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ECO 561 Week 1 Quiz or Knowledge Check – 01.Revenue increases when    

producer surplus increases producer surplus decreases consumer surplus increases consumer surplus decreases

2. An increase in the price of an inelastic good  decreases revenues  decreases the percentage change in quantity less than the percentage change in price  increases revenues  increases the percentage change in quantity more than the percentage change in price 3. Price elasticity of Demand increases when

   

the number of complementary goods decreases the number of substitute goods decreases people become more price sensitive over time people become less price sensitive over time

4. The purpose of a market in a market system is to    

allow government to control what is sold set constraints between buyers and sellers bring buyers and sellers into allow an organization to set prices in relation to their products

5. By specializing in the production of one good, a company is able to benefit from economies of scale which increases its revenue. Which of the following is an attribute of specialization?    

Reducing costs by creating a surplus Saving time by allowing a worker to focus on one task Encouraging workers to learn new skills Encouraging workers to learn a number of different skills

6. The market system promotes progress by  creating incentive to continue to do things in the same way  restricting the amount of capital directed to specific goods  slowly adjusting to changes in the prices of resources  providing incentive for technological advances 7. Productive efficiency is achieved when    

the most valued combination of resources is used the best technology is used when production occurs at a fair cost per unit fewer resources are left for production of other goods

8. The market is said to be in equilibrium when

there is potential for a shortage but not a surplus there is potential for a surplus but not a shortage neither a shortage nor a surplus exists the quantity sold equals the quantity purchased

   

9. The market will move to a higher equilibrium price if  the decrease in supply is equal to the decrease in demand  the increase in supply is greater than the increase in demand  the decrease in demand is greater than the decrease in supply  the increase in demand is greater than the increase in supply 10. The intersection of supply and demand will be at a lower equilibrium price but a higher equilibrium quantity if    

supply is constant and demand supply is constant and demand demand is constant and supply demand is constant and supply

increases decreases decreases increases

11. When a price ceiling occurs  the market price will be lower than the equilibrium price  the market price will be higher than the equilibrium price  the supply will exceed the demand  buyers will not be willing to pay more than the ceiling price 12.Purely competitive firms increase total revenue by    

increasing production decreasing production increasing price decreasing price

13.What are two ways for a competitive firm to determine the optimal level of production, that is, the level of production that will maximize profit or minimize losses?  Comparing total revenue to total cost or marginal revenue to marginal costs  Comparing average revenue to average costs or marginal revenue to marginal costs  Comparing average variable costs to price or marginal revenue to price  Comparing total revenue to average variable costs or price to average variable costs 14.Suppose that a firm determines that its marginal revenue is greater than its marginal cost, it would be better to    

increase production decrease production keep production the same increase price

15.Marginal cost can be defined as the addition to _____ of one more unit of output.    

total variable costs average total costs average variable costs total fixed costs

16.It is profitable for a firm to continue employing additional resources as long as  Marginal Cost  Marginal Cost  Marginal  Marginal

Revenue Product >= Marginal Resource Revenue Product <= Marginal Resource revenue >= Marginal cost Revenue Product >= Price

17.As additional units are produced, the marginal revenue product falls for all firms because marginal product decreases. For firms operating in industries that are not perfectly competitive, marginal revenue product also falls because    

product product product product

price price price price

falls as output increases falls as output decreases increases as outputincreases increases as outputdecreases

18.All things being equal, an increase in demand for a product,  increases demand for the resources usedin its production  decreases demand for the resources usedin its production  increases the supply of a product  decreases the supply of resources used in 19.Demand for resources, including labor, depend on its    

productivity profitability availability accessibility

20.When adding labor or other factors of production, businesses may see their total product rise, but see their perunit increase in returnfor each additional unit diminish. This phenomenon occurs only for firms that do not eff iciently use their factors of production applies only to capital-intensive industries is known as diminishing marginal product and has general market application  depends on how abundant or scarce labor is in existing factor-markets    

21.If a firm stars small and, over time, builds successively larger plantsizes or adds additional work space in an office, average total costare most likely to    

initially decrease, then begin to rise initially rise, then begin to decrease remain constant over time continually increase

22.The primary difference between increasing- and decreasingcost industries lies in  fixed-cost components: only increasing-cost industries have significant fixed costs  variable-cost components: only decreasing-cost industries have significant variable costs  the fact that the average total cost (ATC) of firms in increasing-cost industries will first decline and then eventually increasewith output, while decreasing-cost firms experience progressively lower ATC with increased output  efficiency of production 23.In the short run, firms should shut down if    

AVC > P ATC > P > AVC P > ATC P > MC

24.When you are considering the value of a resource in its next best use, you are considering its    

opportunity cost production cost marginal cost price

25.Of the four major market structuresâperfectly competitive, monopolistic competition, oligopoly, monopolyâreducing variable costs of production  is not a viable option for perfectly competitive firmsâ or price- takersâbecause the per-unit profit margin is fixed by the equilibrium price  can enhance profit for all but the monopoly firm, which, because it has no competition, has little financial incentive tolower its per-unit costs  will result in significant increases in profit-margin, regardless of market structure, if coupled with significant increases inproduct price  enhance profit per-unit, because profit equals revenue minus cost 26.A purely- or perfectly-competitive firm would be characterized by which of the following?  Large number of firms, price taker, free entry and exit, and standardized product  Large number of firms, price maker, free entry and exit, and a differentiated product  Small number of firms, price maker, limited entry and exit, and a standardized product  One firm, price maker, limited entry and exit, and a unique product 27.Oligopolies are characterized by a small number of firms where the top three firms hold the majority of the market. If in an oligopoly market, firm A is almost twice as big as firm B and firm C then  firm A is perfectly free to price however it chooses, since it is by far the most dominant firm in the market  firm C has to beware of pricing collusionby A and B to avoid being picked off in a price war  firms A, B, and C will tend to use non-price strategies to maintain their profits or market share.

