econ exam 1

8/3/2019 Econ Exam 1

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Economics 201

Fall 2011

Review Questions for Exam 1 (KEY)

ECONOMICS THE BASICS

1. Economics primarily addresses the problems associated with

a) poverty.b) money.c) scarcity.d) government policies.

e) shortages or surpluses.

2. Which of the following are the main ideas of economics?

a) Resources used to make goods and services desired by society are scarce.b) Because resources are scarce, we cannot make all the goods and services that society

desires.c) Because we cannot make all the goods and services that society desires, individuals

must continually face trade-offs and make decisions.d) These decisions should be made in such a way as to stretch the available resources to

their fullest and best use.

e) All the above represent main ideas of economics.

3. Why cant we have all the goods and services we want?

a) Because humans wants are unlimited.b) Because the resources used to make goods and services are limited.c) Because humans make illogical or impractical decisions.d) All of the above are true.e) Both a and b are true.

4. Physical capitalis used by economists to mean

a) goods that are used to help make other goods and services.b) the physical space (warehouse) where production occurs.c) time allocated to producing goods and services.d) the education and training of the workforce.e) financial backing.


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5. Human capitalis used by economists to mean

a) the education of the workforce.b) goods that are used to help make other goods.c) training and on the job experience.

d) financial backing.e) Both a and c are correct.

6. Tradeoffs are required in any decision because wants are ____ while resources are ____.

a) realistic; plentifulb) scarce; efficientc) unlimited; scarced) within reason; abundante) scarce; unlimited

7. Suppose that Ken spends 4 hours playing golf, paying green fees of $50, rather thanworking at his job that pays $10 hour. What is the economic cost of his decision to playgolf?

a) $90b) $60c) $50d) $40e) nothing, since he enjoys golf muchmore than working anyway.

8. Which of the following issues are concerned with microeconomic issues?

a) Whether Home Depot hires 50 or 51 workers per shift.b) How consumers respond to a 5% tax on gasoline.c) How a 5% tax on gasoline affects the market for new cars.d) How a firm responds to new pollution regulations on production.e) All of the above are microeconomic in nature.

9. Which of the following statements is normative?

a) Printing money causes the price level to rise.b) People work harder when the wage rate is higher.c) The government should try to lower the unemployment level.d) In the short run, inflation usually rises when unemployment falls.e) A decrease in the capital gains tax by 5% will cause the economy to grow 1% faster.


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10. An economic theory is valuable only if it

a) is complex.b) can be tested.c) is proven correct.d) expresses good news.e) is published in an important academic journal.

11. An economic model

a) can never be proven wrongb) often omits crucial elementsc) simplifies reality in order to focus on crucial elementsd) uses equations to understand normative economic phenomenae) produces poor predictions since they include unrealistic assumptions

Consider the following equation for the next three questions:

Y = 50 3X

12. In the above equation, Y is the ________ and X is the _______.

a) independent variable; dependent variableb) dependent variable; independent variablec) intercept variable; dependent variabled) slope; intercept variablee) independent variable; slope

13. From the equation above, we know that

a) X and Y are negatively related.b) plotting Y on the vertical axis and X on the horizontal axis yields an upward sloping line.c) the Y intercept is 3.d) the slope of the line is 3.e) Both b and d are correct.

14. The slope of the equation above

a) tells us how much X changes in response to changes in Y.b) says that X and Y are negatively related.c) says that if X increases by 1 unit, Y increases by 3 units.d) says that plotting Y on the vertical axis and X on the horizontal axis yields a downward

sloping line.e) b and d are both correct


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Use the graph below to answer the following questions.

15. From the graph, how are X and Y related?

a) negatively related Y increases when X increasesb) positively related Y increases when X increases

c) negatively related Y decreases when X increasesd) positively related Y decreases when X increasese) X and Y are unrelated

16. What is the slope of the graph above?

a) 2b) -2c) d) -e) 1

17. What is the vertical or Y intercept of the graph?

a) 0b) 10c) 20d) 40e) 50

10, 45 20, 40

30, 3540, 30

0

10

20

30

40

50

60

0 10 20 30 40 50

Y

X


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18. What is the appropriate equation that matches the graph above?

a) Y = 50 - Xb) Y = 50 2Xc) Y = 50 + 2Xd) Y = 10 + 45Xe) Y = 30 - X

19. Which of the graphs below shows Y increasing at an increasing rate? C

Y

X X

Y

X

Y

X

Y

A

D

B

C

THE PRODUCTION POSSIBILITIES FRONTIER CURVE

20. The production possibilities frontier demonstrates the

a) problem of scarcity.b) concept of tradeoffs.c) concept of opportunity cost.d) available, efficient choices to society.e) All of the above are true.


