Questoes3

Chapter Three Microeconomics: Competitive Product Markets and Firm Decisions Part A: Theory and Public Policy Applications: 1. The market process is a) made up of people, consumers and entrepreneurs attempting to buy and sell on the best terms possible. b) an ongoing information and exchange system. c) self-correcting in that buyers and sellers routinely revise their plans on the basis of their trading experiences. d) all of the above. 2. Competition a) does not occur between buyers and sellers, but does occur among buyers and among sellers. b) is the process by which market participants, in pursuing their own interests, attempt to outdo, outprice, outproduce, and outmaneuver each other. c) stimulates the exchange of information. d) can be described by all of the above. 3. Which of the following is NOT a characteristic of the type of competitive market captured by supply and demand? a) b) c) d) Many sellers produce an identical product. Firms can increase their prices by restricting their production. Firms have freedom of entry into the market. No single firm can influence the market price. 4. The law of demand states there is a) b) c) d) a direct relationship between the price of a good and the quantity demanded. a direct relationship between the price of a good and the quantity supplied. an inverse relationship between the price and the quantity demanded. an inverse relationship between the price and the quantity supplied. 5. The demand curve a) is downward sloping because of the substitution and income effects associated with a price change. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 2 b) shifts to the right if there is a decrease in demand and shifts to the left if there is an increase in demand. c) illustrates the various quantities supplied at various prices. d) can be described by all of the above. 6. The substitution effect a) explains why the supply curve is upward sloping. b) indicates that people will buy more of a good as its price rises (and the prices of all other goods stay the same) because the purchasing power of consumer incomes rise when the price of a good falls. c) indicates that people will buy more of a good as its price falls (and the prices of all other goods stay the same) because the good becomes relatively cheaper compared to other goods. d) explains why the demand curve shifts to the right as the price falls. 7. According to the law of demand, an increase in the price of a good will a) b) c) d) increase the quantity demanded. decrease the quantity demanded. increase demand. decrease demand. 8. Movement down along a demand curve could be caused by a) b) c) d) a decrease in the price. an increase in consumer's desire or taste for the good. an increase in the price of a substitute good. a decrease in consumer incomes. 9. Which of the following will most likely shift the demand curve to the left? a) b) c) d) An increase in the price of a complementary good An expected increase in the future price of the good An increase in consumers' incomes and the product is a "normal" good An increase in the number of buyers 10. Which of the following will cause an increase in the demand for a product? a) b) c) d) An increase in the number of producers An increase in the number of consumers A decrease in the price of a substitute product Consumer expectations that the product will be more abundant in the near future 11. The supply curve is Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 3 a) downward sloping because of the substitution and income effects associated with a price change. b) downward sloping because a lower price will result in an increase in the quantity demanded. c) upward sloping because of the substitution and income effects on consumers associated with a price change. d) upward sloping because higher marginal (extra) costs result from increased production. 12. Which of the following will cause an increase in the supply of a product? a) b) c) d) An increase in wages that increases costs of production. An increase in consumer incomes. An advancement in technology that reduces costs of production. An increase in the price of the good. 13. If there is an increase in consumer desire or taste for a good, then the demand for the product will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.) 14. If there is an increase in the number of buyers, then the demand for the product will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.) 15. If there is an decrease in the price of a good A, which is a substitute for good B, then the demand for good B will a) b) c) d) increase. decrease. remain the same (Unknown; not enough information to specify among these options.) 16. If there is a decrease in the price of good A, which is a complement for good B, then the demand for good B will a) b) c) d) increase. decrease. remain the same. (Unknown; not enough information to specify among these options.) Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 b) a shortage exists and the price will increase in the near future because sellers will competitively bid up the price. not enough information to specify among these options. decrease. If there is an increase in the productivity of producing good A. to decrease. decrease. If quantity supplied exceeds quantity demanded. Use the graph below to answer the next four questions. remain the same. (Unknown. If there is an increase in profitability of producing goods other than good A.) 21. not enough information to specify among these options.) 20. d) a surplus exists and the price will increase in the near future because buyers will competitively bid up the price. not enough information to specify among these options. remain the same.4 17. If there is an expected decrease in the future price of a good. then the near-term demand for the good will a) b) c) d) increase. c) a surplus exists and the price will decrease in the near future because sellers will competitively bid down the price. (Unknown. not enough information to specify among these options. then the supply of good A can be expected a) b) c) d) to increase. to remain the same. then the supply of good A can be expected to a) b) c) d) increase decrease remain the same (Unknown. then the supply of good A can be expected to a) b) c) d) increase. If there is an increase in market wage rates of workers producing good A.) 19.) 18. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . a) a shortage exists and the price will decrease in the near future because buyers will competitively bid down the price. (Unknown. 23. if the price is $11 and no change occurs in market forces. shortage will lead to a fall in price. In the graph above. the price will a) b) c) d) increase. not enough information to say. shortage will lead to a rise in price. remain the same. if the price is $8. In the graph above. shortage will lead to a rise in price. shortage will lead to a fall in price. (Unknown.) Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . if the price is $16. the resulting a) b) c) d) surplus will lead to a fall in price. 24. the resulting a) b) c) d) surplus will lead to a fall in price. surplus will lead to a rise in price. decrease.5 22. surplus will lead to a rise in price. In the graph above. then the price of the good in the market will a) b) c) d) increase. In the above graph. Price will increase. Supply will fall. d) all of the above. d) don't know (not enough information to specify one of the other options) 29. If there is an increase in productivity of producing good A at the same time that there is an increase in consumers' taste for the good.If there is an increase in productivity of producing good A at the same time there is an increase in consumers' taste for the good. (Unknown. b) the amount bought and sold to rise. 27.) 