Econ Final Exam Practice Quiz Questions

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Questions: 225 | Attempts: 767 | Updated: Feb 2, 2024

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Questions and Answers

1.

Scarcity is
- A.
  
  Best measured in objective terms such as tons or kilowatt hours.
- B.
  
  A problem only in less-developed countries
- C.
  
  A matter of the relationship between resources and human wants
- D.
  
  Important for microeconomics, but not macroeconomics.
Correct Answer
C. A matter of the relationship between resources and human wants

Explanation
Scarcity refers to the limited availability of resources compared to the unlimited wants and needs of individuals and society. It is a concept that applies to all countries, regardless of their level of development. Scarcity is not best measured in objective terms like tons or kilowatt hours, as it is a qualitative concept that involves the relationship between resources and human desires. Both microeconomics and macroeconomics study scarcity, as it is a fundamental concept in understanding economic behavior and decision-making at both individual and aggregate levels.

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2.

Karen spends $20 to hire a tutor to help her prepare for her economics final. This expense should be considered part of
- A.
  
  The out-of-pocket cost of her college education
- B.
  
  The opportunity cost of her college education
- C.
  
  Both a and b
- D.
  
  Neither a nor b
Correct Answer
C. Both a and b

Explanation
The expense of hiring a tutor to help Karen prepare for her economics final should be considered part of both the out-of-pocket cost and the opportunity cost of her college education. It is an out-of-pocket cost because Karen had to spend $20 directly from her own pocket to pay for the tutor's services. Additionally, it is an opportunity cost because Karen had to forego other potential uses of that $20, such as buying study materials or participating in extracurricular activities. Therefore, the expense encompasses both the direct financial cost and the alternative opportunities she had to give up.

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3.

The study of the factors determining the price of gasoline relative to the price of other fuels would be primarily a concern of
- A.
  
  Macroeconomics
- B.
  
  Microeconomics
- C.
  
  Normative Economics
- D.
  
  Forecasting
Correct Answer
B. Microeconomics

Explanation
The study of the factors determining the price of gasoline relative to the price of other fuels would be primarily a concern of microeconomics because it focuses on the individual markets and how supply and demand forces interact to determine prices. In this case, microeconomics would analyze the specific factors that affect the price of gasoline, such as production costs, consumer preferences, and competition among fuel providers. Macroeconomics, on the other hand, looks at the overall economy and broader issues like inflation and unemployment. Normative economics involves making value judgments about what the price of gasoline should be, while forecasting is the process of predicting future economic trends.

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4.

Policies to control unemployment are primarily a concern of
- A.
  
  Macroeconomics
- B.
  
  Microeconomics
- C.
  
  Normative Economics
- D.
  
  Econometrics
Correct Answer
A. Macroeconomics

Explanation
Macroeconomics is the study of the overall economy, including factors such as unemployment rates, inflation, and economic growth. Policies to control unemployment, which involve government intervention and macro-level strategies, fall under the purview of macroeconomics. This branch of economics focuses on understanding and analyzing the economy as a whole, rather than individual markets or specific economic agents. Therefore, it is the most appropriate field to address policies aimed at controlling unemployment at a broader level.

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5.

Which of the following is required for every market?
- A.
  
  A written set of rules for buyers and sellers
- B.
  
  An agreed-upon place where buyers and sellers can meet
- C.
  
  A computer for recording transactions
- D.
  
  None of the above
Correct Answer
D. None of the above

Explanation
Not every market requires a written set of rules for buyers and sellers, an agreed-upon place where buyers and sellers can meet, or a computer for recording transactions. Markets can exist in various forms, including online platforms where buyers and sellers can interact without a physical meeting place, and transactions can be recorded using alternative methods such as paper documentation or mobile applications. Therefore, none of the options listed are required for every market.

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6.

Which of the following disciplines relies on theories to explain how facts are related?
- A.
  
  Economics
- B.
  
  Physics
- C.
  
  Medicine
- D.
  
  All of the above
Correct Answer
D. All of the above

Explanation
All of the above disciplines rely on theories to explain how facts are related. In Economics, theories such as supply and demand explain the relationship between prices and quantities. In Physics, theories like Newton's laws explain the relationship between motion and forces. In Medicine, theories such as the germ theory explain the relationship between microorganisms and diseases. Therefore, all three disciplines rely on theories to explain the connections between facts and phenomena.

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7.

Which of the following is an example of normative economics
- A.
  