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21. Combinations of goods outsidethe production possibilities frontier curve (PPF)

a) are unattainable given society's technology and resourcesb) are combinations of goods that have already been consumedc) are luxury goods that are not necessaryd) result from not utilizing all available resourcese) are the result of economic recessions

22. Combination of goods that lie onthe production possibilities frontier curve (PPF) are said tobe

a) not feasibleb) possible, but inefficientc) inefficientd) efficiente) a poor choice of resource use.

23. Combinations of goods that lie insidethe production possibilities frontier curve (PPF) aresaid to be

a) not feasible.b) luxury goods that arent necessary.c) possible, but inefficient.d) efficient.e) the best choice sets for society.

24. On a PPF, economic growth is shown as a/an

a) movement along the curve from the top left towards the bottom right.b) outward shift in the curve.c) inward shift in the curve.d) a rotation outward along one axis.e) a movement from a point inside the curve to a point on the curve.

25. On a PPF, a technological advance in the production of one good is shown as a/an

a) movement along the curve from the top left towards the bottom right.b) outward shift in the entire curve.c) inward shift in the entire curve.d) a rotation outward along the axis of the good with the technological advance in

production.e) a movement from a point inside the curve to a point on the curve.


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Use the graph below to answer the following few questions (26 30). It shows aproduction possibilities frontier curve for an economy that produces only barrels andbathtubs.

26. What is the opportunity cost of moving from point F to point C?

a) 5 Barrelsb) 2 Bathtubsc) 15 Barrelsd) There is no cost associated with moving from F to C.e) A and B are both correct

27. What is the opportunity cost of moving from point F to point B?

a) 5 Barrelsb) 15 Barrelsc) 10 Barrelsd) 8 Bathtubse) 6 Bathtubs


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33. Along a typical downward sloping demand curve, what is held constant?

a) incomeb) tastes/preferencesc) prices of related goodsd) future price expectationse) All of the above are held constant.

34. Which of the following would shift the demand curve?

a) a change in the incomes of consumersb) a change in the tastes or preferences of consumersc) a change in the price of the good or serviced) All of the above are demand shifters.e) Only a and b are correct.

35. When referring to a graph, a decrease in demandmeans that

a) the demand curve has shifted left.b) the demand curve has shifted right.c) there has been a movement down along the demand curve.d) there has been a movement up along the demand curve.e) Both a and c are correct.

36. When referring to a graph, a decrease in quantity demandedmeans that

a) the demand curve has shifted left.b) the demand curve has shifted right.c) there has been a movement down along the demand curve.d) there has been a movement up along the demand curve.e) Both b and c are correct.

37. All of the following will cause an increase in demandEXCEPT

a) an increase in consumer incomeb) a decrease in the price of the goodc) a decrease in the price of a complement goodd) an increase in the number of buyers in the markete) All of the above will cause an increase in demand.


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38. Which of the following below shows an increase in demandfor Pepsi? C

39. Which of the following below shows a decrease in quantity demandedfor Pepsi? B


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SUPPLY AND DEMAND SUPPLY

40. In a typical market, the supply curveis made up of ___ and slopes ___.

a) sellers; upwardsb) sellers; downwardsc) sellers; verticald) buyers; upwardse) buyers; downwards

41. Which of the following is a supply shifter?

a) expected price (what sellers believe the price will do in the future)b) price of the good itself

c) price of inputsd) All of the above are supply shifters.e) Only a and c are supply shifters.

42. Which of the following would cause a movement along the supply curve?

a) a change in supplier price expectationsb) a change in the technology of productionc) a change in the price of the good itselfd) a change in the number of sellerse) All of the above could cause a movement along the supply curve.

43. When referring to a graph, an increase in supplymeans that

a) the supply curve has shifted right.b) the supply curve has shifted left.c) there has been a movement down along the supply curve.d) there has been a movement up along the supply curve.e) Both b and d are correct.

