Microeconomics True/False Questions

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Quizzes Created: 4 | Total Attempts: 5,129

Questions: 52 | Attempts: 2,667 | Updated: Nov 16, 2023

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Microeconomics True/False Questions - Quiz

Questions and Answers

1.

A number of years ago, a company that is now out of business disposed of its chemical waste products by spraying them on the ground. It will take the EPA millions of dollars to clean up this site. This situation is an example of an externality.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The given scenario describes a company that disposed of its chemical waste by spraying it on the ground, resulting in environmental pollution. The Environmental Protection Agency (EPA) now needs to spend millions of dollars to clean up the site. This situation exemplifies an externality, as the company's actions imposed negative costs on society (pollution and cleanup expenses) without considering or accounting for them.

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2
0
2.

A market economy is usually an efficient method of organizing economic activity.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
A market economy is usually an efficient method of organizing economic activity because it allows for competition, which drives innovation and efficiency. In a market economy, prices are determined by supply and demand, which helps allocate resources efficiently. Additionally, market economies provide individuals with the freedom to make their own economic decisions, which encourages entrepreneurship and productivity. Overall, the decentralized nature of a market economy allows for efficient allocation of resources and fosters economic growth.

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4
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3.

The statement, "The government should step in to increase farm subsidies in times of drought," is an example of a normative economic statement.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
This statement is an example of a normative economic statement because it expresses a value judgment about what the government should do in response to a specific situation. It is not a statement of fact or a description of how the economy actually works. Normative statements involve opinions and subjective judgments rather than objective analysis. In this case, the statement expresses a belief that the government should intervene and provide financial support to farmers during droughts, which is a subjective viewpoint.

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2
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4.

A critical part of economic modeling is to make the correct assumptions for the model.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
Economic modeling requires making accurate assumptions in order to accurately predict and analyze economic outcomes. These assumptions serve as the foundation for the model and any errors or incorrect assumptions can lead to inaccurate results. Therefore, it is crucial to make the correct assumptions when constructing economic models.

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2
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5.

When considering two goods, two countries will benefit from trading the goods only when one country has an absolute advantage over teh other in the production of both goods.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
When considering two goods, two countries will benefit from trading the goods even if one country does not have an absolute advantage over the other in the production of both goods. This is because countries can specialize in producing the goods in which they have a comparative advantage, meaning they can produce a good at a lower opportunity cost compared to another country. By trading based on their comparative advantages, both countries can benefit from increased efficiency and access to a wider range of goods.

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1
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6.

The reason trade makes everyone better off is that businesses can specialize in the things in which they can best use their resources, then trade for the things they are not so efficient at producing.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
Trade allows businesses to specialize in the production of goods and services that they are most efficient at producing. By focusing on their strengths, businesses can maximize their productivity and output. They can then trade with other businesses to obtain goods and services that they are less efficient at producing. This specialization and trade lead to increased efficiency, higher productivity, and ultimately, benefits for all parties involved.

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1
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7.

For some goods and services, it would be wise for a society to produce at a level inside the production possibilities frontier.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
It is false that it would be wise for a society to produce at a level inside the production possibilities frontier for some goods and services. The production possibilities frontier represents the maximum potential output that a society can achieve given its resources and technology. Producing inside the frontier would mean that the society is not utilizing its resources efficiently and is not maximizing its output. Therefore, it would not be wise for a society to produce at a level inside the production possibilities frontier.

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3
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8.

The statement, " A cut in income tax rates spurs growth in the economy." is an example of a positive economic statement.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The statement "A cut in income tax rates spurs growth in the economy" is an example of a positive economic statement because it is a factual statement that can be tested and proven true or false. It is not based on opinions or value judgments, but rather on observable economic outcomes.

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2
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9.

According to the table above, Country B has an absolute advantage in the production of rifles.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
The given statement is false because an absolute advantage in production means that a country can produce a good or service using fewer resources than another country. However, the table above does not provide any information about the production capabilities or resource allocation of Country B in comparison to other countries. Therefore, we cannot determine whether Country B has an absolute advantage in the production of rifles based on the given information.

