CMAPart1A (Mircoeconomics)

PART 1 A B. Market demand curve.
MICROECONOMI
193 QUES C. Pattern of costs in the long run.
[1] Source: CMA 1285 1-15 D. Law of diminishing returns.

In the short run, a purely competitive firm operating
at a loss will
[5] Source: CMA 1286 1-7
A. Shut down. If a rent control law in a competitive housing market
establishes a maximum or ceiling rent that is above
B. Continue to operate as long as price exceeds the
average variable costs. market or equilibrium rent,
C. Raise the price of its product. A. The law has no effect on the rental market.
D. Reduce the size of its plant to lower fixed costs. B. A surplus of rental housing units will result.
C. Supply will decrease as price increases.

[2] Source: CMA 1285 1-16
In an analysis of economic costs of Production, long D. Demand will increase as price increases.
run means
A. More than 1 year but less than 5 years. [6] Source: CMA 0687 1-1
The distribution of income among households in the
B. Five or more years. United States is primarily determined by
C. A period of time long enough to turn over top A. Transfer payments to households.
management.
B. Household purchases of goods and services.
D. A period of time long enough for the firm to
make all resource costs variable in nature. C. The ownership of factors of production.
D. Government taxes.
[3] Source: CMA 1285 1-17
The marginal utility of a good refers to
[7] Source: CMA 0687 1-12
A. The point at which the consumer's total utility is Local electric utilities are considered to be natural
maximized. monopolies because for these firms
B. The point at which the consumer's total utility is A. Supply curves are upward sloping.
minimized.
B. Demand curves are upward sloping.
C. The change in the amount of the good
consumed C. Average total costs never fall.
that increases total utility by one unit.
D. Significant economies of scale are present.
D. The change in total utility when consumption of
the
good increases by one unit. [8] Source: CMA 1287 1-2
If the demand for cigarettes in New York is relatively
elastic, and New York imposes high taxes on
[4] Source: CMA 1286 1-4 cigarettes
Economies and diseconomies of scale are important that result in higher cigarette prices, then in New
determinants of the York
A. Type of product demand faced by individual A. The quantity of cigarettes demanded would
firms. increase.
B. The demand for cigarettes would increase. good or service. The formula for the coefficient of
elasticity,
C. The demand curve for cigarettes would become E, is
vertical.
(relative change in quantity demanded)
D. Expenditures on cigarettes would fall. E = --------------------------------------
(relative change in price)
[9] Source: CMA 1287 1-5 [12] Source: CMA 1288 1-22
The quantity of output a competitive firm can supply (Refers to Fact Pattern #1)
at any price is determined in part by If the coefficient of elasticity is two, then the
consumer
A. Average household income. demand for the product is said to be
B. Consumer tastes and preferences. A. Perfectly inelastic.
C. Input prices. B. Elastic.
D. The distribution of income among households. C. Inelastic.
D. Unit elastic.
[10] Source: CMA 1287 1-10
In the economic theory of production and cost, the
short [13] Source: CMA 1288 1-23
run is defined to be a production process (Refers to Fact Pattern #1)
If the coefficient of elasticity is zero, then the
A. Which spans a time period of less than one year consumer
in demand for the product is said to be
length.
A. Perfectly inelastic.
B. In which both fixed and variable inputs are
employed. B. Elastic.
C. That is subject to economies of scale. C. Inelastic.
D. That always produces economic profits. D. Unit elastic.
Natural monopoly conditions, which often lead to All of the following are true about perfect
economic regulation, refer to competition
except that
A. Rising marginal costs.
A. There is free market entry without large capital
B. Elastic consumer demand for the product. costs for entry.
C. Declining average costs. B. There are many firms participating in the

market.
D. Consumer demand for the product that is
strongly C. In the long run, an increase in profit will have no
influenced by the business cycle. effect on the number of firms in the market.
D. Firms are price takers.

[Fact Pattern #1]
The theory of price elasticity of consumer demand is
helpful when a firm is determining price changes for [15] Source: CMA 1288 1-25
a consumer If the average household income increases and there
is
relatively little change in the price of a normal good,
then
the [19] Source: CMA 0689 1-21
The measurement of using resources now in lieu of
A. Supply curve will shift to the left. alternative uses of the resources is
B. Quantity demanded will move farther down the A. Economic efficiency.

demand curve.
B. Opportunity cost.
C. Demand will shift to the left.
C. Comparative advantage.
D. Demand curve will shift to the right.
D. Absolute advantage.
[16] Source: CMA 1288 1-29

All of the following are characteristics of [20] Source: CMA 0689 1-22
monopolistic The principle of substitution states that
competition except that
A. The costs of two factors of production are
A. The firms sell a homogeneous product. equal.
B. The firms tend not to recognize the reaction of B. Profit maximization is maintained while
competitors when determining prices. choosing
either factor of production.
C. Individual firms have some control over the
price C. The firm chooses more of the less expensive
of the product. factor of production.
D. The consumer demand curve is highly elastic. D. The firm chooses more of the more expensive
factor of production.
[17] Source: CMA 1288 1-30

The cyclical and seasonal fluctuations in consumer [21] Source: CMA 0689 1-24
demand for the products produced by an oligopoly When making a decision to increase the robotic
are automation equipment in an existing facility, a firm
characteristic of takes all of the following into consideration except
A. Differentiated products. A. Economies of scale.
B. Sticky prices. B. Opportunity cost.
C. Kinked demand curves. C. Technological efficiency.
D. Homogeneous products. D. The initial cost of the current facility.
The measurement that uses the factors of A decrease in the price of a complementary good
production as will
inputs in physical terms is
A. Shift the demand curve of the joint commodity
A. Economic efficiency. to
the left.
B. Opportunity cost.
B. Increase the price paid for a substitute good.
C. Technological efficiency.
C. Shift the supply curve of the joint commodity to
D. Comparative advantage. the left.
D. Shift the demand curve of the joint commodity B. Is perfectly elastic.
to
the right. C. Responds as an inferior good.
D. Is perfectly inelastic.
[23] Source: CMA 0689 1-29
If a product is part of the consumers' basket of
goods, and the Consumer Price Index increased 7% [27] Source: CMA 0690 1-20
for the year while the price of this normal good If oil producers and retailers were to increase the
increased 3%, then price of
gasoline for cars during the summer season by $.05
A. The supply curve will shift to the left. per
gallon, these suppliers anticipate that the demand
B. Neither the demand curve nor the supply curve for
will be affected. gasoline
C. The demand curve will shift to the right. A. Is relatively elastic.
D. The demand curve will shift to the left. B. Is relatively inelastic.
C. Responds as an inferior good.

[24] Source: CMA 1289 1-4
If the elasticity of demand for a normal good is D. Is perfectly inelastic.
estimated to be 1.5, a 10% reduction in its price
would cause
[28] Source: CMA 0690 1-21
A. Total revenue to fall by 10%. The Waymand family typically ate hamburger as a
staple in their diet. In the last few years, the family's
B. Total revenue to fall by 15%. income has
doubled, and they have now replaced hamburger
C. Quantity demanded to rise by 15%. with
steak as a staple in their diet. This is an example in
D. Demand to decrease by 10%. which
the demand for hamburger
[25] Source: CMA 1289 1-11 A. Is relatively elastic.

An industry that is oligopolistic would be best
characterized by B. Is perfectly elastic.
A. One firm selling a product with no close C. Is relatively inelastic.

substitutes.
D. Responds as an inferior good.
B. The absence of the profit-maximizing goal.
C. Significant barriers to entry. [29] Source: CMA 0690 1-22

Utility companies can ordinarily price their product,
D. Horizontal or flat demand curves for the output a good that establishes a comfortable life-style (i.e.,
of electricity, gas for home heating), based on the
individual firms. assumption that the demand
A. Is relatively elastic.
[26] Source: CMA 0690 1-19
If a normal good competes with three similar goods, B. Is perfectly elastic.
and all four goods give the consumer equal utils of
satisfaction, the demand for the normal good C. Is relatively inelastic.
A. Is relatively elastic. D. Is perfectly inelastic.

opportunity costs are not considered in calculating
net
[30] Source: CMA 0690 1-23 income.
The demand curve for a normal good is
B. More than its economic profits because
A. Upward sloping because firms produce more at economists do not consider interest payments to
higher prices. be
costs.
B. Upward sloping because higher-priced goods
are C. Equal to its economic profits.
of higher quality.
D. Less than its economic profits because
C. Vertical. accountants include labor costs, while economists
exclude labor costs.
D. Downward sloping because of the income and
substitution effects of price changes.
[34] Source: CMA 0690 1-29
The marginal cost curve is the supply curve for the
[31] Source: CMA 0690 1-24 firm in
Which one of the following changes will cause the
demand A. Pure monopoly.
curve for gasoline to shift to the left?
B. Monopolistic competition.
A. The price of gasoline increases.
C. Pure competition.
B. The supply of gasoline decreases.
D. Oligopoly.
C. The price of cars increases.
D. The price of cars decreases. [35] Source: CMA 0690 1-30

An improvement in technology that in turn leads to
improved worker productivity would most likely
[32] Source: CMA 0690 1-26 result in
Which one of the following examples best depicts
the law A. A shift to the right in the supply curve and a
of diminishing returns? lowering of the price of the output.
A. Small electric generating plants are less efficient B. A shift to the left in the supply curve and a
than large plants. lowering of the price of the output.
B. A manufacturing company purchases its C. An increase in the price of the output if demand
supplier is
of materials. unchanged.
C. An automobile assembly plant has lower per- D. Wage increases.

unit
costs at 85% of capacity than at 95% of capacity.
[36] Source: CMA 1290 1-1
D. Passenger airplanes operate at high costs per The existence of economic profit in pure monopoly
passenger when they fly half-empty. will
A. Have no influence on the number of firms in the

[33] Source: CMA 0690 1-27 industry.
A corporation's net income as presented on its
income B. Lead to a decline in the number of firms in the
statement is usually industry.
A. More than its economic profits because C. Lead to an increase in product supply.
D. Encourage firms to leave the industry.
D. Lead to a decline in market prices for
substitutes.
[41] Source: CMA 1290 1-6
Price ceilings
[37] Source: CMA 1290 1-2
Tennis rackets and tennis balls are A. Are illustrated by government price support
programs in agriculture.
A. Substitute goods.
B. Create prices greater than equilibrium prices.
B. Independent goods.
C. Create prices below equilibrium prices.
C. Inferior goods.
D. Result in persistent surpluses.
D. Complementary goods.
[42] Source: CMA 1290 1-7

[38] Source: CMA 1290 1-3 Entry into monopolistic competition is
Which one of the following is a characteristic of pure
competition? A. Blocked.
A. Mutual interdependence. B. Difficult, with significant obstacles.
B. Significant research and development programs. C. Rare, as significant capital is required.
C. Product differentiation. D. Relatively easy, with only a few obstacles.
D. Standardized product.
[43] Source: CMA 1290 1-8
The long-run average total cost curve
[39] Source: CMA 1290 1-4
Which one of the following statements about supply A. Is horizontal and parallel to the demand curve.
and
demand is true? B. Is strongly influenced by diminishing returns.
A. If supply increases and demand remains C. Is the same as the rising portion of the marginal
constant, cost curve.
equilibrium price will rise.
D. Is ordinarily U-shaped.
B. If demand increases and supply decreases,
equilibrium price will fall.
[44] Source: CMA 1290 1-10
C. If demand increases and supply increases, A normal profit is
equilibrium quantity will fall.
A. The same as an economic profit.
D. If demand increases and supply decreases,
equilibrium price will increase. B. The same as the accountant's bottom line.
C. An explicit or out-of-pocket cost.

[40] Source: CMA 1290 1-5
A government price support program will D. A cost of resources from an economic
perspective.
A. Lead to surpluses.
B. Lead to shortages. [45] Source: CMA 1290 1-9

Which one of the following is not a factor
C. Improve the rationing function of prices. contributing to
economies of scale?
A. Labor specialization. A. Agriculture market.
B. Use of by-products. B. Fast food industry.
C. Efficient use of capital equipment. C. Steel industry.
D. Diminishing returns. D. Auto industry.
A natural monopoly is Marginal revenue is
A. Identified with a one-firm industry with A. Equal to price in monopolistic competition.

significant
economies of scale and in which unit costs are B. The change in total revenue associated with
minimized. increasing prices.
B. An important part of the analysis of C. Greater than price in pure competition.

monopolistic
competition. D. The change in total revenue associated with
producing and selling one more unit.
C. Identified with an industry in which economies
of
scale are rapidly exhausted. [51] Source: CMA 1290 1-16
The kinked demand curve is associated with
D. Identified with an industry in which economies
of A. The analysis of agricultural markets.
scale are few and diseconomies are quickly
incurred. B. The analysis of monopolistic competition.
C. The analysis of pure competition.

[47] Source: CMA 1290 1-12
A high concentration ratio is D. The analysis of oligopoly.
A. An indicator of monopolistic power.

[52] Source: CMA 1290 1-17
B. An indicator of a highly competitive industry. If the price of apples declines and total revenue
received by
C. Consistent with the law of demand. the firm increases, the
D. Consistent with monopolistic competition. A. Demand for apples is elastic.
B. Demand for apples is inelastic.

[48] Source: CMA 1290 1-13
A supply curve illustrates the relationship between C. Elasticity of demand for apples is 1.0.
A. Price and quantity supplied. D. Elasticity of demand for apples is less than 1.0.
B. Price and consumer tastes.

[53] Source: CMA 1290 1-18
C. Price and quantity demanded. The firm's short-run supply curve is derived from the
D. Supply and demand. A. Average total cost curve.
B. Fixed cost curve.

