Supply and Demand

Analytical Questions

1) For each of the following changes, show the effect on the demand curve, and state what will
happen to market equilibrium price and quantity in the short run.
a. Consumers expect that the price of the good will be higher in the future.
b. The price of a substitute good rises.
c. Consumer incomes fall, and the good is normal.
d. Consumer incomes fall, and the good is inferior.
e. A medical report is published showing that this good is hazardous to your health.
f. The price of the good rises.
2) For each of the following changes, show the effect on the supply curve, and state what will
happen to market equilibrium price and quantity in the short run.
a. The government requires pollution control filters that raise good on costs.
b. Wages of workers in this industry fall.
c. There is an improvement in technology.
d. The price of the good falls.
e. Producers expect that the price of the good will fall in the future.
3) List the major non-price determinants of demand.
4) List the major non-price determinants of supply.
5) The market for milk is in equilibrium. Recent health reports indicate that calcium is absorbed
better in natural forms such as milk, and at the same time, the cost of milking equipment rises.
Carefully analyze the probable effects on the market.
6) Suppose that macroeconomic forecasters predict that the economy will be expanding in the
near future. How might managers use this information?

Demand Elasticity
Multiple-Choice Questions

1) 1. The price elasticity of demand is a measure of:

A) the responsiveness of the quantity demanded to price changes
B) the quantity demanded at a given price
C) The shift in the demand curve when price changes
D) The demand for a product holding price constant
2) The elasticity of demand for a product is likely to be greater
A) the smaller the number of substitute products available
B) the smaller the proportion of one’s income spent on the product
C) if the product is a luxury rather than an absolute necessity
D) if the product is an imported good rather than a domestically produced good
3) If O.P.E.C. increases its price of oil, and still the demand for oil decreases by a very small amount, we can
conclude that the demand for oil is:
A) Relatively elastic
B) Relatively inelastic
C) Perfectly elastic
D) Perfectly inelastic
4) If the consumption of sugar does not change at all following a price increase from 50 cents per
pound to 65 cents per pound, the demand for sugar is considered to be
A) relatively inelastic. B) perfectly elastic.
C) perfectly inelastic. D) unitary elastic.
5) If the demand for a product is said to be relatively inelastic, the “absolute” value of the elasticity coefficient will
be:
A) Less than one
B) Greater than one

1
 C) Equal to one
D) Zero
6) If an item has several good substitutes, the demand curve for that item is likely to be:
A) Relatively inelastic
B) Relatively elastic
C) Perfectly inelastic
D) Unit elastic
7) Remembering that demand elasticity is defined as the percentage change in quantity divided
by the percentage change in price, if price decreases and, in percentage terms, quantity rises
more than price has dropped, total revenue will
A) increase. B) decrease.
C) remain the same. D) either increase or decrease.
8) Suppose the price of beans rises from $1.00 a pound to $2.00 a pound, quantity demanded falls from 10 units to
6 units, the coefficient of elasticity of demand for beans using the arc elasticity approach is:
A) -1.33 B) - 0.75 C) -0.4 D) - 0.25
9) In the above example, the demand for beans is said to be:
A) Relatively Elastic
B) Relatively Inelastic
C) Perfectly Elastic
D) Perfectly Inelastic
10) A perfectly elastic demand curve
A) can be represented by a line parallel to the vertical axis
B) is a 45 degree line
C) can be represented by a line parallel to the horizontal axis
D) cannot be represented on a two dimensional graph
11) The sensitivity of the change in quantity consumed of one good to a change in the price of a
related good is called
A) cross-elasticity. B) substitute elasticity.
C) complementary elasticity. D) price elasticity of demand.
12) The Cross-price-elasticity of demand for coffee and tea is likely to be:
A) Greater than zero
B) Less than zero
C) Zero
D) Infinity
13) The Cross-price-elasticity of demand for coffee and coffee-cream is likely to be
A) Greater than zero
B) Less than zero
C) Zero
D) Infinity
14) The Cross-price-elasticity of demand for coffee and caskets is likely to be:
A) Less than zero
B) Greater than zero
C) Zero
D) Infinity
15) When purchases of tennis socks decline following an increase in the price of tennis sneakers
(other things remaining equal), the relationship between these two items can be described as
A) substitutable. B) complementary.
C) unique. D) ordinary.
16) The owner of a produce store found that when the price of a head of lettuce was raised from
50 cents to $1, the quantity sold per hour fell from 18 to 8. The arc elasticity of demand for
lettuce is
A) -0.56. B) -1.15. C) -0.8. D) -1.57.
17) Suppose the price of crude oil drops from $150 a barrel to $120 a barrel. The quantity bought remains
unchanged at 100 barrels. The coefficient of price elasticity of demand in this example would be:
A) 0.5
B) Infinity