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10.

In the table above, the opportunity cost for Country B to produce a rifle would be 18.75 pounds of butter.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The opportunity cost refers to the value of the next best alternative that is given up when making a decision. In this case, the table suggests that for Country B to produce a rifle, it would have to give up producing 18.75 pounds of butter. This indicates that the production of rifles comes at a cost of sacrificing the production of butter, making the statement true.

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11.

According to the table, Country A has a comparative advantage in the production of butter.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
Based on the information provided in the table, it can be inferred that Country A has a comparative advantage in the production of butter. This means that Country A can produce butter at a lower opportunity cost compared to other countries. It implies that Country A is more efficient in producing butter and can potentially produce it at a lower cost or with higher quality compared to other countries.

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12.

The principle of comparative advantage is the basis for most arguments in favor of free trade.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The principle of comparative advantage states that countries should specialize in producing goods and services that they can produce more efficiently and at a lower opportunity cost than other countries. This principle suggests that countries can benefit from trading with each other, as they can focus on producing the goods and services in which they have a comparative advantage. Therefore, the statement that the principle of comparative advantage is the basis for most arguments in favor of free trade is true.

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13.

Most economists believe that if inflation goes down, unemployment will go down in the short term.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
The statement is false because most economists believe in the concept of the Phillips Curve, which suggests that there is a trade-off between inflation and unemployment in the short term. According to this theory, when inflation decreases, unemployment tends to increase, and vice versa. Therefore, if inflation goes down, most economists would expect unemployment to go up in the short term.

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14.

A government program that provides free medical care to low-income mothers with small children is an example of a government intervention in the market because of equity concerns.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The statement is true because the government program mentioned in the question is providing free medical care to a specific group of individuals (low-income mothers with small children). This program is intervening in the market by redistributing resources to ensure that these individuals have access to healthcare services, regardless of their ability to pay. The program is aimed at addressing equity concerns by ensuring that those who may not be able to afford medical care can still receive necessary treatment.

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15.

Jessica Campbell is considering two possible jobs after graduation. One pays $35,000 per year, but requires a move to California. The other pays $30,000 per year for a similar job, but is nearby. If Jessica chooses the nearby job, the opportunity cost of the decision would be $30,000.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
The statement is false because the opportunity cost of choosing the nearby job would actually be $5,000, not $30,000. The opportunity cost is the value of the next best alternative that is forgone when making a decision. In this case, the next best alternative is the job in California that pays $35,000 per year. Therefore, the opportunity cost of choosing the nearby job is the difference in salary between the two jobs, which is $5,000.

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16.

Because economic policies are based on past economic research, economists seldom disagree about economic policy.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
Economists often disagree about economic policy because economic policies are not solely based on past economic research. Economic policies also take into account current economic conditions, political considerations, and societal values, which can vary among economists. Additionally, economic research itself is not always definitive or universally agreed upon, leading to differing opinions and debates among economists. Therefore, the statement that economists seldom disagree about economic policy is false.

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17.

In Bangladesh, the average worker earns about $250 per year. One should expect that Bangladesh would also be an economy with low productivity.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The given statement suggests a correlation between the average worker's earnings and the productivity of the economy in Bangladesh. Since the average worker earns only $250 per year, it implies that the economy has low productivity. This is because low wages often indicate low productivity levels, as workers are not able to generate high levels of output or contribute significantly to the economy. Therefore, the answer "True" is appropriate based on the information provided.

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18.

In the long term, a country would not be able to shift its production possibilities curve for particular goods or services without finding new resources, improving its technology, or becoming more efficient in using its resources.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
This statement is true because a country's production possibilities curve represents the maximum amount of goods or services it can produce with its current resources and technology. In order to shift the curve and increase production, the country would need to acquire new resources, improve its technology, or become more efficient in utilizing its existing resources. Without these changes, the country would not be able to produce more of a particular good or service in the long term.

