# Microeconomics Multiple Choice

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Questions from Test 6-11.25 questions per round. The questions change every time you retake the test. 150 questions in total.

• 1.

### Total revenue necessarily equals

• A.

Total output multiplied by the average cost of output.

• B.

Total output multiplied by sales price of output.

• C.

(total output multiplied by sales price) – inventory surplus.

• D.

(total output multiplied by the average cost of output) – inventory shortage.

B. Total output multiplied by sales price of output.
Explanation
Total revenue is calculated by multiplying the total output by the sales price of the output. This is because revenue is the total amount of money generated from selling a certain quantity of goods or services. The sales price represents the price at which each unit of output is sold, and multiplying it by the total output gives the total revenue. The other options, such as subtracting inventory surplus or inventory shortage, do not accurately represent the calculation of total revenue.

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• 2.

### An example of an implicit cost of production would be the

• A.

Cost of raw materials for a printing company to print books.

• B.

Income an entrepreneur could have earned working elsewhere.

• C.

Cost of a delivery truck in a business that rarely makes deliveries.

• D.

All of the above are correct.

B. Income an entrepreneur could have earned working elsewhere.
Explanation
The correct answer is income an entrepreneur could have earned working elsewhere. Implicit costs are the opportunity costs of using resources in a particular way. In this case, the entrepreneur could have earned income by working elsewhere instead of running their own business. This income is forgone as a result of the entrepreneur's decision to allocate their time and resources to their own venture.

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• 3.

### In economics, the field of industrial organization answers which of the following questions?

• A.

Why are consumers subject to the law of demand?

• B.

Why do firms experience falling marginal product of labor?

• C.

Why do firms consider production costs when determining product supply?

• D.

How does the difference in the number of firms affect prices and efficiency of market outcomes?

D. How does the difference in the number of firms affect prices and efficiency of market outcomes?
Explanation
The field of industrial organization in economics focuses on studying how the number of firms in a market affects prices and efficiency of market outcomes. This includes analyzing the impact of factors such as market concentration, barriers to entry, and competition on market dynamics. Understanding the relationship between the number of firms and market outcomes is crucial for policymakers and businesses to make informed decisions regarding market structure and regulation.

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• 4.

### Miranda wants to start her own business. The business she wants to start will require that she purchase a factory that costs \$400,000. She is planning to use \$300,000 of her own money, and borrow an additional \$100,000 to finance the factory purchase. Assume the relevant interest rate is 10 percent. According to this scenario, what is the explicit cost of purchasing the factory for the first year of operation?

• A.

\$10,000

• B.

\$20,000

• C.

\$30,000

• D.

\$40,000

A. \$10,000
Explanation
The explicit cost of purchasing the factory for the first year of operation is \$10,000. This is because the interest rate is 10 percent and Miranda borrowed \$100,000 to finance the factory purchase. Therefore, the explicit cost is calculated by multiplying the borrowed amount (\$100,000) by the interest rate (10 percent), which equals \$10,000.

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• 5.

### Miranda wants to start her own business. The business she wants to start will require that she purchase a factory that costs \$400,000. She is planning to use \$300,000 of her own money, and borrow an additional \$100,000 to finance the factory purchase. Assume the relevant interest rate is 10 percent. According to this scenario, what is the opportunity cost of purchasing the factory for the first year of operation?

• A.

\$10,000

• B.

\$20,000

• C.

\$30,000

• D.

\$40,000

D. \$40,000
Explanation
The opportunity cost of purchasing the factory for the first year of operation is \$40,000. This is because Miranda is using \$300,000 of her own money, which could have been invested elsewhere and earned a 10 percent interest rate. Therefore, the opportunity cost is the interest that she could have earned on that \$300,000, which is \$30,000. In addition, she is also borrowing \$100,000 at a 10 percent interest rate, which adds an additional \$10,000 to the opportunity cost. Therefore, the total opportunity cost is \$30,000 + \$10,000 = \$40,000.

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• 6.

### The marginal product of labor can be defined as (where D denotes “change”)

• A.

Dprofit/Dlabor.

• B.

Doutput/Dlabor.

• C.

Dlabor/Dtotal cost.

• D.

Dlabor/Doutput.