2
 C) 1.0
D) 0
18) If a firm decreases the price of a good and total revenue decreases, then
A) the demand for this good is price elastic.
B) the demand for this good is price inelastic.
C) the cross elasticity is negative.
D) the income elasticity is less than 1.
19) When total revenue reaches its peak (elasticity equals 1), marginal revenue reaches
A) 1.
B) zero.
C) -1.
D) Cannot be determined from the information provided.
20) If the income elasticity of a particular good is negative 0.2, it would be considered
A) a superior good. B) a normal good.
C) an inferior good. D) an elastic good.

Table 1
The following information is provided for Tony Romo’s income and expenditures.

Quantity Purchased Per Month

Monthly Income Steaks Pizzas
$2,000 2 8
$3,000 4 6

21). In TABLE 1, Tony’s income elasticity of demand for steaks is:

A) 1.0
B) Greater than 1.0
C) Less than 1.0
D) Zero
22). In TABLE 1, pizzas are classified as a (n):
A) Normal good B) Positive good C) Inferior goods D) Marginal good
23) In TABLE 1, Steaks are classified as a(n):
A) Normal good B) Positive good C) Inferior good D) Marginal good
24). In TABLE 1, Tony’s income elasticity of demand for pizzas is:
A) 0
B) Less than zero
C) Greater than 1.0
D) 1.0
25) The government unit that wants to achieve "revenue enhancement" will find it considerably
more favorable to enact an excise tax on goods whose demand is
A) highly elastic. B) relatively elastic.
C) highly inelastic. D) unitary elastic.
26) Which of the following instances will total revenue or receipts decline?
A) Price rises and demand is inelastic
B) Price falls and demand is elastic
C) Price rises and demand is elastic
D) Price falls and demand is unit elastic
27) If the price of a good is increased and total revenue received from the sale of this good
increases, then the price elasticity of demand for the good is
A) elastic.
B) inelastic.
C) unitary.
D) None of the above.
28) If the price of a good is decreased and total revenue received from the sale of this good
does not change, then the price elasticity of demand for the good is

3
 A) elastic. B) inelastic. C) unitary. D) None of the above.
29) If the demand for a good is price inelastic and the good price is increased, then the
marginal revenue (MR) received by the seller will
A) not change.
B) decrease.
C) increase.
D) Can't be determined from this information.
Analytical Questions
1) Suppose that the price elasticity of demand for wheat is known to be -0.75. Will a good wheat
crop (which increases the supply of wheat) be likely to increase or decrease the revenues of farmers? Carefully
explain.
2) The demand for salt is relatively price inelastic, while the demand for pretzels is relatively
price elastic. How can you best explain why?
3) Unions have generally bee far more successful in organizing and raising wages in skilled trades such as carpentry
than in unskilled trades. Use the laws of derived demand to explain why.
4) Governments impose excise taxes on goods that have inelastic demand, such as cigarettes,
more often than in other cases. Why?
5) You are told that the price elasticity of demand for widgets is -0.75, the income elasticity of
widgets is 2, and the cross-price elasticity of widgets and gadgets is 4. Carefully explain what
information you can gather from each of these figures.
6) The income elasticity for most staple foods, such as wheat, is known to be between zero and
one.
a. As incomes rise over time, what will happen to the demand for wheat?
b. What will happen to the quantity of wheat purchased by consumers?
c. What will happen to the percentage of their budgets that consumers spend on wheat?
d. All other things equal, are farmers likely to be relatively better off or relatively worse off in
periods of rising incomes?