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19.

If a producer faces unit elastic demand for his or her product, there are no market incentives to either raise or lower product prices.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
If a producer faces unit elastic demand for their product, it means that a change in price will result in an equal percentage change in quantity demanded. In this case, if the producer were to raise the price, the quantity demanded would decrease by the same percentage, resulting in no increase in revenue. Similarly, if the producer were to lower the price, the quantity demanded would increase by the same percentage, also resulting in no increase in revenue. Therefore, there are no market incentives for the producer to either raise or lower product prices.

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20.

Market supply is a horizontal summation of the supply curves for all producers willing and able to supply their product to the market in a given length of time.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The explanation for the given answer is that market supply is indeed a horizontal summation of the supply curves for all producers. This means that the total supply in the market is determined by adding up the quantities supplied by each individual producer at various prices. It assumes that all producers are willing and able to supply their product to the market. This concept is based on the idea that in a competitive market, producers have no control over the price and can only adjust their quantity supplied. Therefore, the market supply curve is a horizontal summation of the individual supply curves.

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21.

Rumors are flying down at the coffee shop that the largest employer in town is about to announce layoffs. This would tend to shift the demand curve for cars at local car dealers to the left.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The announcement of layoffs by the largest employer in town would likely lead to a decrease in consumer confidence and disposable income, causing people to be more hesitant to make large purchases such as cars. This decrease in demand would result in a leftward shift of the demand curve for cars at local car dealers. Therefore, the statement is true.

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22.

Pork and beef are substitute meat products. This relationship means that if the price for beef goes up, demand for pork goes down.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
Pork and beef are not necessarily substitute meat products. The relationship between the two meats depends on various factors such as consumer preferences, cultural differences, and availability. While some consumers may consider pork and beef interchangeable, others may have a preference for one over the other. Therefore, it cannot be assumed that an increase in beef prices will always lead to a decrease in pork demand.

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23.

As the time period increases, most products will become more elastic in their price elasticity of demand.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
As the time period increases, consumers have more opportunities to adjust their consumption patterns and find substitutes for a product. This increased flexibility makes consumers more responsive to changes in price, resulting in a higher price elasticity of demand. Therefore, most products will become more elastic in their price elasticity of demand as the time period increases.

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1
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24.

Producers who manufacture products with inelastic demand have market incentives to lower prices.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
Producers who manufacture products with inelastic demand do not have market incentives to lower prices. Inelastic demand means that the quantity demanded does not change significantly with a change in price. Therefore, producers can keep prices high without losing many customers, resulting in higher profits.

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25.

The Environmental Protection Agency has just put a regulation in place that will increase the cost of production for coal miners. The new regulation impact the market by causing the supply curve for coal to shift to the left.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The new regulation by the Environmental Protection Agency will increase the cost of production for coal miners. This increase in production costs will likely lead to a decrease in the quantity of coal supplied in the market. As a result, the supply curve for coal will shift to the left, indicating a decrease in supply. Therefore, the statement "The new regulation impacts the market by causing the supply curve for coal to shift to the left" is true.

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26.

A luxury good would also be a normal good.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
A luxury good is a type of product that is not considered a necessity and is often associated with higher quality, exclusivity, and higher price. Normal goods are those that see an increase in demand as consumer income increases. Since luxury goods are often associated with higher income levels and are considered to be of higher quality, it can be inferred that they would also be considered normal goods. Therefore, the statement "A luxury good would also be a normal good" is true.

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27.

One result of a rent control program such as New York City's is a surplus of rent control apartments for this market.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
A rent control program like New York City's does not result in a surplus of rent control apartments for the market. In fact, it often leads to a shortage of affordable housing as landlords may choose to convert their rental units to other uses or not invest in maintenance and improvements. This can decrease the overall supply of rental housing and make it even more difficult for tenants to find affordable options.

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28.