  The rate of inflation was lower in 2009 than in 2008
- B.
  
  The rate of inflation was below 6 percent per year in 2009
- C.
  
  The rate of inflation should be held below 6 percent regardless of what happens to unemployment
- D.
  
  If the budget deficit is reduced, other things being equal, the rate of inflation will fall.
Correct Answer
C. The rate of inflation should be held below 6 percent regardless of what happens to unemployment
8.

Which of the following would be most likely to cause the production possibility frontier for education and cars to shift outward?
- A.
  
  A reduction in average hours per worker per week
- B.
  
  An increase in the price of energy
- C.
  
  An increase in the economy's stock of capital
- D.
  
  None of the above
Correct Answer
C. An increase in the economy's stock of capital

Explanation
An increase in the economy's stock of capital would most likely cause the production possibility frontier for education and cars to shift outward. This is because an increase in the economy's stock of capital means that there are more resources available for production, which can lead to an increase in the production of both education and cars. With more capital, the economy can invest in better technology, machinery, and equipment, which can increase productivity and allow for the production of more goods and services. Therefore, an increase in the economy's stock of capital would result in an outward shift of the production possibility frontier.

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9.

Investment, as the term is used in economics, means
- A.
  
  Creating money
- B.
  
  Putting money in the bank
- C.
  
  Increasing the economy's stock of capital
- D.
  
  Inventing new ways of doing things
Correct Answer
C. Increasing the economy's stock of capital

Explanation
Investment, in economics, refers to the act of increasing the economy's stock of capital. This involves allocating resources towards the production and acquisition of physical assets such as machinery, equipment, buildings, and infrastructure, which are essential for economic growth and development. By increasing the economy's stock of capital, investment aims to enhance productivity, stimulate economic activity, and contribute to long-term economic expansion.

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10.

Japan can produce a car in 1,000 hours and a computer in 100 hours. Brazil can produce a car in 2,000 hours and a computer in 250 hours. Which of the following statements is correct?
- A.
  
  Brazil has a comparative advantage in computers
- B.
  
  Brazil has a comparative advantage in cars
- C.
  
  Brazil has a comparative advantage in both goods
- D.
  
  Japan has a comparative advantage in both goods
Correct Answer
B. Brazil has a comparative advantage in cars

Explanation
Brazil has a comparative advantage in cars because it can produce a car in 2,000 hours, while Japan can produce a car in 1,000 hours. This means that Brazil has a lower opportunity cost for producing cars compared to Japan.

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11.

An economic policy is said to improve inefficiency if
- A.
  
  It makes at least one person better off
- B.
  
  It makes no one worse off
- C.
  
  It makes at least one person better off and makes no one worse off
- D.
  
  It makes a majority of people better off
Correct Answer
C. It makes at least one person better off and makes no one worse off

Explanation
An economic policy is said to improve inefficiency if it makes at least one person better off and makes no one worse off. This means that the policy should result in a positive outcome for at least one individual without negatively impacting anyone else. By ensuring that no one is worse off, the policy avoids creating any losers and promotes overall welfare improvement. This criterion emphasizes the importance of equity and fairness in economic decision-making.

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12.

Which of the following is an illustration of entrepreneurship?
- A.
  
  Starting a new computer company
- B.
  
  Cutting production costs though an improved method of work in an existing facotry
- C.
  
  Opening the first Domino's Pizza franchise in Tokyo
- D.
  
  All of the above
Correct Answer
D. All of the above

Explanation
The correct answer is "All of the above" because each option mentioned represents a different form of entrepreneurship. Starting a new computer company involves creating a new business from scratch, which requires innovation and risk-taking. Cutting production costs through an improved method of work in an existing factory demonstrates entrepreneurial thinking by finding ways to improve efficiency and profitability. Opening the first Domino's Pizza franchise in Tokyo involves taking an established brand and expanding it into a new market, which requires entrepreneurial skills such as market analysis and strategic planning. Therefore, all three options exemplify entrepreneurship in different contexts.

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13.

A point representing 500 roast turkey dinners and 600 steak dinners lies outside the production possibilty frontier of Joe's Restaurant, given the factors of production and technology available to it. This means that
- A.
  
  The point can be produced if all factors are fully used
- B.
  
  The point cannot possibly be produced given the current available factors of production
- C.
  
  The point can be produced even when some of the factors are idle
- D.
  