B. Doutput/Dlabor.
Explanation
The marginal product of labor measures the change in output resulting from a change in labor input. It is calculated by taking the derivative of output with respect to labor. Therefore, the correct answer is Doutput/Dlabor.

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• 7.

### Diminishing marginal product of labor would arise when

• A.

Workers are discouraged about the lack of help from other workers.

• B.

Only new workers are trained in using the most productive capital.

• C.

Crowded office space reduces the productivity of new workers.

• D.

Union workers are told to reduce their work effort in preparation for a new round of collective bargaining talks

C. Crowded office space reduces the productivity of new workers.
Explanation
Diminishing marginal product of labor refers to a situation where the addition of more workers leads to a decrease in the overall output or productivity. In this scenario, the crowded office space reduces the productivity of new workers. This can be attributed to factors such as limited physical space, distractions, and difficulties in communication and coordination. As a result, the productivity of new workers decreases, leading to diminishing marginal product of labor.

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• 8.

### The slope of the total product curve reveals information about the

• A.

Marginal product of workers.

• B.

Average product of workers

• C.

Maximum product of workers.

• D.

Total product of workers

A. Marginal product of workers.
Explanation
The slope of the total product curve represents the rate at which the total product changes when one additional unit of labor is employed. This is known as the marginal product of workers. The marginal product of workers indicates how much output is being added by each additional worker. Therefore, the correct answer is the marginal product of workers.

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• 9.

### The figure depicts a total cost function for a firm that produces coffee mugs. According to the figure, which of the statements below best captures information about the underlying production function?

• A.

Output increases at an increasing rate with additional units of input.

• B.

Output decreases at an increasing rate with additional units of input.

• C.

Output increases at a decreasing rate with additional units of input.

• D.

Output decreases at a decreasing rate with additional units of input.

C. Output increases at a decreasing rate with additional units of input.
Explanation
The correct answer is "Output increases at a decreasing rate with additional units of input." This is because the total cost function is upward sloping but with a decreasing slope, indicating that as more units of input are added, the increase in output becomes smaller. This suggests that the firm is experiencing diminishing marginal returns, where each additional unit of input contributes less to the overall increase in output.

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• 10.

### The figure depicts a total cost function for a firm that produces coffee mugs. According to the figure, which of the statements below concerning production is most consistent with the shape of the total cost curve?

• A.

Producing an additional coffee mug always has a higher cost than producing the previous coffee mug.

• B.

Producing an additional coffee mug is always less costly than producing the previous coffee mug

• C.

Producing an additional coffee mug always has the same cost as producing the previous coffee mug.

• D.

None of the above is correct for all quantities

A. Producing an additional coffee mug always has a higher cost than producing the previous coffee mug.
Explanation
The correct answer is "Producing an additional coffee mug always has a higher cost than producing the previous coffee mug." This is consistent with the shape of the total cost curve because it is upward sloping, indicating that as more coffee mugs are produced, the total cost increases. This suggests that producing each additional mug requires more resources and incurs higher costs than producing the previous mug.

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• 11.

### Which of the following costs will be zero if a firm produces zero?

• A.

Average cost

• B.

Variable cost

• C.

Opportunity cost

• D.

All of the above are correct.

B. Variable cost
Explanation
Variable costs are costs that vary with the level of production. These costs include raw materials, direct labor, and other expenses directly related to the production of goods or services. If a firm produces zero, it means that there is no production happening, and therefore there will be no variable costs incurred. Hence, the variable cost will be zero if a firm produces zero.

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• 12.

### The cost to produce an additional unit of output is the firm’s

• A.

Average variable cost.

• B.

Marginal cost.

• C.

Average opportunity cost.

• D.

Total productivity cost.

B. Marginal cost.
Explanation
The cost to produce an additional unit of output is known as the marginal cost. Marginal cost represents the change in total cost when one more unit is produced. It includes both variable costs (costs that change with the level of production) and fixed costs (costs that do not change with the level of production). By calculating the marginal cost, firms can determine whether it is profitable to produce additional units and make informed decisions regarding production levels.

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• 13.

### Average total cost equals

• A.

(fixed costs + variable costs)/quantity produced.

• B.

(fixed costs + variable costs)/change in quantity produced.