Concrete plants just announced that the price of concrete will go up 15% per cubic yard, effective immediately. Since contractors use concrete for basements, footings, driveways, and sidewalks, the effect of the price increase would be to move the supply curve for new housing to the left.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The announcement of a 15% price increase in concrete will lead to an increase in the cost of construction materials for contractors. As a result, contractors may reduce their demand for concrete, leading to a decrease in the supply of new housing. This decrease in supply will cause the supply curve for new housing to shift to the left, indicating a decrease in the quantity of new housing supplied. Therefore, the statement "the effect of the price increase would be to move the supply curve for new housing to the left" is true.

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29.

Since milk has few substitutes, demand for milk tends to be price inelastic.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The given statement is true because milk has limited substitutes available in the market. This means that consumers have fewer options to switch to if the price of milk increases. As a result, even if the price of milk increases, the demand for milk is unlikely to decrease significantly. This indicates that the demand for milk is price inelastic, meaning that changes in price have a relatively small impact on the quantity demanded.

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30.

Spring has arrived and a local retailer has coats, mittens, and other winter gear left over. In the short run, a competitive market would react to this situation by forcing the prices for this gear lower.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
In a competitive market, the forces of supply and demand determine prices. When spring arrives and winter gear is still available, the demand for these items decreases significantly. As a result, the retailer faces excess inventory and needs to sell off the remaining winter gear. To attract buyers and clear their inventory, the retailer would lower the prices of coats, mittens, and other winter gear. This is because lower prices would incentivize consumers to purchase these items even though they are no longer in high demand. Therefore, the statement that a competitive market would react to this situation by forcing the prices for winter gear lower is true.

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31.

Chronic shortages of goods and services are a characteristic of competitive markets.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
In competitive markets, chronic shortages of goods and services are not a characteristic. Competitive markets are driven by supply and demand, and in such markets, prices tend to adjust to clear any temporary shortages. Competition encourages producers to increase their supply to meet the demand, which reduces the likelihood of chronic shortages. Therefore, the statement is false.

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32.

Market demand represents a horizontal summation of the all of the demand curves for consumers willing and able to purchase a good or service in a given length of time.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
Market demand represents the total quantity of a good or service that consumers are willing and able to purchase at various price levels. It is determined by horizontally adding up the individual demand curves of all consumers in the market. This means that market demand takes into account the preferences and purchasing power of all potential buyers, providing a comprehensive picture of the overall demand for the product. Therefore, the statement that market demand represents a horizontal summation of all demand curves is true.

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33.

Recent good prices for fishing tackle have encouraged new businesses to enter the market and begin production. Entry of these new businesses will move the supply curve for fishing gear to the left.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
The statement suggests that the recent good prices for fishing tackle have encouraged new businesses to enter the market and begin production. However, the entry of new businesses into the market would actually increase the supply of fishing gear, causing the supply curve to shift to the right, not to the left. Therefore, the correct answer is false.

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34.

Because of a terrible ice storm, there has been a run on products like flashlights, kerosene heaters, dry ice, etc. In the short run, a competitive market would react to this shortage by pressuring prices lower.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
In the short run, a competitive market would actually react to a shortage by increasing prices, not pressuring them lower. When there is a high demand for certain products due to a shortage, suppliers have the opportunity to increase prices and make more profit. This is because consumers are willing to pay more for the limited supply of goods. Therefore, the correct answer is false.

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35.

The U.S. Congress is considering a tax cut for the middle class, which would give these consumers additional income. This news would shift the demand curve for expensive watches to the left.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
The statement is false because a tax cut for the middle class would actually increase their disposable income, which could lead to an increase in demand for expensive watches. This would shift the demand curve for expensive watches to the right, not to the left.

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36.

For most consumers, bread and butter are complementary goods. This relationship means that if the price for bread falls, the demand for butter will also fall.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
Bread and butter are not complementary goods, but rather substitute goods. This means that if the price for bread falls, the demand for butter will increase as consumers may choose to substitute bread with butter. Therefore, the correct answer is false.

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37.