44. When referring to a graph, an increase in quantity suppliedmeans that

a) the supply curve has shifted right.b) the supply curve has shifted left.c) there has been a movement down along the supply curve.d) there has been a movement up along the supply curve.e) Both b and d are correct.


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45. Which of the following below shows a decrease in supplyof computers? D

46. Which of the following below shows a decrease in quantity suppliedof computers? B


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SUPPLY AND DEMAND EQUILIBRIUM

47. What does P* stand for?

a) the government mandated priceb) the market clearing pricec) the equilibrium priced) the price buyers pay and the price that sellers receivee) b, c and d are correct

48. In competitive markets, who controls P*?

a) buyers always control priceb) buyers mostly control pricec) sellers always control priced) sellers mostly control pricee) combination of buyers and sellersneither side controls the price

49. When a market for a good/service is in equilibrium,

a) buyers can buy as much of the product they want, if they pay price P*.b) sellers can produce as much of the product they want, if they receive price P*.c) there are no forces on price to rise or fall.d) the amount of the good demanded by consumers exactly equals the amount of the good

supplied by sellers.e) All of the above are true.

50. When the price of a good/service is above the market clearing price (P*), then

a) The amount supplied of the good will exceed the amount demanded.b) Market forces will begin to push the price downwards.c) There will be a surplus of the good.d) Some sellers will not sell all that they have produced.e) All of the above are correct.

51. According to the model of supply and demand, in general what happens when consumers

want moreof the good or service?

a) it causes the price to fallb) it causes the price to rise

c) it has no effect on price


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52. According to the model of supply and demand, in general what happens when consumers

want lessof the good or service?

a) it causes the price to fall

b) it causes the price to rise


53. Generally, anytime there is an increase in demand, the model of supply and demandwould predict equilibrium price to ____ and quantity to ____.

a) rise; fallb) fall; risec) rise; remain unchangedd) rise; rise

e) remain unchanged; rise

54. Generally, anytime there is a decrease in demand, the model of supply and demand wouldpredict equilibrium price to ____ and quantity to ____.

a) rise; fallb) fall; fallc) rise; remain unchangedd) rise; risee) remain unchanged; fall

55. According to the model of supply and demand, in general what happens when sellers

produce/provide lessof the good or service?




56. According to the model of supply and demand, in general what happens when sellers

produce/provide moreof the good or service?





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57. Generally, anytime there is an increase in supply, the model of supply and demand wouldpredict equilibrium price to ____ and quantity to ____.

a) rise; fallb) fall; risec) rise; remain unchanged

d) rise; risee) remain unchanged; rise

58. Generally, anytime there is a decrease in supply, the model of supply and demand wouldpredict equilibrium price to ____ and quantity to ____.

a) rise; fallb) fall; risec) rise; remain unchangedd) rise; risee) remain unchanged; rise

59. Generally, anytime there is a rise in the price of a substitute good, the model of supply anddemand would predict equilibrium price to ___ and quantity to ____.

a) fall; remain unchangedb) rise; risec) fall; rised) fall; falle) remain unchanged; rise

60. Consider the market for blue jeans. Suppose that khakis become more fashionable. In the

model of supply and demand, this would shift the ____ curve to the ____.

a) demand; right

b) demand; left

c) supply; right

d) supply; left

61. Consider the market for blue jeans. Suppose that there is an improvement in the

technology of blue jean production. In the model of supply and demand, this would shift the

___ curve to the _____.

a) demand; right

b) demand; left

c) supply; right

d) supply ; left


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62. Suppose that the price of steel, an important input to automobiles, falls. What does themodel of supply and demand will predict will happen in the market for automobiles?

a) equilibrium price and quantity will both increaseb) equilibrium price and quantity will both decreasec) equilibrium price will decrease while quantity will increase

d) equilibrium price will increase while quantity will decreasee) equilibrium quantity will fall, while the effect on price is ambiguous.