[49] Source: CMA 1290 1-14
A good example of monopolistic competition is the C. Marginal cost curve.
D. Total cost curve. B. Lower prices for the product.
C. Greater tax revenues for the federal

[54] Source: CMA 0691 1-13 government.
If both the supply and the demand for a good
increase, the D. Higher prices for the product.
market price will
A. Rise only in the case of an inelastic supply [58] Source: CMA 0692 1-28
function. The sum of the average fixed costs and the average
variable costs for a given output is known as
B. Fall only in the case of an inelastic supply
function. A. Long-run average cost.
C. Not be predictable with only these facts. B. Average product.
D. Rise only in the case of an inelastic demand C. Total cost.

function.
D. Average total cost.
[55] Source: CMA 0691 1-14

Economic goods are considered scarce resources [59] Source: CMA 0692 1-29
because The change in total product resulting from the use of
they one
unit more of the variable factor is known as
A. Cannot be increased in quantity.
A. The point of diminishing average productivity.
B. Are not produced in adequate quantities.
B. Marginal product.
C. Do not exist in adequate quantities to satisfy all
demands for them. C. Marginal cost.
D. Are limited to man-made goods. D. The point of diminishing marginal productivity.
Economic rent is the total price paid for land and When long-run average cost is declining over a range
other of
natural resources when there is a(n) increasing output, the firm is experiencing
A. Completely elastic supply function. A. Increasing fixed costs.
B. Completely fixed total supply. B. Technological efficiency.
C. Fixed demand schedule. C. Decreasing returns.
D. Artificial market price. D. Economies of scale.
When the federal government imposes health and In any competitive market, an equal increase in both
safety demand and supply can be expected to always
regulations on certain products, one of the most
likely A. Increase both price and market-clearing
results is quantity.
A. Greater consumption of the product.

B. Decrease both price and market-clearing B. Decreases when consumption expands.
quantity.
C. Explains why short-run supply curves are
C. Increase market-clearing quantity. upward
sloping.
D. Increase price.
D. Increases as more units of a variable input are
added to the production process.
[62] Source: CMA 1292 1-2
A perfectly inelastic supply curve in a competitive
market [66] Source: CMA 1292 1-6
In the short run, the supply curve in a competitive
A. Implies a vertical demand curve. market
shows a positive relationship between price and
B. Exists when firms cannot vary input usage. quantity
supplied because
C. Implies a horizontal market supply curve.
A. Consumers will only buy more of a product at a
D. Can exist only in the long run. higher price.
B. Of the law of diminishing returns.

[63] Source: CMA 1292 1-3
Government price regulations in competitive C. As the size of a business firm increases, price
markets that must
set maximum or ceiling prices below the equilibrium rise.
price
will in the short run D. Increases in output imply a shift in consumer
preferences, allowing a higher price.
A. Cause demand to decrease.
B. Cause supply to increase. [67] Source: CMA 1292 1-7

Because of the existence of economies of scale,
C. Create shortages of that product. business
firms may find that
D. Produce a surplus of the product.
A. Each additional unit of labor is less efficient
than
[64] Source: CMA 1292 1-4 the previous unit.
In competitive product markets, equilibrium price in
the B. As more labor is added to a factory, increases in
long run is output will diminish in the short run.
A. A fair price all consumers can afford. C. Increasing the size of a factory will result in
lower
B. Set equal to the total costs of production. average costs.
C. Set equal to the total fixed costs of production. D. Increasing the size of a factory will result in
lower
D. Set equal to the marginal costs of production. total costs.
In the theory of demand, the marginal utility per When compared with firms in perfectly competitive
dollar of a markets, monopolists ordinarily
product
A. Use more advertising to increase sales.
A. Increases when consumption expands.
B. Charge a higher price and produce a higher rate D. Require cartel members to restrict output.
of
output.
[72] Source: CMA 1292 1-12
C. Use more capital and less labor to avoid The definition of economic cost is
problems
with workers. A. All the dollar costs employers pay for all inputs
purchased.
D. Charge a higher price and produce a lower rate
of B. The opportunity cost of all inputs minus the
output. dollar
cost of those inputs.
[69] Source: CMA 1292 1-9 C. The difference between all implicit and explicit
Economic markets that are characterized by costs of the business firm.
monopolistic
competition have all of the following characteristics D. The sum of all explicit and implicit costs of the
except business firm.
A. One seller of the product.

[73] Source: CMA 1292 1-13
B. Economies or diseconomies of scale. In a competitive market for labor in which demand
is
C. Advertising. stable, if workers try to increase their wage,
D. Heterogeneous products. A. Employment must fall.
B. Government must set a maximum wage below

[70] Source: CMA 1292 1-10 the
When markets are perfectly competitive, consumers equilibrium wage.
A. Are able to avoid the problem of diminishing C. Firms in the industry must become smaller.
returns.
D. Product supply must decrease.
B. Have goods and services produced at the lowest
cost in the long run.
[74] Source: CMA 1292 1-14
C. Do not receive any consumer surplus unless The distinguishing characteristic of oligopolistic
producers choose to overproduce. markets is
D. Must search for the lowest price for the A. A single seller of a homogeneous product with
products no
they buy. close substitute.
B. A single seller of a heterogeneous product with

[71] Source: CMA 1292 1-11 no
The manner in which cartels set and maintain price close substitute.
above
the competitive market price is to C. Lack of entry and exit barriers in the industry.
A. Avoid product differentiation in order to D. Mutual interdependence of firm pricing and

decrease output
demand for the product. decisions.
B. Advertise more so market demand increases.

[75] Source: CMA 1292 1-15
C. Increase costs so price must rise. In microeconomics, the distinguishing characteristic
of the
long run on the supply side is that
A. An increase in the product price to make up lost
A. Only supply factors determine price and output. revenue.
B. Only demand factors determine price and B. A decrease in the demand for the product.
output.
C. An increase in product supply because of
C. Firms are not allowed to enter or exit the increased availability.
industry.
D. That demand for the product would become
D. All inputs are variable. completely inelastic.
Any business firm that has the ability to control the In markets that are imperfectly competitive, such as
price of monopoly and monopolistic competition, firms
the product it sells produce at
an output at which
A. Faces a downward-sloping demand curve.
A. Price equals marginal cost.
B. Has a supply curve that is horizontal.
B. Average costs are minimized.
C. Has a demand curve that is horizontal.
C. Price equals average cost.
D. Will sell all output produced.
D. Marginal cost equals marginal revenue.
[77] Source: CMA 1292 1-18

The competitive model of supply and demand [81] Source: CMA 1293 1-29
predicts that Price tends to fall in competitive markets when
a surplus can arise only if there is a there is a(n)
A. Maximum price above the equilibrium price. A. Increase in demand for the product.
B. Minimum price below the equilibrium price. B. Decrease in quantity demanded of the product.
C. Maximum price below the equilibrium price. C. Decline in available labor.
D. Minimum price above the equilibrium price. D. Increase in interest rates.
A natural monopoly exists because Product demand becomes more elastic the
A. The firm owns natural resources. A. Greater the number of substitute products
available.
B. The firm holds patents.
B. Greater the consumer income.
C. Economic and technical conditions permit only
one efficient supplier. C. Greater the elasticity of supply.
D. The government is the only supplier. D. Higher the input costs.
If a group of consumers decide to boycott a In relation to the laws of supply and demand, an
particular increase in
product, the expected result would be supply will
A. Increase the equilibrium price and the A. Total cost.
equilibrium
quantity exchanged. B. Total variable cost.
B. Decrease the equilibrium price and the C. Average fixed costs.

equilibrium
quantity exchanged. D. Marginal cost.
C. Increase the equilibrium price and decrease the

equilibrium quantity exchanged. [87] Source: CMA 1289 1-9
Because of economies of scale, as output from
D. Decrease the equilibrium price and increase the production
equilibrium quantity exchanged. expands,
A. The short-run average cost of production

[84] Source: CMA 1288 1-28 decreases.
A characteristic of a monopoly is that
B. The long-run average cost of production
A. A monopoly will produce when marginal increases.
revenue
is equal to marginal cost. C. The long-run total cost decreases.
B. There is a unique relationship between the D. The slope of the demand curve increases.
market
price and the quantity supplied.
[88] Source: CMA 0694 1-2
C. In optimizing profits, a monopoly will increase An indifference curve represents
its
supply curve to where the demand curve becomes A. All possible combinations of two different
inelastic. product
quantities that a producer would be willing to sell.
D. There are multiple prices for the product to the
consumer. B. All possible combinations of two different
product
quantities that will yield the same level of
[85] Source: CMA 1289 1-7 satisfaction
If a firm currently producing 500 units of output to the consumer.
incurs total
fixed costs of $10,000 and total variable costs of C. Combinations of two different product
$15,000, quantities
the average total cost per unit is that are possible, given a consumer's income and
the
A. $20. prices of the two products.
B. $30. D. A consumer's indifference between varying

levels
C. $50. of income and price changes.
D. $25.
[89] Source: CMA 0694 1-3
As the price for a particular product changes, the
[86] Source: CMA 1289 1-8 quantity
In the short run in perfect competition, a firm of the product demanded changes according to the
maximizes following schedule.
profit by producing the rate of output at which the
price is Total Quantity Price
equal to Demanded per Unit
-------------- -------- D. Razors and razor blades.
100 $50
150 45
200 40 [93] Source: CMA 1294 1-6
225 35 An oligopolist faces a "kinked" demand curve. This
230 30 terminology indicates that
232 25
The price elasticity of demand for this product when A. When an oligopolist lowers its price, the other
the firms in the oligopoly will match the price
price decreases from $50 to $45 is reduction,
but if the oligopolist raises its price, the other
A. 0.20 firms
will ignore the price change.
B. 10.00
B. An oligopolist faces a non-linear demand for its
C. 0.10 product, and price changes will have little effect on
demand for that product.
D. 3.80
C. An oligopolist can sell its product at any price,
but
[90] Source: CMA 0694 1-6 after the "saturation point," another oligopolist
If a product's demand is elastic and there is a will
decrease in lower its price and, therefore, shift the demand
price, the effect will be curve
to the left.
A. A decrease in total revenue.
D. Consumers have no effect on the demand curve,
B. No change in total revenue. and an oligopolist can shape the curve to optimize
its
C. A decrease in total revenue and the demand own efficiency.
curve
shifts to the left.
[94] Source: CMA 1294 1-7
D. An increase in total revenue. In the pharmaceutical industry where a diabetic
must have
insulin no matter what the cost and where there is
[91] Source: CMA 0694 1-13 no other
The movement along the demand curve from one substitute, the diabetic's demand curve is best
price-quantity combination to another is called a(n) described as
A. Change in demand. A. Perfectly elastic.
B. Shift in the demand curve. B. Perfectly inelastic.
C. Change in the quantity demanded. C. Elastic.
D. Increase in demand. D. Inelastic.
All of the following are complementary goods except Monopolistic competition is characterized by
A. Margarine and butter. A. A relatively large number of sellers who

produce
B. Cameras and rolls of film. differentiated products.
C. VCRs and video cassettes. B. A relatively small number of sellers who

produce
differentiated products. Which one of the following is not a key assumption
of
C. A monopolistic market where the consumer is perfect competition?
persuaded that there is perfect competition.
A. Firms sell a homogeneous product.
D. A relatively large number of sellers who
produce a B. Customers are indifferent about which firm they
standardized product. buy from.
C. The level of a firm's output is small relative to

If a product has a price elasticity of demand of 2.0, industry's total output.
the
demand is said to be D. Each firm can price its product above the
industry
A. Perfectly elastic. price.
B. Perfectly inelastic.
[100] Source: CMA 0695 1-18
C. Elastic. A market with many independent firms, low barriers
to
D. Inelastic. entry, and product differentiation is best classified as
A. A monopoly.
[97] Source: CMA 0695 1-15
Demand for a product tends to be price inelastic if B. Monopolistic competition.
A. The product is considered a luxury item. C. An oligopoly.
B. Few good complements for the product are D. Pure competition.

available.
C. The population in the market area is large. [101] Source: CMA 0695 1-19
Which one of the following would cause the demand
D. Few good substitutes are available for the curve
product. for a normal good to shift to the left?
A. A rise in the price of a substitute product.

[98] Source: CMA 0695 1-16
Which one of the following statements is not true of B. A rise in average household income.
indifference curves?
C. A rise in the price of a complementary
A. Indifference curves slope downward to the commodity.
right,
indicating goods are substitutable. D. A change in consumers' tastes in favor of the
commodity.
B. Indifference curves indicate that more goods are
preferable to fewer goods.
[102] Source: CMA 0695 1-20
C. The marginal utility of a good decreases as An increase in the market supply of beef would
consumption of the good increases. result in
a(n)
D. Indifference curves cross at their equilibrium
point. A. Increase in the price of beef.
B. Decrease in the demand for beef.

[99] Source: CMA 0695 1-17
C. Increase in the price of pork.
[106] Source: CMA 1285 1-18
D. Increase in the quantity of beef demanded. In preparing a cost-volume-profit analysis for his
candle
manufacturing business, Joe Stark is considering
[Fact Pattern #2] raising his
prices $1.00 per candle. Stark is worried about the
Number of Total Average impact
Workers Product Units Selling Price the increase will have on his volume of sales at craft
--------- ------------- ------------- fairs.
10 20 $50.00 Stark is concerned about the
11 25 49.00
12 28 47.50 A. Elasticity of demand.
[103] Source: CMA 1295 1-17 B. Substitution effect.