  No conclusion can be drawn from the information given
Correct Answer
B. The point cannot possibly be produced given the current available factors of production

Explanation
The given answer, "The point cannot possibly be produced given the current available factors of production," is the correct explanation. This means that Joe's Restaurant does not have the resources or technology to produce 500 roast turkey dinners and 600 steak dinners. The production possibility frontier represents the maximum output that can be achieved with the given resources and technology, and any point outside of this frontier is unattainable. Therefore, the point representing 500 roast turkey dinners and 600 steak dinners cannot be produced by Joe's Restaurant.

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14.

Which of the following woudl be an example of "spontaneous order"?
- A.
  
  Coordinating the horn section with the string section in the Cleveland Symphony Orchestra
- B.
  
  Coordinating orders placed by the parts department with work done in the service department in an auto dealership
- C.
  
  Coordinating the number of houses available in Leesburg, Virginia, with the number of people wanting to live in that city
- D.
  
  None of the above
Correct Answer
C. Coordinating the number of houses available in Leesburg, Virginia, with the number of people wanting to live in that city

Explanation
The example of "spontaneous order" is coordinating the number of houses available in Leesburg, Virginia, with the number of people wanting to live in that city. This is because spontaneous order refers to the emergence of order without central planning or coordination. In this example, the coordination happens naturally as the number of houses available adjusts to meet the demand of people wanting to live in the city. There is no central authority or planning involved in this process.

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15.

If the U.S. were to relax it's immigration restrictions, we might expect
- A.
  
  A shift outward of the nations production possibilities frontier because of an increase in the potential labor force
- B.
  
  A shift inward of the nations production possibilities frontier as unemployment increases.
- C.
  
  No change in the production possibilities frontier.
- D.
  
  An inward shift of the nations production possibilities frontier because of new technology
Correct Answer
A. A shift outward of the nations production possibilities frontier because of an increase in the potential labor force

Explanation
If the U.S. were to relax its immigration restrictions, it would lead to an increase in the potential labor force. This means that there would be more workers available to contribute to the production of goods and services in the country. As a result, the nation's production possibilities frontier would shift outward. This indicates that the economy would be able to produce more goods and services than before, leading to potential economic growth and expansion.

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16.

The "other things being equal" clause in the law of demand covers
- A.
  
  Consumer incomes
- B.
  
  The prices of other goods
- C.
  
  Consumer tastes and preferences
- D.
  
  All of the above
Correct Answer
D. All of the above

Explanation
The "other things being equal" clause in the law of demand refers to the assumption that all other factors influencing demand remain constant. This means that when considering the relationship between price and quantity demanded, changes in consumer incomes, prices of other goods, and consumer tastes and preferences are all taken into account. Therefore, the correct answer is "All of the above" as all these factors are considered in the law of demand.

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17.

A rise in the price of coffee is likely to have which of the following initial effects on the market for tea, a subsitute?
- A.
  
  A movement up along the tea demand curve
- B.
  
  A downward movement along the tea demand curve
- C.
  
  A leftward shift in the tea demand curve
- D.
  
  A rightward shift in the tea demand curve
Correct Answer
B. A downward movement along the tea demand curve

Explanation
A rise in the price of coffee would likely lead to a decrease in the demand for coffee, as consumers might find it more expensive and choose to buy less of it. As tea is considered a substitute for coffee, this decrease in demand for coffee would result in an increase in demand for tea. Therefore, the initial effect on the market for tea would be a downward movement along the tea demand curve, as consumers shift their preference from coffee to tea due to the increase in coffee prices.

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18.

If consumer incomes go up, which of the following is initially most likely?
- A.
  
  An upward movement along the demand curve for cars
- B.
  
  A downward movement along the demand curve for cars
- C.
  
  A rightward shift in the demand curve for cars
- D.
  
  A leftward shift in the demand curve for cars
Correct Answer
C. A rightward shift in the demand curve for cars

Explanation
When consumer incomes go up, it is most likely that there will be a rightward shift in the demand curve for cars. This means that at any given price, consumers are willing and able to buy a larger quantity of cars. As their incomes increase, consumers have more purchasing power and are more likely to demand more cars. This shift indicates an increase in demand and a positive relationship between income and the quantity demanded of cars.

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19.

Assuming gasoline and tires to be complementary goods, the intial effect on the tire market of an increase in the price of gasoline (other things being equal), would be best described as?
- A.
  
  An increase in the demand for tires
- B.
  
  A decrease in the demand for tires
- C.
  