D

SP

Q

D

P

P

QQ

A

D

SP

Q

D

P

P

QQ

B

D

SP

Q

S

P

P

Q Q

C

D

SP

Q

S

P

P

Q Q

D

63. Which of the graphs above shows an increase in demand?

a) A

b) B

c) Cd) D

64. Which of the graphs above shows a decrease in demand?

a) A

b) B

c) C

d) D


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65. Which of the graphs above shows a decrease in supply?

a) A

b) B

c) C

d) D

66. Which of the graphs above shows an increase in supply?

a) A

b) B

c) C

d) D

67. Consider the market for X. Recently, it has been noted that the price of X has decreasedwhile at the same time the equilibrium quantity has increased. Which of the following wouldexplain that result?

a) an increase in demandb) a decrease in demandc) an increase in demand along with a decrease in supplyd) a decrease in supplye) an increase in supply

68. Generally, anytime there is a simultaneous increase in supplyand an increase in demand,the model of supply and demand would predict equilibrium price to ____ and quantity to

____.

a) rise; fallb) unable to determine; risec) rise; unable to determined) rise; risee) fall; rise

69. Generally, anytime there is a simultaneous increase in supplyand a decrease in demand,the model of supply and demand would predict equilibrium price to ____ and quantity to

____.

a) fall; riseb) rise; rise

c) unable to determine; falld) fall; unable to determinee) rise; unable to determine


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APPLICATION OF SUPPLY AND DEMAND ELASTICITY

70. To say that demand for a good is elastic, it means that

a) a 1% change in quantity demanded results in a 1% change in price.b) a 1% rise in price results in a drop in quantity demanded by more than 1%.c) a 1% rise in price results in a drop in quantity demanded by less than 1%d) a 1% rise in price results in a drop in quantity demanded by 1%.e) quantity demanded does not respond much to changes in price.

71. If a good has a price elasticity of demand of 0.5, this means that if price changed by 6%,quantity demanded would change by ___.

a) 1%b) 2%c) 3%d) 6%e) 12%

72. If a good has a price elasticity of demand of 3, this means that if price changed by 6%,quantity demanded would change by ___.

a) 1%b) 2%

c) 3%d) 6%e) 18%

73. A good generally tends to be more elastic (elasticity of demand)

a) in the short run.b) if the good is a luxury.c) if the good is a necessity.d) if the market is broadly defined.e) if the good has few close substitutes.

74. If a good is a necessity with no close substitutes, then demand will most likely be

a) very inelasticb) slightly inelasticc) unitary elasticd) slightly elastice) very elastic


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75. If demand for a good or service is elastic, then an increase in price will lead to ___.

a) an increase in revenue because increasing price always means more revenue.b) an increase in revenue because the increase in price will outweigh the loss in quantity

demandc) a decrease in revenue because decreasing price always means less revenue.d) a decrease in revenue because the increase in price will be outweighed by the

loss in quantity demand.e) It is impossible to predict what will happen to revenue after increasing the price.

76. What is the official formulafor the price elasticity of demand?

a) Ed = slope

b) Ed = %Qd / %P

c) Ed = Qd /P

d) Ed = Q / P

e) Both a and b are true

77. What is the midpoint formulafor the price elasticity of demand?

a) Ed = 1 / slope

b) Ed = [Qd / avg Qd] / [P / avg P]

c) Ed = Qd /P

d) Ed = avg Q / avg P

e) Both b and c are true


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Use the following information to answer the next several questions. You work at Granny

Grieves, a local campus grocery. The manager wants to raise the price of a box of Oreo

Cookies from $4 to $5 (a 20% price increase). At the old price ($4), you sold 150 boxes per

week. From past data, you have estimated the elasticity or demand for a box of Oreos to be

0.5. Use the official formula to answer.

78. What was your original revenue per week from sales of Oreos?

a) $4 per weekb) $150 per weekc) $450 per weekd) $600 per weeke) $750 per week

79. The increase in price is 20% (from $4 to $5). How do you expect quantity demanded tochange?

a) quantity demanded will fall by about 50%b) quantity demanded will fall by about 50 boxesc) quantity demanded will rise by about 25%d) quantity demanded will fall by about 10%e) quantity demanded will fall by about 20%

80. How many boxes of Oreos do you predict you will sell after the price increase?

a) 75b) 100c) 135d) 150e) 187

81. What do you predict will happen to total revenue after raising the price?

a) total revenue will rise, since demand is inelasticb) total revenue will rise, since demand in elastic

c) total revenue will rise, since raising price always leads to an increase in total revenued) total revenue will fall, since demand is inelastice) total revenue will fall, since demand is elastic


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82. Confirm your answer above. What is the new total revenue per week from Oreo sales?

a) $5 per weekb) $540 per week

c) $600 per weekd) $675 per weeke) $750 per week

Use the following information showing the market for CD's, with the demand and supply

schedules for the next 8 questions. Use the midpoint formula to calculate elasticities.