(Refers to Fact Pattern #2)
The marginal physical product when one worker is C. Nature of supply.
added
to a team of 10 workers is D. Maximization of utility.
A. 1 unit.
[107] Source: CMA 0696 1-3
B. 8 units. Which one of the following statements concerning
pure
C. 5 units. monopolies is correct?
D. 25 units. A. The demand curve of a monopolist is perfectly

elastic.
[104] Source: CMA 1295 1-18 B. The price at which a monopolist maximizes its
(Refers to Fact Pattern #2) profit is where price equals both marginal cost and
The marginal revenue per unit when one worker is marginal revenue.
added
to a team of 11 workers is C. A monopolist's marginal revenue curve lies
below
A. $35.00 its demand curve.
B. $225.00 D. For a monopolist, there is a unique relationship

between the price and the quantity supplied.
C. $105.00
D. $47.50 [108] Source: CMA 0696 1-4

The law of diminishing marginal utility states that
[105] Source: CMA 1295 1-19 A. Marginal utility will decline as a consumer
(Refers to Fact Pattern #2) acquires
The marginal revenue product when one worker is additional units of a specific product.
added
to a team of 11 workers is B. Total utility will decline as a consumer acquires
additional units of a specific product.
A. $42.00
C. Declining utils cause the demand curve to slope
B. $225.00 upward.
C. $105.00 D. Consumers' wants diminish with the passage of

time.
D. $47.50
[109] Source: CMA 0696 1-5

If a product has a price elasticity of demand of 2.0,
the [113] Source: CMA 1296 1-2
demand is considered to be Compared with firms in a perfectly competitive
market, a
A. Perfectly elastic. monopolist tends to
B. Perfectly inelastic. A. Produce substantially less but charge a higher

price.
C. Relatively elastic.
B. Produce substantially more and charge a higher
D. Relatively inelastic. price.
C. Produce the same output and charge a higher

[110] Source: CMA 0696 1-6 price.
If a diabetic must have insulin no matter what the
cost, the D. Produce substantially less and charge a lower
diabetic's demand is considered to be price.
A. Perfectly elastic.
[114] Source: CMA 1296 1-3
B. Perfectly inelastic. Which one of the following statements concerning
pure
C. Relatively inelastic. monopolies is correct?
D. Indifferent. A. The demand curve of a monopolist is perfectly

elastic.
[111] Source: CMA 0696 1-7 B. The point of profit maximization for a monopoly
Monopolistic competition is characterized by is
where average total revenue equals average total
A. A relatively large group of sellers who produce cost.
differentiated products.
C. The monopolist's marginal revenue curve lies
B. A relatively small group of sellers who produce below the monopolist's demand curve.
differentiated products.
D. The supply curve of a monopoly is perfectly
C. A monopolistic market where the consumer is inelastic.
persuaded that there is perfect competition.
D. A relatively large group of sellers who produce a [115] Source: CMA 1296 1-4
homogeneous product. In the long run, a firm may experience increasing
returns
due to
[112] Source: CMA 1296 1-1
If the federal government regulates a product or A. Law of diminishing returns.
service in a
competitive market by setting a maximum price B. Opportunity costs.
below the
equilibrium price, what is the long-run effect? C. Comparative advantage.
A. A surplus. D. Economies of scale.
B. A shortage.
[116] Source: CMA 1296 1-19
C. A decrease in demand. Natural monopoly conditions, which often lead to
governmental regulation, exist when
D. No effect on the market.
A. Consumer demand for a product is perfectly
elastic.
[119] Source: CMA 0697 1-2
B. Marginal costs are rising. (Refers to Fact Pattern #3)
The market structure Karen Parker is attempting to
C. Consumer demand is inversely related to the enter is
business cycle. best described as
D. Total average costs are declining. A. A natural monopoly.
B. A cartel.
[117] Source: CMA 1296 1-27
A horizontal merger is best defined as a merger of C. An oligopoly.
A. Two or more firms in the same industry. D. Monopolistic competition.
B. A manufacturing company and its supplier.

[120] Source: CMA 0697 1-3
C. Two or more firms in different industries. The local video store's business increased by 12%
after the
D. Two or more firms in different stages of the movie theater raised its prices from $6.50 to $7.00.
production process. This is
an example of
[Fact Pattern #3] A. Substitute goods.

Karen Parker wants to establish an environmental
testing B. Superior goods.
company that would specialize in evaluating the
quality of C. Complementary goods.
water found in rivers and streams. However, Parker
has D. Public goods.
discovered that she needs either certification or
approval
from five separate local and state governmental [Fact Pattern #4]
agencies
before she can commence business. Also, the Total Units Average Average Average
necessary of Product Fixed Cost Variable Cost Total Cost
equipment to begin would cost several million ----------- ---------- ------------- -----------
dollars. 6 $15.00 $25.00 $40.00
Nevertheless, Parker believes that if she is able to 7 12.86 24.00 36.86
obtain 8 11.25 23.50 34.75
capital resources, she can gain market share from 9 10.00 23.75 33.75
the two
major competitors. [121] Source: CMA 0697 1-4
[118] Source: CMA 0697 1-1 The total cost of producing seven units is
The large capital outlay necessary for the equipment A. $90.02
is an
example of a(n) B. $168.00
A. Entry barrier. C. $258.02
B. Minimum efficient scale. D. $280.00
C. Created barrier.
[122] Source: CMA 0697 1-5
D. Production possibility boundary. (Refers to Fact Pattern #4)
The marginal cost of producing the ninth unit is
Which one of the following examples best describes
A. $23.50 a
vertical merger?
B. $23.75
A. A grocery store buying another grocery store in
C. $25.75 the same market.
D. $33.75 B. A grocery store buying another grocery store in

a
state where the first company does not do
[123] Source: CMA 0697 1-6 business.
Long Lake Golf Course has raised greens fees for a
nine-hole game due to an increase in demand. C. A hot dog producer buying a soft drink
manufacturer.
Average Average
Games Games D. A brewer buying a glass company.
Played Played
Previous New at Previous at New
Rate Rate Rate Rate [126] Source: Publisher
-------- ---- ----------- -------- The output and cost information for a firm is
Regular presented
weekday $10 $11 80 70 below.
Senior citizen 6 8 150 82
Weekend 15 20 221 223 Output Total Variable Cost Total Cost
Which one of the following is correct? ------ ------------------- ----------
0 $-0- $100
A. The regular weekday and weekend demand is 1 $150 $250
inelastic. 2 $260 $360
3 $350 $450
B. The regular weekday and weekend demand is The marginal cost of the second unit of output is
elastic.
A. $100
C. The senior citizen demand is elastic, and
weekend B. $110
demand is inelastic.
C. $150
D. The regular weekday demand is inelastic, and
weekend demand is elastic. D. $180
[124] Source: CMA 0697 1-17 [127] Source: Publisher

Patents are granted in order to encourage firms to A company operating in a perfectly competitive
invest in market has
the research and development of new products. been paying $10 per hour for labor and $20 per hour
Patents are to
an example of rent a piece of capital equipment. The firm can use
labor
A. Vertical integration. and capital in any desired proportions to produce its
product. If wages rise to $20 per hour and capital
B. Market concentration. equipment rentals rise to $22 per hour, in the long
run the
C. Entry barriers. firm will
D. Collusion. A. Use relatively more equipment and relatively

less
labor in its production.
[125] Source: CMA 0697 1-18
B. Use relatively more labor and relatively less
equipment in its production.
C. Use less of both labor and equipment in its [130] Source: Publisher
production, but in the same proportions as before. (Refers to Fact Pattern #5)
Which company had the highest accounting income?
D. Lower its average equipment-output ratio and
raise its average labor-output ratio. A. Company A.
B. Company B.
[128] Source: Publisher
If the price elasticity of demand for a normal good is C. Company C.
estimated to be 2.5, a 5% reduction in its price
causes D. Two were equal.
A. Total revenue to fall by 5%.

B. Total revenue to fall by 12.5%. Below are the grocers' demand schedules for Palm
Valley
C. Quantity demanded to rise by 12.5%. Grapes. Assuming that John, Towny, and Dorothea
are the
D. Quantity demanded to decrease by 5%. only three customers of Palm Valley Grapes, which
of the
following sets of prices and output levels will be on
[Fact Pattern #5] the
Companies A, B, and C had the following results for market demand curve?
last
year as reported on financial statements prepared in Price John Towny Dorothea
conformity with generally accepted accounting of Grapes Q Q Q
principles: dx dx dx
--------- ---- ----- --------
A B C $6 0 1 0
--------- --------- --------- 5 1 2 0
Sales $100,000 $200,000 $400,000 4 2 4 0
Cost of goods sold 60,000 120,000 200,000 3 3 6 1
Gross profit 40,000 80,000 200,000 2 4 8 2
Other expenses 10,000 20,000 80,000 1 5 9 3
--------- --------- --------- A. ($6, 2); ($1, 17)
Net income $ 30,000 $ 60,000 $120,000
========= ======== ======== B. ($5, 3); ($1, 17)
Shareholders'
equity $500,000 $300,000 $900,000 C. ($4, 4); ($2, 12)
[129] Source: Publisher D. ($4, 0); ($1, 9)

Assets are equal to shareholders' equity. The
company has [132] Source: Publisher
no long-term debt outstanding. The cost of Last week, the quantity of apples demanded fell
internally-generated equity capital is 12%. Which from
company 51,500 units per week to 48,500 units per week. If
had the highest economic profit? this
was a result of a 10% price increase, what is the
A. Company A. price
elasticity of demand for apples?
B. Company B.
A. 1.67
C. Company C.
B. 1.06
D. Cannot be determined from information given.
C. 0.16
D. $10 - $6
D. 0.60

[133] Source: Publisher If Tonya used $10,000 from her savings account,
The amount of boysenberries demanded for the which
third was paying 5% interest annually, to invest in a
quarter rose from 1,250 units to 1,750 units from saloon, the
last year. opportunity cost of this investment would annually
This was due to a decrease in price from $1.25 to be
$0.75
per unit. Therefore, the price elasticity of A. $500
boysenberries is
B. The dividend paid by the coffee shop.
A. 1/3
C. $10,000
B. 3/2
D. $10,500
C. 1
D. 2/3 [Fact Pattern #6]

Gator Company is selling in a purely competitive
market
[134] Source: Publisher and has the following cost data.
Suppose the price of mood rings rises from $3 to $4
when Average Average Average
the quantity demanded of mood rings decreases Fixed Variable Total Marginal
from Output Cost Cost Cost Cost
1,000 to 900. What would be the price elasticity of ------ ------- -------- -------- --------
demand coefficient? 1 $600 $100 $700 $100
2 300 75 375 50
A. 3.00 3 200 70 270 60
4 150 73 223 80
B. 2.71 5 120 70 190 110
6 100 90 190 190
C. 0.37 7 86 105 191 200
8 76 119 195 230
D. 0.33 9 67 138 205 290
10 60 160 220 360
[135] Source: Publisher [137] Source: Publisher

Demand price is inelastic in which range of the (Refers to Fact Pattern #6)
following If the market price for Gator's product is $190, this
demand schedule? firm
should produce
Price Quantity Demanded
----- ----------------- A. 5 units at an economic loss of $70.
$22 100
18 200 B. 6 units and break even.
14 400
10 600 C. 8 units and break even.
6 800
A. $22 - $18 D. 8 units at an economic profit of $74.
B. $18 - $14
C. $14 - $10 (Refers to Fact Pattern #6)
If the market price for Gator's product is $290, this
firm [Fact Pattern #7]
should produce Holly, a horseshoe maker, has collected the following
data
A. 7 units at an economic profit of $707. regarding the local market for full sets of
horseshoes.
B. 8 units at an economic profit of $760.
Horseshoe Sets Horseshoe Sets
C. 9 units at an economic profit of $765. Price Demanded Supplied
----- -------------- --------------
D. 10 units at an economic profit of $700. $30 400 180
33 375 250
36 350 290
[139] Source: Publisher 39 320 320
(Refers to Fact Pattern #6) 42 285 345
An equilibrium price will be set at 45 235 395
A. $110 [142] Source: Publisher

B. $190 The market has an equilibrium price for horseshoes
of
C. $200
A. $30
D. $230
B. $33
[140] Source: Publisher C. $36

(Refer to Figure 1.) If a legal price floor of $3.00 is
declared in the diagram, what will be the result? D. $39
A. A surplus of 20 units.
B. A surplus of 10 units. (Refers to Fact Pattern #7)
At each price, there is a 60 unit decrease in the
C. A shortage of 20 units. number of
horseshoes supplied for every increase in the cost of
D. A shortage of 10 units. labor.
Therefore, the market has a new equilibrium price
for
[141] Source: Publisher horseshoes of
While walking around a yard sale, Jimbo happened
upon a A. $36
bicycle that he personally valued at $55. Jimbo was
able to B. $39
purchase the bicycle for $30, even though it was
only 2 C. $42
years old and originally sold for $100. What is
Jimbo's D. $45
consumer surplus?
A. $70 [144] Source: Publisher

B. $15 Assume the supply stays as shown in the previous
table,
C. $45 and the quantity of horseshoes demanded at each
price
D. $25 increase by 160 units. What will be the new
equilibrium
quantity?
[Fact Pattern #8]
A. 510 Rock Salt, Inc. has collected the following
information
B. 480 regarding the current market for rock salt.
C. 445 Salt Salt Supplied

Demanded Price (pounds)
D. 395 -------- ----- -------------
2,000 $44 8,000
2,500 42 7,000
[145] Source: Publisher 3,000 40 6,000
When a 5% fall in the price of velcro shoes causes 3,500 38 5,000
the 4,000 36 4,000
quantity demanded to increase by 10%, the demand 4,500 34 3,000
for
velcro shoes is said to be [148] Source: Publisher
A. Perfectly inelastic. What would equilibrium price and quantity be?
B. Elastic. A. $40 and 6,000 pounds.
C. Unit elastic. B. $38 and 3,500 pounds.
D. Inelastic. C. $36 and 4,000 pounds.
D. $34 and 3,000 pounds.

Suppose that a stairway manufacturer's price
elasticity of [149] Source: Publisher
demand was inelastic. If this manufacturer decided (Refers to Fact Pattern #8)
to What would occur if a legal price floor were set at
increase the price of its stairways, what should have $42?
been
the result? A. Shortage of 6,000 pounds.
A. Total revenues decreased. B. Surplus of 6,000 pounds.
B. Total revenues increased. C. Shortage of 4,500 pounds.
C. Total revenues remain unchanged. D. Surplus of 4,500 pounds.
D. Total revenues were perfectly inelastic.