  An increase in the quantity of tires demanded
- D.
  
  A decrease in the quantity of tires demanded
Correct Answer
B. A decrease in the demand for tires

Explanation
An increase in the price of gasoline would lead to a decrease in the demand for tires. This is because gasoline and tires are considered complementary goods, meaning they are often used together. When the price of gasoline increases, it becomes more expensive to drive, leading to a decrease in the demand for cars and therefore a decrease in the demand for tires.

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20.

If the price of leather increases, other things being equal, which of the following would be the most likely initial effect?
- A.
  
  A leftward shift of the shoe supply curve
- B.
  
  A rightward shift of the shoe supply curve
- C.
  
  An upward movement along the shoe supply curve
- D.
  
  A decrease int he quantity of tires demanded
Correct Answer
A. A leftward shift of the shoe supply curve

Explanation
When the price of leather increases, it raises the production cost for shoe manufacturers. As a result, they are less willing or able to supply the same quantity of shoes at each price level. This leads to a leftward shift of the shoe supply curve, indicating a decrease in the quantity of shoes supplied at every price.

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21.

Market equilibrium
- A.
  
  Is represented graphically by the intersection of the suppky and demand curves
- B.
  
  Is the condition under which the plans of buyers and sellers exactly mesh when tested in the market
- C.
  
  Is the condition under which neither buyers nor sellers have an incentive to change their plans
- D.
  
  Includes all of the above
Correct Answer
D. Includes all of the above

Explanation
Market equilibrium is the point where the supply and demand curves intersect on a graph. It represents the condition where the plans of buyers and sellers perfectly align in the market. At this point, neither buyers nor sellers have any motivation to alter their plans, as the market is in a state of balance. Therefore, the correct answer is that market equilibrium includes all of the above explanations.

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22.

Using Qs to indicate quantity supplied and Qd to indicate quantity demanded, which of the following circumstances would be likely to produce an upward movement of the price of a good?
- A.
  
  Qs=100, Qd=200
- B.
  
  Qs= 100, Qd=100
- C.
  
  Qs=200, Qd=100
- D.
  
  Not enough information given for an answer
Correct Answer
A. Qs=100, Qd=200

Explanation
When the quantity supplied (Qs) is less than the quantity demanded (Qd), it indicates that there is a shortage in the market. In this case, Qs=100 and Qd=200, which means that the demand for the good exceeds the supply. As a result, sellers can increase the price of the good to take advantage of the high demand and limited supply. This upward movement of the price is likely to occur in this circumstance.

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23.

An increase in the cost of raising hogs, other things being equal, would be likely to affect the price of bacon via
- A.
  
  A leftward shift of the supply curve
- B.
  
  A leftward shift of the demand curve
- C.
  
  A rightward shift of the supply curve
- D.
  
  A rightward shift of the demand curve
Correct Answer
A. A leftward shift of the supply curve

Explanation
An increase in the cost of raising hogs would lead to a decrease in the supply of bacon. This is because higher costs would make it less profitable for farmers to produce bacon, resulting in a decrease in the quantity supplied at each price level. As a result, the supply curve would shift to the left, indicating a decrease in the quantity supplied at every price point. This decrease in supply would likely lead to an increase in the price of bacon, as the limited supply would not be able to meet the demand.

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24.

Assume an increase in the price of beef increases the demand for pork. Restoration of equilibrium in the pork market will require
- A.
  
  A leftward shift of the supply curve
- B.
  
  A rightward shift of the supply curve
- C.
  
  A movement up along the supply curve
- D.
  
  A movement down along the supply curve
Correct Answer
C. A movement up along the supply curve

Explanation
An increase in the price of beef would lead consumers to substitute beef with pork, resulting in an increase in the demand for pork. To restore equilibrium in the pork market, producers would need to respond to the increased demand by increasing the quantity supplied. This would involve a movement up along the supply curve, as producers would be willing to supply a higher quantity at each price point.

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25.

Suppose hot dogs to be an inferior good. An increase in consumer incomes, other things being equal, is likely to cause which of the following?
- A.
  
  A shift in the demand curve and a higher price
- B.
  
  A shift in the supply curve and a higher price
- C.
  
  A shift in the demand curve and a lower price
- D.
  
  A shift in the supply curve and a lower price
Correct Answer
C. A shift in the demand curve and a lower price

Explanation
An increase in consumer incomes would result in a shift in the demand curve for hot dogs. As hot dogs are considered an inferior good, when consumers have higher incomes, they are likely to switch to higher quality goods and decrease their demand for hot dogs. This shift in the demand curve would lead to a lower price for hot dogs as the quantity demanded decreases.