Price($) Quantity Demanded (Qd) Quantity Supplied (Qs)

6 70 30

8 60 40

10 50 50

12 40 60

14 30 70

83. The equilibrium price of CD's is _____ and quantity is ______ CD's, respectively.

a) $6; 50b) $8; 40c) $10; 50d) $12; 60

e) $14; 30

84. What is the price elasticity of demandwhen the price rises from $10 to $14? Is demandelastic, unit elastic or inelastic at this range?

a) 1.5; elasticb) 0.5; inelasticc) 2/3; inelasticd) 1/3; inelastice) 1; unit elastic

85. What is the price elasticity of supplywhen the price falls from $12 to $8? Is supply elastic,unit elastic or inelastic at this range?

a) 0.4; inelasticb) 0.4; elasticc) 2.5; elasticd) 2.5; inelastice) 1; unit elastic


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86. Suppose that CD producers lobby the government for a price floor. To be effective (orbinding), the price floor must be set at

a) $10.

b) any price below $8.c) any price above $8.d) any price below $10.e) any price above $10.

87. Suppose that the government does impose a price floor on CDs of $12. This would lead to

a) a shortage of 10 CDsb) a surplus of 10 CDsc) a surplus of 20 CDsd) a surplus of 60 CDs

e) It would have no effect on quantity since the price floor is non-binding.

88. Suppose that CD buyers lobby the government for a price ceiling. To be effective (orbinding), the price ceiling must be set at

a) $10b) any price below $8c) any price above $8d) any price below $10e) any price above $10

89. Suppose that CD buyers lobby the government for a price ceiling of $8. This would lead to

a) a shortage of 20 CDs.b) a surplus of 20 CDs.c) a shortage of 60 CDsd) a shortage of 40 CDs.e) It would have no effect since the price ceiling is non-binding.

90. Suppose that there is a technological advance in the production of CDs, leading to anincrease in supplyof 20 CDs at every price level. The new equilibrium price is now _____

and equilibrium quantity is now _______.

a) $8; 50b) $8; 60c) $10; 70d) $12; 60e) $12; 50


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APPLICATION OF SUPPLY AND DEMAND GOVERNMENT POLICIES

91. A binding price floor in a market sets price

a) above the equilibrium price and causes a shortage.b) above the equilibrium price and causes a surplus.c) below the equilibrium price and causes a shortage.d) below the equilibrium price and causes a surplus.e) below the equilibrium price and causes no adverse effects on quantity.

92. A binding price floor in the market for apples will cause

a) a shortage of apples.b) a surplus of apples.c) the quantity demanded of apples to be greater than the quantity supplied.d) the price to be higher than the free-market (equilibrium) price.e) Both b and d are correct

93. A $10 tax on the sellers of a good will cause the

a) demand curve to shift up by $10.b) supply curve to shift up by $10.c) demand curve to shift down $5 and the supply curve to shift up $5.d) supply curve to shift down by $10.e) demand curve to shift down by $10.

94. A $2 tax on the buyers of sneakers will cause the

a) demand curve for sneakers to shift down by $2

b) demand curve for sneakers to shift right by $2

c) demand curve to shift down by $1 and supply to shift up by $1

d) supply curve for sneakers to shift by $2

e) demand curve for sneakers to shift up by $2


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95. Which of the statements below concerning taxation is true?

i) Buyers and sellers always split a tax evenlyii) The government levies the tax on either buyers or sellers, and this group will pay

the majority of the taxiii) A tax $3 on buyers shifts the demand curve up by $3iv) A tax $4 on sellers shifts the supply curve up by $4.v) The government can control how a tax is split between buyers and sellersvi) Elasticity of supply and demand controls how a tax is split between buyers and

sellersvii) Whichever side of the market is the most inelastic will pay the majority of the taxviii) Whichever side of the market is the most elastic will pay the majority of a tax

a) i, iv, v and viib) ii, iii, iv and v

c) ii, iii, vi and viiid) iv, vi and viie) iii, iv, vi and vii

96. Which of the following is the most correct statement about tax burdens?

a) The tax burden depends entirely upon which side of the market is taxed (buyers orsellers).

b) Buyers always bear most of the burden of a tax.c) The tax burden falls the heaviest on the side of the market that is the most elastic.d) The tax burden falls the heaviest on the side of the market that is the most

inelastic.e) It is impossible to determine how a tax burden will be shared between buyers and

sellers.