Suppose a customer is deciding between purchasing
[147] Source: Publisher product X and product Y. The marginal utility of
(Refer to Figure 8.) In the diagram, points J and K product X
have a is 30 and its price is $10. The marginal utility of
price elasticity of supply between them of what? product Y
is 45 and its price is $20. In agreement with the
A. 1.33 utility-maximizing rule, the consumer should
B. .75 A. Increase consumption of product Y and

decrease
C. .40 consumption of product X.
D. 2.50 B. Increase consumption of product Y and increase

consumption of product X.
C. Increase consumption of product X and [153] Source: Publisher
decrease (Refers to Fact Pattern #9)
consumption of product Y. If the consumer's income is increased from $18 to
$24 and
D. Make no change in consumption of product X or the consumer wishes to maximize utility, then the
Y. consumer
will purchase
[Fact Pattern #9] A. 6M and 3N.

The following table shows the marginal-utility
schedules for B. 8M and 2N.
goods M and N for a consumer. The price of good M
is C. 2M and 5N.
$2, and the price of good N is $4. The income of the
consumer is $18. D. 4M and 4N.
Good M Good N
-------------- -------------- [154] Source: Publisher
Quantity MU Quantity MU The prices of A and B are $5 and $4, respectively.
-------- -- -------- -- The
1 8 1 10 consumer is spending her entire income buying 5
2 7 2 8 units of A
3 6 3 6 and 7 units of B. The marginal utility of both the
4 5 4 4 fifth unit of
5 4 5 3 A and the seventh unit of B is 3. It follows that
6 3 6 2
7 2 7 1 A. The consumer is in equilibrium.
8 1 8 0
B. The consumer should buy more of A and less of
[151] Source: Publisher B.
If the consumer wishes to maximize utility, then the C. The consumer should buy less of A and more of
consumer will purchase B.
A. 7M and 1N. D. The consumer should buy less of both A and B.
B. 5M and 2N.
C. 3M and 3N. Jim is satisfying his hunger by consuming two
desserts, pies
D. 1M and 4N. and cakes. If the marginal utility of a pie is half that
of a
cake, what is the price of a pie if the price of a cake
[152] Source: Publisher is
(Refers to Fact Pattern #9) $8.00?
If the consumer wishes to maximize utility, then
total utility A. $4.00
will equal
B. $8.00
A. 24
C. $12.00
B. 36
D. $16.00
C. 48
D. Cannot be determined. [Fact Pattern #10]

Following are total utility data for tapes and CDs. If a firm's fixed costs are $500, and its average
Assume variable
that the prices of tapes and CDs are $9 and $12, costs stay constant despite various levels of output,
respectively, and that consumer income is $54. which
of the following must be true?
Units of Units of
Tapes Total Utility CDs Total Utility A. Marginal cost will equal average total cost.
-------- ------------- -------- -------------
1 9 1 16 B. Marginal cost will be less than average variable
2 15 2 28 cost.
3 19 3 36
4 21 4 40 C. Average total cost will decrease when output is
5 22 5 42 increased.
[156] Source: Publisher D. Average total cost will be constant.

How many of each product will the consumer buy?
A. 1 tape and 4 CDs. For a firm, capital costs $10 per unit and labor costs
$5
B. 2 tapes and 2 CDs. per unit. If the marginal product of labor is 10 and
the
C. 2 tapes and 3 CDs. marginal product of capital is 5, the firm should
D. 3 tapes and 3 CDs. A. Employ less capital and more labor.
B. Employ more capital and less labor.

(Refers to Fact Pattern #10) C. Employ less capital and labor.
What is the consumer's total utility at the
equilibrium point? D. Employ more capital and labor.
A. 47
B. 51 Ekin Inc. has always used 100 units of capital and
100
C. 55 units of labor to produce 10 automobiles. Recently,
Ekin
D. 61 has decided to double both inputs. This increase in
production has resulted in the production of 15
more
[158] Source: Publisher automobiles. Ekin is experiencing
If the price of tapes decreases to $6, then the A. Decreasing returns.
consumer
will purchase B. Constant returns.
A. 4 tapes and 2 CDs. C. Increasing returns.
B. 2 tapes and 4 CDs. D. Diseconomies of scale.
C. 3 tapes and 3 CDs.

D. 4 tapes and 4 CDs. Microhard Technologies has always used 100 units of
labor and 100 units of capital to produce 10
keyboards.
[159] Source: Publisher Recently, Microhard has decided to double both
inputs.
This increase in production has resulted in increasing C. $250
the
outputs from 10 units to 18 units. Microhard is D. $600
experiencing
A. Increasing returns. [165] Source: Publisher

B. Decreasing returns. Civic has an average total cost when 4 units of
output are
C. Economies of scale. produced of
D. Constant returns. A. $150
B. $250
During the previous year, Morrison Inc. produced C. $400
200,000
pogo sticks and sold them all for $10 each. The D. $600
explicit
costs of production were $700,000, and the implicit
costs [166] Source: Publisher
of production were $200,000. The firm had an (Refers to Fact Pattern #11)
accounting Civic's marginal cost of the seventh unit of output is
profit of
A. $100
A. $1.1 million and economic profit of $0.
B. $300
B. $1.3 million and economic profit of $1.1 million.
C. $400
C. $1.3 million and economic profit of $1.3 million.
D. $1,000
D. $1.3 million and economic profit of $1.5 million.

[Fact Pattern #11] When a firm produces 10,000 units of output, its
The fixed cost of Civic Co. is $1,000, and Civic's total total
variable cost is indicated in the table. variable cost is equal to $50,000. Also, it experiences
average fixed costs of $3 per unit. What are the total
Output Total Variable Cost costs
------ ------------------- for producing 10,000 units?
1 $ 200
2 360 A. $30,000
3 500
4 600 B. $50,000
5 1,000
6 1,800 C. $50,003
7 2,800
D. $80,000
Civic has an average variable cost when 4 units of [168] Source: Publisher
output Regardless of output, a firm has $4,000 a year in
are produced of total fixed
costs. This same firm has an average variable cost of
A. $150 $3,
while producing 1,000 units of output. If the firm
B. $200 decides to
produce 1,000 units, what will be its average total
cost? A. Decrease production.
A. $1.00 B. Increase production.
B. $3.00 C. Shut down.
C. $4.00 D. Not change production.
D. $7.00
As of December 31 of the current year, a monopolist
[169] Source: Publisher was
A firm produces only 5 units of output. If total producing at a level that experienced price = $18,
variable cost average
is $400, and total fixed cost is $200, then total cost = $15, average variable cost = $12,
marginal
A. Marginal cost is $120. revenue = $13, and marginal cost = $14. To maximize
profits in the new year, the monopolist should
B. Average total cost is $600.
A. Not change the output level, because the
C. Average fixed cost is $200. monopolist is currently at the profit-maximizing
output
D. Average variable cost is $80. level.
B. Shut down.
Mr. Bojangles is hired as a consultant to a firm that C. Increase production.
is,
currently, competing perfectly. At the current output D. Decrease production.
level
the price is $20, the average variable cost is $15,
average [173] Source: Publisher
total cost is $22, and marginal cost is $20. In order to The individual purely competitive firm faces a
maximize profits, Mr. Bojangles will recommend that demand
the schedule that is
firm should
A. Perfectly inelastic.
A. Not change output. This firm is at its
profit-maximizing position. B. Inelastic but not perfectly inelastic.
B. Decrease production. C. Perfectly elastic.
C. Increase production. D. Elastic but not perfectly elastic.
D. Shut down.
Spruce Goose Inc. is a chief competitor in the highly
[171] Source: Publisher competitive field of small jet production. Its total
Mrs. Robinson is hired as a consultant to a firm that revenue
is for producing 10 small jets is $60. Meanwhile, its
currently competing perfectly. At the current output total
level revenue for producing 11 small jets is $77.
the price is $10, the average variable cost is $6, the Therefore, the
average total cost is $10, and marginal cost is $8. To
maximize profits, Mrs. Robinson will recommend A. Average revenue for producing 11 units is $17.
that the
firm should B. Average revenue for producing 11 units is $77.
As a profit-maximizing monopolist, Billingsworth will
C. Marginal revenue for producing the eleventh sell its
unit is product at a price of
$17.
A. $1,000
D. Marginal revenue for producing the eleventh
unit is B. $600
$77.
C. $500
[175] Source: Publisher D. $400

At its current production, Abba Co., a monopolist,
has a
marginal cost of $18, and marginal revenue of $21. [178] Source: Publisher
Abba (Refers to Fact Pattern #12)
will maximize profits by Billingsworth has decided to put 4 units on the
market. If
A. Increasing price while keeping production Billingsworth is able to sell each unit at the
constant. maximum price
that the buyer is willing to purchase it for, how much
B. Decreasing price and increasing production. would
total revenue be?
C. Decreasing both price and production.
A. $1,600
D. Increasing both price and production.
B. $2,500
[Fact Pattern #12] C. $2,800

Demand and cost data for Billingsworth, a pure
monopolist, is shown below. D. $4,000
Output Price per Unit Total Cost

------ -------------- ---------- [Fact Pattern #13]
1 $1,000 $ 500 Soggy Shoes, a pure monopolist, has accumulated
2 600 520 the
3 500 580 following cost data.
4 400 700
5 300 1,000 Quantity
6 200 1,500 Demanded Price per Unit Total Cost
-------- -------------- ----------
[176] Source: Publisher 1 650 410
(Refers to Fact Pattern #12) 2 600 450
Billingsworth, a profit-maximizing monopolist, will 3 550 510
produce 4 500 590
how many units? 5 450 700
6 400 840
A. 1 7 350 1,020
8 300 1,250
B. 2 9 250 1,540
C. 3 [179] Source: Publisher

D. 4 The profit-maximizing output and price for Soggy
Shoes is
[177] Source: Publisher A. 5 units and a $450 price.

B. 6 units and a $400 price.
C. 7 units and a $350 price. D. $2,550
D. 8 units and a $300 price.

Suppose the price of a factor of production is $10,
[180] Source: Publisher and the
(Refers to Fact Pattern #13) product's price (evaluated in a competitive market)
Assume Soggy Shoes is able to engage in price is $8. If
discrimination and sell each unit of the product at a the last unit of a factor of production employed has
price a
equal to the maximum price the buyer of that unit marginal physical product of 12, then this factor's
would be marginal
willing to pay. The marginal revenue that Soggy revenue product is
Shoes
obtains from the sale of an additional unit will equal A. $96
its
B. $24
A. Total cost.
C. $10
B. Average cost.
D. $8
C. Unit cost.
D. Price. [184] Source: Publisher

The last hour of labor, hired for $20, produces 6
units of
[181] Source: Publisher output selling for $3 per unit. Therefore, that labor-
(Refers to Fact Pattern #13) hour
Assuming Soggy Shoes is a price-discriminating adds _______________ to the firm's profit, so
monopolist, what would their profit-maximizing ______________ labor should be hired.
output be?
A. $ 2; more.
A. 6 units.
B. $ 2; less.
B. 7 units.
C. $18; more.
C. 8 units.
D. $18; less.
D. 9 units.

[182] Source: Publisher A particular piece of equipment, owned by Meehan
(Refers to Fact Pattern #13) Inc., is
Assume Dry Toes is a nondiscriminating monopolist to become worthless in exactly 1 year, the same
and time in
Soggy Shoes is a discriminating monopolist. How which it will produce its last marginal revenue
much product,
greater of a total economic profit will Soggy Shoes valued at $50,000. If the interest rate is 8%, a firm
obtain would
than Dry Toes, based upon the data given for Soggy be willing to buy the piece of equipment when the
Shoes? purchase
price is
A. $990
A. Below $50,000.
B. $1,400
B. Below $46,296.
C. $1,560
C. Above $46,296.
[Fact Pattern #15]
D. Above $50,000.
Units of Resource Total Product Marginal Product
----------------- ------------- ----------------
[Fact Pattern #14] 1 8 8
2 14 6
Number of Total Product 3 18 4
Workers Production Price ($) 4 21 3
--------- ---------- --------- 5 23 2
1 16 4
2 26 4 [189] Source: Publisher
3 34 4 (Refers to Fact Pattern #15)
4 40 4 The product that the firm produces has a selling
5 44 4 price of
$5. Therefore, the fourth unit of the resource will
[186] Source: Publisher have a
(Refers to Fact Pattern #14) marginal revenue product of
If the wage rate is $15, the firm will employ
A. $3
A. Two workers.
B. $5
B. Three workers.
C. $10
C. Four workers.
D. $15
D. Five workers.

[187] Source: Publisher (Refers to Fact Pattern #15)
(Refers to Fact Pattern #14) Assume that the firm's product still has a price of $5
If the wage rate is $35, the firm will employ and
that the price of the resource is valued at $20. It can
A. Two workers. be
concluded that the firm will employ _____ units of
B. Three workers. the
resource.
C. Four workers.
A. 1
D. Five workers.
B. 3
[188] Source: Publisher C. 4

Assume the product has an increase to a fixed price D. 5
of $6,
then if the wage rate is maintained at $35, the firm
will [191] Source: Publisher
employ At current conditions, the firm can sell 15 units of
the
A. Two workers. output at a price equal to $1 per unit or 18 units of
the
B. Three workers. output at a price equal to $0.80 per unit. Therefore,
the
C. Four workers. marginal revenue product is
D. Five workers. A. $15.00

B. $14.40
C. $.60
D. $.60

Santa Maria Co. employs inputs that have a marginal
product of labor of 10 and a price of labor equal to
$5.
Santa Maria's inputs also have a marginal price of
capital of
45 and a price of capital of $15. Assuming the firm
wishes
to maximize profits, Santa Maria should
A. Use more labor and less capital.
B. Use less labor and less capital.
C. Use less labor and more capital.
D. Make no change in resource use.

Pinta Inc., a profit-maximizing manufacturer,
employs two
resources, resource P and resource Q. The price of
resource P is $40 and its marginal revenue product
(MRP)
for the last unit of P hired was $240. The price of
resource
Q is $25 and its MRP for the last unit of Q hired was
$150. Pinta should
A. Hire more of resource X and less of resource Y.
B. Hire less of resource X and more of resource Y.
C. Hire less of both resource X and resource Y.
D. Hire more of both resource X and resource Y.

