# Econ160: Practice Questions Chapters 7, 9 10 & 11

Marginal utility can be:
positive, negative, or zero.
Refer to the data. The value for W is:
20.
The data illustrate the:
law of diminishing marginal utility.
If the price of product X rises, then the resulting decline in the amount purchased will:
increase the marginal utility of the last unit consumed of this good.
Marginal utility is the:
change in total utility obtained by consuming one more unit of a good.
Utility refers to the:
satisfaction that a consumer derives from a good or service.
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The law of diminishing marginal utility explains why:
demand curves slope downward.
The theory of consumer behavior assumes that:
consumers behave rationally, attempting to maximize their satisfaction.
To maximize utility, a consumer should allocate money income so that the:
marginal utility obtained from the last dollar spent on each product is the same.
The marginal utility of the last unit of apples consumed is 12 and the marginal utility of the last unit of bananas consumed is 8. What set of prices for apples and bananas, respectively, would be consistent with consumer equilibrium?
\$6 and \$4
Suppose you have a limited money income and you are purchasing products A and B, whose prices happen to be the same. To maximize your utility, you should purchase A and B in such amounts that:
their marginal utilities are the same.
A consumer is maximizing her utility with a particular money income when:
MUa/Pa = MUb/Pb = MUc/Pc = . . . = MUn/Pn.
If a rational consumer is in equilibrium, which of the following conditions will hold true?
The marginal utility of the last dollar spent on each good purchased will be the same.
A consumer who has a limited budget will maximize utility or satisfaction when the:
ratios of the marginal utility of each product purchased divided by its price are equal.
Prashanth decides to buy a \$75 ticket to a particular New York professional hockey game rather than a \$50 ticket for a particular Broadway play. We can conclude that Prashanth:
has a higher “marginal utility-to-price ratio” for the hockey game than for the play.
Why do people tend to eat more at all-you-can-eat buffet restaurants than at restaurants where each item is purchased separately?
Once the all-you-can-eat meal is purchased, consumers view additional trips back to the buffet as having a price of zero.
Which of the following statements is correct?
(Last Word) All of the following would reduce property crime by increasing its “price,” except:
cutting out the middlemen (“fences”) by selling stolen goods via Internet auction sites.
Refer to the budget line shown in the diagram. If the consumer’s money income is \$20, the:
price of C is \$4 and the price of D is \$2.
Refer to the budget line shown in the diagram. The absolute value of the slope of the budget line is:
PC/PD.
Increases in product prices shift the consumer’s:
budget line to the left.
Suppose you have money income of \$10, all of which you spend on Coke and popcorn. In the diagram, the prices of Coke and popcorn respectively are:
\$.50 and \$1.00.
The slope of a budget line reflects the:
price ratio of the two products.
Edith is buying products X and Y with her money income. Suppose her budget line shifts rightward (outward). This might be the result of:
her money income increasing more than proportionately to increases in the prices of X and Y.
Which of the following is correct?
Budget lines are linear and downsloping; indifference curves are downsloping and convex to the origin.
Refer to the diagram where xy is the relevant budget line and I1, I2, and I3 are indifference curves. If the consumer is initially at point L, he or she should:
purchase more of Y and less of X.
Refer to the diagram in which the downsloping lines are budget lines and I1, I2, and I3 comprise an indifference map. The combinations of products M and N indicated by points 1, 2, and 5 are such that:
points 1, 2, and 5 yield equal amounts of utility.
Refer to the diagram. If the budget line shifts from ab to ac, the:
price of K has increased.
Refer to the diagram. If the budget line shifts from ab to ac, the:
consumer will purchase more of J and less of K.
A rational consumer will try to achieve the highest indifference curve that his or her income will allow.
True
Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?
Use of savings to pay operating expenses instead of generating interest income.
Which of the following is most likely to be an implicit cost for Company X?
Forgone rent from the building owned and used by Company X.
An explicit cost is:
a money payment made for resources not owned by the firm itself.
Economic profits are calculated by subtracting:
explicit and implicit costs from total revenue.
Normal profit is:
The following is cost information for the Creamy Crisp Donut Company:

Entrepreneur’s potential earnings as a salaried worker = \$50,000
Annual lease on building = \$22,000
Annual revenue from operations = \$380,000
Payments to workers = \$120,000
Utilities (electricity, water, disposal) costs = \$8,000
Value of entrepreneur’s talent in the next best entrepreneurial activity = \$80,000
Entrepreneur’s forgone interest on personal funds used to finance the business = \$6,000

Refer to the data. Creamy Crisp’s total economic costs are:

\$286,000.
The following is cost information for the Creamy Crisp Donut Company:

Entrepreneur’s potential earnings as a salaried worker = \$50,000
Annual lease on building = \$22,000
Annual revenue from operations = \$380,000
Payments to workers = \$120,000
Utilities (electricity, water, disposal) costs = \$8,000
Value of entrepreneur’s talent in the next best entrepreneurial activity = \$80,000
Entrepreneur’s forgone interest on personal funds used to finance the business = \$6,000

Refer to the data. If, other things equal, Creamy Crisp’s revenue fell to \$286,000:

it would earn a normal profit but not an economic profit.
To economists, the main difference between the short run and the long run is that:
in the long run all resources are variable, while in the short run at least one resource is fixed.
The long run is characterized by:
the ability of the firm to change its plant size.
Which of the following best expresses the law of diminishing returns?
As successive amounts of one resource (labor) are added to fixed amounts of other resources (capital), beyond some point the resulting extra or marginal output will decline.
The law of diminishing returns results in:
a total product curve that eventually increases at a decreasing rate.
Which of the following is not correct?
Where total product is at a maximum, average product is also at a maximum.
Use the following data to answer the question:

Refer to the data. Marginal product becomes negative with the hiring of the __________ unit of labor.

seventh
If you owned a small farm, which of the following would most likely be a fixed cost?
Hail insurance.
Which of the following is most likely to be a variable cost?
Fuel and power payments.
For most producing firms:
average total costs decline as output is carried to a certain level, and then begin to rise.
Average fixed cost:
declines continually as output increases.
Which of the following is correct as it relates to cost curves?
Marginal cost intersects average total cost at the latter’s minimum point.
Other things equal, if the prices of a firm’s variable inputs were to fall:
marginal cost, average variable cost, and average total cost would all fall.
Answer the question on the basis of the following cost data:

Refer to the data. The profit-maximizing output for this firm:

cannot be determined from the information given.
Answer the question on the basis of the following information:

Refer to the information. Average fixed cost is:

MC/Q
Refer to the diagram, where variable inputs of labor are being added to a constant amount of property resources. The total output of this firm will cease to expand:
if a labor force in excess of Q3 is employed.
In the short run, which of the following statements is correct?
Total cost will exceed variable cost.
Which of the following holds true?
When AP is rising AVC is falling, and when AP is falling AVC is rising.
Refer to the short-run production and cost data. In Figure A curve (1) is:
average product and curve (2) is marginal product.
Answer the question on the basis of the following cost data:

Refer to the data. If the firm closed down in the short run and produced zero units of output, its total cost would be:

\$50.
If a technological advance increases a firm’s labor productivity, we would expect its:
average total cost curve to fall.
The Sunshine Corporation finds that its costs are \$40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use this information to answer the following question.

Refer to the information. The average fixed cost of 3 units of output is:

\$13.33.
Refer to the diagram. The profit-maximizing level of output for this firm:
cannot be determined from the information given.
Refer to the graph. Which one of the following would cause a move from point b to point c along short-run average total cost curve ATC1?
Diminishing marginal returns.
Refer to the graph. Which one of the following would cause a move from point d to point e along short-run average total cost curve ATC2?
Increasing marginal returns.
When diseconomies of scale occur:
the long-run average total cost curve rises.
Refer to the diagram. For output level Q, per unit costs of C are:
attainable, but imply the inefficient use of resources.
A natural monopoly exists when:
unit costs are minimized by having one firm produce an industry’s entire output.
In the diagram it is assumed that:
all costs are variable.
(Consider This) If the law of diminishing returns applies to study time:
the tenth hour of study will likely be less productive than the third.
(Last Word) Which of the following is predicted to deliver a Third Industrial Revolution characterized by low production and transportation costs?
Diseconomies of scale stem primarily from the difficulties in managing and coordinating a large-scale business enterprise.
True
Average fixed costs diminish continuously as output increases.
True
A firm’s economic profit is usually higher than its accounting profit.
False
In which of the following market structures is there clear-cut mutual interdependence with respect to price-output policies?
Oligopoly.
A purely competitive seller is:
a “price taker.”
In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.