97. If a tax is imposed on a market with an elastic demand and inelastic supply

a) buyers and sellers will share equally in the tax burden.b) buyers will bear most of the tax burden.c) sellers will bear most of the tax burden.d) It depends whether the tax is imposed on the sellers or buyers..e) It is impossible to tell the tax burden has nothing to do with elasticities.


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Use the graph below to answer the next questions (98 103). The graph depicts the market for

do-dads, with an initial equilibrium price of $6 and quantity of 60 (before the tax). The

government has imposed a tax on do-dads.

98. The tax has been imposed on ______ and the amount of the tax is _______.

a) sellers; $1b) sellers; $3c) buyers; $1d) buyers: $2e) buyers; $3

99. After the tax, the price buyers pay is ____ while the price sellers receive is _____.

a) $8; $5b) $8; $6c) $6; $6d) $6; $5e) $6; $3


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100. The amount of the tax paid by buyers is ______ while sellers pay _____ of the tax.

a) $2; $1b) $3; $1

c) $2; $3d) $1; $2e) Buyers and sellers equally split the burden of the tax.

101. What is the amount of revenue collected by the government?

a) $50b) $100c) $150d) $180e) Impossible to tell from the graph.

102. Of the total revenue, how much do buyers pay and how much do sellers pay?

a) buyers pay $150; sellers pay $0b) sellers pay $150; buyers pay $0c) buyers pay $150; sellers pay $150d) buyers pay $100; sellers pay $50e) buyers pay $75; sellers pay $75

103. What can we say about the elasticity of supply and demand in the market for do-dads?

a) demand must be elastic while supply is inelasticb) demand must be more elastic than supplyc) demand must be more inelastic than supplyd) demand must be inelastic while supply is elastice) demand and supply must both be inelastic


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104. Suppose that in Knoxville the market for coffee, the equilibrium price for a cup is $1.00.

Which of the following is the best example of a binding price ceiling?

a) The Knoxville City Council makes it illegal to sell coffee at any price higher than $1.50

b) The Knoxville City Council makes it illegal to sell coffee at any price lower than $1.50c) The Knoxville City Council makes it illegal to sell coffee at any price higher than

$0.75

d) The Knoxville City Council makes it illegal to sell coffee at any price lower than $0.75

e) The Knoxville consumer group Knoxvillians for Cheaper Java agree to boycott any

coffee shop that sells coffee for more than $100

105. Suppose that in Knoxville the market for coffee, the equilibrium price for a cup is $1.00.

Which of the following is the best example of a binding price ceiling?

a) The Knoxville City Council makes it illegal to sell coffee at any price higher than $1.50b) The Knoxville City Council makes it illegal to sell coffee at any price lower than $1.50

c) The Knoxville City Council makes it illegal to sell coffee at any price higher than

$0.75

d) The Knoxville City Council makes it illegal to sell coffee at any price lower than $0.75

e) The Knoxville consumer group Knoxvillians for Cheaper Java agree to boycott any

coffee shop that sells coffee for more than $100

PRODUCTION AND COST

106. The motivating behavior we assume to drive ALL firm behavior is

a) maximizing price.b) maximizing profit.c) maximizing revenue.d) minimizing total cost.e) minimizing average total cost.

107. Marginal product of labor is defined as the additional

a) revenue generated from employing 1 more unit of labor.b) cost generated from employing 1 more unit of labor.c) revenue generated from producing 1 more unit of output.d) cost generated from producing 1 more unit of labor.e) output generated from employing 1 more unit of labor.


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108. At Ken's Cookie Store, 4 workers can bake 44 cookies in one hour, while 5 workers can

bake 70 cookies in one hour. The marginal product of the 5th worker is

a) 11 cookies.

b) 14 cookies.c) 26 cookies.d) 70 cookies.e) Mmmmm. Cookies

109. Diminishing returns to labor, or diminishing marginal product of labor implies that,holding other inputs fixed, eventually

a) output decreases as we employ more units of labor.b) output rises by more and more as we employ more units of labor.c) revenue rises by more and more as we produce more units of output.

d) output rises by less and less as we add more units of labor.e) costs rise by less and less as we produce more units of output.

