Total utility can be objectively measured in numbers that
indicate usefulness or benefit to the consumer.
____ 2. Consumers should purchase quantities of a good to the
point where MU > P.
____ 3. Voluntary exchange requires that there must be mutual
____ 4. Points along a budget line represent the maximum
combinations of two commodities that a consumer can afford.
____ 5. The budget line represents a consumer's preferences
for a commodity.
____ 6. A change in consumer preferences will shift the budget
____ 7. Elasticity computations related to demand carry a
minus sign to show that the demand curve is negatively
____ 8. A vertical demand curve has an elasticity of demand
equal to zero.
____ 9. When the goods of competing companies are identical,
consumers have no reason to prefer one product over the other so
the demand curve for each manufacturer will be perfectly
____ 10. Total expenditure equals price times quantity.
____ 11. Elasticity of demand is likely to be higher for
less-expensive goods, other things being equal.
____ 12. Cross-elasticity of demand could be used to measure
the responsiveness of the quantity demanded of swimming pools to a
change in the price of picnic tables.
____ 13. Variable costs increase when output rises.
____ 14. In most businesses there is only one way to produce
____ 15. The average cost curve shows the total cost divided
by quantity produced for various levels of output.
____ 16. The average fixed cost curve increases as output
____ 17. For most industries, average costs decrease
indefinitely as output expands.
____ 18. Cost curves in the long run differ from cost curves
in the short run.
____ 19. The behavior of historical cost curves says nothing
about the cost advantages or disadvantages of a single large
____ 20. Economists assume that business firms attempt to
maximize their profits.
____ 21. Economists assume that business firms have many
goals, and profit maximization is just one of them.
____ 22. Total revenue is equal to quantity multiplied by
____ 23. Total revenue cannot be derived from the demand curve
or a demand schedule.
____ 24. It can be shown that average revenue and price are
____ 25. Average revenue is slightly higher than price.
____ 26. Marginal, average, and total figures are bound
together. If any two are known, the third can be calculated.
____ 27. The rule of equating marginal benefit with marginal
cost is proper for economics, but it does not describe the way in
which people make non-economic decisions.
____ 28. When a firm's fixed costs increase it should raise
its prices in order to maximize profits.
____ 29. In the case study discussed in the chapter, the
electronics firm was losing money by selling its calculators at a
price that was below average cost.
____ 30. Economists use a model that is a literal description
of business' behavior.
Multiple Choice 30%
Identify the choice that best completes the statement or
answers the question.
____ 31. Total utility can be thought of as the
a. total satisfaction derived from a bundle of goods.
b. minimum amount of money a consumer is willing to spend on a
bundle of goods.
c. additional satisfaction a consumer receives from the
marginal unit of a good.
d. willingness to pay for the marginal unit of a good.
____ 32. The marginal utility of a unit of good X
a. is always greater than the total utility of X.
b. is always less than the average utility of X.
c. generally depends on how much X the consumer already
d. is always equal to the price of X.
____ 33. Resolving Adam Smith's diamond-water puzzle
a. realizing that price is not directly related to total
b. knowing that at optimal purchase, price will tend to equal
c. knowing that, as increasing quantities of a good are
consumed, marginal utility diminishes and, conversely, consuming a
small quantity of a good produces high marginal utility.
d. All of the above are correct.
____ 34. Market demand curves are found by
a. vertically summing individual demand curves.
b. horizontally summing individual demand curves.
c. summing individual demand curves in a parallel
d. adding the slopes of individual demand curves.
____ 35. Assume the market consists of three consumers with
the demand curves in Figure 5-3. At a price of 1, the total market
____ 36. For a consumer to maximize utility, he will choose
a. point where the slope of the budget line equals the slope
of the indifference curve.
b. any point where the budget line and indifference curve
c. point where he gets the most of the good he prefers
d. point where the marginal rate of substitution is
e. the point where marginal utility is zero for both
____ 37. At $6 per steak, consumers are willing to buy two
steaks. At a price of $2, consumers are willing to buy six steaks.
The elasticity of the market demand curve between P = $6 and P = $2
(dropping all minus signs) is
____ 38. All of the following observations concerning the
elasticity formula are true except
a. the changes with which it deals is measured as a percentage
b. each of the percentage changes is calculated in terms of
the average values.
c. the calculation considers both positive and negative
d. each percentage change is taken as an "absolute
____ 39. In Figure 6-5, if price falls from point A to point B
along the unit-elastic demand curve,
a. total expenditure remains unchanged.
b. total expenditure increases.
c. total expenditure decreases.
d. total expenditure first increases and then declines.
____ 40. The price elasticity of a vertical demand curve is
a. infinitely large.
d. increasing as price increases.
____ 41. Along a perfectly elastic demand curve,
a. the slope is always zero.
b. the price elasticity of demand is 1.
c. consumer purchases will not respond at all to a change in
d. All of the above are true.
____ 42. A price cut will increase the revenue a firm receives
if the demand for its product is
c. of unit elasticity.
d. straight elastic.