In an industry where it may take a year or longer to get a new plant up and running (e.g., automobile manufacturing), supply would tend to be inelastic.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
In industries like automobile manufacturing, setting up a new plant can be a time-consuming process that can take a year or longer. This means that the supply of products in this industry is not easily adjustable or responsive to changes in demand. Therefore, supply tends to be inelastic, meaning that it does not change significantly in response to changes in price or demand.

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38.

Big-ticket items like houses tend to be elastic in their price elasticity of demand.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
Big-ticket items like houses tend to be elastic in their price elasticity of demand because they are considered luxury goods and not necessities. This means that as the price of houses increases, the demand for them decreases significantly. People are more likely to postpone or cancel their plans to buy a house if the price is too high. On the other hand, if the price of houses decreases, the demand for them increases as more people can afford to purchase them. Therefore, the price elasticity of demand for big-ticket items like houses is high, making them elastic.

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39.

If the government sets the farm commodity loan price above the market equilibrium price, surpluses will occur for farm commodities covered by the loan programs.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
If the government sets the farm commodity loan price above the market equilibrium price, it means that the loan price is higher than what the market is willing to pay. This will lead to surpluses because farmers will be incentivized to produce more since they can sell their commodities at a higher price through the loan program. However, since the market equilibrium price is lower, there will be less demand for these commodities, resulting in surpluses. Therefore, the statement is true.

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40.

The DIRTI 5 is an acronym for all variable costs.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
The statement is false because the DIRTI 5 is not an acronym for all variable costs. The acronym DIRTI 5 stands for the five categories of costs in managerial accounting, which are Direct materials, Direct labor, Factory overhead, Selling expenses, and Administrative expenses. It does not encompass all variable costs, as there may be other variable costs that do not fall under these categories.

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41.

Easy entry and exit of firms ensures that there will be no long-run economic profits for a firm in perfect competition.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
In perfect competition, there are no barriers to entry or exit for firms. This means that new firms can easily enter the market and existing firms can easily exit if they are not making profits. As a result, any economic profits made by a firm in the short run will attract new firms to enter the market, increasing competition and driving down prices. This process continues until all economic profits are competed away, resulting in zero long-run economic profits for firms in perfect competition. Therefore, the statement is true.

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42.

Firms in competitive markets will be able to set their price for their products, regardless of what other firms in the market are charging for the product.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
In competitive markets, firms do not have the ability to set their prices independently. They are price takers, meaning they have to accept the prevailing market price determined by the forces of supply and demand. If a firm tries to set a higher price, customers will simply switch to a competitor offering a lower price. Therefore, firms in competitive markets do not have the power to set their prices.

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43.

At Businessman Adams' CD production plant, average fixed costs per CD are 1.1 cent and average total costs are 2.8 cents. Adams' average variable costs must be 1.7 cent per CD.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
The average total cost is the sum of the average fixed cost and the average variable cost. In this case, the average fixed cost is 1.1 cents and the average total cost is 2.8 cents. Therefore, the average variable cost can be calculated by subtracting the average fixed cost from the average total cost, which gives us 2.8 - 1.1 = 1.7 cents per CD. Hence, the statement "Adams' average variable costs must be 1.7 cent per CD" is true.

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44.

In competitive markets, there are market incentives for firms to make as efficient use as possible of the resources committed to the business.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
In competitive markets, firms have a strong incentive to use their resources efficiently in order to maximize their profits and gain a competitive advantage. This is because in a competitive market, there are many other firms offering similar products or services, and customers have the freedom to choose among them. Therefore, if a firm is not making efficient use of its resources, it may lose customers to competitors who can offer better quality or lower prices. By using resources efficiently, firms can reduce costs, increase productivity, and ultimately improve their profitability in the market.

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45.

In the short run, only those businesses currently in the market will have the ability to respond to market price incentives and supply more (or less) product to the market.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
In the short run, businesses that are already operating in the market have the advantage of being able to respond quickly to changes in market prices. They can increase or decrease their supply of products based on market demand and price incentives. This is because they already have the necessary infrastructure, resources, and knowledge in place to adjust their production levels. On the other hand, new businesses entering the market would take time to set up their operations and may not be able to respond as quickly. Therefore, the statement is true.

