Sample Questions and Answers
A firm’s marginal cost curve is upward sloping due to:
A) Diminishing marginal returns to factors of production.
B) The law of demand.
C) The economies of scale.
D) Increasing average total cost.
Answer: A
A monopolist maximizes profit by producing the quantity at which:
A) Marginal cost equals marginal revenue.
B) Average total cost equals marginal revenue.
C) Price equals marginal cost.
D) Price equals average total cost.
Answer: A
If a firm is operating where marginal cost is greater than marginal revenue, the firm should:
A) Increase output.
B) Decrease output.
C) Keep output constant.
D) Increase price.
Answer: B
The price elasticity of demand for a good is determined by:
A) The size of the good’s market.
B) The availability of substitutes for the good.
C) The time of day the good is purchased.
D) The number of firms in the market.
Answer: B
A firm in perfect competition faces a market price of $15 and its marginal cost is $10. In this situation, the firm should:
A) Increase output to maximize profit.
B) Decrease output to reduce costs.
C) Continue producing as long as marginal cost equals marginal revenue.
D) Shut down production.
Answer: A
The “efficient scale” of a firm is the level of output at which:
A) Marginal revenue equals marginal cost.
B) The firm maximizes its total revenue.
C) The firm minimizes its average total cost.
D) Average total cost equals average variable cost.
Answer: C
In the case of a Giffen good, the income effect outweighs the substitution effect, leading to:
A) A positive relationship between price and quantity demanded.
B) A negative relationship between price and quantity demanded.
C) No change in quantity demanded.
D) A horizontal demand curve.
Answer: A
The substitution effect explains why:
A) A decrease in the price of a good leads to an increase in the quantity demanded of that good.
B) A decrease in the price of a good leads to a decrease in the quantity demanded of that good.
C) A consumer will always buy more of a good if its price decreases.
D) Consumers will buy less of a good if its price increases.
Answer: A
In the long run, if firms in a perfectly competitive market are earning economic profits, what will happen?
A) New firms will enter the market, increasing supply and driving the price down.
B) Existing firms will leave the market.
C) The supply curve will shift leftward.
D) Firms will stop producing.
Answer: A
The marginal revenue product of labor is:
A) The additional revenue generated by employing one more unit of labor.
B) The total revenue generated by labor.
C) The total cost of employing labor.
D) The total output produced by labor.
Answer: A
A firm in monopolistic competition maximizes its profit by setting the price where:
A) Marginal cost equals marginal revenue.
B) Price equals marginal cost.
C) Average total cost equals marginal revenue.
D) Average total cost equals price.
Answer: A
Which of the following is an assumption of the model of perfect competition?
A) Firms are able to set prices above marginal cost.
B) All firms produce a homogeneous product.
C) There are significant barriers to entry.
D) There is only one firm in the market.
Answer: B
The concept of “diminishing marginal utility” implies that:
A) As a person consumes more of a good, the total utility decreases.
B) The more of a good a person consumes, the less satisfaction they get from each additional unit.
C) A person will never consume too much of a good.
D) The more of a good a person consumes, the more satisfaction they get from each additional unit.
Answer: B
In a competitive market, firms will produce at the point where:
A) Marginal cost equals marginal revenue.
B) Average total cost equals average variable cost.
C) Marginal revenue equals average total cost.
D) Marginal cost equals average total cost.
Answer: A
If a firm’s marginal cost is less than its average total cost, then:
A) Average total cost is decreasing.
B) Average total cost is increasing.
C) The firm is making an economic profit.
D) The firm is in long-run equilibrium.
Answer: A
In monopolistic competition, the demand curve faced by a firm is:
A) Perfectly elastic.
B) Perfectly inelastic.
C) Downward sloping, but more elastic than a monopoly.
D) Downward sloping and less elastic than in perfect competition.
Answer: C
In a perfectly competitive market, if the price is greater than average total cost, firms:
A) Will enter the market in the long run.
B) Will leave the market in the long run.
C) Will reduce production.
D) Will maintain production at the same level.
Answer: A
The law of diminishing returns states that as more units of a variable input are added to a fixed input:
A) Marginal product increases at a decreasing rate.
B) Marginal product increases at an increasing rate.
C) Marginal product decreases.
D) Total product decreases.
Answer: A
A price ceiling is effective only if it is set:
A) Above the equilibrium price.
B) Below the equilibrium price.
C) At the equilibrium price.
D) It is always effective.
Answer: B
If the cross-price elasticity of demand between two goods is negative, the goods are:
A) Substitutes.
B) Complements.
C) Independent.
D) Necessities.
Answer: B
If a firm in a perfectly competitive market is producing where marginal cost equals marginal revenue and the price is equal to average total cost, the firm:
A) Is earning economic profit.
B) Is earning zero economic profit.
C) Should increase its production.
D) Should decrease its production.
Answer: B
The optimal consumption rule for a consumer states that:
A) The consumer should spend all of their income on the good with the highest marginal utility.
B) The consumer should equalize the marginal utility per dollar spent across all goods.
C) The consumer should allocate income in such a way that marginal utility is maximized.
D) The consumer should only purchase the good that gives the highest total utility.
Answer: B
A monopoly maximizes profit by:
A) Producing at the point where marginal cost equals marginal revenue.
B) Setting a price equal to marginal cost.
C) Producing at the point where average total cost equals marginal revenue.
D) Producing at the point where average variable cost equals marginal revenue.
Answer: A
In the long run, a perfectly competitive firm will produce at the level of output where:
A) Price equals average total cost.
B) Marginal revenue equals marginal cost.
C) Total revenue equals total cost.
D) All of the above.
Answer: D
The production function shows the relationship between:
A) The quantity of inputs used in production and the quantity of output produced.
B) The total cost and the level of output.
C) The total revenue and the price level.
D) The price of a good and the quantity demanded.
Answer: A
A perfectly competitive firm’s supply curve in the short run is:
A) The portion of the marginal cost curve above average total cost.
B) The portion of the marginal cost curve above average variable cost.
C) The average total cost curve.
D) The marginal revenue curve.
Answer: B
The total cost of production is:
A) The sum of fixed and variable costs.
B) The sum of the costs of capital and labor.
C) The total revenue minus total profit.
D) The cost of goods sold.
Answer: A
Which of the following describes an oligopoly market structure?
A) There is one firm that controls the entire market.
B) There are a large number of firms producing identical products.
C) A few large firms dominate the market, and they may produce differentiated or identical products.
D) All firms are price takers.
Answer: C
The shutdown point for a firm occurs when:
A) Price equals marginal cost.
B) Average total cost is minimized.
C) Price equals average variable cost.
D) Marginal cost is greater than marginal revenue.
Answer: C
The total revenue for a firm is:
A) Price times quantity.
B) Price minus cost.
C) The area under the marginal cost curve.
D) The sum of fixed and variable costs.
Answer: A
The income effect explains why, when the price of a good falls, a consumer:
A) Will buy more of that good and less of other goods.
B) Will buy more of that good and more of other goods.
C) Will buy less of that good and more of other goods.
D) Will buy more of other goods, but not more of that good.
Answer: B
If a firm in monopolistic competition is making economic profits, in the long run, new firms will:
A) Enter the market, shifting the demand curve for existing firms to the left.
B) Enter the market, shifting the demand curve for existing firms to the right.
C) Exit the market, reducing competition.
D) Remain in the market, maintaining the demand curve.
Answer: A
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