PART 1 A Answer (B) is incorrect because in this context, the
MICROECONOMICS term marginal means incremental change and
(ANSWERS) does
not refer to a minimum or maximum.
[1] Source: CMA 1285 1-15
Answer (C) is incorrect because marginal utility is
Answer (A) is incorrect because assuming price the
exceeds average variable costs, a shutdown would change in total utility from consumption of an
result in the loss of the contribution margin. Since additional unit of the good.
fixed costs are not avoided by shutting down, the
firm Answer (D) is correct. Utility is a measure of the
should continue to produce in the short run as usefulness, or satisfaction, that results from
long as consumption. Marginal utility is the amount of
it covers its variable costs. increase in utility when one additional unit is
consumed. Marginal utility diminishes with
Answer (B) is correct. In the short run, a firm additional
should consumption.
continue operating as long as selling price exceeds
average variable cost (a contribution margin is
earned). If selling price drops below average [4] Source: CMA 1286 1-4
variable
cost, variable costs as well as fixed costs are no Answer (A) is incorrect because economies or
longer being met, and the firm should shut down. diseconomies of scale do not affect the demand
curve.
Answer (C) is incorrect because in pure
competition Answer (B) is incorrect because economies or
a single firm has no influence on price. diseconomies of scale do not affect the demand
curve.
Answer (D) is incorrect because this could only be
accomplished in the long run. Answer (C) is correct. Economies and diseconomies
of scale affect a company's costs. When it
experiences economies of scale, a company's
[2] Source: CMA 1285 1-16 long-run average costs will decrease.
Diseconomies
Answer (A) is incorrect because no specific time of scale occur when the long-run average costs
frame is contemplated by the definition. increase. Economies or diseconomies of scale do
not
Answer (B) is incorrect because no specific time apply in the short run because many costs are
frame is contemplated by the definition. fixed.
In the long run, all costs are variable.
Answer (C) is incorrect because top management is
but one of many inputs. The long run is the period Answer (D) is incorrect because the law of
within which all inputs can be varied. diminishing returns describes the short-run
phenomenon in which, beyond some point,
Answer (D) is correct. In the long run, no resource increasing
costs are fixed. A firm can therefore vary the amounts of a variable input will contribute less
amount and
of any of its inputs. In the short run, one or more less to the total product.
inputs are fixed.
[5] Source: CMA 1286 1-7

[3] Source: CMA 1285 1-17
Answer (A) is correct. If the market rate is less
Answer (A) is incorrect because in this context, the than
term marginal means incremental change and the maximum allowed, a rent control law will have
does no
not refer to a minimum or maximum. effect whatsoever.
Answer (B) is incorrect because if the higher price Answer (D) is correct. Economies of scale exist
were required to be charged, consumers would when a larger output is associated with a lower
demand less housing and a surplus would occur. average cost. Since only large firms can efficiently
operate in such circumstances, the natural barriers
Answer (C) is incorrect because if price increases, to
supply will increase. entry are substantial. Natural monopolies are
those in
Answer (D) is incorrect because demand will fall which significant economies of scale are present.
when price increases. Electric utilities are examples of such companies.
Answer (A) is incorrect because transfer payments Answer (A) is incorrect because the increase in
provide only a small portion of income. price
would decrease the quantity demanded.
Answer (B) is incorrect because household
purchases are a result, not a determinant, of Answer (B) is incorrect because the price increase
income would not affect the position of the demand curve.
distribution.
Answer (C) is incorrect because the price increase
Answer (C) is correct. Distribution of income is would not affect the position of the demand curve.
determined in large part by ownership of the
factors Answer (D) is correct. Given a relatively elastic
of production: land, labor, capital, and demand curve, an increase in the price, such as
management. from
For example, a union that monopolizes the labor a tax increase, would lead to a decrease in
supply in an industry may be able to increase the expenditures. Price elasticity of demand equals
incomes of its members. However, other factors the
may percentage change in quantity demanded divided
also play roles. These include inherent ability, by
access the percentage change in price. If the result is
to education or training, political influence, and greater
even than one, demand is elastic, and total revenue will
sheer luck or the lack thereof. increase with a decrease in price or decline with
an
Answer (D) is incorrect because studies have increase.
shown
that pretax and after-tax incomes are similarly
distributed. Thus, taxation in practice does not [9] Source: CMA 1287 1-5
achieve significant income redistribution.
Answer (A) is incorrect because in pure (perfect)
competition, a particular firm will produce for a
[7] Source: CMA 0687 1-12 market in which the selling price is given; only
costs
Answer (A) is incorrect because supply curves are (input prices) can influence the level of production.
normally assumed to be upward sloping for most
products. The supply curve of a monopolist may Answer (B) is incorrect because in pure (perfect)
be competition, a particular firm will produce for a
essentially flat or even downward sloping. market in which the selling price is given; only
costs
Answer (B) is incorrect because demand curves are (input prices) can influence the level of production.
normally downward sloping for all products.
Answer (C) is correct. A competitive firm will
Answer (C) is incorrect because average costs fall produce at a level at which marginal cost equals
for any product whose production involves fixed marginal revenue (selling price). Thus, a change in
costs, such as natural monopolies. input prices affects marginal cost and the quantity
of
output supplied. only one firm is in the industry. Fixed costs are so
high that relatively low prices are possible only at
Answer (D) is incorrect because in pure (perfect) high
competition, a particular firm will produce for a levels of sales. If competition existed, each firm's
market in which the selling price is given; only share of the market would be insufficient to drive
costs down unit costs enough to permit charging a low
(input prices) can influence the level of production. price.
Answer (D) is incorrect because consumer demand

[10] Source: CMA 1287 1-10 would be inelastic and not influenced by business
cycles.
Answer (A) is incorrect because the short run can
be
more or less than a year depending upon a firm's [12] Source: CMA 1288 1-22
ability to change its inputs.
Answer (A) is incorrect because perfect inelasticity
Answer (B) is correct. The short run is defined as a exists when the quantity demanded is constant for
period so brief that a firm has insufficient time to all
vary prices (the coefficient of elasticity is zero).
the amount of all inputs. Thus, the quantity of one
or Answer (B) is correct. The coefficient of elasticity
more inputs is fixed. The long run is a period long measures the responsiveness of the percentage
enough that all inputs, including plant capacity, change in quantity demanded (the numerator) to a
can be given percentage change in the price of a product
varied. The firm will thus use both fixed and (the
variable denominator). Consumer demand is said to be
inputs in the short run. elastic
when the coefficient of elasticity is greater than
Answer (C) is incorrect because economies of scale one.
are associated with the long run.
Answer (C) is incorrect because inelastic demand is
Answer (D) is incorrect because economic profits characterized by a coefficient of less than one.
may be earned, either in the long or short run,
when a Answer (D) is incorrect because unitary elasticity
firm earns more than the profits needed for it to exists when the coefficient is exactly one.
remain in operation.
[13] Source: CMA 1288 1-23

[11] Source: CMA 1287 1-12
Answer (A) is correct. When the coefficient of
Answer (A) is incorrect because in a natural elasticity (percentage change in demand/change in
monopoly, marginal costs continue to decrease. price) is less than one, demand is inelastic. When
the
Answer (B) is incorrect because regulation is coefficient is zero, the demand is perfectly
necessary when demand for the natural inelastic.
monopoly's
product is inelastic. Without regulation, the Answer (B) is incorrect because demand is elastic
monopolist could exploit consumers because they when the coefficient is greater than one.
would have to buy the product regardless of price.
Answer (C) is incorrect because demand is inelastic
Answer (C) is correct. A natural monopoly is an when the coefficient is less than one but greater
industry, such as a utility, in which consumers are than
benefited by the existence of a monopoly. These zero.
monopolies are regulated by the government to
control prices and prevent abuses. The reason for Answer (D) is incorrect because unitary elasticity
a exists when the coefficient is exactly one.
natural monopoly is that economies of scale are so
great that the lowest average cost is reached when
[14] Source: CMA 1288 1-27 movement along an existing demand curve occurs
when the price is changed. A shift in the curve
Answer (A) is incorrect because it is an attribute of itself
perfect competition. occurs when any of the determinants changes.
Such
Answer (B) is incorrect because it is an attribute of shifts can be caused by a change in the tastes and
perfect competition. preferences of consumers toward a product, for
example, as a result of a successful advertising
Answer (C) is correct. Perfect competition assumes campaign, an increase in consumer income (if a
a product is a normal good), or changes in the prices
large number of buyers and sellers that act of
independently, a homogeneous or standardized substitute or complementary products. An
product, free entry into and exit from the market, increase in
perfect information, no nonprice competition, no consumer income would shift the demand curve to
control over prices (sellers are price takers rather the right and result in greater consumption of the
than price setters), and an equilibrium price equal product at each price.
to
the average total cost. Given free entry into the
market and perfect information, an increase in [16] Source: CMA 1288 1-29
profits
in the industry will result in an increase in the Answer (A) is correct. Monopolistic competition
number assumes a large number of firms with
of firms in the market. This increase will have the differentiated
long-run effect of reducing the price to the level at (heterogeneous) products, and relatively easy
which no economic profits are earned. entry
into the market. Sellers have some price control
Answer (D) is incorrect because it is an attribute of because of product differentiation. Monopolistic
perfect competition. competition is characterized by nonprice
competition,
such as advertising, service after the sale, and
[15] Source: CMA 1288 1-25 emphasis on trademark quality. In the short run,
firms
Answer (A) is incorrect because the increase in equate marginal revenue and marginal cost. In the
income shifts the demand, not the supply, curve. long run, firms tend to earn normal (not
economic)
Answer (B) is incorrect because moving down an profits, and price exceeds marginal cost, resulting
existing demand curve is the effect of a lower in
price. an underallocation of resources. Firms produce
The change in income shifts the economy to a new less
demand curve. than the ideal output, and the industry is
populated by
Answer (C) is incorrect because a shift to the left too many firms that are too small in size. Price is
means that consumers will buy fewer products at higher and output less than in pure competition.
each price. This leftward shift in response to
increased income is characteristic of an inferior Answer (B) is incorrect because responses to
good, competitors' actions are unnecessary if products
not a normal good. The demand for inferior goods are
is sufficiently differentiated to make price
inversely related to income. Hamburger is an competition
inferior meaningless.
good, and steak is a normal good.
Answer (C) is incorrect because product
Answer (D) is correct. The demand schedule is a differentiation permits some price control.
relationship between the prices of a product and
the Answer (D) is incorrect because the availability of
quantity demanded at each price, holding other close substitutes makes the product demand curve
determinants of the quantity demanded constant. elastic.
A
Answer (C) is correct. Technological efficiency is
[17] Source: CMA 1288 1-30 defined as the relationship between the physical
output of a given technology and the maximum
Answer (A) is incorrect because an oligopoly can output
have either differentiated (automobiles) or that is possible.
undifferentiated (steel) products.
Answer (D) is incorrect because comparative
Answer (B) is correct. An oligopoly consists of only advantage compares the costs of producing
a few firms. Each firm reacts to decisions of other products
firms in the industry. Prices in a noncollusive within a single country.
market
tend to be rigid, or sticky, because of the
interdependence among firms. Entry is difficult [19] Source: CMA 0689 1-21
thanks
to barriers that can be either natural, such as an Answer (A) is incorrect because economic
absolute cost advantage, or artificial, such as efficiency
massive is a comparison measured in dollar terms.
advertising by existing firms. The price rigidity
normally found in oligopolistic markets can be Answer (B) is correct. Opportunity cost is the
explained in part by the kinked demand curve benefit
theory. forgone by using scarce resources in a given way.
Because competitors respond to price changes by Thus, it is the benefit that could have been
one of the firms in an oligopolistic industry, the obtained
demand curve for an oligopolist's products tends from the best alternative use of the resources.
to
be kinked. Price decreases are usually matched, Answer (C) is incorrect because comparative
with advantage compares the costs of producing
no increase in market share. Price increases are products
often within a single country.
not followed, with a loss of market share by the
first Answer (D) is incorrect because absolute
to raise prices. An oligopoly must often confront advantage
cyclical or seasonal fluctuations in the quantity compares input costs among countries.
demanded. Price rigidity makes it difficult for
oligopolists to maintain sales levels by reducing
price [20] Source: CMA 0689 1-22
when the demand curve shifts to the left or by
increasing sales and output when demand Answer (A) is incorrect because an equality of
increases. costs
would provide no incentive or disincentive to
Answer (C) is incorrect because the kinked demand substitute.
curve explains price rigidity in an oligopoly.
Answer (B) is incorrect because profits will be
Answer (D) is incorrect because an oligopoly can greater if a lower-cost substitute can be used.
have either differentiated (automobiles) or
undifferentiated (steel) products. Answer (C) is correct. The principle of substitution
states that, when given a choice, the firm will
choose
[18] Source: CMA 0689 1-20 the factor of production that is less expensive. In
other words, the cheaper input will be used as a
Answer (A) is incorrect because economic substitute for the higher-priced input.
efficiency
is measured in dollar terms. Answer (D) is incorrect because the firm will not
knowingly use more of an expensive input if a
Answer (B) is incorrect because opportunity cost is cheaper substitute can be used.
defined as the return possible from the next best
alternative other than the one selected.
[21] Source: CMA 0689 1-24
be unaffected, but the demand curve will shift to
Answer (A) is incorrect because this should be the
evaluated when purchasing capital goods. right.
Answer (B) is incorrect because this should be Answer (C) is correct. The relative price of the
evaluated when purchasing capital goods. normal good is improved relative to other goods as
a
Answer (C) is incorrect because this should be consequence of inflation. Thus, consumers will
evaluated when purchasing capital goods. demand more of the normal good. This increase in
demand is caused not by a price change but by a
Answer (D) is correct. A firm considers such factors favorable change in the preferences of consumers.
as price, relationships with suppliers, product As
demand, avoidable future costs, economies of a result, the demand curve for the product will
scale, shift to
opportunity costs, technological efficiency, and the the right.
capital-labor ratio when evaluating the purchase
of Answer (D) is incorrect because the supply curve
new equipment. The cost of the current facility will
would be unaffected, but the demand curve will shift to
not be relevant because it is a sunk cost. the
right.
[22] Source: CMA 0689 1-26

