Question;Multiple ChoiceIdentify the letter of the choice that best completes the statement or answers the question. 1. (E.1) Price elasticity of demand is a measure of the responsiveness of quantity demanded to changes ina. the inflation rate.b..the price level in general.c. price of the good itselfd. the price of substitute goods. 2. (E.1) If the percentage change in quantity demanded is less than the percentage change in price, demand isa. inelastic.b. unit elastic.c. elastic.d. perfectly elastic.e. perfectly inelastic. 3. (E.2) Which of the following would result in higher price elasticity?a. spending on a good representes a very, very tiny percentage of the average person's budgetb. shorter periods of time consideredc. the good is a necessityd. more substitutes for a good 4. (E.2) If the price of a good rises and total revenue earned by selling it falls,a. the price elasticity of demand for this good is elastic.b. the price elasticity of demand for this good is inelastic.c. the good is an inferior good.d. the good is a normal good.e. the good is a necessity. Exhibit 1 5. (E.3) Refer to Exhibit 1. As a consequence of the depicted change in the supply of X, the demand curve for Y shifted from D1 to D2. It follows thata. demand for Y is price elastic.b. X and Y are substitutes.c. X and Y are complements.d. X and Y are inferior goods. 6. (E.3) Income elasticity of demand for a normal good isa. less than zero.b. greater than zero.c. equal to zero.d. none of the above 7. (E.4) The theory of consumer choice assumes that consumers attempt to maximizea. the difference between total utility and marginal utility.b. average utility.c. total utility.d.marginal utility. 8. (E.4) A utility is an artificial construct used as a means of measuring thea. price of a good.b. satisfaction one receives from the consumption of a good.c. costs of producing a good.d. difference between the price and the value of a good. Exhibit 2 9. (E. 5) Refer to Exhibit 2. The marginal utility of the fourth plum isa. 3 utils.b. 5 utils.c. 10 utils.d. 12.5 utils.e. 50 utils. 10. (E.5) The law of diminishing marginal utilitya. allows us to make interpersonal utility comparisons.b. tells us that an additional dollar is worth less to a millionaire than to a poor person.c. tells us the worth of an additional dollar of income to an individual.d. simply tells us that an additional dollar of income to an individual is worth less than the preceding dollar of income.e. a, b, and d 11. (E.6) Consumer equilibrium exists whena. marginal utility for all goods is the same.b. total utility is constant.c. prices for all goods are the same.d. total utility for all goods is the same.e. the MU/P ratio for all goods is the same. 12. (E.6) A person is in consumer equilibrium when the price rises for one of the goods she purchases. If she wants to restore herself to consumer equilibrium, she will (most likely)a. buy less of the good whose price has risen and more of the relatively lower priced goods.b. try to increase the marginal utility she receives from the good whose price has risen.c. try to decrease the marginal utility she receives from the goods whose prices did not rise.d. buy more of both the good whose price has risen and of the goods whose prices have not risen.e. There is not enough information to answer the question. Exhibit 3APPLESUnits Total Utility ORANGESUnits Total Utility0 01 152 283 384 445 47 0 01 202 383 554 705 80 13. (E.7) Refer to Exhibit 3. Linda spends $5 a week on apples and oranges. If the price of both goods is $1 per unit, how many apples and oranges, respectively, does she purchase per week if she wants to maximize her utility?a. 0 and 5b. 1 and 4c. 2 and 3d. 3 and 2e. none of the above 14. (E.7) Refer to Exhibit 3. If the price of oranges now rises to $2 per unit while the price of apples remains unchanged at $1 per unit, what is the change in the number of oranges Linda purchases at the $2 per unit price of oranges as compared to what she purchased at the $1 per unit price?a. 0b. -1c. -2d. -3e. -4 15. (E.8) The diamond-water paradox is illustrated by which of the following statements?a. Water, a necessity, has a relatively low price whereas diamonds, usually a luxury, have a relatively high price.b. Although water appears to have a relatively low price when compared to diamonds, in reality, it has a relatively higher price.c. Although water appears to have a relatively low price when compared to diamonds, in reality, the prices are equal.d. Although water appears to have a relatively low price when compared to diamonds, at the margin, water has the relatively higher price.e. Although water appears to have a relatively low price when compared to diamonds, at the margin, the prices are equal. 