Practice Questions

Practice Questions • Two goods are ________. A(n) _________ in the price of one good will _________ the demand for the other good: • (A) substitutes; increase; increase; • (B) substitutes; increase; decrease; • (C) complements; increase; increase; • (D) complements; increase; decrease; • (E) A & D.

Practice Questions • _____ elasticity of demand refers to the degree of consumer responsiveness to the percentage change in _______ with respect to the percentage change in _______: • (A) Income; price of the a good; income; • (B) Income; quantity of a good; income; • (C) Own-price; price of a good; demand for that good; • (D) Own-price; quantity demanded; price of a good; • (E) Cross-price; quantity of one good; price of the other good; • (F) B & D & E.

Practice Questions • The _____ substitutes available, the ____ elastic the demand for a good is: • (A) more; less; • (B) more; more; • (C) less; more; • (D) Not enough information.

Practice Questions • The price of a product is ______ the marginal revenue under conditions of perfect competition: • (A) greater than; • (B) equal to; • (C) less than; • (D) Not enough information; • (E) None of the above.

Practice Questions • A shift in the demand curve is generally caused by changes in ______: • (A) the prices of substitutes and complements; • (B) incomes; • (C) both of the above; • (D) none of the above.

Practice Questions • The law of diminishing marginal returns says: • (A) Less goods will be available to consume over time; • (B) Marginal utility declines as more of a good is consumed during a period of time; • (C) There is a maximum amount of total utility; • (C) Two of the above; • (D) None of the above.

Practice Questions • A budget constraint reflects: • (A) the income available for consumption; • (B) the prices for the goods a consumer may purchase; • (C) the marginal rate of substitution that will result in consumer equilibrium; • (D) all of the above.

Practice Questions • A firm’s supply curve corresponds to: • (A) the average total cost curve; • (B) the marginal cost curve above the minimum average variable cost curve; • (C) the average variable cost curve; • (D) the marginal cost curve.

Practice Questions • Which of the following is true: • (A) Average Fixed Cost + Average Variable Cost = Average Total Cost; • (B) A shift to the right of the demand curve makes consumer better off; • (C) The law of diminishing marginal returns states that as the use of an input increases, ceteris paribus, its Marginal Physical Product will eventually fall; • (D) All of the above.

Practice Questions P • A firm acts as a profit maximizer with its MC, AVC, ATC as shown in graph. At market price P2, it will produce an output of ____, making a loss of ____: • (A) Q1; P2P3KG; • (B) Q2; P1P2ED; • (C) Q3; P1P2ED; • (D) None of the above. MC ATC AVC D P1 G E F P2 K H P3 Q3 Q1 Q2 Q

Practice Questions • Generally, firms want to maximize profit, which is equivalent to setting: • (A) MPP = 0; • (B) MR = 0; • (C) MR = MC; • (D) MPP = APP.

Practice Questions • In the graph, IQ indicates an isoquant curve of a firm; EE’ indicates the price ratio of capital over labor; & A indicates the firm’s current input mix. To increase its profit, the firm should use: • (A) more capital, less labor; • (B) more labor, less capital; • (C) more labor, same amount of capital; • (D) maintain the input mix at A. Capital A E IQ E’ Labor

Practice Questions • If marginal cost exceeds average variable cost, then ____ cost is ____: • (A) average total; increasing; • (B) average variable; increasing; • (C) average total; at a minimum; • (D) average fixed; increasing; • (E) average total; at a maximum.

Practice Questions • To maximize profit, firms should NOT produce in the stage during which: • (A) MPP is decreasing; APP is greater than MPP; • (B) MPP is increasing; MC is less than AVC & ATC; • (C) MPP is decreasing; MVP equals MIC; • (D) None of the above.

Practice Questions • Billy Bob’s Fried Chicken Palace has an Average Fixed Cost of $0.25/chicken wing producing 500 wings/day. If production doubles to 1000 wings/day, AFC will: • (A) Increase; • (B) Increase, then decrease; • (C) Decrease, then increase; • (D) Decrease; • (E) None of the above;

Practice Questions • Billy Bob’s also has the following information regarding demand for their chicken: at a price of $6/chicken wing, demand for their good is 0 chicken wings, while at the current market price of $2, demand is 100 wings. Suppose consumer willingness-to-pay for wings increases by $1 (i.e. the demand curve shifts up in a parallel manner). Consumer surplus _______ by _______ if the market price stays at $2: • (A) Increases; $112.50; • (B) Increases; $225; • (C) Decreases; $100; • (D) Not enough information is provided;

Practice Questions • The own-price elasticity of demand for a good is -1 at the current market price. At this price: • (A) The firm selling the good is maximizing revenue; • (B) The firm selling the good could increase revenue by lowering the price; • (C) The firm selling the good could decrease revenue by raising the price; • (D) A + C; • (E) B + C;

Practice Questions • Stage 2 of production is where: • (A) Firms do not want to produce to maximize profits; • (B) Marginal physical product is greater than average physical product; • (C) Marginal physical product is negative; • (D) Average physical product is decreasing and marginal physical product is less than average physical product but still positive; • (E) None of the above;

Practice Questions • Pat consumes pudding and pickles. Pat’s marginal utility from pudding is 10, and Pat’s marginal utility from pickles is 20. Pudding costs $1 while pickles cost $2. Assuming Pat’s current bundle of goods is on the frontier of the budget constraint, which of the following are true?: • (A) Pat could increase total utility by consuming more pickles and less pudding; • (B) Pat could increase total utility by consuming less pickles and more pudding; • (C) Pat is maximizing total utility given the budget constraint; • (D) None of the above;

Practice Questions