110. The short-runproduction function assumes that

a) all inputs are free to vary.b) at least one input is held fixed or constant.c) the length of time is less than one year.d) all inputs are held fixed.e) the firm wont stay in business long.

111. The long-runproduction function assumes that

a) at least one or more inputs are held fixed or constant.b) the length of time is over one year.c) the length of time is over six monthsd) all inputs are held fixed or constant.e) all inputs are free to vary.

112. An example of an explicitcost of production would be the cost of

a) hiring extra labor for a busy season.b) remodeling a store to expand business.c) repaying a business loan.d) purchasing raw materials (such as flour for a bakery).e) All of the above are examples of explicit costs of production.


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Sabrina owns her own broomstick factory. She pays her employees $150,000 per year. Her

inventories/supplies cost her an additional $90,000 per year. Her rent on the factory is $60,000

per year. Before running the broomstick factory, she was a race car driver earning $175,000

per year. Use this information to answer the next several questions (113 116).

113. What are Sabrina's implicitcosts?

a) labor ($150,000) and inventory ($90,000)b) labor ($150,000) and her foregone income from being a race car driver ($175,000)c) her foregone income from being a race car driver ($175,000)d) All costs are implicit costs (labor, inventory, rent, and foregone income)e) labor ($150,000), inventory ($90,000) and rent ($60,000)

114. What are Sabrina's explicitcosts?

a) labor ($150,000) and inventory ($90,000)b) labor ($150,000) and her foregone income from being a race car driver ($175,000)

c) her foregone income from being a race car driver ($175,000)d) All costs are implicit costs (labor, inventory, rent, and foregone income)e) labor ($150,000), inventory ($90,000) and rent ($60,000)

115. An accountant would say that Sabrina's yearly costs are ______ while an economistwould say that her yearly costs are _________.

a) $150,000; $325,000b) $300,000; $475,000c) $475,000; $475,000d) $300,000; $175,000e) $475,000; $300,000

116. If her revenues were $500,000 for the year, an accountant would say that Sabrina'sprofits were ______ while an economist would say that her profits were _________.

a) $200,000; $325,000b) $325,000; $350,000c) $25,000; $200,000d) $200,000; $25,000e) $300,000; $475,000


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117. Economic profits are normally _____ than accounting profits because ____.

a) lower; economic revenues are lower than accounting revenuesb) lower; economic costs are greater than accounting costs

c) the same; costs and revenues are the same in economics and accountingd) higher; economic costs are greater than accounting costse) higher; economics costs are lower than accounting costs

118. Marginal Cost (MC) can be thought of as the change in

a) revenue from employing one additional unit of labor.b) labor from producing one additional unit of output.c) total output from utilizing one additional unit of capitald) total cost from producing one more unit of output.e) total cost due to employing one more unit of labor.

119. Because the amount of labor can be changed in the short run, it is known as a(n)

a) average cost.b) maximum cost.c) variable cost.d) minimum cost.e) fixed cost.

120. What happens to fixed costs(FC) as the firm increases production in the short-run?

a) FC increase at a constant rateb) FC increase slowly at first, and then increase faster and fasterc) FC remain constantd) FC continually decreasee) FC decrease at first and then begin to increase

121. What happens to average fixed costs(AFC) as the firm increases production in theshort-run?

a) AFC increase at a constant rate

b) AFC increase slowly at first, and then increase faster and fasterc) AFC remain constantd) AFC continually decreasee) AFC decrease at first and then begin to increase


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122. What happens to variable costs(VC) as the firm increases production in the short-run?

a) VC increase at a constant rateb) VC increase slowly at first and then increase faster and faster

c) VC remain constantd) VC continually decreasee) VC decrease at first and then begin to increase

123. What happens to average variable costs(AVC) as the firm increases production in theshort-run?

a) AVC increase at a constant rateb) AVC increase slowly at first and then increase faster and fasterc) AVC remain constantd) AVC continually decrease

e) AVC decrease at first and then begin to increase

124. What happens to total costs(TC) as the firm increases production in the short-run?

a) TC increase at a constant rateb) TC increase slowly at first and then increase faster and fasterc) TC remain constantd) TC continually decreasee) TC decrease at first and then begin to increase