The Theory of Production

Multiple-Choice Questions

1) The term Production Function refers to the:

A) Use of machinery and equipment in production
B) Relationship between costs and output
C) Relationship between inputs and output
D) Role of labor unions
2) The production period in which at least one input is fixed in quantity is the:
A) Production run
B) Long run
C) Short run
D) Planning horizon
3) The difference between the short-run and the long-run is:

A) three months or one business quarter.

B) the time it takes for firms to change all production on inputs.
C) the time it takes for firms to change only their variable inputs.
D) More information is required to answer this question.
4) In a call center, which of the following situations be considered as a variable input in the
short- run?

A) the level of computer-telephony software being utilized

B) the number of call center representatives on duty at the center
C) the number of call center managers or supervisors
D) the size (e.g., square footage) of the call center
5) Which of the following holds true?

4
 A) When the Marginal Product (MP) is rising, Marginal cost (MC) is rising; and when MP is falling, MC is
falling.
B) When MP is rising, MC is falling, and when MP is falling, MC is rising.
C) When MP is rising, MC is constant, and when MP is falling, MC is negative
D) There is no relationship between MP and MC.
6). The marginal product of the variable input:
A) is always positive
B) typically falls then rises
C) is equal to the total product divided by the total amount of the variable input employed
D) none of the above
7) Which of the following statements about the short-run production function is true?

A) MP always equals AP at the maximum point of MP.

B) MP always equals zero when TP is at its maximum point.
C) TP starts to decline at the point of diminishing returns.
D) When MP diminishes, AP is at its minimum point.
E) None of the above is true.
Answer the questions based on the following information.

Number of Workers Units of Ouput

0 0
1 40
2 90
3 126
4 150

8) The marginal product of the fourth worker is:

A) 150 units of output
B) 24 units of output
C) Negative
D) 36 units of output
9) Average product is at a maximum when the number of workers that are hired is:
A) 1
B) 2
C) 3
D) 4
10) Output (Total Product) is maximized when

A) average productivity is at its maximum.

B) the "law of diminishing returns" sets in.
C) marginal productivity is zero.
D) marginal productivity is at its maximum.
17) The "Law of Diminishing Returns" states that

A) additional inputs will reduce output.

B) additional inputs will decrease average productivity.
C) the supply of inputs is becoming scarce.
D) additional inputs will lead to less additional output.
18) Which of the following is not true about the law of diminishing returns?

A) It is a short-run phenomenon.
B) It refers to diminishing marginal product
C) It will have an impact on the firm's marginal cost.
D) It divides Stage I and II of the production process.

5
 E) All of the above are true.
19) When the law of diminishing returns takes effect

A) firms must add increasingly more input if they are to maintain the same extra amount of
output.
B) firms must add decreasingly more input if they are to maintain the same extra amount of
output.
C) more input must be added in order to increase its output.
D) a firm must always try to add the same amount of input to the production process.
20) Assume a firm employs 10 workers and pays each $15 per hour. Further assume that the MP
of the 10th worker is 5 units of output and that the price of the output is $4. According to
economic theory, in the short run,

A) the firm should hire additional workers.

B) the firm should reduce the number of workers employed.
C) the firm should continue to employ 10 workers.
D) More information is required to answer this question.
28) When is it not in the best interest of a company to hire additional workers in the short run?