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46.

In the short run, a firm in a competitive market that cannot pay for all its fixed and variable costs should shut down until the price improves.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
In the short run, a firm in a competitive market should not shut down if it cannot pay for all its fixed and variable costs. This is because in the short run, a firm can still cover its variable costs even if it cannot cover its fixed costs. By continuing to operate, the firm can at least minimize its losses by covering its variable costs and contribute towards paying off its fixed costs. Shutting down would result in zero revenue and would not help improve the firm's financial situation. Therefore, the statement is false.

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47.

A firm making an economic profit must also be making an accounting profit.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
A firm making an economic profit refers to a situation where the revenue earned by the firm exceeds its total costs, including both explicit costs (such as wages, rent, and materials) and implicit costs (such as the opportunity cost of the owner's time and capital). On the other hand, an accounting profit is the difference between a firm's total revenue and its explicit costs. Since economic profit includes both explicit and implicit costs, it is always equal to or greater than accounting profit. Therefore, if a firm is making an economic profit, it must also be making an accounting profit.

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48.

ABC Manufacturing has been analyzing the plastic worm manufacturing market, but is not currently in the business of making them. If ABC's variable cost per worm would be 38 cents and its fixed cost per worm would be 35 cents, ABC would be likely to enter the market if the current market price for plastic worms is 49 cents each.
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
ABC Manufacturing would not be likely to enter the market if the current market price for plastic worms is 49 cents each because the total cost per worm (variable cost + fixed cost) would be 73 cents, which is higher than the market price. Therefore, ABC would not be able to make a profit and it would not be economically feasible for them to enter the market.

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49.

Adding production workers, but being able to supervise them with the same number of supervisory staff would be an example of an economy of scale.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
Adding production workers while maintaining the same number of supervisory staff allows for a larger workforce to be managed by the same level of supervision. This can result in increased efficiency and productivity, as the supervisory staff can effectively oversee a larger number of workers. This is an example of an economy of scale, where the cost per unit decreases as production volume increases.

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50.

In the long run, a firm in a competitive market whose average total cost is higher than the current market price will exit the market.
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
A firm with an average total cost higher than the current market price will not be able to cover its costs and make a profit. This means that the firm will face losses in the long run. In a competitive market, where there are many other firms offering similar products or services, customers have many alternatives to choose from. As a result, the firm will struggle to attract customers and generate enough revenue to sustain its operations. Eventually, the firm will be forced to exit the market as it cannot compete effectively and continue to operate at a loss.

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Microeconomics True/False Questions

A number of years ago, a company that is now out of business disposed of its chemical waste products by spraying them on the ground. It will take the EPA millions of dollars to clean up this site. This situation is an example of an externality.

A market economy is usually an efficient method of organizing economic activity.

The statement, "The government should step in to increase farm subsidies in times of drought," is an example of a normative economic statement.

A critical part of economic modeling is to make the correct assumptions for the model.

When considering two goods, two countries will benefit from trading the goods only when one country has an absolute advantage over teh other in the production of both goods.

The reason trade makes everyone better off is that businesses can specialize in the things in which they can best use their resources, then trade for the things they are not so efficient at producing.

For some goods and services, it would be wise for a society to produce at a level inside the production possibilities frontier.

The statement, " A cut in income tax rates spurs growth in the economy." is an example of a positive economic statement.

According to the table above, Country B has an absolute advantage in the production of rifles.

In the table above, the opportunity cost for Country B to produce a rifle would be 18.75 pounds of butter.

According to the table, Country A has a comparative advantage in the production of butter.

The principle of comparative advantage is the basis for most arguments in favor of free trade.

Most economists believe that if inflation goes down, unemployment will go down in the short term.

A government program that provides free medical care to low-income mothers with small children is an example of a government intervention in the market because of equity concerns.

