Chapter (5_7) Questions

Chapter (5&6) MCQs

1. Suppose a country produces only bikes and clothing. The country achieves an efficient
allocation of resources when
a. it can’t produce any more bikes unless it gives up clothing
b. It produces equal amount of bikes and clothes.
c. The marginal benefit of producing a bike equals the marginal cost of producing a
bike.
d. The prices charged for the goods are as low as possible.
2. It is efficient to produce an additional shirt if
a. The marginal benefit of producing the shirt is greater than zero.
b. The marginal benefit of producing the shirt is zero
c. The marginal benefit of producing the shirt is greater than the marginal cost of
producing it
d. Total benefits from producing shirts are maximized
3. If the marginal benefit of the fifth slice of pizza is greater than the marginal cost of the
fifth slice of pizza then the output level is
a. Efficient and more pizza should be produced
b. Efficient and less pizza should be produced
c. Inefficient and more pizza should be produced
d. Inefficient and less pizza should be produced
4. When the efficient quantity of output is produced
a. The marginal benefit of the last unit produced is equal to the marginal cost of the
last unit produced.
b. The sum of consumer surplus and producer surplus is maximized
c. Resources are used in the activities in which they are most highly valued
d. All of the above answers are correct
5. The value of a good is the
a. Maximum price you are willing to pay for it
b. Price that you actually pay for it
c. Price you actually pay for it minus the maximum you is willing to pay for it
d. Maximum you are willing to pay for it minus the price you actually pay for it
6. A used car was recently priced at $20,000.00. Seeing the car, Bobby thought, “It’s nice, but
if I have to pay more than $19,500 for this car, then I would rather do without it.” After
negotiations, Bobby purchased the car for $19,250.00. His consumer surplus was equal to
a. $19,500.00
b. $1,750.00
c. $250.00
d. $0.00
7. If there are no external costs or benefits, a good’s marginal cost curve
a. Is the same as its supply curve?
b. Measures the minimum price that producers. Must be offered to produce a given
quantity of the good
c. None of the above answers are correct
d. Both answers A and B are correct.
8. Producer surplus is the
a. Value of a good minus the price paid for it.
b. Price paid for a good minus the value of the good
c. Price paid for a good minus the opportunity cost of making it.
d. Opportunity cost of making a good minus the price paid for it.

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9. When the Smiths were shopping for their present home, the asking price from the previous
owner was $250,000.00. The Smith’s had decided they would pay no more than $245,000.00
for the house. After negotiations, the Smith’s actually purchased the house for
$239,000.00. Therefore, the previous owner earned a producer surplus of
a. $250,000.00.
b. $11,000.00.
c. $5,000.00.
d. An amount unknown given the information in the question
10. To cover all her costs of production, Sarah knows that she must sell her sunflower seeds
for $5.00 per bushel. She simply cannot accept any lower price and remain in business.
When she sells all of her seeds for $5.50 per bushel, she earns a producer surplus equal to
a. $5.50 times the number of bushels produced
b. $5.00 times the number of bushels produced
c. $0.50 times the number of bushels produced
d. zero
11. When a market is in equilibrium, the total amount of consumer surplus must be ____ the
total amount of producer surplus.
a. larger than
b. equal to
c. less than
d. None of the above answers are correct
12. When the competitive market is using its resources efficiently, the
a. Total amount of consumer surplus is maximized
b. Total amount of producer surplus is maximized
c. Sum of the total amount of consumer surplus plus the total amount of producer
surplus are maximized
d. sum of the total amount of consumer surplus plus the total amount of producer
surplus equals zero
13. If there are no external costs or benefits, no price ceilings or price floors, and the good is
not a public good or a common resource, then efficiency is
a. Achieved when a monopoly produces the good.
b. Achieved when the good is produced in a competitive market
c. Achieved when the amount of output exceeds the amount produced in a
competitive market
d. Unrelated to the amount produced in a competitive market
14. A price ____ makes it illegal to pay a lower price than the specified level. One example
is
a. Floor; the minimum wage
b. Floor; rent control
c. Ceiling; the minimum wage
d. Ceiling; rent control
15. A payment by the government that decreases the price paid by consumers and increases
the price received by sellers is a
a. price ceiling.
b. Tax.
c. Subsidy
d. quota
16. A law or regulation that limits the amount that a firm is permitted to produce is called a
a. subsidy.
b. Tax.
c. Floor.
d. Quota