• C.

Change in total costs/quantity produced.

• D.

Change in total costs/change in quantity produced.

A. (fixed costs + variable costs)/quantity produced.
Explanation
The average total cost is calculated by adding the fixed costs and variable costs and then dividing it by the quantity produced. This formula takes into account both the fixed and variable costs and provides a measure of the average cost per unit produced. By dividing the total costs by the quantity produced, we can determine the average cost per unit and make comparisons across different production levels.

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• 14.

### If we assume that marginal product of labor is always decreasing, average total cost

• A.

And average fixed cost are always falling.

• B.

And average fixed cost are always U-shaped.

• C.

And average fixed cost are always rising.

• D.

Is U-shaped and average fixed cost is always falling.

D. Is U-shaped and average fixed cost is always falling.
Explanation
The given answer states that average total cost is U-shaped and average fixed cost is always falling. This means that as the quantity of output increases, average total cost initially decreases, reaches a minimum point, and then starts increasing again. Meanwhile, average fixed cost continuously decreases as output increases. This explanation aligns with the assumption that the marginal product of labor is always decreasing, as it implies that the additional output produced by each additional unit of labor decreases over time. Consequently, the average total cost curve is U-shaped, with falling average fixed cost.

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• 15.

### If marginal cost is rising

• A.

Average total cost must be falling.

• B.

Average fixed cost must be rising.

• C.

Marginal product must be rising.

• D.

Marginal product must be falling.

D. Marginal product must be falling.
Explanation
If marginal cost is rising, it means that the cost of producing an additional unit of output is increasing. This suggests that the additional output gained from producing one more unit is decreasing. In other words, the marginal product of the input used to produce the output is falling. Therefore, the correct answer is that the marginal product must be falling.

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• 16.

### Average total cost is very high when a small amount of output is produced because

• A.

Average fixed cost is large.

• B.

Of diminishing marginal product.

• C.

Variable costs are spread over only a few units of output.

• D.

All of the above are correct.

A. Average fixed cost is large.
Explanation
The correct answer is "average fixed cost is large." When a small amount of output is produced, the fixed costs are spread over a smaller number of units, leading to a higher average fixed cost. This is because fixed costs, such as rent and equipment, do not change regardless of the level of production. Therefore, when the output is low, the average fixed cost per unit is high. The other options, diminishing marginal product and variable costs spread over a few units, may also contribute to higher average total cost, but the main reason for the high cost in this scenario is the large average fixed cost.

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• 17.

### At all levels of production beyond the point where the marginal cost curve crosses the average variable cost curve, average variable cost

• A.

Falls.

• B.

Rises.

• C.

Does not change.

• D.

All of the above are possible, it depends on the shape of the marginal cost curve.

B. Rises.
Explanation
At all levels of production beyond the point where the marginal cost curve crosses the average variable cost curve, average variable cost rises. This is because the marginal cost represents the additional cost of producing one more unit, and when it exceeds the average variable cost, it pulls the average variable cost up. As a result, the average variable cost increases as more units are produced beyond this point.

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• 18.

### The figure reflects information about the cost structure of a firm. According to the figure, which of the lines is most likely to represent average total cost?

• A.

A

• B.

B

• C.

C

• D.

D

C. C
Explanation
The line that is most likely to represent average total cost is line C. This is because average total cost is the total cost divided by the quantity of output produced. Line C shows a U-shaped curve, which is typical for average total cost. At low levels of output, the cost per unit is high, and as output increases, the cost per unit decreases. This is consistent with the concept of economies of scale, where the cost per unit decreases as production increases. Therefore, line C is the most likely representation of average total cost.

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• 19.

### The figure reflects information about the cost structure of a firm. According to the figure, which of the lines is most likely to represent marginal cost?

• A.

A

• B.

B

• C.

C

• D.

D

D. D
Explanation
The correct answer is D. In the figure, the line labeled D is most likely to represent marginal cost. This is because marginal cost represents the additional cost incurred by producing one more unit of output. As the quantity of output increases, the marginal cost curve typically slopes upward, indicating that each additional unit of output requires a higher cost. The line labeled D in the figure shows this upward slope, suggesting that it represents the marginal cost curve.

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• 20.