A) when the average good of labor is decreasing

B) when the firm is in Stage II of the production process
C) when the marginal revenue good equals zero
D) when the wage rate is equal to or greater than labor's marginal revenue good

Analytical Questions

Number Of Output
Workers
0 0
1 50
2 110
3 300
4 450
5 590
6 665
7 700
8 725
9 710
10 705

1) The table above shows the weekly relationship between output and number of workers for a
factory with a fixed size of plant.
a. Calculate the marginal product of labor.
b. At what point does diminishing returns set in?
c. Calculate the average product of labor.
d. Find the three stages of production.

The Theory of Cost

Multiple-Choice Questions

1). To an Economist, total costs include:

A) Explicit, but not implicit costs
B) Implicit, but not explicit costs
C) Explicit and implicit costs
D) Neither explicit nor implicit costs

6
2) Economists consider which of the following costs to be irrelevant to a short-run business
decision?

A) opportunity cost B) out-of-pocket cost

C) historical cost D) replacement cost
3) Changes in the Short Run total costs result from changes in only:
A) Variable costs
B) Fixed costs
C) Zero
D) Total fixed costs
4) Which of the following cost relationships is not true?

A) AFC = AC - MC
B) TVC = TC - TFC
C) The change in TVC/the change in Q = MC.
D) The change in TC/ the change in Q = MC.
5) When a firm increased its output by unit, its AFC decreased. This is an indication that

A) the law of diminishing returns has taken effect.

B) MC < AFC.
C) AVC < AFC.
D) the firm is spreading out its total fixed cost.
7) Which of the following relationships is correct?

A) When marginal product starts to decrease, marginal cost starts to decrease.

B) When marginal cost starts to increase, average cost starts to increase.
C) When marginal cost starts to increase, average variable cost starts to increase.
D) When marginal product starts to decrease, marginal cost starts to increase.
8) The relationship between MC and AC can best be described as follows:

A) when AC increases, MC starts to increase.

B) when MC increases, AC starts to increase.
C) when MC decreases, AC decreases.
D) when MC exceeds AC, AC starts to increase.
9) The law of diminishing returns begins first to affect a firm's short-run cost structure when

A) average variable cost begins to increase.

B) marginal cost begins to increase.
C) average cost begins to increase.
D) average fixed cost begins to decrease.
10) The marginal cost will intersect the average variable cost curve

A) when the average variable cost curve is rising.

B) where average variable cost curve equals price.
C) at the minimum point of the average variable cost curve.
D) the two will never intersect.
11) Which of the following statements best represents a difference between short-run and
long-run cost?

A) Less than one year is considered the short run; more than one year the long run.
B) There are no fixed costs in the long run.
C) In the short-run labor must always be considered the variable input and capital the fixed
input.
D) All of the above are true.
12) When a firm increased its output by one unit, its AC decreased. This implies that

7
 A) MC < AC.
B) MC = AC.
C) MC < AFC.
D) the law of diminishing returns has not yet taken effect.
13) Which of the following relationships implies that a firm's short-run cost function is linear?

A) MC = AC B) MC = AVC
C) AC = AFC + AVC D) MC > AC
Analytical Questions

2) Consider a firm that has just built a plant, which cost $20,000. Each worker costs $5.00 per
hour. Based on this information, fill in the table below.

Number of Average Average

Worker Output Marginal Fixed Variable Total Marginal Variable Total
Hours Product Cost Cost Cost Cost Cost Cost
0 0 -- 20,000 -- -- --
50 400 20,250
100 900 20,500
150 1300 20,750
200 1600 21,000
250 1800 21,250
300 1900 21,500
350 1950 21,750
3) How would each of the following affect the firm's marginal, average, and average variable cost curves?
a. An increase in wages
b. A decrease in material costs
c. The government imposes a fixed amount of tax.
d. The rent that the firm pays on the building that it leases decreases.
4) Carefully explain if the following statements are true, false, or uncertain.
a. If average cost is increasing, marginal cost must be increasing.
b. If there are diminishing returns, the marginal cost curve must be positively sloped.
c. Marginal costs decrease as output increases because the firm can spread fixed costs over more units.