16. (E.8) To resolve the diamond-water paradox, it is important to note that under normal circumstances,a. price reflects personal values, not the values of society.b. price reflects marginal utility, not total utility.c. the marginal utility of water is higher than the marginal utility of diamonds.d. price reflects total utility, not marginal utility.e. diamonds are scarce but water is not. 17. (E.9) Economists hypothesize that firms are formed whena. the sum of what individuals can produce alone is greater than what they can produce as a team.b. someone wants to earn profits.c. someone comes up with the idea that customers will buy a new product.d. the sum of what individuals can produce as a team is greater than the sum of what they can produce alone. 18. (E.9) A major role the monitor (or manager) plays in a firm is that ofa. observing the behavior of the owners of the firm.b. increasing shirking of subordinate employees.c. keeping shirking to a minimum.d. a and be. a, b, and c 19. (E.10) An advantage of the sole proprietorship is thata. the owner has limited liability.b. all decision-making power resides with the proprietor.c. it can realize the benefit of specialization.d. it has easy access to investment funds. 20. (E.10) Limited liability of owners is an advantage ofa. sole proprietorships.b. sole proprietorships and partnerships.c. partnerships.d. corporations and partnerships.e. corporations. 21. (E.11) Economic profit is the difference between total revenue anda. explicit costs.b. implicit costs.c. sunk costs.d. the sum of explicit and implicit costs. 22. (E.11) Joe is the owner-operator of Joe's Haircuts Unlimited. Last year he earned $100,000 in total revenues and paid $65,000 to his employees and suppliers. During the course of the year, he received three offers to work for other barbers, with the highest offer being $40,000 per year. What are Joe's economic profits?a. $0b. $25,000c. -$5,000d. $40,000e. $35,000 23. (E.12) The law of diminishing marginal returns holds for a situation in whicha. all inputs are variable.b. some inputs are variable and some inputs are fixed.c. all inputs are fixed.d. all inputs are increased in the same proportion. 24. (E.12) It would be possible to produce the world's present supply of wheat in a flowerpot if it were not for the law ofa. demand.b. supply.c. comparative advantage.d. diminishing marginal returns. 25. (E.13) The demand curve for a perfectly competitive firma. is downward sloping.b. is upward sloping.c. is perfectly horizontal.d. is perfectly vertical.e. may be downward or upward sloping, depending upon the type of product offered for sale. 26. (E.13) The perfectly competitive firm will seek to maximize profits by producing at the output level at whicha. average variable cost is at a minimum.b. marginal cost equals marginal revenue.c. average fixed cost is at a minimum.d. average total cost is at a minimum. 27. (E.15) Average variable cost equalsa. total variable cost divided by output.b. total variable cost divided by the change in output.c. average fixed cost plus average total cost.d. price of the variable input times the quantity of the variable input.e. none of the above 28. (E.15) Marginal cost is the change ina. total cost that results from a change in output.b. average variable cost that results from a change in output.c. average fixed cost that results from a change in output.d. a and be. all of the above Exhibit 4 2. (E.15) Which of the curves labeled in Exhibit 4 is the Average Total Cost curve?a. Ib. Jc. Kd. Le. MC 3. (E.15) The perfectly competitive firm's short-run supply curve is thea. upward-sloping portion of its average total cost curve.b. horizontal portion of its marginal revenue curve.c. portion of its average variable cost curve that lies above the average fixed cost curve.d. upward-sloping portion of its marginal cost curve.e. portion of its marginal cost curve that lies above its average variable cost curve.
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