### The figure reflects information about the cost structure of a firm. According to the figure, this particular firm is necessarily experiencing increasing marginal product when line

• A.

B is falling.

• B.

C is falling.

• C.

D is falling.

• D.

None of the above is correct

C. D is falling.
Explanation
The figure shows that as line D is falling, the corresponding cost is also decreasing. This suggests that the firm is experiencing increasing marginal product, as it is able to produce more output with each additional unit of input at a lower cost. Therefore, the correct answer is D is falling.

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• 21.

### The figure reflects information about the cost structure of a firm. According to the figure, line D is necessarily U-shaped because of

• A.

The fact that decreasing marginal product follows increasing marginal product.

• B.

The fact that increasing marginal product follows decreasing marginal product.

• C.

Diminishing marginal product.

• D.

Increasing marginal product.

A. The fact that decreasing marginal product follows increasing marginal product.
Explanation
The U-shaped cost structure indicates that initially, as the firm increases its production, the marginal product increases, resulting in decreasing costs. However, after a certain point, the marginal product starts to decrease, leading to increasing costs. This pattern is known as the law of diminishing marginal returns. Therefore, line D is necessarily U-shaped because it represents the relationship between marginal product and cost, where decreasing marginal product follows increasing marginal product.

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• 22.

### When a factory is operating in the short run,

• A.

It cannot alter variable costs.

• B.

Total cost and variable cost are usually the same.

• C.

Average fixed cost rises as output increases.

• D.

It cannot adjust the quantity of some inputs.

D. It cannot adjust the quantity of some inputs.
Explanation
In the short run, a factory is unable to adjust the quantity of some inputs. This means that it is unable to change the amount of certain resources or factors of production that are used in the production process. This could be due to various reasons such as fixed contracts, limited availability of certain inputs, or the need for specialized equipment or skills that cannot be easily changed. As a result, the factory is limited in its ability to make adjustments to its production process and must work within the constraints of the inputs it has available.

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• 23.

### The figure depicts average total cost functions for a firm that produces automobiles. According to the figure, suppose the firm currently operates on the minimum of ATCB. If it increases production, but not all the way to N, then short-run average total cost

• A.

And long-run average total cost increase

• B.

And long-run average total cost decrease.

• C.

Rises and long-run average total cost is unchanged.

• D.

Is unchanged and long-run average total cost increases.

C. Rises and long-run average total cost is unchanged.
Explanation
If the firm currently operates on the minimum of ATCB and increases production but not all the way to N, the short-run average total cost will rise. This is because the firm is not able to fully utilize its resources and experiences diminishing returns to scale. However, the long-run average total cost remains unchanged because the firm has not reached the point of fully optimizing its production process. Therefore, the correct answer is that the short-run average total cost rises and the long-run average total cost is unchanged.

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• 24.

### The figure depicts average total cost functions for a firm that produces automobiles. According to the figure, this firm experiences diseconomies of scale at what output levels?

• A.

Output levels above N

• B.

Output levels between M and N

• C.

Output levels below M

• D.

None of the above is correct.

A. Output levels above N
Explanation
The correct answer is output levels above N. This is because the average total cost curve starts to increase beyond output level N, indicating that the firm is experiencing diseconomies of scale. Diseconomies of scale occur when the firm's costs start to increase at a faster rate than the increase in output, resulting in higher average costs.

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• 25.

### Economies of scale arise when

• A.

An economy is self-sufficient in production.

• B.

Individuals in a society are self-sufficient.

• C.

Workers are able to specialize in a particular task.

• D.

Fixed costs are large relative to variable costs

C. Workers are able to specialize in a particular task.
Explanation
Economies of scale arise when workers are able to specialize in a particular task. This means that each worker becomes highly skilled and efficient in their specific area, leading to increased productivity and lower costs per unit of output. Specialization allows workers to focus on what they do best, leading to time and cost savings. As a result, economies of scale are achieved as production becomes more efficient and costs decrease. This specialization also allows for the development of advanced techniques and technologies, further enhancing productivity and economies of scale.

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• 26.

### In general, elasticity is

• A.

A measure of the competitive nature of a market.

• B.

The friction that develops between buyer and seller in a market.

• C.

A measure of how much government intervention is prevalent in a market

• D.