Perfect Competition and Monopoly

Multiple-Choice Questions

1) Which of the following markets comes closes to the model of perfect competition?
A) Automobile industry B) Information Technology industry
C) Aerospace industry D) Agriculture
2) A feature of Perfect Competition is

A) use of non-price competition by firms. B) mutual interdependence among firms.

C) unique products. D) standardized products.
3) Which is a required characteristic of a perfectly competitive industry?
A) There are few firms so that none can influence market price.
B) Products are highly differentiated.
C) Barriers to entry are high
D) None of the above
4) Which of the following characteristics is most important in differentiating between perfect
competition and all other types of markets?

A) whether or not the product is standardized

B) whether or not there is complete market information about price

8
 C) whether or not firms are price takers
D) All of the above are equally important.
5) Demand facing an individual, perfectly competitive firm is:
A) perfectly inelastic at the quantity the firm chooses to produce.
B) perfectly inelastic at the quantity determined by market forces.
C) perfectly elastic at the price the firm chooses to charge.
D) perfectly elastic at the price determined by market forces.
6) In perfect competition:
A) The firm’s demand curve is relatively inelastic
B) The firm’s demand curve is relatively inelastic
C) The firm’s demand curve is perfectly elastic
D) The firm’s demand curve is perfectly inelastic
7) For a demand curve that is horizontal, the marginal revenue curve:
A) will be to the right of the demand curve and half as steep.
B) will be to the left of the demand curve and half as steep.
C) will be to the right of the demand curve and twice as steep.
D) will be the same as the demand curve
8) According to the shutdown rule, a firm should produce no output in the short run if:
A) price is below minimum average total cost.
B) price is above minimum average total cost.
C) total revenues are lower than total fixed costs.
D) price is below minimum average variable costs.
9) Which of the following conditions would definitely cause a perfectly competitive company to
shut down in the short run?

A) P < MC B) P = MC < AC C) P < AVC D) P = MR

12) If a perfectly competitive firm incurs an economic loss, it should:

A) shut down immediately.

B) try to raise its price.
C) shut down in the long run.
D) shut down if this loss exceeds variable cost.
13) A perfectly competitive firm sells 15 units of output at the going market price of $10.
Suppose its average fixed cost is $15 and its average variable cost is $8. Its contribution
margin (i.e. contribution to fixed cost) is

A) $30.
B) $150.
C) $105.
D) Cannot be determined from the above information.
14) Mars Inc. produces 100,000 boxes of Snickers bars which sell for $4 a box. If variable
costs are $3 per box, and it has $150,000 fixed operating costs, in the short run, it should:
A) shut down as fixed costs are not being covered.
B) keep producing as profits are $50,000.
C) keep producing as variable costs are being met.
D) keep producing as total costs are being recovered
18). The principle marginal revenue equal-marginal-cost rule for maximizing profit:
A) Does not apply to firms in the monopoly or oligopolistic industries
B) Applies only for firm in perfect competition but not in monopolistic competition
C) Applies to new firms but not to existing firms in an industry
D) Applies to all the firms in all industries
19) Assume a profit maximizing firm's short-run cost is TC = 700 + 60Q. If its demand curve is
P = 300 - 15Q, what should it do in the short run?

A) shut down
B) continue operating in the short run even though it is losing money

9
 C) continue operating because it is earning an economic profit
D) Cannot be determined from the above information.
20) Assume a perfectly competitive firm's short-run cost is TC = 100 + 160Q + 3Q2. If the
market price is $196, what should it do?