Refer to the information. For a purely competitive firm, total revenue graphs as a:

straight, upsloping line.
In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.

Refer to the information. For a purely competitive firm:

the demand and marginal revenue curves will coincide.
Refer to the diagram, which pertains to a purely competitive firm. Curve A represents:
total revenue only.
Marginal revenue is the:
change in total revenue associated with the sale of one more unit of output.
Refer to the short-run data. The profit-maximizing output for this firm is:
320 units.
Curve (1) in the diagram is a purely competitive firm’s:
total economic profit curve.
Curve (3) in the diagram is a purely competitive firm’s:
total revenue curve.
When a firm is maximizing profit, it will necessarily be:
maximizing the difference between total revenue and total cost.
Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at \$10 per unit. Its total fixed costs are \$100 and its average variable cost is \$3 at 20 units of output. This corporation:
is realizing an economic profit of \$40.
A purely competitive firm’s short-run supply curve is:
upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.
Answer the question on the basis of the following data confronting a firm:

Refer to the data. At the profit-maximizing output, the firm’s total revenue is:

\$48.
Refer to the diagram for a purely competitive producer. The firm will produce at a loss at all prices:
between P2 and P3.
Refer to the diagram. At the profit-maximizing output, total variable cost is equal to:
0CFE
Answer the question on the basis of the following cost data for a firm that is selling in a purely competitive market:

Refer to the data. If the market price for the firm’s product is \$32, the competitive firm will produce:

8 units at an economic profit of \$16.
Answer the question on the basis of the following cost data for a firm that is selling in a purely competitive market:

Refer to the data. Which of the following is the firm’s short-run supply schedule?

Refer to the diagram. At the profit-maximizing output, total profit is:
efbc
Refer to the diagram. The short-run supply curve for this firm is the:
segment of the MC curve lying to the right of output level h.
Refer to the diagram. This firm is selling its product in a(n):
purely competitive market.
In the short run, a purely competitive seller will shut down if product price:
is less than AVC.
The short-run supply curve for a purely competitive industry can be found by:
summing horizontally the segments of the MC curves lying above the AVC curve for all firms.
In contrast to American firms, Japanese firms frequently make lifetime employment commitments to their workers and agree not to lay them off when product demand is weak. Other things being equal, we would expect Japanese firms to:
continue to produce in the short run at lower prices than would American firms.
Answer the question on the basis of the following cost data for a purely competitive seller:

Refer to the data. If product price is \$25, the firm will:

shut down and incur a \$50 loss.
Refer to the diagram. The firm will realize an economic profit if price is:
P4
Refer to the diagram. The firm will shut down at any price less than:
P1.
Refer to the diagram. The firm’s supply curve is the segment of the:
MC curve above its intersection with the AVC curve.
Answer the question on the basis of the following cost data for a firm that is selling in a purely competitive market.

Refer to the data. At 3 units of output, total variable cost is ____ and total cost is ____.

\$60; \$210
Answer the question on the basis of the following cost data for a purely competitive seller:

The data are for:

the short run.
Answer the question on the basis of the following cost data for a purely competitive seller:

Refer to the data. At 5 units of output, average fixed cost, average variable cost, and average total cost are:

\$10, \$60, and \$70 respectively.
Answer the question on the basis of the following cost data for a purely competitive seller:

Refer to the data. The marginal cost of the fifth unit of output is:

\$80.
Answer the question on the basis of the following cost data for a purely competitive seller:

Refer to the data. If product price is \$75, the firm will produce:

4 units of output.
Answer the question on the basis of the following cost data for a purely competitive seller:

Refer to the data. Given the \$75 product price, at its optimal output the firm will:

realize a \$30 economic profit.
(Last Word) Temporary shutdowns of firms are most widespread when:
the economy experiences recession.
The term imperfect competition refers to every market structure besides pure competition.
True
In a purely competitive industry competition centers more on advertising and sales promotion than on price.
False
Price and marginal revenue are identical for an individual purely competitive seller.
True
In maximizing profit, a firm will always produce that output where total revenues are at a maximum.
False
A competitive firm will produce in the short run so long as its price exceeds its average fixed cost.
False
Refer to the diagram. If demand fell to the level of FNJ, there would be no output at which the firm could realize an economic profit.
False
The ability of a good or service to satisfy wants is called:
utility
Refer to the data. The value for Z is:
-5
Refer to the diagram. Marginal utility:
becomes negative after consuming 4 units of output.
If total utility is increasing, marginal utility:
is positive but may be either increasing or decreasing.
The law of diminishing marginal utility explains why:
demand curves slope downward.
Why do people tend to eat more at all-you-can-eat buffet restaurants than at restaurants where each item is purchased separately?
Once the all-you-can-eat meal is purchased, consumers view additional trips back to the buffet as having a price of zero.
A rational consumer will cease purchasing a product at that quantity where marginal utility begins to diminish.
False
If the price of A is \$12 and the price of B is \$3, the budget line tells us that a consumer in effect can trade:
1 unit of A for 4 of B.
Assume initially that the price of X (measured on the horizontal axis) is \$9 and the price of Y (measured on the vertical axis) is \$4. If the price of X now declines to \$6, the budget line will:
shift outward on the horizontal axis.
Refer to the diagram where xy is the relevant budget line and I1, I2, and I3 are indifference curves. If the consumer is initially at point L, he or she should:
purchase more of Y and less of X.
Which of the following is true concerning purely competitive industries?
In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then:
new firms will enter this market.
Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs. After all economic adjustments have been completed, product price will be:
higher and total output will be larger than originally.
Assume a purely competitive, increasing-cost industry is in long-run equilibrium. If a decline in demand occurs, firms will:
leave the industry and price and output will both decline.
A purely competitive firm:
cannot earn economic profit in the long run.
Refer to the diagrams, which pertain to a purely competitive firm producing output q and the industry in which it operates. The predicted long-run adjustments in this industry might be offset by:
a technological improvement in production methods.
A purely competitive firm is precluded from making economic profits in the long run because:
of unimpeded entry to the industry.
Under what conditions would an increase in demand lead to a lower long-run equilibrium price?
The firms in the market are part of a decreasing-cost industry.
A decreasing-cost industry is one in which:
input prices fall or technology improves as the industry expands.
Suppose that an industry’s long-run supply curve is downsloping. This suggests that:
it is a decreasing-cost industry.
Refer to the diagram showing the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm’s total revenue:
is \$400.
Refer to the diagram. Line (1) reflects the long-run supply curve for:
an increasing-cost industry.
Refer to the diagram. Line (1) reflects a situation where resource prices:
increase as industry output expands.
Refer to the diagram. Line (2) reflects a situation where resource prices:
remain constant as industry output expands.
Resources are efficiently allocated when production occurs where:
price is equal to marginal cost.
The term productive efficiency refers to:
the production of a good at the lowest average total cost.
The term allocative efficiency refers to:
the production of the product mix most desired by consumers.
Under pure competition in the long run:
both allocative efficiency and productive efficiency are achieved.
Refer to the diagram. By producing at output level Q:
both productive and allocative efficiency are achieved.
If production is occurring where marginal cost exceeds price, the purely competitive firm will:
fail to maximize profit and resources will be overallocated to the product.
In long-run equilibrium, purely competitive markets:
maximize the sum of consumer surplus and producer surplus.
Which of the following would not be expected to occur in a purely competitive market in long-run equilibrium?
Consumer and producer surplus will be minimized.
Creative destruction is least beneficial to:
workers in the “destroyed” industries.
(Consider This) Which of the following statements is true about U.S. firms?
Over half are bankrupt within the first five years after starting up.
(Last Word) Patents are most likely to infringe on innovation:
for products that incorporate many different technologies into a single product.
(Last Word) “Patent trolls:”
buy up patents in order to collect royalties and sue other companies.
The long-run supply curve for a decreasing-cost industry is downsloping.
True
Refer to the diagram. If this firm is producing at the profit-maximizing level of output in the short run, then it is achieving productive and allocative efficiency.
False
When entrepreneurs in competitive industries successfully innovate to lower production costs, it usually results in long-run economic profits for the firm.
False
The process by which new firms and new products destroy existing dominant firms and their products is called creative destruction.
True