Jessica Campbell is considering two possible jobs after graduation. One pays $35,000 per year, but requires a move to California. The other pays $30,000 per year for a similar job, but is nearby. If Jessica chooses the nearby job, the opportunity cost of the decision would be $30,000.

Because economic policies are based on past economic research, economists seldom disagree about economic policy.

In Bangladesh, the average worker earns about $250 per year. One should expect that Bangladesh would also be an economy with low productivity.

In the long term, a country would not be able to shift its production possibilities curve for particular goods or services without finding new resources, improving its technology, or becoming more efficient in using its resources.

If a producer faces unit elastic demand for his or her product, there are no market incentives to either raise or lower product prices.

Market supply is a horizontal summation of the supply curves for all producers willing and able to supply their product to the market in a given length of time.

Rumors are flying down at the coffee shop that the largest employer in town is about to announce layoffs. This would tend to shift the demand curve for cars at local car dealers to the left.

Pork and beef are substitute meat products. This relationship means that if the price for beef goes up, demand for pork goes down.

As the time period increases, most products will become more elastic in their price elasticity of demand.

Producers who manufacture products with inelastic demand have market incentives to lower prices.

The Environmental Protection Agency has just put a regulation in place that will increase the cost of production for coal miners. The new regulation impact the market by causing the supply curve for coal to shift to the left.

A luxury good would also be a normal good.

One result of a rent control program such as New York City's is a surplus of rent control apartments for this market.

Concrete plants just announced that the price of concrete will go up 15% per cubic yard, effective immediately. Since contractors use concrete for basements, footings, driveways, and sidewalks, the effect of the price increase would be to move the supply curve for new housing to the left.

Since milk has few substitutes, demand for milk tends to be price inelastic.

Spring has arrived and a local retailer has coats, mittens, and other winter gear left over. In the short run, a competitive market would react to this situation by forcing the prices for this gear lower.

Chronic shortages of goods and services are a characteristic of competitive markets.

Market demand represents a horizontal summation of the all of the demand curves for consumers willing and able to purchase a good or service in a given length of time.

Recent good prices for fishing tackle have encouraged new businesses to enter the market and begin production. Entry of these new businesses will move the supply curve for fishing gear to the left.

Because of a terrible ice storm, there has been a run on products like flashlights, kerosene heaters, dry ice, etc. In the short run, a competitive market would react to this shortage by pressuring prices lower.

The U.S. Congress is considering a tax cut for the middle class, which would give these consumers additional income. This news would shift the demand curve for expensive watches to the left.

For most consumers, bread and butter are complementary goods. This relationship means that if the price for bread falls, the demand for butter will also fall.

In an industry where it may take a year or longer to get a new plant up and running (e.g., automobile manufacturing), supply would tend to be inelastic.

Big-ticket items like houses tend to be elastic in their price elasticity of demand.

If the government sets the farm commodity loan price above the market equilibrium price, surpluses will occur for farm commodities covered by the loan programs.

The DIRTI 5 is an acronym for all variable costs.

Easy entry and exit of firms ensures that there will be no long-run economic profits for a firm in perfect competition.

Firms in competitive markets will be able to set their price for their products, regardless of what other firms in the market are charging for the product.

At Businessman Adams' CD production plant, average fixed costs per CD are 1.1 cent and average total costs are 2.8 cents. Adams' average variable costs must be 1.7 cent per CD.

In competitive markets, there are market incentives for firms to make as efficient use as possible of the resources committed to the business.

In the short run, only those businesses currently in the market will have the ability to respond to market price incentives and supply more (or less) product to the market.

In the short run, a firm in a competitive market that cannot pay for all its fixed and variable costs should shut down until the price improves.

A firm making an economic profit must also be making an accounting profit.

Adding production workers, but being able to supervise them with the same number of supervisory staff would be an example of an economy of scale.

In the long run, a firm in a competitive market whose average total cost is higher than the current market price will exit the market.