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26.

If the steelworkers' union negotiates a new contract with sharply higher wages, we would expect, once a new equilibrium is reached in the steel market,
- A.
  
  Shortage of steel
- B.
  
  A decrease in the demand for steel
- C.
  
  A decrease in the price of steel
- D.
  
  A decrease in the quantity of steel demanded
Correct Answer
D. A decrease in the quantity of steel demanded

Explanation
If the steelworkers' union negotiates a new contract with sharply higher wages, it would lead to an increase in labor costs for steel production. This increase in costs would likely result in higher prices for steel products. As a result, the quantity of steel demanded by consumers would decrease because higher prices would deter some buyers from purchasing steel. Therefore, the correct answer is a decrease in the quantity of steel demanded.

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27.

During a visit to Havana, Cuba, you notice long lines outside every butcher shop. The most reasonable conclusion to be drawn from this observation is that the
- A.
  
  Meat is very expensive in cuba
- B.
  
  Citizans are insatiable carnivores
- C.
  
  Clerks in cuban stores work very slowly
- D.
  
  Price of meat is held below equilibrium price
Correct Answer
D. Price of meat is held below equilibrium price

Explanation
The correct answer is that the price of meat is held below equilibrium price. This conclusion can be drawn from the observation of long lines outside every butcher shop in Havana, Cuba. If the price of meat was at equilibrium, there would not be a need for such long lines as the supply and demand would be balanced. The fact that the lines exist suggests that the price of meat is lower than what it should be in equilibrium, leading to increased demand and scarcity.

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28.

If the equilibrium price of natural gas is $2.50 per thousand cubic feet and a price ceiling is imposed of $3 per thousand cubic feet, the likely result will be
- A.
  
  A surplus
- B.
  
  A shortage
- C.
  
  A depletion of inventories
- D.
  
  None of the above
Correct Answer
D. None of the above

Explanation
If the equilibrium price of natural gas is $2.50 per thousand cubic feet and a price ceiling is imposed at $3 per thousand cubic feet, the likely result will not be any of the options provided. A price ceiling is a maximum price set by the government, and in this case, it is above the equilibrium price. Since the price ceiling is above the equilibrium price, it will not have any immediate impact on the market. Therefore, there will be no surplus, shortage, or depletion of inventories as a result of the price ceiling.

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29.

According to a supply and demand analysis, the likely effect of a minimum wage law would be
- A.
  
  A shortage of jobs for low-skill workers
- B.
  
  A shortage of workers to fill low-skill jobs
- C.
  
  Increased incomes for all low-skill workers
- D.
  
  Decreased incomes for all low-skill workers
Correct Answer
A. A shortage of jobs for low-skill workers

Explanation
A minimum wage law would likely lead to a shortage of jobs for low-skill workers. This is because when the minimum wage is set above the equilibrium wage rate, it increases the cost of hiring low-skill workers. As a result, employers may choose to hire fewer workers or replace them with automation or other alternatives. This leads to a decrease in the quantity of low-skill jobs available, creating a shortage of jobs for these workers.

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30.

If the equilibrium price of sugar is 15 cents per pound and government imposes a minimum price of 20 cents per pound, the likely result will be
- A.
  
  A shortage of sugar
- B.
  
  A surplus of sugar
- C.
  
  A depletion of sugar inventories
- D.
  
  None of the above
Correct Answer
B. A surplus of sugar

Explanation
If the equilibrium price of sugar is 15 cents per pound and the government imposes a minimum price of 20 cents per pound, this means that the government is setting a price floor above the equilibrium price. This will likely result in a surplus of sugar because the higher price will discourage consumers from buying as much sugar, while at the same time incentivizing producers to increase their supply. As a result, there will be more sugar supplied than demanded, leading to a surplus.

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31.

If a firm has total revenues of $100 million, explicit costs of $90 million, and implicit costs of $20 million, its pure economic profit is
- A.
  
  $80 million
- B.
  
  $70 million
- C.
  
  $10 million
- D.
  
  -$10 million
Correct Answer
D. -$10 million

Explanation
The firm's total revenue is $100 million, and its explicit costs are $90 million. Implicit costs are the opportunity costs of using the firm's resources, which in this case amount to $20 million. To calculate pure economic profit, we subtract both explicit and implicit costs from total revenue. Therefore, the firm's pure economic profit is -$10 million. This means that the firm is experiencing a loss of $10 million, indicating that its costs exceed its revenue.