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17. Which of the following is NOT an obstacle to the achievement of an efficient allocation of
resources in a market economy?
a. Price ceilings and price floors
b. Rapid technological change
c. Monopoly.
d. Taxes, subsidies, and quotas
18. Lobbyists for the steel industry have been able to get legislation passed that guarantees
that steel will be sold for $500 per ton. The competitive equilibrium is $400 per ton. As a
result of this legislation
a. less steel than the efficient quantity will be produced
b. More steel than the efficient quantity will be produced
c. Steel consumers would be willing to pay $400 per ton for steel
d. Consumer surplus will increase in value
19. Underproduction implies that for the last unit produced
a. marginal social benefit exceeds marginal social cost
b. marginal social benefit equals marginal social cost
c. marginal social cost exceeds marginal social benefit
d. the deadweight loss is zero
20. Overproduction implies that for the last unit produced
a. marginal social benefit exceeds marginal social cost
b. marginal social benefit equals marginal social cost
c. marginal social cost exceeds marginal social benefit
d. the deadweight loss is zero
21. The deadweight loss from producing an inefficient amount is
a. a loss to the consumer but a gain to the producer
b. a loss to the producer but a gain to the consumer
c. a gain to the consumer and the producer, but a loss to the rest of society.
d. a loss to the consumer and to the producer
22. Consider the market for hot dogs. If the government imposes a tax on hot dogs,
a. there will be a loss of consumer surplus
b. There will be a gain of producer surplus
c. Dead weight loss will be minimized
d. The marginal cost and marginal benefit of hot dogs will decrease
23. A rightward shift of the demand curve for apartments will
a. Stimulate investment in buildings, thus reducing the original rise in rents
b. Stimulate investment in buildings, thus reducing the original fall in rents
c. Discourage investment in buildings, thus increasing the original rise in rents
d. Discourage investment in buildings, thus increasing the original fall in rents
24. The effect of a rent ceiling set above the equilibrium price
a. Is powerful, eliminating price as a regulator of quantity supplied and quantity
demanded?
b. Is powerful, strengthening price as a regulator of quantity supplied and quantity
demanded?
c. Encourages the development of black markets
d. Is essentially nonexistent
25. A rent ceiling below the equilibrium rent will encourage
a. A more efficient allocation of housing
b. A larger number of apartments rented
c. No change in the number of apartments rented
d. Increased search time and black markets
26. A rent ceiling set above the equilibrium rent
a. restricts the quantity demanded but not the quantity supplied
b. Restricts the quantity supplied but not the quantity demanded
c. Restricts both the quantity demanded and the quantity supplied
d. Has no effect
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27. With rent controls, which of the following is most likely to occur?
a. Decreased search activity
b. Black market activity
c. A building boom
d. A housing surplus
28. Effective rent controls
a. increase search activity
b. Decrease search activity
c. Have no effect on search activity
d. Shift the long-run housing supply curve rightward
29. One consequence of rent ceilings is that
a. surplus of housing units develops
b. Renters are no longer exploited by landlords
c. It makes the long-run housing supply more elastic
d. Search costs for housing increase
30. With rent controls, what mechanism might arise to bring about equilibrium?
a. Decreased search costs
b. Black market activity
c. Increased advertising by landlords
d. More favorable leases offered to tenants
31. Assume that your state government has placed a price ceiling of $.20 per kilowatt hour on
electricity. The equilibrium price per kilowatt hour for electricity is $.25. This action will
result in
a. surplus of electricity in the electricity market
b. An increase in the price of electricity to $.25 per kilowatt hour
c. An increase in producer surplus
d. a deadweight loss occurring
32. The opportunity cost of buying a good includes
I. the price of the good.
II. the value of time spent searching for the good.
a. Only I.
b. Only II.
c. Both I and II.
d. Neither I nor II

# Ans. # Ans. # Ans. # Ans. # Ans. # Ans.

1 C 7 D 13 B 19 A 25 D 31 D
2 C 8 C 14 A 20 C 26 D 32 C
3 C 9 D 15 C 21 D 27 B
4 D 10 C 16 D 22 A 28 A
5 A 11 D 17 B 23 A 29 D
6 C 12 C 18 B 24 D 30 B