[24] Source: CMA 1289 1-4
Answer (A) is incorrect because a shift to the left (a
decrease in demand) would occur if the price of a Answer (A) is incorrect because revenue should
complementary product increased. rise
as the price drops.
Answer (B) is incorrect because demand for a
substitute would decrease, thereby lowering its Answer (B) is incorrect because revenue should
equilibrium price. rise
as the price drops.
Answer (C) is incorrect because the demand curve
will shift to the right, but the supply curve will not Answer (C) is correct. Elasticity is the change in
change. demand divided by the change in price. An
elasticity
Answer (D) is correct. A decrease in the price of a of 1.5 means that the change in demand (the
complementary good (e.g., gasoline) will cause the numerator of the fraction) will increase by 150% of
demand curve of the joint commodity (e.g., any change in price (the denominator) measured
automobiles) to shift to the right (increase). The in
lower absolute terms (the minus sign is ignored). Thus, a
price results in greater demand by consumers at 10% price reduction increases demand by 15% (1.5
each x 10%).
price level. A movement along an existing demand
curve occurs when the price for the product is Answer (D) is incorrect because the price decline
changed but demand is constant. will
lead to increased demand if elasticity is greater
than
[23] Source: CMA 0689 1-29 1.0.
Answer (A) is incorrect because the supply curve

will [25] Source: CMA 1289 1-11
be unaffected, but the demand curve will shift to
the Answer (A) is incorrect because an industry with a
right. single firm is monopolistic.
Answer (B) is incorrect because the supply curve Answer (B) is incorrect because oligopolists have
will the
same profit-maximizing goal as other firms. Answer (D) is incorrect because inelasticity is more
apt to occur when few substitutes are available.
Answer (C) is correct. An oligopolistic industry is
characterized by only a few firms. Usually there
are [27] Source: CMA 0690 1-20
significant barriers to entry, such as high capital
requirements, which prevent new firms from Answer (A) is incorrect because if demand is price
entering elastic, the quantity demanded will decline by a
the industry. The automobile industry is an greater percentage than the percentage price
example. increase.
Answer (D) is incorrect because the demand curve Answer (B) is correct. An increase in gasoline
for a firm in perfect competition is horizontal. An prices
oligopolist's demand curve is relatively flat but during the summer implies that demand for
may be gasoline is
kinked if competitors follow its price decreases but relatively price inelastic in the short run. That is,
not the price increases. the
price increase will result in little or no decline in
the
[26] Source: CMA 0690 1-19 amount demanded, and total revenues will
increase.
Answer (A) is correct. A normal good that
competes Answer (C) is incorrect because the distinction
with several similar items will have an elasticity between inferior and normal goods is based on the
greater than one (its demand is relatively elastic) effects on quantity demanded of a change in
because a given percentage change in price will income.
result
in a greater percentage change in sales as Answer (D) is incorrect because perfect inelasticity
consumers means there would be no decline in demand
shift to or from the close substitutes. Price because
elasticity of of a price increase.
demand is promoted by the availability of
substitute
goods. [28] Source: CMA 0690 1-21
Answer (B) is incorrect because demand has Answer (A) is incorrect because no information is
perfect given about the effects of changes in the price.
price elasticity if a small change in price causes
buyers to reduce their purchases to zero (an Answer (B) is incorrect because no information is
increase given about the effects of changes in the price.
in price) or to purchase all of the available supply
(a Answer (C) is incorrect because no information is
decrease in price). given about the effects of changes in the price.
Answer (C) is incorrect because consumers Answer (D) is correct. Consumers purchase more
purchase (less) of a normal good (such as steak) at every
more (less) of a normal good (such as steak) at price
every when income levels increase (decrease). The
price when income levels increase (decrease). The opposite is true of inferior goods (such as
opposite is true of inferior goods (such as hamburger). These effects result because normal
hamburger). These effects result because normal goods have a positive income elasticity of demand
goods have a positive income elasticity of demand and inferior goods have a negative income
and inferior goods have a negative income elasticity.
elasticity. Income elasticity of demand equals the percentage
The availability of close substitutes affects the change in quantity demanded divided by the
price percentage change in income.
elasticity of demand but not income elasticity.
[29] Source: CMA 0690 1-22 product and the quantity demanded to be
inversely
Answer (A) is incorrect because utility products are related.
price inelastic.
Answer (B) is incorrect because utility products are [31] Source: CMA 0690 1-24
price inelastic.
Answer (A) is incorrect because a price change
Answer (C) is correct. Utility products are typically causes a movement to a new point on the demand
price inelastic because they are regarded as curve, not a shift of the curve itself.
necessities for which few substitutes are available.
That is why utilities are regulated by state Answer (B) is incorrect because a change in supply
agencies. would not affect the position of the demand curve;
The existence of monopolies and price inelastic it
products would permit an unregulated utility to would only change the equilibrium point at which
take the
unfair advantage of consumers. two curves intersect.
Answer (D) is incorrect because utility products are Answer (C) is correct. A shift to the left means that
not perfectly price inelastic. Some consumers the quantity demanded will be less at each price.
would This
reduce their consumption as prices rise. Given result follows because cars and gasoline are
perfect complementary goods. If automobile prices
price inelasticity of demand, the amount increase,
demanded fewer cars are purchased, fewer miles are driven,
will be the same at all prices. and
the quantity of gasoline demanded declines at
each
[30] Source: CMA 0690 1-23 price.
Answer (A) is incorrect because the demand curve Answer (D) is incorrect because a decrease in car
is prices would result in the sale of more cars and
downward sloping. increased demand at each gasoline price. The
effect
Answer (B) is incorrect because the demand curve would be a shift of the demand curve to the right.
is
downward sloping.
[32] Source: CMA 0690 1-26
Answer (C) is incorrect because a vertical demand
curve signifies that the quantity demanded does Answer (A) is incorrect because it illustrates the
not concept of increasing returns to scale.
change with price.
Answer (B) is incorrect because it illustrates the
Answer (D) is correct. The demand curve for a concept of increasing returns to scale.
consumer good (normal or inferior) is downward
sloping to the right. At high prices, the amount Answer (C) is correct. The law of diminishing
demanded is relatively low. As prices decrease, the returns
amount demanded increases. The substitution states that, when successive equal amounts of a
effect is variable input are applied to a fixed input, there is
the change in the cost of a good relative to others some point beyond which additional units of the
that variable input will contribute less and less to the
will cause a cheaper good to be substituted for total
more product. In other words, marginal product will
expensive ones. The income effect is the change in decline. An assembly plant with lower unit costs at
purchasing power experienced by consumers as a 85% than at 95% capacity is experiencing
result of a price change (real income increases or diminishing
decreases). Both of these effects cause the price of returns.
a
Answer (D) is incorrect because it illustrates the a given level of output except in pure competition.
concept of increasing returns to scale. In
this structure, the MR curve is the firm's demand
curve.
[33] Source: CMA 0690 1-27
Answer (B) is incorrect because the marginal
Answer (A) is correct. Economic (pure) profit revenue
equals curve is downward sloping in these cases. Thus,
total revenue minus economic costs. Economic the
costs point on the MC curve equal to MR indicates the
are defined by economists as opportunity costs, profit-maximizing quantity but not the price. The
which are the values of productive resources in price
their is found by extending a perpendicular line up to
best alternative uses. The return sufficient to the
induce demand curve from the MR = MC point. In other
the entrepreneur to remain in business (normal words, the price (vertical) coordinate of each point
profit) on the MC curve does not equal the market price
is an economic cost. Net income as computed at
under a given level of output except in pure competition.
generally accepted accounting principles considers In
only explicit costs, not such implicit costs as this structure, the MR curve is the firm's demand
normal curve.
profit and the opportunity costs associated with
not Answer (C) is correct. Under pure competition, the
using assets for alternative purposes. Thus, net portion of a firm's marginal cost (MC) curve above
income will be higher than economic profit its average variable cost curve (the firm cannot
because cover
the former fails to include a deduction for its variable costs below this shutdown point) is
opportunity also
costs, for example, the salary forgone by an its supply curve. Because the firm is a price taker
entrepreneur who chooses to be self-employed. (the
marginal revenue (MR) curve is horizontal),
Answer (B) is incorrect because both economists increases
and in supply can occur only at higher prices because
accountants treat interest as a cost. the
firm produces at the level at which MR equals MC.
Answer (C) is incorrect because economic profits
will be less than net income. Answer (D) is incorrect because the marginal
revenue
Answer (D) is incorrect because economic profits curve is downward sloping in these cases. Thus,
will be less than net income. the
point on the MC curve equal to MR indicates the
profit-maximizing quantity but not the price. The
[34] Source: CMA 0690 1-29 price
is found by extending a perpendicular line up to
Answer (A) is incorrect because the marginal the
revenue demand curve from the MR = MC point. In other
curve is downward sloping in these cases. Thus, words, the price (vertical) coordinate of each point
the on the MC curve does not equal the market price
point on the MC curve equal to MR indicates the at
profit-maximizing quantity but not the price. The a given level of output except in pure competition.
price In
is found by extending a perpendicular line up to this structure, the MR curve is the firm's demand
the curve.
demand curve from the MR = MC point. In other
words, the price (vertical) coordinate of each point
on the MC curve does not equal the market price [35] Source: CMA 0690 1-30
at
Answer (A) is correct. Enhanced technology and are not substitutes for each other; both are
worker productivity would cause the supply curve needed to
to play tennis.
shift to the right where it would intersect with the
demand curve at a lower price level. The shift is Answer (B) is incorrect because rackets and balls
caused by the producer's ability to lower costs and are
produce more at a given market price. not independent goods; they are used together.
Answer (B) is incorrect because the increased Answer (C) is incorrect because an inferior good is
productivity would cause a rightward shift in the one that experiences increased (decreased)
supply curve. demand
as consumers' incomes decline (rise). Tennis
Answer (C) is incorrect because the rightward shift equipment is a leisure item, not an inferior good.
would result in an intersection with the demand
curve Answer (D) is correct. As sales of tennis rackets
at a lower price. increase, a corresponding increase should occur in
the demand for tennis balls because balls are
Answer (D) is incorrect because the effect on needed
wages to use the rackets. Thus, the two items are
cannot be determined from the information given. complementary goods.
Answer (A) is correct. Economic or pure profit is Answer (A) is incorrect because sellers in pure
what remains after all explicit and implicit costs competition act independently.
have
been deducted from total revenue. These costs Answer (B) is incorrect because the need for large
include the opportunity costs of the use of research and development programs would make
resources it
as well as the payments made to others. Economic difficult for new participants to enter the market.
profit is normal in a monopoly because a
monopolist Answer (C) is incorrect because competition is
can bar the entry of competitors and influence the characterized by product similarity; differentiation
market price. reduces competition.
Answer (B) is incorrect because, by definition, a Answer (D) is correct. Pure competition is
pure characterized by numerous buyers and sellers who
monopoly consists of only one firm. Thus, no act independently, a standardized product, ease of
decline entry into or exit from the market, perfect
in the number of firms can occur unless the information, the inability of each firm to influence
monopolist goes out of business. prices, and the absence of nonprice competition.
Answer (C) is incorrect because an increase in