30. then the quantity of the good bought and sold in the market will a) increase. Consider the market for some item of clothing. remains the same. 28. the efficient (welfare-maximum) output level is a) b) c) d) 100 150 225 350 26. market efficiency. b) decrease. market surplus. The equilibrium quantity will fall. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . If this type of clothing suddenly becomes more fashionable. what will happen in the market? a) b) c) d) Demand will fall. this will cause a) the price of the product to rise.6 25. decrease. An effective price floor will lead to a a) b) c) d) market shortage. c) remain the same. c) a temporary shortage of the product that will be eliminated over time as buyers competitively bid up the price. market equilibrium. If demand increases for a product. not enough information to specify among these options. 7 31. An effective price ceiling will lead to a a) b) c) d) market shortage. the long-run equilibrium price to be equal to the short-run equilibrium price. Suppose new genetic engineering results in oranges becoming less susceptible to damage from freezing temperatures. Yesterday's newspaper reports results of a study indicating that people who eat lots of apples can expect a significant increase in life expectancy. The equilibrium price will increase and the equilibrium quantity will increase. what will happen to the equilibrium price and quantity of oranges? a) b) c) d) The equilibrium price will decrease and the equilibrium quantity will decrease. 35. market efficiency. Which of the following are shortcomings of free competitive markets? a) Competition sometimes leads to product proliferation. a larger number of smaller firms operating within the industry. The equilibrium price will decrease and the equilibrium quantity will increase. we would most likely expect a) b) c) d) the long-run equilibrium price to be lower than the short-run equilibrium price. market surplus. The equilibrium price will increase and the equilibrium quantity will increase. 32. If this technology becomes widely used. d) All of the above. 33. If economies of scale are experienced as the market for a good grows. The equilibrium price will increase and the equilibrium quantity will decrease. This innovation is expected to save orange growers $1 billion a year in crop losses. 34. What do you expect to happen to the market price and quantity of apples? a) b) c) d) The equilibrium price will decrease and the equilibrium quantity will decrease. market equilibrium. The equilibrium price will decrease and the equilibrium quantity will increase. c) Competition can promote socially undesirable goods or services. The equilibrium price will increase and the equilibrium quantity will decrease. That which must be given up in order to get something else is called Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . the long-run equilibrium price to be greater than the short-run equilibrium price. e) None of the above 36. b) The outcome of competition will not be efficient to the extent that production costs are imposed on people who do not consume a product. remain the same. not enough information to specify among these options. decrease. Which of the following statements about queues is correct? Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . d) Neither a nor b. If the long-run increase in market demand is greater than the long-run increase in market supply. decrease. b) Queues enable firms to lower their costs and prices by more than queues raise the opportunity costs incurred by customers standing in line. (Unknown.8 a) b) c) d) an opportunity cost. (Unknown. If the long-run increase in market demand is greater than the long-run increase in market supply. (Unknown. the quantity produced in competitive markets will a) b) c) d) increase. c) Both a and b. then in the long run. remain the same. If the long-run increase in market supply is greater than the long-run increase in market demand. decrease.) 39. the competitive price will a) b) c) d) increase. a fixed cost. (Unknown. remain the same. a sunk cost. decrease. not enough information to specify among these options. the quantity produced in competitive markets will a) b) c) d) increase. then in the long run. If the long-run increase in market supply is greater than the long-run increase in market demand. not enough information to specify among these options.) 40. the competitive price will a) b) c) d) increase. Which of the following arguments can explain queues in competitive markets? a) Queues are observed in markets because firms make mistakes in stocking goods. then in the long run. 37. remain the same.) 41. then in the long run. not enough information to specify among these options.) 38. a variable cost. 42. Assume competitive markets and normal slopes for supply and demand. not enough information to specify among these options. price a) b) c) d) increases. (Unknown. remains the same.) 45. not enough information to specify among these options. (Unknown.) 44. (Unknown. When demand decreases. Given the following changes (and only those changes) in market conditions. c) People's opportunity costs will have nothing to do with the length of queues since queues are the result of a firm’s stocking and pricing mistakes.9 a) Queues indicate inefficiency in markets and are not expected even in perfectly competitive markets.) 47. quantity a) b) c) d) increases. (Unknown. quantity a) b) c) d) increases. remains the same. When cost of production decreases. What happens to price and quantity: 43. When price of a substitute good B increases the price of substitute good A will a) increase. decreases. b) Queues are expected in competitive markets and have an optimum length. decreases. remains the same. remains the same. When demand decreases. decreases. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . price a) b) c) d) increases. When cost of production decreases. not enough information to specify among these options. d) An increase in people's opportunity costs in a given market will leave the length of queues unaffected. predict the directional change in equilibrium price and quantity in the next ten problems.) 46. decreases. not enough information to specify among these options. not enough information to specify among these options. remain the same. decrease. the price of gasoline can be expected to a) b) c) d) increase. When given the conditions in question 52.10 b) decrease. not enough information to specify among these options. (Unknown.) 51. (Unknown. not enough information to specify among these options. not enough information to specify among these options. (Unknown. decrease. When Hurricane Katrina knocks out several oil refineries along the Gulf Coast. remains the same. When the price of a complement good B increases. (Unknown. the price of gasoline-powered motor scooters will Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . not enough information to specify among these options. remain the same. decrease. the quantity of gasoline can be expected to a) b) c) d) increase.) 49. When the price of a substitute good B increases. the quantity of substitute good A will a) b) c) d) increase. c) remain the same.) 53. remain the same. decrease. remain the same. not enough information to specify among these options. When Hurricane Katrina knocks out several oil refineries along the Gulf Coast. decrease.) 