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32.

Economics profit is calculated as:
- A.
  
  Total revenue minus explicit costs minus implicit costs.
- B.
  
  Total revenue plus explicit costs plus implicit costs.
- C.
  
  Total revenue minus explicit costs
- D.
  
  Total revenue minus implicit costs
Correct Answer
A. Total revenue minus explicit costs minus implicit costs.

Explanation
The correct answer is "Total revenue minus explicit costs minus implicit costs." This is because economic profit takes into account not only the explicit costs (such as wages, rent, and materials) but also the implicit costs (such as the opportunity cost of the owner's time and capital). By subtracting both explicit and implicit costs from total revenue, we get a more accurate measure of the true profitability of a business or venture.

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33.

A firm has total capital of $500 million. The opportunity cost of capital is 12 percent per year. The firm earns an accounting profit of $65 million and has no other implicit costs. Its pure economic profit is
- A.
  
  -$5 million
- B.
  
  $5 million
- C.
  
  $60 million
- D.
  
  $65 million
Correct Answer
B. $5 million

Explanation
The pure economic profit is $5 million. This is calculated by subtracting the opportunity cost of capital from the accounting profit. The opportunity cost of capital is 12 percent of the total capital, which is $500 million x 0.12 = $60 million. Therefore, the pure economic profit is $65 million - $60 million = $5 million.

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34.

If a firm decided it could save on total cost by unplugging itself from the local electric utility and buying its own generating equipment, we could assume that
- A.
  
  Both its fixed and variable costs would fall
- B.
  
  Both its fixed and variable costs would rise
- C.
  
  Its fixed costs would rise and its variable costs would fall
- D.
  
  Its fixed costs would fall and its variable costs would rise
Correct Answer
C. Its fixed costs would rise and its variable costs would fall

Explanation
If a firm decides to buy its own generating equipment and unplug from the local electric utility, it would incur higher fixed costs due to the initial investment and ongoing maintenance of the equipment. However, its variable costs would decrease as it would no longer need to pay for electricity from the utility. Therefore, the firm's fixed costs would rise while its variable costs would fall.

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35.

To attract the attention of potential customers, U.S. bank spends $500 to hire a band to play at the opening of a branch at the new Walmart shopping center. With regard to the ongoing operations of the new branch, the cost of hiring the band is considered to be
- A.
  
  An explicit fixed cost
- B.
  
  An implicit fixed cost
- C.
  
  A variable cost
- D.
  
  A sunk cost
Correct Answer
D. A sunk cost

Explanation
A sunk cost is a cost that has already been incurred and cannot be recovered. In this case, the bank has already spent $500 to hire the band for the opening of the branch. Once the money has been spent, it cannot be retrieved, regardless of the ongoing operations of the branch. Therefore, the cost of hiring the band is considered a sunk cost.

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36.

The law of diminishing returns implies that the marginal physical product curve must
- A.
  
  Be U-shaped
- B.
  
  Be shaped like an upside-down U
- C.
  
  Have a negative slope throughout its length
- D.
  
  Have a negative slope for at least part of its length
Correct Answer
D. Have a negative slope for at least part of its length

Explanation
The law of diminishing returns states that as more units of a variable input are added to a fixed input, the marginal physical product (MPP) of the variable input will eventually decrease. This means that the additional output produced by each additional unit of the variable input will be smaller than the previous unit. Therefore, the MPP curve will have a negative slope for at least part of its length. This is because initially, as more units of the variable input are added, the MPP may increase, but eventually, due to limited resources or other factors, the MPP will start to decline.

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37.

If a marginal physical product curve and an average physical product curve were both drawn on a single diagram,
- A.
  
  The marginal curve would cut the average curve at the minimum point of the latter
- B.
  
  The marginal curve would cut the average curve at the minimum point of the former
- C.
  
  The marginal curve would cut the average curve at the maximum point of the latter
- D.
  
  The marginal curve would cut the average curve at the maximum point of the former
Correct Answer
C. The marginal curve would cut the average curve at the maximum point of the latter

Explanation
The marginal curve represents the additional output produced by each additional unit of input, while the average curve represents the average output per unit of input. When the marginal curve cuts the average curve, it indicates that the marginal product is equal to the average product. At the maximum point of the latter, the average product is at its highest level. Therefore, the marginal curve would cut the average curve at the maximum point of the latter.