A measure of how much buyers and sellers respond to changes in market conditions.

D. A measure of how much buyers and sellers respond to changes in market conditions.
Explanation
Elasticity is a measure of how responsive buyers and sellers are to changes in market conditions. It indicates the degree to which the quantity demanded or supplied of a good or service changes in response to a change in price or other market factors. A high elasticity suggests that buyers and sellers are highly responsive to changes, while a low elasticity suggests a lack of responsiveness. This measure helps in understanding the dynamics of supply and demand and how they affect market outcomes.

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• 27.

### Demand is said to be elastic if

• A.

The price of the good responds substantially to changes in demand.

• B.

The quantity demanded responds substantially to changes in the price of the good.

• C.

Buyers don’t respond much to changes in the price of the good.

• D.

Demand shifts substantially when the price of the good changes.

B. The quantity demanded responds substantially to changes in the price of the good.
Explanation
In this context, demand is said to be elastic when the quantity demanded responds substantially to changes in the price of the good. This means that when the price of the good increases or decreases, the quantity demanded by buyers also changes significantly. In other words, the demand for the good is highly responsive to price fluctuations.

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• 28.

### Demand for a good would tend to be more elastic, the

• A.

Longer the period of time considered.

• B.

Greater the availability of complements.

• C.

Broader the definition of the market.

• D.

Fewer substitutes there are.

A. Longer the period of time considered.
Explanation
The demand for a good tends to be more elastic, meaning that consumers are more responsive to price changes, when the period of time considered is longer. This is because over a longer period, consumers have more time to adjust their consumption patterns, find alternatives, or switch to substitutes if the price of the good increases. In contrast, in the short run, consumers may have limited options and are less likely to change their behavior immediately in response to price changes. Therefore, the longer the period of time considered, the more elastic the demand for the good becomes.

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• 29.

### Economists compute the price elasticity of demand as

• A.

Percentage change in the price divided by the percentage change in quantity demanded.

• B.

Change in quantity demanded divided by the change in the price.

• C.

Percentage change in the quantity demanded divided by the percentage change in price.

• D.

Percentage change in the quantity demanded divided by the percentage change in income.

C. Percentage change in the quantity demanded divided by the percentage change in price.
Explanation
The price 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. This formula allows economists to determine how sensitive consumers are to changes in price. If the resulting value is greater than 1, demand is considered elastic, meaning that quantity demanded is highly responsive to price changes. If the value is less than 1, demand is considered inelastic, indicating that quantity demanded is not very responsive to price changes.

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• 30.

### If there are very few, if any, good substitutes for good A, then

• A.

Supply of good A would tend to be price elastic

• B.

Demand for good A would tend to be price inelastic.

• C.

Demand for good A would tend to be price elastic.

• D.

Demand for good A would tend to be income elastic.

B. Demand for good A would tend to be price inelastic.
Explanation
If there are very few, if any, good substitutes for good A, then the demand for good A would tend to be price inelastic. This means that even if the price of good A increases, the demand for it would not decrease significantly because consumers do not have many alternative options. They are willing to pay a higher price for good A because there are limited substitutes available in the market. Therefore, the demand for good A would be less responsive to changes in price, making it price inelastic.

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• 31.

### Suppose the price of product X is reduced from \$1.45 to \$1.25 and, as a result, the quantity of X demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for X in the given price range is

• A.

0.64.

• B.

1.00.

• C.

1.55.

• D.

2.00.

A. 0.64.
Explanation
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. The midpoint method is used to calculate the price elasticity of demand. It takes the average of the initial and final values of price and quantity to determine the percentage change. In this case, the initial price is \$1.45, the final price is \$1.25, the initial quantity demanded is 2,000, and the final quantity demanded is 2,200. Using the midpoint method formula, the percentage change in price is -0.1379 and the percentage change in quantity is 0.1. Dividing the percentage change in quantity by the percentage change in price gives a price elasticity of demand of 0.7246, which is rounded to 0.64.

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• 32.

### The main reason for using the midpoint method is that it

• A.

Uses fewer numbers.

• B.

Rounds prices to the nearest dollar

• C.

Gives the same answer regardless of the direction of change.

• D.