52. the price of complement good A will a) b) c) d) increase. d) (Unknown.) 50. (Unknown. the quantity of complement good A will a) b) c) d) increase. When the price of a complement good B increases.) 48. (Unknown. remain the same. not enough information to specify among these options. (Unknown. the quantity of good B will a) b) c) d) increase.) 54. When given the conditions in question 52 above. decrease. not enough information to specify among these options. remain the same. the price of good A will a) increase. When an excise tax is imposed on the producers of good B. remain the same. (Unknown. which is a substitute for good B. the price of good B will a) b) c) d) increase. When a subsidy is granted to the buyers of good A. not enough information to specify among these options. When an excise tax is imposed on the producers of good B. decrease. (Unknown. decrease. not enough information to specify among these options. not enough information to specify among these options. the quantity of gasoline-powered motor scooters will a) b) c) d) increase. remain the same. (Unknown.) 57.) 59. then the price of good A. When an excise tax is imposed on the producers of good B. When an excise tax is imposed on the producers of good B. remain the same. not enough information to specify among these options. will a) b) c) d) increase. decrease. (Unknown.11 a) b) c) d) increase.) 56. decrease. which is a substitute for good B. will a) b) c) d) increase. then the quantity of good A. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . remains the same. decrease.) 58.) 55. predict the directional change in equilibrium price and quantity in the next ten questions. c) remain the same. the quantity of Good A will a) b) c) d) increase. decrease. the quantity of good B will a) b) c) d) increase. remain the same. not enough information to specify among these options. remain the same.) 65. When cost of production increases in highly competitive markets. not enough information to specify among these options. remain the same. (Unknown. Assume competitive markets and normal slopes for supply and demand. decrease. not enough information to specify among these options. not enough information to specify among these options. remain the same. remain the same.) 61. not enough information to specify among these options. (Unknown.12 b) decrease. decrease. price will a) b) c) d) increase. decrease.. the price good B will a) b) c) d) increase.) 62. d) (Unknown.) Given the following changes (and only these changes) in market conditions. not enough information to specify among these options. When a subsidy is granted to the producers of substitute good A. (Unknown. When a subsidy is granted to the buyers of good A. 63.) 60.) 64. price will Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 .When demand increases.When demand increases. (Unknown. quantity will a) b) c) d) increase. (Unknown. When a subsidy is granted to the producers of substitute good A. decrease. ) 67. decreases. which is a complement to good A. the price of good A will a) b) c) d) increase. the price of good A will a) b) c) d) increase. Remains the same. (Unknown. not enough information to specify among these options. decrease. (Unknown.) 69.. When the price of a good B. which is a complement to good A. decrease. not enough information to specify among these options. remain the same. remain the same. decrease. the quantity of good A will a) b) c) d) increase. price of the good will a) increase.) 70. not enough information to specify among these options. not enough information to specify among these options. decrease. remain the same. not enough information to specify among these options. (Unknown. remain the same. (Unknown. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . decrease.) 66. decrease. When cost of production increases in highly competitive markets. When the price of a substitute good B decreases. quantity will a) b) c) d) increase. When the factories of several major suppliers of a good are blown up. the quantity of good A will a) b) c) d) increase.13 a) b) c) d) increase. not enough information to specify among these options. When the price of a substitute good B decreases. (Unknown. Remain the same.decreases in highly competitive markets. When the price of a good B.) 71.) 68. (Unknown. the quantity of the domestic good that competes with the import in the domestic market will a) b) c) d) increase. the price of the domestic good that competes with the import in the domestic market will a) b) c) d) increase. decrease. not enough information to specify among these options. remain the same. When the factories of several major suppliers of a good are blown up.) 76. (Unknown. When a tariff is imposed on an import collected from the importer. remain the same. (Unknown.14 b) decrease. decrease.) 73.) 74. b) decrease. remain the same. (Unknown.) 75. (Unknown. c) remain the same. not enough information to specify among these options. not enough information to specify among these options. c) remain the same.) 77. the quantity of the imported good will a) b) c) d) increase. When a tariff is imposed on an import collected from the importer. as above. When a subsidy is granted to domestic producers of a good that competes with an imported good. not enough information to specify among these options. then the price of the domestic good will Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . not enough information to specify among these options. as above. d) (Unknown. quantity of the good will a) increase. the price of the imported good will a) b) c) d) increase. When a tariff is imposed on the import. (Unknown. decrease. When a tariff is imposed on the import. decrease. not enough information to specify among these options.) 72. remain the same. decrease. not enough information to specify among these options. When a subsidy is granted to domestic producers of a good that competes with an imported good. decrease. remain the same. (Unknown. not enough information to specify among these options. remain the same. not enough information to specify among these options.) 81. decrease. (Unknown. decrease. (Unknown. the quantity of the good in foreign markets will a) b) c) d) increase. (Unknown. When supply increases while the demand decreases (the amount of change in each curve is unknown). (Unknown. then the price of the good in foreign markets will a) b) c) d) increase. When a subsidy is granted to domestic producers of a good that competes with an imported good. remain the same. When a subsidy is granted to domestic producers of a good that competes with an imported good. remain the same.15 a) b) c) d) increase. not enough information to specify among these options. then the quantity of the domestic good will a) b) c) d) increase. (Unknown. remain the same. Perfect competition is a market structure in which Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . then quantity will a) b) c) d) increase.) 79.) 83. then price will a) b) c) d) increase. not enough information to specify among these options. remain the same.) 82. decrease. decrease.) 80. not enough information to specify among these options.) 78. When supply increases while the demand decreases (the amount of change in each curve is unknown). 85. output has been maximized given supply and demand constraints.) 