supply could lower prices, a result that would not [39] Source: CMA 1290 1-4
benefit the monopolist.
Answer (A) is incorrect because an increase in
Answer (D) is incorrect because the demand for supply causes a decline in price if demand is
and constant.
prices of substitutes might increase if the
monopolist Answer (B) is incorrect because an increase in
charges a price sufficient to earn an economic demand and a decline in supply both result in
profit. higher
prices.
[37] Source: CMA 1290 1-2 Answer (C) is incorrect because an increase in both
demand and supply results in a higher equilibrium
Answer (A) is incorrect because rackets and balls quantity.
Answer (B) is incorrect because prices may be
Answer (D) is correct. An increase in demand lower
signifies a rightward shift in the demand curve, than at the equilibrium level.
that is,
an increase in the quantity demanded at each Answer (C) is correct. Government imposed price
price. A ceilings may cause prices to be set at rates below
decrease in supply involves a leftward shift in the equilibrium. Because prices are set artificially low,
supply curve, that is, a reduction in the quantity demand will tend to exceed the supply and
supplied at each price. Each event increases the shortages
equilibrium price if other factors are constant. will occur.
Thus, if
both events occur, the price will increase. Answer (D) is incorrect because price ceilings
cause
shortages if consumers demand more than sellers
[40] Source: CMA 1290 1-5 are
willing to supply.
Answer (A) is correct. A government price support
program will cause producers to supply more
goods [42] Source: CMA 1290 1-7
than can be absorbed by the market if the support
price is higher than the equilibrium price. The Answer (A) is incorrect because entry is possible
effect and
will be surpluses because the amount supplied will relatively easy. Blocked entry is typical of
exceed the amount demanded. monopoly.
Answer (B) is incorrect because no shortages will Answer (B) is incorrect because difficult entry is
occur. Suppliers will be induced by the higher than typical of oligopoly.
equilibrium price to produce more than the
amount Answer (C) is incorrect because, given the large
demanded. number of firms, most are likely to be small, with
correspondingly low economies of scale and
Answer (C) is incorrect because no rationing would capital
occur. Consumers will be able to buy all they needs.
desire
because supply will exceed demand. Answer (D) is correct. Monopolistic competition is
characterized by the existence of a large number
Answer (D) is incorrect because firms will be of
encouraged to enter the industry by the firms, differentiated products, relative ease of
availability of entry,
greater revenue than that provided by consumer some control of price by the firms, and significant
demand. In fact, price support programs are often nonprice competition (e.g., by advertising). Entry
designed with the intention of keeping marginal into
firms monopolistic competition is more difficult than
from leaving the industry. entry
into pure competition, but it is relatively easy
compared with entry into a monopoly.
[41] Source: CMA 1290 1-6
Answer (A) is incorrect because price ceilings are [43] Source: CMA 1290 1-8
essentially the opposite of price supports. If price
is Answer (A) is incorrect because the curve is not
subject to a ceiling, suppliers may receive less than horizontal. It varies with changes in production
at scale.
the equilibrium level. But the supplier may receive
more at the equilibrium rate if the price is Answer (B) is incorrect because, although returns
supported. to
incremental input may be diminishing and
marginal
cost rising, average total cost may continue to Answer (C) is incorrect because the fixed costs
decline. related to the use of capital equipment can be
spread
Answer (C) is incorrect because the average total over more products when such equipment is more
cost curve is a U-shaped curve that is intersected efficiently used.
at
its minimum point by the rising portion of the Answer (D) is correct. Economies of scale result in
marginal a
cost curve. decline in the average cost of production. These
economies result from specialization of labor and
Answer (D) is correct. The long-run average total management, the ability to use by-products and
cost curve is normally U-shaped because the scrap, and more efficient use of capital equipment.
average The law of diminishing returns states that, as
cost per unit declines as the firm experiences additional units of a variable input are combined
economies of scale. However, beyond the point of with
intersection with the marginal cost curve, it will a fixed input, marginal product will begin to fall
begin when
rising because the amount added (marginal cost) the theoretical limit of efficiency is exceeded.
to Hence,
total cost is greater than the average total cost. this principle is not applicable to the discussion of
economies of scale, which explains diminishing
average cost. Moreover, the latter concept
[44] Source: CMA 1290 1-10 assumes
that all costs are variable in the long run, whereas
Answer (A) is incorrect because economic (pure) the
profit is the residual return in excess of normal law of diminishing returns assumes a fixed
profit. component
Economic profit equals total revenue minus of input.
opportunity costs. These are the sum of explicit
and
implicit costs, including normal profit. [46] Source: CMA 1290 1-11
Answer (B) is incorrect because accounting profit is Answer (A) is correct. A natural monopoly occurs
the excess of total revenue over explicit costs when economies of scale are very great. In a
(out-of-pocket payments to outsiders). natural
monopoly, the unit cost of meeting the entire
Answer (C) is incorrect because a normal profit is demand
an for a product is minimized when there is only one
implicit cost. firm
in the industry. Thus, the presence of two or more
Answer (D) is correct. Normal profit is the level of firms would prevent the realization of the
profit necessary to induce entrepreneurs to enter economies
and of scale necessary to minimize cost. Public utilities
remain in the market. Economists view this profit are
as common examples of natural monopolies.
an implicit cost of economic activity.
Answer (B) is incorrect because monopolistic
competition is a market structure in which many
[45] Source: CMA 1290 1-9 firms
operate.
Answer (A) is incorrect because labor
specialization Answer (C) is incorrect because natural
means more efficient use of labor and lower costs. monopolies
exist when economies of scale are very great.
Answer (B) is incorrect because the ability to use
by-products results in lower costs and thus Answer (D) is incorrect because natural
economies of scale. monopolies
exist when economies of scale are very great.
best represented by the fast food industry. Many
firms are in competition, but the products are
[47] Source: CMA 1290 1-12 differentiated.
Answer (A) is correct. The concentration ratio is Answer (C) is incorrect because the steel industry
the has few firms and is best characterized as an
percentage of total industry sales attributable to a oligopoly. Moreover, its products tend to be
specified number of the largest firms. A high standardized.
concentration ratio indicates that few firms are
operating in an industry. Thus, a high ratio Answer (D) is incorrect because the auto industry
indicates is
monopoly power. oligopolistic. Few producers exist because of the
difficulty of entering the market.
Answer (B) is incorrect because a highly
competitive
industry would have a low concentration ratio. [50] Source: CMA 1290 1-15
Answer (C) is incorrect because the concentration Answer (A) is incorrect because marginal revenue
ratio has no relationship to the law of demand. equals price in pure competition. In monopolistic
competition, no firm can affect the price. Hence,
Answer (D) is incorrect because a high the
concentration price is the same at all levels of output.
ratio is more indicative of a monopoly than of
monopolistic competition, which is characterized Answer (B) is incorrect because marginal revenue
by is
the existence of many firms. the change in revenue from selling one additional
unit
of product, not from a change in prices. Moreover,
[48] Source: CMA 1290 1-13 in
market structures other than pure competition,
Answer (A) is correct. A supply curve illustrates the marginal revenue declines as sales increase
relationship between price and the quantity of a because
good prices eventually must be lowered to stimulate
that sellers are willing to supply. As price demand.
increases,
the supply will increase. Answer (C) is incorrect because marginal revenue
cannot be greater than price.
Answer (B) is incorrect because consumer tastes
are Answer (D) is correct. Marginal revenue is the
reflected by the demand curve, not the supply change in total revenue resulting from producing
curve. and
selling one additional unit of product. Marginal
Answer (C) is incorrect because the demand curve revenue is constant in pure competition but
shows the relationship between price and quantity declines
demanded. as output rises in other market structures.
Equating
Answer (D) is incorrect because the supply curve marginal revenue and marginal cost is the
shows only the supply, not the demand. profit-maximizing position for all firms.
Answer (A) is incorrect because agriculture is Answer (A) is incorrect because an agricultural
closer market approximates pure competition and
to pure competition. Many producers sell an exhibits a
undifferentiated product. normal demand curve.
Answer (B) is correct. Monopolistic competition is Answer (B) is incorrect because monopolistic
competition is characterized by a normal demand Answer (B) is incorrect because the short-run
curve. supply
curve is derived from the marginal cost curve, not
Answer (C) is incorrect because pure competition the
is fixed cost curve.
characterized by a normal demand curve.
Answer (C) is correct. In the short run, certain
Answer (D) is correct. The kinked demand curve is costs
characteristic of an oligopoly. This phenomenon are fixed regardless of output. Given that fixed
occurs because decreases but not increases tend costs
to are incurred even if the firm shuts down, the firm
be matched by the other firms in the industry. gains in the short run by continuing to operate if
Thus, revenues exceed variable costs. Accordingly, the
the slope of the demand curve is likely to change firm's short-run supply curve is derived from the
significantly above and below the current price. An marginal cost curve. The firm benefits by
oligopolist that raises its price is likely to lose producing
substantially more of its market share than it until marginal cost equals marginal revenue. As
would long
gain by a price cut. In other words, the curve is as the marginal cost is lower than the marginal
relatively elastic with respect to price increases revenue, the firm will recover some of its fixed
and costs
less elastic for price cuts. as well as its variable costs. However, only the
segment of the marginal cost curve that lies above
average variable cost will constitute the short-run
[52] Source: CMA 1290 1-17 supply curve. At a price below the average variable
cost, the firm's losses equal its fixed costs plus
Answer (A) is correct. A decline in price some
accompanied by an increase in total revenue of its variable costs. In this case, the firm would
indicates close
that quantity demanded has increased by a down and not supply anything.
greater
percentage than the percentage price decrease. Answer (D) is incorrect because the short-run
Hence, the price elasticity of demand is greater supply
than curve is derived from the marginal cost curve, not
1.0. Demand is elastic when it is greater than 1.0. the
total cost curve.
Answer (B) is incorrect because the increase in
revenue resulting from the price decrease
indicates [54] Source: CMA 0691 1-13
elasticity.
Answer (A) is incorrect because the degree of
Answer (C) is incorrect because elasticity must be elasticity is not a sufficient predictor of the nature
greater than 1.0 if the total revenue increases as of
the the change in market price.
result of a price decrease.
Answer (B) is incorrect because the degree of
Answer (D) is incorrect because the elasticity is elasticity is not a sufficient predictor of the nature
greater than 1.0. of
the change in market price.
[53] Source: CMA 1290 1-18 Answer (C) is correct. If demand is constant, an
increase in supply will lower the price of a good. If
Answer (A) is incorrect because the short-run supply is constant, an increase in demand will raise
supply the price. When both events occur, the effect
curve is derived from the marginal cost curve, not depends on the magnitude of the changes. Thus,
the the
average total cost curve. market price is not predictable from the facts
given.
schedule is typical of resources that receive
Answer (D) is incorrect because the degree of economic
elasticity is not a sufficient predictor of the nature rent.
of
the change in market price. Answer (D) is incorrect because market price is
irrelevant to the definition.
[55] Source: CMA 0691 1-14

[57] Source: CMA 0691 1-19
Answer (A) is incorrect because economic goods
can be increased in quantity if suppliers want to Answer (A) is incorrect because consumption will
supply more goods. either remain unchanged or decline following the
increase in price.
Answer (B) is incorrect because the issue is not
whether actual production is adequate but Answer (B) is incorrect because the costs of
whether compliance will lead to higher prices.
potential production would be adequate to meet
zero-price demand. Answer (C) is incorrect because tax revenues are
more likely to decline as price rises and the
Answer (C) is correct. Economic goods are quantity
demanded by consumers but exist in insufficient demanded falls.
supply to satisfy all demands for them. Thus,
economic goods are scarce because, at a zero Answer (D) is correct. When government imposes
price, health and safety regulations, production cost is
demand would exceed the potential supply that likely
can to increase as a result of the manufacturer's
be produced given the finite resources (inputs) efforts to
available on this planet. The problem facing comply. The increased costs are then passed on to
society is consumers in the form of higher prices. Moreover,
how to allocate a fixed supply of resources. the amount the manufacturer is willing to supply
will
Answer (D) is incorrect because an economic good decrease.
does not have to be man-made.
[58] Source: CMA 0692 1-28

[56] Source: CMA 0691 1-15
Answer (A) is incorrect because the use of fixed
Answer (A) is incorrect because an elastic supply costs implies a short-run analysis.
function would not be fixed in total. Economic rent
is Answer (B) is incorrect because average product is
paid when the supply is perfectly inelastic. a
nonsense answer.
Answer (B) is correct. Economic rent is the total
price paid for land and other natural resources Answer (C) is incorrect because the combination of
that two average costs produces an average cost, not a
have a completely fixed supply. Given this perfect total cost.
inelasticity, the sole factor determining rent for
land Answer (D) is correct. The sum of the average fixed
and other resources with a completely fixed total costs and the average variable costs for a given
supply is demand. A higher price will not increase output is the average total cost. Recognition of
supply and thereby the productive potential of the fixed
economy. Thus, no part of the rent paid for such costs implies a short-run analysis because long-run
resources provides an incentive to increase supply, analysis assumes a period long enough for all costs
and the entire rent is deemed to be a surplus to
(economic rent) by economists. be variable. Thus, the economist's short-run
analysis
Answer (C) is incorrect because a fixed supply of cost is similar to the accounting concept of cost
in
which the sum of variable and fixed costs is total
cost. Answer (D) is correct. When long-run average cost
declines as output increases, the firm is
experiencing
[59] Source: CMA 0692 1-29 economies of scale. Average cost falls when
marginal
Answer (A) is incorrect because the point of cost is below it and rises when marginal cost is
diminishing average productivity is the point at above
which it. Average cost reaches its minimum when it
average productivity begins to decline as equals
additional marginal cost. Some of the reasons for this
units of input are used. phenomenon are increased specialization and
division
Answer (B) is correct. Marginal product is the of labor, better use and specialization of
output management,
obtained by adding one extra unit of a variable and use of more efficient machinery and
input equipment.
factor. If the cost of the input factor is constant, a
rising marginal product will result in a declining
marginal cost of output. If marginal product is [61] Source: CMA 1292 1-1
falling,
marginal cost is rising. Hence, marginal cost is at a Answer (A) is incorrect because prices might
minimum when marginal product is at a decline
maximum. or stay the same depending upon the slope of the
demand and supply curves. For example, if the
Answer (C) is incorrect because marginal cost is demand curve were steeper than the supply curve,
the prices would decline.
addition to total cost as a result of increasing
production by one unit. Answer (B) is incorrect because prices might
increase or stay the same depending upon the
Answer (D) is incorrect because the point of slope
diminishing marginal productivity is that point at of the demand and supply curves. For example, if
which the
marginal productivity begins to decline as supply curve were steeper than the demand curve,
additional prices would increase.
inputs are added to production.
Answer (C) is correct. In a competitive market,
equilibrium exists when demand is exactly equal to
[60] Source: CMA 0692 1-30 supply. If both demand and supply increase in
equal
Answer (A) is incorrect because an increase in amounts, the market will still be in equilibrium,
fixed but the
costs could cause average costs to increase. Also, new price may be higher, lower, or unchanged
by depending upon the slopes of the demand and
definition, all long-run costs are variable. supply
curves. Whatever the new price, the quantity of
Answer (B) is incorrect because technological products cleared by the market should increase.
efficiency refers to the ratio of physical output of a
given technology and the maximum output that is Answer (D) is incorrect because prices might
possible. An increase in technological efficiency is decline
only one of the ways that economies of scale can or stay the same depending upon the slope of the
occur. demand and supply curves.
Answer (C) is incorrect because a decline in