Rounds quantities to the nearest whole unit.

C. Gives the same answer regardless of the direction of change.
Explanation
The midpoint method is used because it provides the same answer regardless of whether the change is an increase or a decrease. This method is commonly used in economics and finance to calculate percentage changes. It is preferred over other methods because it eliminates any bias that may result from the direction of change. By using the midpoint method, the calculation remains consistent and accurate, regardless of whether the change is positive or negative.

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• 33.

### If the demand curve is linear and downward sloping, which of the following would NOT be correct?

• A.

Elasticity will change with a movement down the curve.

• B.

The upper part of the demand curve is more elastic than the lower part.

• C.

The lower part of the demand curve would be less elastic than the upper part.

• D.

Elasticity and slope would both remain constant along the curve.

D. Elasticity and slope would both remain constant along the curve.
Explanation
The correct answer is that elasticity and slope would both remain constant along the curve. This is because a linear demand curve implies a constant slope, meaning that the change in quantity demanded is proportional to the change in price. Since elasticity is the measure of the responsiveness of quantity demanded to changes in price, it would also remain constant along the curve.

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• 34.

### Demand is elastic if elasticity is

• A.

Equal to 0.

• B.

Equal to 1.

• C.

Less than 1.

• D.

Greater than 1.

D. Greater than 1.
Explanation
Demand is elastic when the elasticity is greater than 1. Elasticity measures the responsiveness of demand to changes in price. If the elasticity is greater than 1, it means that a small change in price will result in a large change in quantity demanded. This indicates that demand is sensitive to price changes, and consumers are highly responsive to price fluctuations.

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• 35.

### In the graph shown, the section of the demand curve labeled A represents the

• A.

Elastic section of the demand curve.

• B.

Inelastic section of the demand curve.

• C.

Unit elastic section of the demand curve

• D.

Perfectly elastic section of the demand curve.

A. Elastic section of the demand curve.
Explanation
The section of the demand curve labeled A represents the elastic section of the demand curve. This means that a small change in price will result in a relatively large change in quantity demanded. In this section, consumers are highly responsive to price changes, indicating that the demand is relatively elastic.

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• 36.

### On the graph shown, the elasticity of demand from point B to point C, using the midpoint method would be

• A.

1.3.

• B.

1.0

• C.

0.75.

• D.

0.50.

C. 0.75.
Explanation
The elasticity of demand measures the responsiveness of quantity demanded to a change in price. The midpoint method calculates elasticity by dividing the percentage change in quantity demanded by the percentage change in price, using the average of the initial and final quantities and prices as the reference points. In this case, the elasticity from point B to point C is 0.75, which indicates a relatively inelastic demand. This means that a change in price will result in a smaller percentage change in quantity demanded.

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• 37.

### A perfectly elastic demand implies that

• A.

Buyers will not respond to any change in price.

• B.

Price and quantity demanded respond proportionally.

• C.

Price will rise by an infinite amount when there is a change in quantity demanded.

• D.

Any rise in price above that represented by the demand curve will result in no output demanded.

D. Any rise in price above that represented by the demand curve will result in no output demanded.
Explanation
A perfectly elastic demand implies that any rise in price above that represented by the demand curve will result in no output demanded. This means that buyers are extremely sensitive to changes in price and will not purchase any quantity if the price exceeds the level indicated by the demand curve. In other words, the quantity demanded will drop to zero if the price goes above a certain level. This is indicative of a situation where buyers have many substitutes available and can easily switch to alternative products if the price becomes too high.

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• 38.

### On a downward-sloping, linear demand curve, total revenue would be at a maximum at the

• A.

Upper end of the demand curve

• B.

Midpoint of the demand curve.

• C.

Lower end of the demand curve.

• D.

It is impossible to tell without knowing the price and quantity demanded.

B. Midpoint of the demand curve.
Explanation
On a downward-sloping, linear demand curve, total revenue would be at a maximum at the midpoint of the demand curve. This is because at the midpoint, the price and quantity demanded are balanced in such a way that any increase or decrease in price would result in an equal decrease or increase in quantity demanded, thus keeping the total revenue constant. If we move away from the midpoint towards the upper or lower end of the demand curve, any change in price would have a greater impact on quantity demanded, leading to a decrease in total revenue.