88.16 a) b) c) d) the product is perfect. Markets are said to be efficient when a) b) c) d) e) the market price equals the marginal cost of producing the last unit sold. If the price of a good goes up. If the price of a good goes down. then the demand a) b) c) d) increases. (Unknown. decreases. individual producers and consumers have no control over the market price. all of the above. not enough information to specify among these options. not enough information to specify among these options. not enough information to specify among these options. then the demand a) b) c) d) increases. decreases. the supply of the good will a) b) c) d) increase. (Unknown. remain the same. (Unknown.) 86. the output level is inefficient. If the price of a good goes down. remains the same. all gains from trade have been exploited. decrease. 84. (Unknown. the price is set by government.) 87. remain the same. remains the same. the marginal benefit of the last unit sold equals the marginal cost of production. the supply of the good will a) b) c) d) increase. If the price of a good goes down.) 89. decrease. A product improvement will be made a) whenever the additional value of the improvement is greater than the additional cost of the improvement. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . not enough information to specify among these options. If a product improvement adds more to consumer value than it adds to production costs. in a competitive market. (Unknown. b) better off because the increase in the price producers receive will be greater than the increase in their added costs. consumers will be a) worse off because of the price increase consumers will pay. c) worse off because the increase in the price consumers pay is greater than the added cost of production. remain the same. If a product improvement adds more to consumer value than it adds to production costs. decrease. the demand for labor will a) increase. d) better off because the decrease in the price producers receive will exceed the increase in their added cost of production. in a competitive market. producers will be a) worse off because of the cost increase producers will incur. b) better off because the increase in the added value consumers receive will be greater than the increase in the price they pay. the price of the good in a competitive market will a) b) c) d) increase. c) worse off because the increase in producers’ cost will be greater than the higher price they receive. not enough information to specify among these options. decrease. the quantity of the good produced and sold in a competitive market will a) b) c) d) increase. not enough information to specify among these options. d) better off because the decrease in the price consumers pay will exceed the increase in the added cost of production.) 91. 94. If the price of the product workers produce goes up. 90. If a product improvement adds more to consumer value than it adds to production costs. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . 93. remain the same. c) whenever the improvement has value. If a product improvement adds more to consumer value than it adds to production costs. (Unknown. d) only when the improvement comes at no cost.) 92.17 b) whenever the total value of the improved product is greater than the total cost of the improved product. ) 97. c) remain the same. not enough information to specify among these options. decrease. _________ _________ Quantity of labor _________ _________ _________ _________ 101. predict the directional change to the equilibrium wage rate and quantity of labor hired. the demand for labor will a) b) c) d) increase.18 b) decrease. remain the same. d) (Unknown. not enough information to specify among these options. (Unknown. The price of the product produced _________ Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . The supply of labor decreases. Use the following four alternatives: a) b) c) d) Increases Decreases Remains the same (Not enough information to determine. decrease. 99. The productivity of labor increases. (Unknown. The opportunity cost of labor decreases. If worker productivity goes up.) 96. not enough information to specify among these options. If workers’ opportunity costs rise.) Wage rate 98. remain the same. the supply of labor will a) b) c) d) increase. 100. not enough information to specify among these options. If workers’ opportunity costs rise. the demand for labor will a) b) c) d) increase. remain the same. The demand for labor increases.) Assume competitive labor markets and normal shapes for the demand for and supply of labor. (Unknown. _________ 102.) 95. Given the specified change in market conditions in each question (and no other change for each question). decrease. If a competitive market process exists. the wage rate will a) b) c) d) increase. b) The amount buyers wish to purchase will eventually match the amount sellers wish to produce and make available in the market.19 increases. e) All of the above. c) Eliminate any shortage. remain the same. the quantity of labor supplied will exceed the quantity of labor demanded. a) b) c) d) the quantity of labor demanded will exceed the quantity of labor supplied. 106. If the wage rate is held below the equilibrium wage rate. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . If there is a shortage in a competitive labor market.. (Not enough information to determine). If the wage rate is held above the equilibrium wage rate. 103. remain the same. The working environment improves at a cost to employers that is less than the value of the improved environment to workers _________ _________ _________ _________ 104. (Not enough information to determine) 108. b) Result in a production level exactly desired by consumers. the quantity of labor supplied and demanded will be unaffected. this means a) There are both buyers and sellers of an item. the quantity of labor supplied will equal the quantity of labor demanded. If there is a surplus in a competitive labor market. 107. 109. the quantity of labor supplied will equal the quantity of labor demanded. the quantity of labor supplied and demanded will be unaffected. decrease. d) No one individual seller has the ability to control the price. the quantity of labor supplied will exceed the quantity of labor demanded. a) b) c) d) the quantity of labor demanded will exceed the quantity of labor supplied. 105. decrease. the wage rate will a) b) c) d) increase. c) No one individual buyer has the ability to control the price. A competitive market will a) Achieve equilibrium. e) Subtracting supply from demand at each price. e) Consumer preferences are equal to production costs. e) Be characterized by all of the above. d) As price decreases. b) The amount people wish to purchase is equal to the amount producers wish to produce. When an economist says the demand for a product has increased. quantity demanded increases. d) Consumers would be willing and able to pay less to receive the same quantity. quantity demanded increases. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . If price is below equilibrium a) Demand is too low for equilibrium. 112. quantity supplied decreases. c) Quantity demanded exceeds quantity supplied. d) Demand will increase. d) Whatever happens to price happens to quantity supplied. b) Price changes are always in the same direction as demand changes. he or she means that a) Consumers are willing and able to purchase more at any given price. A market is in equilibrium when a) Changes in demand are equal to changes in supply. The law of supply illustrates that a) As price increases. e) The price has decreased and consumers will therefore purchase more of the product. c) Subtracting the demand for the product from the supply of the product. b) The income and substitution effects will cause the price to rise. c) The product has become more scarce and consumers therefore want it more. c) A change in price causes a change in supply. d) Equilibrium price equals quantity supplied. c) The determinants of supply are equal to the determinants of demand. 