A) produce 5 units and continue operating

B) produce 6 units and continue operating
C) produce zero units (i.e., shut down)
D) Cannot be determined from the above information.
21. Which of the following is false? A monopolist
A) will sell less at a higher price
B) has a marginal revenue that is less than the price.
C) will produce where MR = MC.
D) is a price taker
22). A monopolist sells 100 units at $10 per unit and 90 units at $15 per unit. The marginal
revenue from the tenth unit is:
A) $1000 B) $1350 C) $100 D) $350
23). For a demand curve that is downward sloping, the marginal revenue curve:
A) Will be to the left of the demand curve and half as steep.
B) Will be to the right of the demand curve and twice as steep.
C) Will be to the left of the demand curve and half as steep.
D) The same as the demand curve.
24). If an industry could be organized either perfectly competitively or as monopoly, a monopoly
would
A) Produce less output
B) Produce where P > MC
C) Charge higher prices.
D) All of the above
25) Which of the following correctly completes this statement? The monopolist’s marginal
revenue
A) will be greater than price
B) will be less than price
C) will be equal to price.
D) will be greater than total revenues
26) At the point at which P=MC, suppose that a perfectly competitive firm's MC = $100, its
AVC = $80 and its AC = $110. This firm should

A) shut down immediately.

B) continue operating in the short run.
C) try to take advantage of economies of scale.
D) try to increase its advertising and promotion.
27) When a firm produces at the point where MR = MC, the profit that it is earning is considered
to be

A) maximum. B) normal.
C) above normal. D) Not enough information is provided.
28) When a firm has the power to establish its price,

A) P = MR. B) P = MC. C) P > MR. D) P < MR.

29) When MR = MC,

A) marginal profit is maximized. B) total profit is maximized.

C) marginal profit is positive. D) total profit is zero.
30) In the short run, which of the following would indicate that a perfectly competitive firm is
producing an output for which it is receiving a normal profit?

10
 A) P > AC B) AVC < P < AC C) P = AC D) P = AVC
31) A firm that seeks to maximize its revenue is most likely to adhere to which of the following?

A) MR = MC B) MR =0 C) MR =P D) MR < MC
31) Which of the following is true for a monopoly?

A) P = MC B) P = MR C) P > MR D) P < MR
32) Which of the following is true about a monopoly?

A) Its demand curve is generally less elastic than in more competitive markets.
B) It will always earn economic profit.
C) It will always produce the same as a perfectly competitive firm.
D) It will always be subject to government regulation.
E) None of the above is true.
33) A monopoly will usually produce

A) where its demand curve is inelastic.

B) where its demand curve is elastic.
C) where its demand curve is either elastic or inelastic.
D) only when its demand curve is perfectly inelastic.
34) The main difference between the price-quantity graph of a perfectly competitive firm and a
monopoly is

A) that the competitive firm's demand curve is horizontal, while that of the monopoly is
downward sloping.
B) that a monopoly always earns an economic profit while a competitive company always
earns only normal profit.
C) that a monopoly maximizes its profit when marginal revenue is greater than marginal cost.
D) that a monopoly does not incur increasing marginal cost.
35) When the slope of the total revenue curve is equal to the slope of the total cost curve

A) monopoly profit is maximized.

B) marginal revenue equals marginal cost.
C) the marginal cost curve intersects the total average cost curve.
D) the total cost curve is at its minimum.
E) Both A and B
36) Monopoly is characterized by

A) unique products.
B) market entry and exit difficult or impossible.
C) non-price competition not necessary.
D) All of the above.
37) The fact that a perfectly competitive firm has a perfectly elastic demand curve means
A) there is no limit to the firm's profits. B) there is no limit to the firm's revenues.
C) that it can sell all it wants at any price. D) None of the above
38) In the short run a firm should shut down if it cannot

A) make normal profits. B) make economic profits.

C) cover its variable costs. D) cover its fixed costs.
39) Firms are 'price makers" if they

A) have sufficient market power to set their product price.

B) make the market price their product price.
C) make their product price competitive.
D) None of the above.
40) If a monopoly wants to maximize it profit, it should

11
A) produce in the range where its average costs are declining.
B) produce in the range where its demand curve is elastic.
C) produce in the range where its marginal costs are declining.
D) produce in the range where its marginal costs are less than its average costs.

12