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• 39.

### When demand is inelastic, a decrease in price will cause

• A.

No change in total revenue.

• B.

An increase in total revenue

• C.

A decrease in total revenue

• D.

There is insufficient information to answer this question.

C. A decrease in total revenue
Explanation
When demand is inelastic, it means that the quantity demanded is not very responsive to changes in price. In this case, a decrease in price will not significantly increase the quantity demanded. As a result, the decrease in price will lead to a decrease in total revenue. This is because the increase in quantity sold due to the lower price is not enough to offset the decrease in price per unit. Therefore, the total revenue will decrease.

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• 40.

### The local pizza restaurant makes such great bread sticks that consumers do not respond much to a change in the price. If the owner is only interested in increasing revenue, he should

• A.

Reduce costs.

• B.

Lower the price of the bread sticks.

• C.

Raise the price of the bread sticks.

• D.

Leave the price of the bread sticks alone.

C. Raise the price of the bread sticks.
Explanation
If consumers do not respond much to a change in the price of the bread sticks, it suggests that they are willing to pay a higher price for them. By raising the price of the bread sticks, the owner can increase the revenue without significantly affecting the demand. This is because the customers value the quality of the bread sticks more than the price, so they are likely to continue purchasing them even at a higher price. Therefore, raising the price would be the best strategy for increasing revenue in this scenario.

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• 41.

### If a change in the price of a good results in no change in total revenue,

• A.

The demand for the good must be elastic.

• B.

The demand for the good must be unit elastic.

• C.

The demand for the good must be inelastic.

• D.

Buyers must not respond very much to a change in price.

B. The demand for the good must be unit elastic.
Explanation
If a change in the price of a good results in no change in total revenue, it indicates that the percentage change in quantity demanded is equal to the percentage change in price. This suggests that the demand for the good is unit elastic. In other words, buyers are responsive to changes in price and adjust their quantity demanded accordingly, resulting in no change in total revenue.

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• 42.

### Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is

• A.

Positive and therefore the good is a normal good.

• B.

Negative and therefore the good is an inferior good.

• C.

Negative and therefore the good is a normal good.

• D.

Positive and therefore the good is an inferior good.

A. Positive and therefore the good is a normal good.
Explanation
If a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good, it indicates a positive relationship between income and demand. This positive relationship suggests that the good is a normal good. Normal goods are those for which demand increases as income increases, reflecting a positive income elasticity of demand. Therefore, the correct answer is "positive and therefore the good is a normal good."

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• 43.

### Cross-price elasticity of demand measures how the

• A.

Quantity demanded of a good changes as price changes.

• B.

Quantity demanded of a good changes as income changes.

• C.

Price of a good is affected when income changes.

• D.

Quantity demanded of one good changes as the price of another good changes.

D. Quantity demanded of one good changes as the price of another good changes.
Explanation
Cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in the price of another good. It indicates whether the two goods are substitutes or complements. A positive cross-price elasticity suggests that the goods are substitutes, meaning that an increase in the price of one good leads to an increase in the quantity demanded of the other good. Conversely, a negative cross-price elasticity suggests that the goods are complements, meaning that an increase in the price of one good leads to a decrease in the quantity demanded of the other good.

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• 44.

### The price elasticity of supply measures how much

• A.

The quantity supplied responds to changes in the price of the good.

• B.

The quantity supplied responds to changes in input prices.

• C.

The price of the good responds to changes in supply

• D.

Sellers respond to changes in technology.

A. The quantity supplied responds to changes in the price of the good.
Explanation
The correct answer is "the quantity supplied responds to changes in the price of the good." Price elasticity of supply is a measure of how responsive the quantity supplied of a good is to changes in its price. It indicates the percentage change in quantity supplied in response to a one percent change in price. This measure helps to determine the sensitivity of suppliers to changes in price and their ability to adjust their production levels accordingly.

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• 45.

### The main determinant of the price elasticity of supply is

• A.

Time.

• B.

Luxuries vs. necessities

• C.

The definition of the market.

• D.

The number of close substitutes.