125. What happens to average total costs(ATC) as the firm increases production in theshort-run?

a) ATC increase at a constant rateb) ATC increase slowly at first and then increase faster and fasterc) ATC remain constantd) ATC continually decreasee) ATC decrease at first and then begin to increase

126. What happens to marginal cost(MC) as the firm increases production in the short-run?

a) MC increase at a constant rateb) MC increase slowly at first and then increase faster and fasterc) MC remain constantd) MC continually decreasee) MC decrease at first and then begin to increase


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127. Which of the following concerning typical cost curves is correct?

a) When marginal cost equals average total cost (ATC), the ATC is at its minimum.b) When marginal cost equals average total cost (ATC), the ATC is at its maximum.c) When marginal cost is greater than average total cost (ATC), the ATC is falling.

d) When marginal cost is less than average total cost (ATC), the ATC is falling.e) Both a and d are correct.

128. Which of the following short-run cost curves is NOT typically U-shaped?

a) average fixed costb) average variable costc) average total costd) marginal coste) All of the above are typically U-shaped

Use the graph below the answer the following five questions. (129 133)


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129. What would be the best way to interpret point A on the graph above?

a) When the firm produces 80 units per day, its total costs are $60 per day.b) When the firm produces 80 units per day, its total costs are $4,800 per day.

c) When the firm produces 80 units per day, its variable costs are $4,800 per day.d) When the firm produces 80 units per day, each one on average costs $60 to make.e) When the firm produces 80 units per day, the 80th unit costs an extra $60 to make.

130. What would be the best way to interpret point B on the graph above?

a) When the firm produces 80 units per day, each one on average costs $45 to make.b) When the firm produces 80 units per day, the 80th one costs an extra $45 to make.c) When the firm produces 80 units per day, each unit costs on average $35 to make.d) When the firm produces 80 units per day, its total costs are $3,600 per day.e) Both a and d are correct

131. When the firm produces 80 units per day, what are its total costs per day?

a) $45b) $60c) $3,600d) $4,800e) $2,800

132. When the firm produces 80 units per day, what are its variable costs per day?

a) $35b) $45c) $2,800d) $3,600e) $4,800

133. When the firm produces 80 units per day, what are its fixed costs per day?

a) $10

b) $800c) $2,800d) $3,600e) There are no fixed costs for the firm.


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134. Diminishing returns to labor occurs

a) in the short-run only

b) in the long-run only

c) in both the short-run and the long-rund) in neither.

135. In the long run, fixed costs

a) remain constant.b) always increase as output increases.c) always decrease as output increases.d) first decrease and then increase as output increases.e) There are no fixed costs in the long run.

136. Decreasing returns to scale means that as a firm increases production,

a) Total Costs are increasing

b) Average Total Costs are increasing

c) Total Costs are decreasing

d) Average Total Costs are decreasing

e) Total Costs are holding constant

137. Increasing returns to scale means that as a firm increases production,

a) Total Costs are increasing

b) Average Total costs are increasing

c) Total Costs are decreasing

d) Average Total Costs are decreasing

e) Total Costs are holding constant


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138. Suppose that, in the long run, Chuck Norris could produce 75 thousand Total Gymsper month and incur total economic costs of $90 million per month. If he increasesproduction to 100 thousand Total Gyms per month, total economic costs increase to $120million per month. What can we say about Chuck?

a) Chuck is experiencing constant returns to scale.b) Chuck is experiencing economies of scale (increasing returns to scale).c) Chuck is experiencing diseconomies of scale (decreasing returns to scale).d) Not sure. We need more information about its cost structure.e) Before he goes to bed at night, the Bogeyman checks his closet for Chuck Norris.

139. Suppose that, in the long run, Chuck Norris could produce 15 thousand Total Gymsper month and incur total economic costs of $750,000 per month. If he increases productionto 20 thousand Total Gyms per month, total economic costs increase to $900,000 permonth. What can we say about Chuck?

a) Chuck is experiencing constant returns to scale.b) Chuck is experiencing economies of scale (increasing returns to scale).c) Chuck is experiencing diseconomies of scale (decreasing returns to scale).d) Not sure. We need more information about its cost structure.e) Chuck Norris can make onions cry.

econ exam 1

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