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38.

Where the marginal cost curve is below the average variable cost curve,
- A.
  
  The average variable cost curve must have a negative slope
- B.
  
  The marginal cost curve must have a negative slope
- C.
  
  The average variable cost curve must have a positive slope
- D.
  
  The marginal cost curve must have a positive slope
Correct Answer
A. The average variable cost curve must have a negative slope

Explanation
When the marginal cost curve is below the average variable cost curve, it means that the additional cost of producing one more unit is less than the average cost of producing each unit. This suggests that the average variable cost curve must have a negative slope because the average cost is decreasing as more units are produced.

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39.

The quantity of output where the marginal cost curve stops decrease and begins to increase corresponds with the output where:
- A.
  
  Average variable cost is at a maximum
- B.
  
  Total cost is at a maximum
- C.
  
  Marginal product of labor is at a maximum
- D.
  
  Average product or labor is at a maximum
Correct Answer
C. Marginal product of labor is at a maximum

Explanation
The correct answer is "Marginal product of labor is at a maximum." This is because the marginal cost curve represents the additional cost incurred by producing one more unit of output. When the marginal cost curve starts to increase, it indicates that the cost of producing an additional unit of output is increasing. This happens when the marginal product of labor, which measures the additional output produced by adding one more unit of labor, starts to decline. Therefore, the point where the marginal product of labor is at a maximum corresponds to the quantity of output where the marginal cost curve stops decreasing and begins to increase.

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40.

Rising marginal cost of production is due primarily to:
- A.
  
  Overcrowding in the workplace
- B.
  
  Rising fixed costs
- C.
  
  Rising cost of inputs such as labor
- D.
  
  Too few workers on the production line
Correct Answer
A. Overcrowding in the workplace

Explanation
The correct answer is rising fixed costs. Rising marginal cost of production occurs when the cost of producing each additional unit increases. This can be caused by various factors, but in this case, it is primarily due to rising fixed costs. Fixed costs are expenses that do not change with the level of production, such as rent, utilities, and equipment. If these costs increase, the overall cost of production increases, leading to a rise in marginal cost.

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41.

Which of the following statements is true of MC > ATC?
- A.
  
  MC is falling
- B.
  
  ATC is falling
- C.
  
  ATC is rising
- D.
  
  AVC is falling
Correct Answer
C. ATC is rising

Explanation
When MC (Marginal Cost) is greater than ATC (Average Total Cost), it means that each additional unit produced is adding more cost than the average cost of production. This implies that the average cost of production is increasing. Therefore, the correct statement is "ATC is rising".

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42.

The long-run average cost curve
- A.
  
  Passes through the minimum points of all short-run average total cost curves
- B.
  
  Passes through the minimum points of all short-run average variable cost curves
- C.
  
  Is the envelope of all short-run average total cost curves
- D.
  
  Is the envelope of all short-run average variable cost curves
Correct Answer
C. Is the envelope of all short-run average total cost curves

Explanation
The long-run average cost curve is the envelope of all short-run average total cost curves because it represents the lowest possible average cost of production for each level of output in the long run. As a firm increases its scale of production and adjusts all inputs, it can take advantage of economies of scale and reduce its average costs. The envelope of all short-run average total cost curves shows the minimum average cost achievable at each level of output, which is represented by the long-run average cost curve.

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43.

A firm is said to experience economies of scale over the range of output for which long-run average cost
- A.
  
  Is constant
- B.
  
  Is falling
- C.
  
  Is rising
- D.
  
  Economies of scale are not related to long-run average cost
Correct Answer
B. Is falling

Explanation
When a firm experiences economies of scale, it means that as the firm increases its level of production, the average cost of producing each unit decreases. This happens because the firm can spread its fixed costs over a larger number of units, leading to lower average costs. Therefore, the correct answer is "Is falling."

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44.

The minimum efficient scale for a firm is the level of output at which
- A.
  
  Economies of scale cease
- B.
  
  Diseconomies of scale cease
- C.
  
  Short-run average variable cost first exceeds long-run average cost
- D.
  
  None of the above
Correct Answer
A. Economies of scale cease

Explanation
The minimum efficient scale for a firm is the level of output at which economies of scale cease. This means that after reaching this level, the firm no longer experiences cost reductions and efficiencies associated with economies of scale. This could be due to various factors such as limited market demand, diminishing returns to scale, or increasing costs of coordination and management. At this point, the firm is producing at its most efficient level and further increases in output would result in diseconomies of scale.