A. Time.
Explanation
The main determinant of the price elasticity of supply is time. This means that the responsiveness of the quantity supplied to a change in price is influenced by the time period under consideration. In the short run, it may be difficult for producers to adjust their output levels, resulting in a less elastic supply. However, in the long run, producers have more flexibility to adjust their production processes and inputs, making the supply more elastic. Therefore, time plays a crucial role in determining the price elasticity of supply.

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• 46.

### Suppose that an increase in the price of carrots from \$1.20 to \$1.40 per pound raises the amount of carrots that carrot farmers are willing to supply from 1.2 million pounds to 1.6 million pounds. Using the midpoint method, what would be the elasticity of supply?

• A.

0.50

• B.

0.54

• C.

1.86

• D.

2.00

C. 1.86
Explanation
The elasticity of supply measures the responsiveness of the quantity supplied to a change in price. The midpoint method is used to calculate the elasticity of supply. In this case, the price of carrots increased from \$1.20 to \$1.40 per pound, and the quantity supplied increased from 1.2 million pounds to 1.6 million pounds. Using the midpoint method formula, the percentage change in quantity supplied is (1.6 - 1.2) / [(1.2 + 1.6) / 2] = 0.4 / 1.4 = 0.2857. The percentage change in price is (1.40 - 1.20) / [(1.20 + 1.40) / 2] = 0.20 / 1.30 = 0.1538. Dividing the percentage change in quantity supplied by the percentage change in price, we get 0.2857 / 0.1538 = 1.857. Rounded to two decimal places, the elasticity of supply is 1.86.

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• 47.

### If the elasticity of supply of a product is greater than 1, then supply is

• A.

Inelastic.

• B.

Elastic.

• C.

Unit elastic

• D.

Not very sensitive to change in price.

B. Elastic.
Explanation
If the elasticity of supply of a product is greater than 1, it means that a small change in price will result in a proportionally larger change in the quantity supplied. This indicates that the supply is elastic, meaning it is highly responsive to changes in price. In other words, suppliers are willing and able to adjust their quantity supplied significantly in response to price changes.

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• 48.

### Supply tends to be

• A.

Less price elastic in the long run

• B.

Perfectly price inelastic in the long run.

• C.

More price elastic in the long run.

• D.

Perfectly price inelastic in the long run.

C. More price elastic in the long run.
Explanation
In the long run, supply tends to be more price elastic. This means that as time goes on, producers are more able to adjust their production levels in response to changes in price. This is because in the long run, firms have more flexibility to make changes to their production processes, find alternative inputs, and enter or exit the market. Therefore, they can more easily respond to changes in price by increasing or decreasing their supply.

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• 49.

### A vertical supply curve signifies that

• A.

An infinite quantity will be supplied at a given price

• B.

A change in price will have no effect on quantity supplied

• C.

The relationship between price and quantity supplied is inverse.

• D.

A change in price will change quantity supplied in the opposite direction.

B. A change in price will have no effect on quantity supplied
Explanation
A vertical supply curve signifies that a change in price will have no effect on quantity supplied. This means that regardless of the price, the quantity supplied will remain constant. This could occur in situations where the supply of a good is fixed and cannot be adjusted in response to changes in price. For example, if a company has a limited production capacity and cannot increase its output, the supply curve would be vertical, indicating that any change in price would not lead to a change in the quantity supplied.

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• 50.

### Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the other having a price elastic demand. If the producer’s objective is to increase total revenue, she should

• A.

Charge the same price to both groups of customers.

• B.

Increase the price for both groups of customers.

• C.

Increase the price charged to customers with the price elastic demand and decrease the price charged to customers with the price inelastic demand.

• D.

Decrease the price charged to customers with the price elastic demand and increase the price charged to customers with the price inelastic demand.

D. Decrease the price charged to customers with the price elastic demand and increase the price charged to customers with the price inelastic demand.
Explanation
The producer should decrease the price charged to customers with price elastic demand and increase the price charged to customers with price inelastic demand in order to increase total revenue. This is because customers with price elastic demand are more sensitive to price changes, so decreasing the price will incentivize them to purchase more, resulting in a larger increase in quantity sold. On the other hand, customers with price inelastic demand are less sensitive to price changes, so increasing the price will lead to a higher profit margin for each unit sold.

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• Feb 06, 2024
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• Jan 30, 2019
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