 firms B and C will try to observe nonprice strategies taken by firm A and follow similar strategies to maintain their profits. 28.Regulated monopolies are empowered by public authority for which specific reason?  The provision of a good or service that, if left to the free market system, would require additional government regulation  to prevent negative externalities to consumers as well as the public.  The need to avoid the unnecessary use of duplicate resources that could be more efficiently employed by a single supplier to meet the needs of the broadest range of consumers.  The public policy of protecting consumers from the excesses of unrestricted, demand-driven pricing.  The governmentâs goal of maintaining artificially low prices for particular goods or services. 29.For a purely-competitive firm, price must be  equal to marginal revenue and average revenue  greater than marginal revenue and average revenue  greater than marginal revenue, and equal to average revenue  less than both marginal revenue and average revenue

30. Business cycles occur when output    

falls below its potential rises above its potential is fixed at its potential fluctuates around its growth trend

31.Which of the following equals the market value of all final goods and services produced in an economy, stated in the prices of a specific base year?    

Nominal GNP Nominal GDP Real GDP Real GNP

32. Because the goals of firms, entrepreneurs, and workers have different incentives, which of the following principles applies?    

Self-interest Invisible hand Moral hazard Free enterprise

33. Imagine a country has a population of 210 million. Within the country there are 95 million people who are employed workers, 50 million people incapable of working, and 60 million people capable of working, but not actively looking. Based on this information, what is the unemployment rate?    

3% 5% 7% 9%

34. A good real-world example of monopolistic competition is    

lawyers gas stations Time Warner Cable groceries store

35.An industry comprising a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions, is called    

monopolistic competition oligopoly pure monopoly pure competition

36.Price is constant or given to the individual firm selling in a purely competitive market because  the firm's demand curve is downward sloping  of product differentiation reinforced by extensive advertising  each seller supplies a negligible fraction of total supply  there are no good substitutes for its product 37. The most important pricing strategy for a perfectly competitive firm is    

minimizing cost maximizing sales product differentiation advertising

38. Which of the following is a nonprice barrier of entry?    

Huge sunk cost Discounts Product differentiation Advertising

39. A third-degree price discrimination can be applied to which of the following market structures?    

A monopoly An oligopoly A monopolistic competition A perfect competition

40. An economy’s aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the    

net export effect wealth effect real-balances effect multiplier effect

41. Suppose productivity rises in a particular economy, but wages stay the same. Other things equal,    

the demand curve will shift leftward the supply curve will shift rightward the supply curve will shift leftward expenditures curve will shift rightward

42. If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium    

output would rise output would fall price level would necessarily fall price level would necessarily rise

43. Expansionary fiscal policy is so named because it  involves an expansion of the nation's money supply  can only be attained by expanding government consumption  is aimed at achieving greater price stability  can motivate an expansion of real GDP 44. Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative$100 billion. To achieve full-employment output (exactly), government should  increase government expenditures by $100 billion  increase government expenditures by $50 billion

 reduce taxes by $50 billion  reduce taxes by $200 billion 45. GDP understates the value of output produced by an economy because it  includes transactions that do not take place in organized markets, such as home cooked meals  includes environmental degradation caused by increased output production  excludes value added from the underground economy, such as tips taken under the table  excludes the value of the wages and benefits of government employee 46. Other things equal, a decrease in the real interest rate will  shift the investment demand curve to the right  shift the investment demand curve to the left  move the economy upward along its existing investment demand curve  move the economy downward along its existing investment demand curve 47. Other things equal, a decrease in corporate income taxes will  decrease the market price of real capital goods  have no effect on the location of the investment demand curve  shift the investment demand curve to the right  shift the investment demand curve to the left 48. Inflation in U.S. prices will cause  an increase in the demand for U.S. dollars and an appreciation in the exchange rate  an increase in the supply of U.S. dollars and a depreciation in the exchange rate  a decrease in the demand for U.S. dollars and a depreciation in the exchange rate

 a decrease in the supply of U.S. dollars and an appreciation in the exchange rate 49. Suppose that U.S. prices rise 4% over the next year while prices in Mexicorise 6%. According to the purchasing power parity theory of exchange rates,what should happen to the exchange rate between the dollar and the peso?    

The The The The

dollar should depreciate. peso should appreciate. peso should depreciate. dollar will be revalued.

50. A rise in the domestic interest rate leads to capital    

outflows and exchange rate appreciation outflows and exchange rate depreciation inflows and exchange rate depreciation inflows and exchange rate appreciation

51. A firm under monopolistic competition will earn  a positive economic profit as it has some monopoly power  zero economic profit as it sets P = MC  zero economic profit as its P = ATC  a positive economic profit as it sets MC = MR

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