114. 113. The market demand curve is determined by a) Adding individual demand curves. d) Adding the demand for the product and the supply of the product. 111. b) The demand curve has shifted to the left. e) Quantity supplied exceeds quantity demanded. e) Price changes are always in the same direction as supply changes. demand increases. e) As price decreases. 110. The law of demand illustrates that a) As price decreases. b) Adding the quantity supplied by all producers at various prices. and a shortage will occur. quantity supplied increases. c) As price increases.20 d) Eliminate any surplus. b) Demand must decrease to cause an increase in quantity supplied. and a shortage will occur. c) A change in consumer incomes. 117. d) The inflation rate. d) A change in the price of the product. c) Price and quantity supplied are inversely related. b) The higher the price the smaller the quantity that will be sold. e) Demand was too high for producers to make a profit. e) National income. e) As price decreases. b) A decrease in the cost of producing the product. d) A change in productivity due to a change in technology e) A change in consumer incomes. Which of the following is not a determinant of supply? a) A change in the price of resources utilized in production. The income effect measures the effect a price change has on a) The purchasing power of consumer incomes. demand increases.21 115. Which of the following may cause a change in demand for a product? a) A change in the profitability of producing another product. Which of the following will not cause the demand for ice cream to change? a) A change in population size b) A change in the price of ice cream Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . 118. d) The price is too low for equilibrium. 121. c) There is an inverse relationship between price and quantity demanded. c) A greater quantity will be produced at any price. b) The price is too high for equilibrium. quantity demanded increases. he or she means that a) A smaller quantity will be produced at any price. d) There is an inverse relationship between price and quantity supplied. e) None of the above. The law of demand states that a) There is a direct (positive) relationship between price and quantity supplied. c) The relative price of other substitutable products. c) A change in the profitability of producing other goods. b) The change in demand. d) Price and quantity demanded are inversely related. b) A change in production costs. 120. 116. 119. The law of supply states that a) Price and quantity supplied are positively (directly) related. When an economist says the supply of a product has decreased. e) All of the above. b) As price increases. d) Movement up along the demand curve. e) Is above the equilibrium price. If consumer incomes rise then a) The equilibrium price and quantity falls. b) Demand to rise. d) X is an inferior good and Y is a normal good. A successful advertising campaign will most likely cause a) The equilibrium price and quantity to rise. e) X and Y are normal goods. A price at which quantity demanded equals quantity supplied a) Could not possibly exist in the short run. e) None of the above. c) X and Y are substitutes. d) The demand for resources (inputs) to rise. d) A complementary good. 125. c) Demand rises and supply falls. 123. d) Is an equilibrium price. e) None of the above. b) X and Y are inferior goods. c) Movement down along the demand curve. If the price of a product decreases. this causes a) Demand to increase. Consider the market for an inferior product. c) A normal good. If the demand for a product varies inversely with changes in consumer incomes. c) Is below the equilibrium price. 124. d) The equilibrium price rises and the equilibrium quantity falls. b) The equilibrium price and quantity rises. 127. b) A substitute good. 126. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . b) Will cause a shift in demand. b) The demand curve to shift to the left. c) Profits to firm to rise.22 c) A change in the seasons d) A change in consumer preferences e) A change in consumer incomes 122. then the product is a) An inferior good. e) All of the above. If the price of product X falls and this causes the demand for product Y to shift to the right then we can conclude a) X and Y are complements. If a product is in surplus supply. 128. 132. 131. e) None of the above. c) The lower price increases the purchasing power of consumers.25 to $8. e) Of the substitution effect. b) Changes in demand and supply. e) The lower price shifts demand to the left. b) A greater quantity of sirloin steak will be supplied. b) Its price is too low for equilibrium. d) Potatoes are a normal good. One reason why the quantity demanded of a good increases as its price decreases is that a) The number of consumers in the market increases. enabling them to buy more. e) The supply of sirloin steak will decrease. Assume the supply of sirloin steak is upward sloping. Price ceilings and price floors cause a) An efficient allocation of resources. it is most likely because a) The supply of potatoes decreases. d) Quantity supplied exceeds quantity demanded. If consumer incomes increase and the demand for potatoes decreases. At the equilibrium price a) There is a tendency for the price to rise. c) The amount consumers want to buy to be different from the amount producers want to produce.23 e) None of the above. d) Market equilibrium. e) There is a tendency for the price to fall. 129. c) Potatoes are an inferior good. b) Of the income effect. b) The lower price shifts demand to the right. d) The supply of substitute products increases. If the price increases from $4. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . 130. we can conclude that a) Quantity demanded exceeds quantity supplied.60 per pound a) The supply of sirloin steak will rise. b) There is no pressure upon price to rise or fall. 133. d) The demand for sirloin steak will decrease. c) A smaller quantity of sirloin steak will be supplied. c) Quantity demanded exceeds quantity supplied. b) Will cause a larger quantity of watermelons to be demanded. d) When government imposes price controls. 134. fall. b) When the price is high. but equilibrium price my either rise.24 c) Its price is above equilibrium. c) Occurs when the market is in equilibrium. A market is in equilibrium a) When equilibrium price equals equilibrium quantity. e) Causes quantity demanded to exceed quantity supplied. 138. c) When the price is low. e) Will cause a smaller quantity of watermelons to be demanded. Bacon and eggs are most likely a) Complements b) Substitutes. we can conclude that a) They are substitutes. d) They are complements. b) They are normal products. 139. or remain unchanged. 135. If an increase in the price of product X causes a decrease in the demand for product Y. e) The quantity supplied for product Y will increase. d) Could have been caused by an increase in supply. e) None of the above. c) Equilibrium quantity must rise. b) Is a minimum legal price for which a product can be sold. e) Where demand and supply curves intersect. fall. 136. or remain unchanged. d) Is a legal price set by the government that is below the equilibrium level. c) The price of product Y will increase. e) Consumers want to buy more than is being made available by producers. d) Its price will rise. b) Equilibrium price and quantity must both go down. d) Equilibrium price and quantity must both go up. then a) Equilibrium price must increase. 