policymakers to assess the distribution of income within a country and to inform policies aimed at reducing inequality.

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  • 24. 

    The crowding model of discrimination suggests that:

    • A.

      Women and selected minorities are systematically excluded from high-paying occupations and crowded into low-paying occupations, decreasing their wages and reducing domestic output

    • B.

      Employers having high discrimination coefficients will be crowded out of the market by nondiscriminating employers in the long run

    • C.

      Firms will base hiring decisions on group averages, rather than on individual characteristics and productivity

    • D.

      Occupational segregation is largely the result of the “taste for discrimination” among employers

    Correct Answer
    A. Women and selected minorities are systematically excluded from high-paying occupations and crowded into low-paying occupations, decreasing their wages and reducing domestic output
    Explanation
    The crowding model of discrimination suggests that women and selected minorities are systematically excluded from high-paying occupations and crowded into low-paying occupations. This leads to a decrease in their wages and a reduction in domestic output. This explanation aligns with the concept of occupational segregation and the negative impact it has on certain groups in terms of employment opportunities and economic outcomes.

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