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 Chapter (7) MCQs
1. Which of the following describes the most consistent difference between a pure
competitor and a monopolist?
a. The monopolist has larger total assets.
b. Marginal revenue and price are the same for the competitor, but different for the
monopolist
c. The competitor is in a constant-cost industry; the monopolist
d. The monopolist's price is government-controlled; the competitor's is not
2. Which of the following is correct? In the long run, in monopolistic competition, high profits
on the part of one firm
a. Will lead to high profits for others, as they imitate the successful firm's methods.
b. Will drive other firms out of the industry, and lead to pure monopoly.
c. Will lead to new entry, and tend to drive profits down to normal
d. Will continue indefinitely, since the profitable firm will erect barriers to entry
3. An imperfectly competitive firm discovers that at its present level of output average
total cost, which is at a minimum, is $16.50 and its average revenue is $18. Marginal
revenue is $12. To maximize profit what should the firm do?
a. Leave price and output unchanged.
b. Increase price and leave output unchanged.
c. Increase price and decrease output
d. Decrease price and decrease output
4. Which of the following is the key economic objection to a profit-maximizing, unregulated
monopoly?
a. Price will not equal average cost
b. Price will be above marginal cost.
c. Marginal revenue will be below marginal cost
d. Marginal cost will not equal average cost
5. Suppose a fully employed economy had only two industries, one being monopolistic and
the other being competitive. Assuming that there are no economies of large-scale
production, what would be the result of government action to break up the monopoly into
many competitive firms? There would be
a. An increase in output for the monopolized industry and a decrease in output for the
competitive industry
b. A decrease in output for the monopolized industry and an increase in output for the
industry
c. An increase in output for both industries.
d. A decrease in output for both industries
6. A firm operating under conditions of pure competition will:
a. Face a vertical demand curve
b. Generate zero economic profit in the long run.
c. Produce a quantity where marginal revenue is less than marginal cost.
7. Under pure competition, a firm will experience economic losses when:
a. price is less than ATC.
b. MC is less than ATC
c. MC = ATC = MR = price
8. A price-taker firm will increase output as long as:
a. Marginal revenue is positive
b. Marginal revenue is greater than marginal cost.
c. marginal revenue is greater than the average cost
9. Under perfect competition, the long-run equilibrium condition for a firm may be described
as:
a. P = ATC = TR
b. MC = TR = TC.
c. P = MC = ATC.

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10. In a purely competitive market, economic losses indicate that:
a. Price is below average total costs.
b. Collusion is occurring in the market place
c. firms need to expand output to reduce costs
11. A monopolist will expand production until MR = MC and charge a price determined by the:
a. Demand curve.
b. Marginal cost curve.
c. average total cost curve
12. Which one of the following statements most accurately describes a significant difference
between a monopoly firm and a perfectly competitive firm? A perfectly competitive firm:
a. Minimizes costs; a monopolistic firm maximizes profit
b. Maximizes profit; a monopolistic firm maximizes price
c. Takes price as given; a monopolistic firm must search for the best price
13. A monopolist will maximize profits by producing at the output level where:
a. price is equal to MC
b. MR equals ATC and charging a price along the demand curve that corresponds to
the output rate
c. MR equals MC and charging a price on the demand curve that corresponds to the
output rate
14. For effective price discrimination to occur, the seller must:
a. Face a downward-sloping demand curve
b. Have a large advertising budget relative to sales
c. Be able to ensure resale of the product among customers
15. When a regulatory agency requires a monopolist to use average cost pricing, the intent is
to price the product where the:
a. MR curve intersects the demand curve.
b. ATC curve intersects the MR curve
c. ATC curve intersects the market demand curve
16. A characteristic of monopolistic competition is:
a. Differentiated products.
b. High barriers to entry and exit
c. a single seller with no competition
17. The demand for products from monopolistic competitors is elastic due to:
a. High barriers to entry
b. The availability of many close substitutes
c. The availability of many complementary goods
18. Which of the following is least likely a feature that monopolistic competition and perfect
competition have in common?
a. Output occurs where MR = MC.
b. Zero economic profits in the long run.
c. Extensive advertising to differentiate products
19. An oligopolistic industry has:
a. Few barriers to entry
b. Few economies of scale
c. A great deal of interdependence among firms.
20. Consider a firm in an oligopoly market that believes the demand curve for its product is
more elastic above a certain price than below this price. This belief fits most closely to
which of the following models?
a. Dominant firm model
b. Kinked demand model
c. Variable elasticity model

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 # Ans. # Ans. # Ans. # Ans. # Ans.
1 B 5 A 9 C 13 C 17 B
2 C 6 B 10 A 14 A 18 C
3 C 7 A 11 A 15 C 19 C
4 B 8 B 12 C 16 A 20 B

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