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45.

Which of the following is a source of diseconomies of scale?
- A.
  
  As a firm expands it's output labor begins to specialize
- B.
  
  As a firm expands it finds itself depending more on hierarchical means of coordinating it's employees' activities
- C.
  
  Individual employee incentives become clearer
- D.
  
  Individual departments and divisions tend to work more as a team
Correct Answer
B. As a firm expands it finds itself depending more on hierarchical means of coordinating it's employees' activities

Explanation
As a firm expands, it finds itself depending more on hierarchical means of coordinating its employees' activities. This is a source of diseconomies of scale because as the firm grows, the need for coordination and management increases. This can lead to increased bureaucracy, slower decision-making processes, and a loss of flexibility. The firm may also experience communication issues and difficulties in coordinating different departments and divisions, which can result in inefficiencies and higher costs.

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46.

Which of the following is not characteristic of perfect competition?
- A.
  
  Many firms, each of which is small
- B.
  
  A homogeneous product
- C.
  
  An intense climate of rivalry among entrepreneurs
- D.
  
  Free entry and exit
Correct Answer
C. An intense climate of rivalry among entrepreneurs

Explanation
Perfect competition is a market structure where there are many small firms that produce homogeneous products. In this type of market, there is intense competition among the firms, but it is not characterized by an intense climate of rivalry among entrepreneurs. Instead, perfect competition is based on the principle of price taking, where each firm is a price taker and has no control over the market price. Therefore, the absence of an intense climate of rivalry among entrepreneurs is not characteristic of perfect competition.

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47.

Which of the following markets can contain a number of firms producing differentiated products?
- A.
  
  Monopoly
- B.
  
  Monopolistic competition
- C.
  
  Perfect competition
- D.
  
  None of the above
Correct Answer
B. Monopolistic competition

Explanation
Monopolistic competition is the correct answer because in this market structure, there are many firms producing similar but differentiated products. Each firm has some control over the price of its product due to product differentiation, but there is still competition from other firms. Monopoly refers to a market structure with only one firm, perfect competition refers to a market with many firms producing identical products, and "none of the above" is incorrect as monopolistic competition fits the description given in the question.

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48.

A perfectly competitive firm sells its output for $50 a unit. At 1,000 units of output, marginal cost is $40 and is increasing, average variable cost is $35, and average total cost is $60. To maximize short-run profit, what should the firm do?
- A.
  
  Increase output
- B.
  
  Decrease output but not shut down
- C.
  
  Maintain its current rate of output
- D.
  
  Shut down
Correct Answer
A. Increase output

Explanation
To maximize short-run profit, the firm should increase output. This is because the marginal cost is less than the selling price of $50, indicating that the firm can still generate additional profit by producing more units. Additionally, the average variable cost is less than the selling price, suggesting that the firm is covering its variable costs and can benefit from economies of scale by increasing production. Therefore, increasing output would allow the firm to maximize its profit in the short run.

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49.

Which of the following market structures is likely to have the most barriers to entry?
- A.
  
  Perfect competition
- B.
  
  Monopolistic competition
- C.
  
  Oligopoly
- D.
  
  Monopoly
Correct Answer
D. Monopoly

Explanation
A monopoly is likely to have the most barriers to entry compared to other market structures. This is because in a monopoly, there is only one firm that dominates the market and has exclusive control over the supply of a particular product or service. The barriers to entry can include high start-up costs, patents or copyrights, government regulations, and economies of scale that make it difficult for new firms to enter the market and compete effectively. As a result, monopolies often have little or no competition, allowing them to set higher prices and earn higher profits.

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50.

A perfectly competitive firm sells its output at $40 per unit. At 100 units of output, it has an average total cost of $40. Marginal cost is equal to average total cost at that point. To maximize profit, what should the firm do?
- A.
  
  Increase output
- B.
  
  Decrease output
- C.
  
  Maintain its current rate of output
- D.
  
  Insufficient information is given for an answer to be reached.
Correct Answer
C. Maintain its current rate of output

Explanation
The firm should maintain its current rate of output because when the marginal cost is equal to the average total cost, the firm is already producing at the most efficient level. Increasing or decreasing output would result in either higher costs or lower revenues, leading to a decrease in profit. Therefore, the firm should continue producing at the current rate to maximize its profit.

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