137. A price floor a) Causes a shortage. Assume the demand for watermelons is downward sloping. c) Will cause demand to decrease. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . If demand moves to the right as supply moves to the right. but equilibrium quantity may either rise. An increase in price from $2 per pound to $3 per pound a) Could have been caused by a decrease in quantity supplied. d) Overproduced in a competitive market. 145. d) Increase the supply of oil e) All of the above. e) Supply has increased. but equilibrium quantity is indeterminate. e) Equilibrium price will decrease. then a) Price would decrease b) Supply would increase. d) The price of corn to increase. If there is a technological advance that enables every worker to process twice as much film. what will happen to the market for almonds? a) People will buy the same amount now. 141. then we can expect a) The supply of corn to decrease. c) Increase the quantity demanded of oil. c) Equilibrium quantity will rise. but equilibrium price is indeterminate. c) The supply of corn to increase. Consider the market for corn. b) The demand for corn to decrease. but equilibrium price is indeterminate. c) Quantity supplied has increased. If the price of fertilizer decreases. d) Quantity supplied would increase. If producers require higher prices to produce various quantities.25 c) Inferior goods. The discovery of vast new oil reserves in Texas will a) Decrease the price of oil. b) Equilibrium quantity will decrease. If demand decreases but supply increases. b) People will buy less now. b) Consumer incomes will decrease. 143. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . d) We would require more information to determine the movement in price and quantity. but equilibrium quantity is indeterminate. d) Supply has shifted to the left. e) The demand for corn to increase. 144. If everyone expects the price of almonds to rise in the near future. then a) Demand will decrease. c) The amount bought and sold will increase. we can say that a) Equilibrium price will rise. c) Quantity demanded would increase. b) Increase the quantity supplied of oil. causing a decrease in demand. e) None of the above. 140. 142. e) All of the above. Consider the market for film processing. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . 147. b) Fewer commercial movies to be shown on television. causing the equilibrium price to increase and the equilibrium quantity to decrease. d) Supply would increase. e) Supply would decrease. Now suppose they have threatened the economy with a national strike and have consequently received a substantial pay increase. d) Supply increased. e) None of the above. we can conclude that a) Supply decreased. Use the graph below to answer the following 4 questions. e) Both demand and supply increased. d) The supply of fruit will decrease. If producers must obtain higher prices to produce various quantites. 146. 148. If a natural disaster destroys California’s fruit crop. b) Output would rise. c) The price of fruit will drop because people will consume less. Suppose all blue-collar workers unite and form a national union. c) Demand increased. c) Price would fall. e) The supply of fruit will decrease. If there is a decrease in the number of popular television programs. What would happen in most markets in this economy? a) Demand would decrease. 149. b) Demand decreased. d) The profits of commercial movie makers to decrease. we can expect a) Demand for commercial movies to increase. causing the equilibrium price to decrease and the equilibrium quantity to increase. c) Demand for commercial movies to decrease.26 d) The supply will increase. e) The amount bought and sold will decrease. Consider the market for commercial movies seen on television. then a) The supply of fruit will remain unchanged but the demand will decrease. b) The demand for fruit will increase. e) All of the above. b) OG and OB. and equilibrium price and equilibrium quantity will move to OE and OA. 152. If D1 and S1 are the original demand and supply curves. e) Supply has decreased. c) A surplus will exist equal to AB. our original equilibrium price and equilibrium quantity would be a) OE and OA. Given S1. c) Equilibrium price will rise to OF. Given D1. if demand shifts from D1 to D2 a) Demand has increased. e) OD and OB. d) Quantity supplied will increase to OC. 151.27 150. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . d) OD and OA. c) OF and OC. and equilibrium price and equilibrium quantity will move to OG and OB. b) Equilibrium quantity will rise. if supply moves from S1 to S2 a) Quantity supplied has increased. d) Supply has decreased. b) Demand will decrease from OB to OA. 157. 155. c) People will buy more automobiles at any given price. A price ceiling imposed on a product will a) Cause sellers to competitively bid down the price over time. e) None of the above. 158. d) The demand for wheat to increase. d) A particular quantity supplied at a specific price. what can be expected to happen to the market for automobiles? a) Automobile manufacturers will decrease supply. e) None of the above will happen. d) Equilibrium price will rise to OG but equilibrium quantity will remain at OB. we can expect a) The price of wheat to rise. c) A whole set of price and quantity supplied combinations. 156. d) A decrease in the supply of lettuce. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . e) Cause demand to exceed supply at that price. b) The upward sloping line which relates consumer expenditures to different output levels. If the population doubles in size. d) People will use fewer automobiles. e) None of the above. b) The price of automobiles will decrease. c) Demand has decreased and supply has increased.28 153. c) Be a price above equilibrium. c) A decrease in the demand for lettuce. 154. If demand shifts from D1 to D2 and supply shifts from S1 to S2 a) Equilibrium price will rise to OF but equilibrium quantity will remain at OB. e) Both equilibrium price and equilibrium quantity will decrease. e) The supply of corn to decrease. b) Equilibrium price will move to OC and equilibrium quantity to OG. b) The supply of corn to increase. b) Cause the quantity supplied to exceed the quantity demanded. A successful boycott of lettuce is expected to cause a) An increase in the equilibrium quantity of lettuce bought and sold. b) An increase in the price of lettuce. d) Cause fewer resources to be devoted to the product. Economists use the term “supply” to refer to a) The downward sloping line which relates consumer expenditures to different output levels. c) The quantity demanded of wheat to decrease. If it is now more profitable for farmers to produce wheat than corn. e) Some firms leaving an industry. d) Supply has decreased.” “quantity supplied” used correctly? a) Changes in demand and supply causes changes in the equilibrium price. c) Sellers will competitively bid down the price. b) If the price rises. d) Demand has increased. b) An increase in the price of an input (resources). e) None of the above. c) Demand has decreased. b) Supply has increased. b) Exists where the demand curve intersects the X axis.29 159. c) An increase in the price of the product. If consumers are willing and able to pay a higher price in order to obtain any particular quantity.” “quantity demanded. 163. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . c) The price of oranges is cheaper in Florida and therefore the demand is greater in Florida. 161. b) Supply has increased.” “supply. An increase in a product supply curve might be caused by a) Some firms entering an industry. e) Means consumer’s or producer’s welfare will be reduced by an expansion or contraction of output. d) Exists at an output level in which buyers will not pay as much as suppliers require. In which of the following statements are the terms “demand. If a smaller quantity is supplied at each of the various price levels. d) A decrease in consumer incomes. then a) Demand has increased. e) None of the above. e) None of the above. supply rises. d) When demand exceeds supply the equilibrium price will rise. 164. If the quantity demanded equals the quantity supplied. c) Demand has decreased. e) All of the above. b) Sellers will competitively bid up the price. 160. c) Exists at an output level in which buyers will pay more than suppliers require. d) Buyers will competitively bid down the price. then a) Buyers will competitively bid up the price. An efficient output level in any market a) Exists where the supply curve intersects the Y axis. 162. then a) Supply has decreased. b) Produces an output in which the price consumers are willing to pay exactly equals the price producers are willing to accept. c) Produces an output in which the demand curve lies above the supply curve. c) Any period of time for which producers cannot alter their production facilities. 166. d) The market would maximize output given what consumers were willing to pay and what producers had to receive. 167. c) Most markets compete solely on the basis of price. Assume an increase in the profitability of firms in a product market. d) Any period of time in which producers have the ability to alter their production facilities. b) Quantity demanded would equal quantity supplied. b) Is any period of time less than one month. e) Government price controls would be required. d) Price competition is always the most profitable way producers compete.30 165. d) Results in a product which can be purchased at many different prices. A market operates efficiently if it a) Produces a surplus. Which of the following would not be a result of perfect price competition? a) The market would be in equilibrium. e) Is any period of time less than one year. e) Produces an output in which the supply curve lies above the demand curve. c) Neither a surplus nor a shortage would exist. The short-run is a) Any period of time for which producers can change demand for their products. Assume a market is currently earning large profits. Which of the following statements is true about competitive markets? a) Non-price competition usually results in a wider variety of products from which consumers can choose. Over time we can expect a) Market supply to decrease. c) The equilibrium price of the product to rise. b) Competitive markets do not usually offer as wide of a variety of products as do non-competitive markets. 169. b) The demand for resources (inputs) to rise. d) Firms to leave this market. 168. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . e) Non-price competition almost always reduces consumer welfare. Over the long run a) Demand will fall. 170. e) The equilibrium price of the product to fail. The essential characteristics of the long run is that a) Firms are either losing money or earning large profits. 172. An increase in the demand for a resource might be caused by a) An industry which is losing money. e) It is always greater than one year. c) Firms do not have any fixed resources. None of the above. d) An increase in the price of a complementary resource. 174. 173. b) An increase in demand. b) As the wage rate rises.. c) Allowing market forces to operate will result in a market equilibrium wage rate Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . b) A decrease in its price. c) New firms will enter the market increasing market supply. d) Losses will rise. More television sets are being sold today than one year ago. Demand will rise. e) An exception to the law of demand. d) Firms will always produce an output in which the price consumers are willing to pay exceeds the lowest price firms are willing to accept. e) None of the above. c) An increase in the demand for the product the resource produces. 171. Which of the following statements is true concerning the standard model of a competitive market as it applies to labor? a) As the wage rate rises. e) Any of the above.31 b) c) d) e) Supply will fall. b) The firms in the market will demand more resources (inputs). employers will hire fewer workers. and the selling price has increased. c) A decrease in demand. Supply will rise. What can be expected to happen over the long run in a market which is losing money? a) The equilibrium price of the product will rise while the equilibrium quantity will fall. This could have been caused by a) A decrease in supply. d) An increase in supply. Part B: Organizational Economics and Management: 175. more workers will seek employment. b) Firms are unable to change their production facilities (plan sizes). d) All of the above. d) will decrease if the wage rate rises. c) will increase. The demand for labor a) is upward sloping. a decrease in the supply of labor. 176. the quantity demanded of labor will exceed the quantity supplied of labor. but impossible to determine an equilibrium wage rate. b) will increase. An increase in the demand for labor can be caused by a) b) c) d) a decrease in the wage rate. 178. b) the wage rate is below equilibrium. if the price of the output produced by workers rises. d) it is possible to determine an equilibrium quantity of labor. an increase in the productivity of workers. or shift to the right. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . one of the problems with the standard demand and supply model as it applies to a real-world labor market is that a) demand and supply analysis simply does not apply to a labor market. a decrease in the price of the output produced by workers. but workers' wages also affect their productivity. 180. According to the standard model of demand and supply. c) there is a surplus of labor then wage rates rise. a shortage of labor will result. the wage rate will rise and the equilibrium quantity of labor seeking and finding a job will fall. if a) the wage rate is above equilibrium. if the supply of labor increases. According to the standard model of demand and supply. 177. b) the equilibrium wage rate will decrease and the equilibrium quantity of labor will decrease. b) not only does worker productivity affect the demand for labor and therefore the wage rate. 179.32 where the quantity demanded of labor equals the quantity supplied of labor. d) the demand for labor increases. According to the textbook authors. or shift to the right. if the productivity of workers falls. then a) the equilibrium wage rate will decrease and the equilibrium quantity of labor will increase. reflecting the fact that businesses hire fewer workers as the wage rate rises. c) the demand for labor is upward sloping and the supply of labor is downward sloping in real-world labor markets. Offering higher than equilibrium wages may a) b) c) d) enable employers to be more demanding of workers to extract more productivity. Which of the following statements is true concerning overpayment of workers? Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . 182. both immediately and in the future. d) all of the above 185. 181. the presence of lazy workers. 183. Overpayment to employees is likely to a) reduce the number of workers who slack. d) take the job because the employer obviously cares for the well-being of employees. enable employers to be more selective in the people they hire. a shortage of workers. According to the standard market model. c) inspire effort from those who can't be monitored directly on a daily basis. all of the above. 186. b) reduce the misuse of funds and other company resources by managers who are difficult to monitor. 184. unemployment is caused by a) b) c) d) a wage rate below equilibrium. they should a) immediately take the job because of the high pay b) rarely take the job because the company will likely not survive and their jobs will be insecure. b) prompt some workers to put up with some strict rules and to be obedient to management. Offering higher than equilibrium wages can be expected to a) increase the cost of losing a job. c) consider carefully what will be expected of them. d) all of the above. d) the equilibrium wage rate will increase and the equilibrium quantity of labor will decrease. increase the cost to workers of quitting their jobs. If potential employees are offered premium wages or salaries.33 c) the equilibrium wage rate will increase and the equilibrium quantity of labor will increase. a wage rate above equilibrium. c) reduce training costs and increase efficiency over time. d) All of the above. b) typically reduce productivity and payments to workers over time. c) may be abandoned if the company is purchased by another firm who has no compulsion to hold to the original owner's prior commitments. Which of the following statements is true? a) Mandatory retirement systems can be explained by the expected physical impairment of workers as they age. a) is generally more difficult for a start-up company because of its lack of history in keeping its promises of more pay later. as discussed in chapter 2.34 a) A person who quickly fails at a high salary can end up doing far worse than the person who begins his or her career by succeeding at a more modest salary. d) require credible commitments by firms to keep their promises of more pay over time. c) Deferred compensation is almost never acceptable to employees because it is viewed as another form of exploitation by companies. Deferred compensation plans a) imply being paid more than you are worth now at the expense of being paid less than you are worth in the future. d) All of the above. c) are rare in the real world. c) The abolishment of mandatory retirement systems by Congress can create unexpected gain in wealth by some older workers. 187. Which of the following statements is true? a) Manipulation of a worker's career wage structure. d) All of the above. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . b) Firms may "overpay” their workers because they have "underpaid" their workers early in their careers. or earning path over time. b) Mandatory retirement systems can be explained by the need to cutoff overpayment to older workers. A twisted pay structure. c) Initial "underpayment" of employees may be acceptable to workers if "overpayment" is likely in the future. d) all of the above. b) Management must pay workers an amount equal to what they are worth over the course of their careers or else workers will leave the company. will typically reduce worker productivity and lifetime income. 189. 188. 190. b) may not be able to fulfill the promise of overpayment to employees if the company faces stiff competition in the future. c) will cause most young workers to be no better off because the reduction in their underpayment while young will be offset by their reduction in overpayment when older. d) all of the above. b) expected worker absenteeism to go up because workers did not then have to put in as many hours to earn the same weekly wages. c) expected Ford's productivity demands placed on workers to go up. d) all of the above. d) expected Ford's profits to go down. b) retirement systems are underfunded. 196. and who can hang on to their overpayments. Companies and employees can both benefit from buyout offers to workers if a) workers have a lower discount rate than owners. The abolition of mandatory retirement systems a) can hurt some older workers who are years from retirement. demoted. b) can help some older workers who are fired. 195. c) can increase the starting wages of younger workers because wage overpayments later in life are reduced. 194. d) all of the above. b) can raise worker productivity over their careers. 192. d) neither a nor b. When Henry Ford doubled his workers' wage rate in 1914. c) can both lower workers' starting wages and raise their productivity and career incomes. Being able to make "credible commitments" can be important to firms because such an ability a) can lower the starting wages of workers. 193. b) can be expected to reduce productivity overall. c) companies are expected to meet with financial difficulty from competition down the road. not given raises or have their pay cut. Employers can impose higher work demands on workers in competitive labor markets Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . The abolition of mandatory retirement systems by Congress a) will tend to help those who are about to retire.35 191. he a) was trying to be socially responsible. who work for large companies. producers who face a surplus of labor at the current wage rate will be pressed to a) decrease the wage rate paid their workers. In perfectly competitive product markets. d) none of the above. d) None of the above.36 so long as the wage rate a) goes up by more than the negative value workers place on the greater work demands. b) decrease work demands and lower the wage rate and lower their products’ price. e) all of the above. 197. c) do nothing because the surplus in the labor market will not affect the final product market. b) goes up by more than the added costs to employers. 200. c) seek to use the work of their initial workers as “sweat equity” when they don’t have the track record to raise financial capital. c) decrease work demands and raise the wage rate and hold the final product price constant. d) none of the above. 199. c) He relaxed work demands so that the supply of labor would increase. c) goes down by more than the added costs of the greater work demands to employers. Startup firms use stock options as a means of paying their workers because they a) are trying to get labor for nothing. b) increase the wage rate paid their workers. d) increase work demand and keep the wage rate and the final product price the same the same. 198. If workers in competitive labor markets place more value on relaxed work than on the loss of worker productivity that may result. How could Henry Ford justify paying his workers double the going wage rate? a) He demanded an increase in worker productivity that was greater than the added wage rate b) He expected the added wage rate to lead to a shortage of workers. b) don’t have the track record to make credible commitments to pay underpay workers initially and to pay above market wages in the future. Microeconomics for MBAs | Richard McKenzie & Dwight Lee |© Cambridge University Press 2010 . then employers in perfectly competitive final product markets can be expected to a) leave work demands and the wage rate as they are and raise their products’ price. d) both b and c.