____ 43. In an attempt to raise sales, Hannah cut prices in
her bookstore by 20 percent. If the dollar value of her sales
remained constant, that indicates
a. old customers bought no more books.
b. no new customers bought books.
c. the quantity of books sold increased 20 percent.
d. the demand curve is vertical.
____ 44. A demand curve to remain unit elastic along its
entire length should
a. cross the X axis.
b. touch the X axis but not the Y axis.
c. never touch either the X or the Y axis.
d. touch the Y axis but not the X axis.
____ 45. The demand for Exxon gasoline is ____ the demand for
a. exactly as elastic as, and of a different slope from
b. more elastic than
c. less elastic than
d. exactly as elastic and of a different slope from
____ 46. The demand for potatoes at current prices is likely
c. unit elastic.
d. perfectly elastic.
____ 47. The elasticity measure which has been employed by the
courts to assess the degree of market competition is
a. price elasticity of demand.
b. income elasticity of demand.
c. cross elasticity of demand.
d. inverse elasticity of demand.
____ 48. In which case will the transition from short run to
long run involve the shortest chronological time?
a. a service that provides temporary secretaries to
b. an automobile factory
c. a farm
d. an electric utility
____ 49. In August 1988, the Los Angeles Kings hired Wayne
Gretzky for $15 million in cash. The hockey team's decision must
have been based on the expectation that
a. Gretzky's opportunity cost will exceed $15 million.
b. Gretzky's marginal revenue product will equal or exceed $15
c. the team's total revenue will equal $15 million.
d. Gretzky's marginal revenue product will rise in the long
____ 50. Which of the graphs in Figure 7-5 could be a firm's
total fixed cost curve?
____ 51. Which of the following is a fixed cost?
b. worker bonuses
c. mortgage on the building
d. steel to produce refrigerators
____ 52. Which of the following is a fixed cost to farmer
____ 53. One reason why critics argue that large firms should
not be broken up is that in some cases
a. large firms have a concentration of economic power.
b. large firms are less-efficient producers.
c. many smaller firms would be less-efficient producers.
d. there is no economic reason to break up large firms that
may have some control over the market.
____ 54. If in some production range average cost is rising,
the firm is experiencing
a. increasing returns to scale.
b. decreasing returns to scale.
c. constant returns to scale.
d. increasing costs per unit of output.
____ 55. Joe and Ed go to a diner that sells hamburgers for $5
and hot dogs for $3. They agree to split the lunch bill evenly. Ed
chooses a hot dog. The marginal cost to Joe then of ordering a
hamburger instead of a hot dog is
____ 56. The demand curve facing Company ABC is perfectly
elastic. What is its marginal revenue?
a. Equal to the average revenue.
b. Less than the price.
c. Higher than the price.
d. Higher than the average revenue.
____ 57. The marginal cost of Alexa's Guide to Street People
and Their Pets is constant at $5. Alexa sells 5,000 copies per year
at $20 per copy. She would like to increase readership and hold
total profit constant. If the price goes to $15, how many copies
must she sell?
____ 58. When a firm's fixed cost rises, its total profit
a. up at every output level.
b. down at every output level.
c. left at every profit level.
d. right at every profit level.
Output (units) 0 1 2 3 4 5
Total Revenue ($) 0 9 16 21 27 31
Total Cost ($) 10 12 15 19 26 35
____ 59. At optimal output, the firm described in Table 8-1
sells its output at a price of
____ 60. An airline can profit by offering standby customers
an unsold seat at a substantial discount just before takeoff
a. additional passengers are needed to balance the load.
b. the marginal cost of additional passengers is very
c. additional passengers add little to fixed costs.
d. such passengers add more to profits than do those with
Essay Take-home 20% +Test in class March 27, 2018 20% Total of
Ice Cream Cones Total Utility
1. Using Table 5-3, graph the marginal utility curve.
2. The Sandy Deli operates near a college campus. It has been
selling 325 sandwiches a day at $1.75 each and is considering a
price cut. It estimates 450 sandwiches would sell per day at $1.50
each. Calculate the marginal revenue of such a price cut and the
elasticity between the two points.
3. The following table contains information regarding price
and output for a firm. For each point except the first, calculate
the elasticity between it and the point above.
Price Quantity Elasticity
$7 10 _____
6 20 _____
5 30 _____
4 40 _____
3 50 _____
2 60 _____
1 70 _____
4. What is an optimal decision?
5. If Polaroid wanted damages against Kodak for infringing on
its instant development film process, and the courts found a high
positive cross elasticity between purchases of Polaroid instant
film and 35mm regular film, would that have strengthened or
weakened Polaroid's claim against Kodak?
6. Differentiate between the short run and the long run.
7. "A producer wanting to employ optimal quantity of inputs
should choose the point where diminishing returns sets in." True or
8. A firm has $200,000 to spend on either direct sales or
advertising. Suppose further that if the $200,000 is spent on
direct sales, it will bring in an accounting profit of $40,000.
Instead, the (accounting) profit it could obtain from a $200,000
investment in advertising is $X. Compare the profitability of the
two options if (a) X = 50,000, (b) X = 30,000, or (c) X =