average [62] Source: CMA 1292 1-2
cost means the firm is experiencing increasing
returns, Answer (A) is incorrect because the elasticity of
not decreasing returns.
supply is not a measure involving the demand [64] Source: CMA 1292 1-4
curve.
Answer (A) is incorrect because the equilibrium
Answer (B) is correct. The elasticity of supply is a price
measure of the responsiveness of a change in the is the intersection of the demand and supply
quantity supplied to a percentage change in the curves
price and has nothing to do with what is fair to
of the commodity. A perfectly inelastic supply consumers.
curve At lower prices, more consumers would be in the
has an elasticity of zero. This can occur only when market.
the
numerator of the elasticity fraction, the Answer (B) is incorrect because the price would
percentage not
change in quantity supplied, is zero. Thus, a be equal to total costs unless the average cost
condition were
of perfect inelasticity of supply could occur only the same as marginal cost.
when
a firm could not vary the quantity it supplies, i.e., Answer (C) is incorrect because both variable and
when the firm cannot vary its input usage. fixed costs have to be covered. In the long run,
moreover, all costs are variable.
Answer (C) is incorrect because a perfectly
inelastic Answer (D) is correct. In long-run equilibrium,
supply curve is vertical. The firm will supply the price,
same which equals marginal revenue in a purely
quantity at all price levels. competitive
market, will be equal to the suppliers' marginal
Answer (D) is incorrect because, in the long run, a costs
firm can vary its inputs. Only in the short-run of production. Allocation of the economy's
situation resources
is input usage unchangeable. Hence, perfectly is optimal at this point. Suppliers will continue to
inelastic supply is a short-run condition. benefit as long as price is greater than the
marginal
cost; therefore, production will increase up to the
[63] Source: CMA 1292 1-3 point at which marginal cost exactly equals price.
If
Answer (A) is incorrect because the amount marginal cost exceeds price, suppliers would have
demanded will increase as a result of the no
artificially incentive to produce.
low price.
Answer (B) is incorrect because the amount [65] Source: CMA 1292 1-5
supplied
will decline as a result of the artificially low price. Answer (A) is incorrect because the principle of
diminishing marginal utility states that marginal
Answer (C) is correct. A price ceiling lower than utility
the decreases as consumption expands.
equilibrium price causes shortages to develop. The
artificially low price results in an amount supplied Answer (B) is correct. A rational individual
less maximizes total utility from income. This objective
than that at the equilibrium price. It also causes can
consumers to demand more of the commodity be accomplished when the utility obtained from
than at the
the equilibrium price. last dollar spent on each commodity purchased is
the
Answer (D) is incorrect because shortages will same. In other words, the marginal utility for each
occur. dollar spent on product A should be the same as
the
marginal utility for each dollar spent on product B,
and so on. However, the principle of diminishing consumer preferences.
marginal utility must be considered. Under this
assumption, equal increments of additional
consumption of a product result in less than equal [67] Source: CMA 1292 1-7
additions of utility to the consumer. For example,
when a person is thirsty, the first glass of water Answer (A) is incorrect because economies of scale
tastes refer to the savings in costs as production
better than the second, and the third has even less increases;
utility than the second. less efficient labor would lead to higher costs.
Answer (C) is incorrect because the concept of Answer (B) is incorrect because output should
marginal utility is a measure associated with increase, although average productivity may or
demand, may
not with supply. not change.
Answer (D) is incorrect because marginal utility is Answer (C) is correct. As most firms expand
not output,
associated with inputs to the production process; average costs of production initially tend to
it is decline.
a measure associated with demand. The reasons for this include increased
specialization
and division of labor, better use and specialization
[66] Source: CMA 1292 1-6 of
management, and use of more efficient machinery
Answer (A) is incorrect because consumers will and
buy equipment. Consequently, increasing the size of a
less of a product if prices are higher. factory often results in lower average costs.
Answer (B) is correct. The law of diminishing Answer (D) is incorrect because increasing factory
returns size will normally increase total costs, but result in
states that if increasing amounts of a variable lower average costs.
input are
applied to a fixed input, there is some point
beyond [68] Source: CMA 1292 1-8
which additional units of the variable input will
contribute less and less to the total product. Thus, Answer (A) is incorrect because only goodwill
an advertising is likely to be used. The monopolist will
input is used up to the point at which the marginal already be maximizing its profits because it has no
increase in revenue from that input is equal to its competitors.
marginal cost. This means that adding variable
inputs Answer (B) is incorrect because monopolists
to a firm's fixed inputs will result in lower product produce a lower rate of output than in a
costs, but only up to a point. Accordingly, a firm competitive
will market.
increase short-run supply as long as marginal
revenue Answer (C) is incorrect because the blend of
(the price in a purely competitive market) exceeds capital
marginal cost, whether because of a lower and labor is not a consideration exclusive to the
marginal monopolist.
cost or a higher price.
Answer (D) is correct. Competitive markets are
Answer (C) is incorrect because costs decline up to preferable to other types of markets, such as
a monopolies, because price is lower and output
point as economies of scale are achieved. greater. All firms should equate marginal revenue
(MR) and marginal cost (MC). For a competitive
Answer (D) is incorrect because the supply curve is firm, MR equals price at all output levels because
independent of the demand curve, which is based the
on firm is a price taker. However, a monopolist must
reduce price to raise sales, so its MR curve will market, perfect information, no control over
decline with output. Assuming no difference prices,
between and no nonprice competition. Because price equals
the MC curves of the purely competitive firm and marginal cost, allocation of resources is optimal.
the Firms produce the ideal output, the output at
monopolist, the latter's downward-sloping MR which
curve average cost is lowest. Price is lower and output
will intersect the MC curve at a lower output level greater than in any other market structure.
than that for a competitive firm. This lower output
level corresponds to a higher point (a higher price) Answer (C) is incorrect because, in pure
on competition,
the demand curve. the optimal output is produced. Because resource
allocation is ideal, no over- or underproduction
occurs, and consumer surplus (the difference
[69] Source: CMA 1292 1-9 between what consumers are willing to pay and
what
Answer (A) is correct. The characteristics of they actually pay) is nonexistent.
monopolistic competition are a large number of
firms, Answer (D) is incorrect because all suppliers will
differentiated products, relatively easy entry into charge the market price, given perfect information
the in
market, some price control by individual firms, and the economy.
large amounts of nonprice competition. In such
cases,
price exceeds marginal cost and resources are [71] Source: CMA 1292 1-11
under-allocated. The industry is typically
populated Answer (A) is incorrect because oligopolists do not
by too many firms that are too small. These attempt to decrease demand for the product.
conditions are often referred to as the waste of
monopolistic competition. Prices are higher and Answer (B) is incorrect because prices are
output is less than with pure competition. maintained by restricting output.
Answer (B) is incorrect because economies and Answer (C) is incorrect because increased costs do
diseconomies of scale do exist with monopolistic not necessarily result in higher prices.
competition.
Answer (D) is correct. In an oligopolistic industry, a
Answer (C) is incorrect because advertising is an cartel can be formed to add structure to a market
important element in an economy characterized by with a few firms. A cartel arises when a group of
monopolistic competition. oligopolistic firms join together for price-fixing
purposes. This practice is illegal except in
Answer (D) is incorrect because monopolistic international markets. Prices are fixed at an
competition is characterized by heterogeneous amount
products. greater than would occur under pure competition.
Members of the cartel maintain higher prices by
voluntarily restricting output.
[70] Source: CMA 1292 1-10
Answer (A) is incorrect because diminishing [72] Source: CMA 1292 1-12
returns
can exist in any market structure. Answer (A) is incorrect because economic cost
includes not only explicit costs (dollars paid), but
Answer (B) is correct. Pure competition is implicit costs as well; implicit costs include
characterized by a large number of buyers and opportunity costs.
sellers
acting independently, homogeneous or Answer (B) is incorrect because opportunity costs
standardized and dollar costs should be added, not subtracted.
products, free entry into and exit of firms from the
Answer (C) is incorrect because all explicit and
implicit costs should be added, not subtracted. monopoly.
Answer (D) is correct. Economic cost is defined as Answer (C) is incorrect because oligopolies are
the sum of all costs, both implicit and explicit, of a typified by barriers to entry; that is the reason the
firm. Explicit costs include direct expenditures industry has only a few firms.
made
to those outside the firm, for example, the costs of Answer (D) is correct. The oligopoly model is much
labor, materials, and equipment. Implicit costs are less specific than the other market structures, but
the there are typically few firms in the industry. Thus,
payments that would have been received if the
self-owned resources had been used outside the decisions of rival firms do not go unnoticed.
firm's business. Thus, the lease payments forgone Products
by can be either differentiated or standardized. Prices
not renting the firm's building to others is an tend to be rigid (sticky) because of the
implicit interdependence among firms. Entry is difficult
cost. The return necessary to keep resources because of either natural or created barriers. Price
employed in a given enterprise (normal profit) is leadership is typical in oligopolistic industries.
also Under
an implicit cost. price leadership, price changes are announced first
by
a major firm. Once the industry leader has spoken,
[73] Source: CMA 1292 1-13 other firms in the industry match the price
charged by
Answer (A) is correct. In a competitive market for the leader. The mutual interdependence of the
labor in which demand is stable, total wages firms
cannot influences both pricing and output decisions.
increase. If some workers do increase their wages,
the increases can occur only if some workers are
laid [75] Source: CMA 1292 1-15
off. Given a stable demand curve for labor, a
higher Answer (A) is incorrect because both demand and
price for this resource will result in a decrease in supply factors determine price and output.
the
amount of labor demanded (a movement up the Answer (B) is incorrect because both supply and
demand curve). demand factors determine price and output.
Answer (B) is incorrect because a maximum wage Answer (C) is incorrect because, in the long run,
that is lower than the equilibrium wage will not firms can enter or exit an industry.
allow
workers to increase their wages. Answer (D) is correct. The distinction in
microeconomics between the short run and the
Answer (C) is incorrect because firms may choose long
to run is that the long run is a time period long
become more capital intensive rather than smaller. enough
that all inputs, including plant capacity, can be
Answer (D) is incorrect because supply will not varied.
decrease if the workers are more productive after The short run is a time period so brief that a firm
gaining an increase in wages. has
insufficient time to vary the amount of all inputs.
Thus,
[74] Source: CMA 1292 1-14 in the short run, the quantity of one or more
inputs is
Answer (A) is incorrect because oligopolies contain fixed.
several firms; a single seller is characteristic of a
monopoly.
[76] Source: CMA 1292 1-17
Answer (B) is incorrect because oligopolies contain
several firms; a single seller is characteristic of a Answer (A) is correct. A firm that can control the
price of its product is a monopolist. In a pure However, at a price of $4, supply would exactly
monopoly, the industry demand curve is also the equal demand.
monopolist's demand curve. Because this curve is
not
perfectly elastic, the monopolist's demand curve is [78] Source: CMA 1293 1-3
downward sloping, not horizontal like the pure
competitor's. Answer (A) is incorrect because the ownership of
natural resources is not a necessary factor in the
Answer (B) is incorrect because a horizontal supply existence of a natural monopoly.
curve implies that the company will produce any
quantity of output at the constant price. The Answer (B) is incorrect because the ownership of
ability to patents is not a necessary factor in the existence of
control one's price implies a changing price level. a
natural monopoly.
Answer (C) is incorrect because a horizontal
demand Answer (C) is correct. A natural monopoly exists
curve implies an unchanging price. because economic and technical conditions exist in
the industry or economy that permit only one
Answer (D) is incorrect because the supplier could efficient
not sell all of its output if the established price was supplier in a locale. A natural monopoly exists
higher than what consumers were willing to pay. when
Also, a monopolist has no incentive to sell the economies of scale are very great, that is, when
maximum that can be produced. very
large-scale operations are required to achieve low
unit costs and prices. In a natural monopoly, the
[77] Source: CMA 1292 1-18 unit
cost (the long-term average cost) of meeting the
Answer (A) is incorrect because a maximum price entire demand is minimized when the industry
in consists
excess of the equilibrium price creates neither a of one firm. Thus, competition would be
surplus nor a shortage. undesirable
because the presence of two or more firms would
Answer (B) is incorrect because a minimum price prevent the realization of the necessary economies
below the equilibrium price creates neither a of
surplus scale.
nor a shortage.
Answer (D) is incorrect because the government is
Answer (C) is incorrect because a maximum price typically not the supplier when a natural
(such as rent controls) set lower than the monopoly
equilibrium exists.
price leads to shortages. Producers will not be
willing
to supply as much as consumers demand. [79] Source: CMA 1293 1-10
Answer (D) is correct. In the competitive model of Answer (A) is incorrect because reduced demand
supply and demand, a surplus can never occur. will drive the price downward.
Pure
competition leads to perfect equilibrium between Answer (B) is correct. A group boycott will
supply and demand. Only when government decrease
intervenes with price controls can a surplus or the demand for a product (shift the demand curve
shortage occur. A surplus can arise if a minimum to
price is set that exceeds the equilibrium price. For the left). This decrease in demand should lead to a
example, if the minimum price is $5 and the lower price for the product assuming that supply is
equilibrium price is $4, consumers will demand constant (the supply curve does not shift).
fewer
goods at $5 than $4, but producers will supply Answer (C) is incorrect because supply remains
more unchanged in the short run.
goods at $5 than $4. Thus, a surplus will occur.
Answer (D) is incorrect because, if demand is cost of production tends to increase price.
inelastic, customers will continue buying the
product
regardless of the price; a boycott, however, means [82] Source: CMA 1293 1-30
that consumers will stop buying the product.
Answer (A) is correct. Elasticity is the percentage
change in quantity demanded divided by the
[80] Source: CMA 1293 1-28 percentage change in price. It is a measure of how
total revenues will be affected given a specified
Answer (A) is incorrect because price equals change in price. A factor affecting the price
marginal cost only in pure competition. elasticity
of demand is the availability of substitutes. As
Answer (B) is incorrect because, for a monopolist, price
the optimal output is less than that at which increases, buyers are more likely to seek
average substitutes.
cost is lowest. The more substitutes, the greater the elasticity.
Answer (C) is incorrect because a monopolist's Answer (B) is incorrect because the level of
price consumer income may change a demand curve,
will not equal average cost. The firm will stop but
producing before reaching that level. not elasticity.
Answer (D) is correct. Whether a market is Answer (C) is incorrect because the elasticity of
competitive or noncompetitive, a firm should supply is different from the elasticity of product
produce demand.
at the level at which marginal cost equals marginal
revenue. The difference between monopoly and Answer (D) is incorrect because the level of input
perfect competition is reflected in the marginal costs affects the elasticity of supply, not demand.
revenue curve. In perfect competition, the price is
a
constant and therefore equals marginal revenue, [83] Source: CMA 1288 1-26
which is represented by a horizontal line. In a
monopoly (or in monopolistic competition), the Answer (A) is incorrect because an increase in
price supply will decrease the equilibrium price and
declines as output increases, resulting in a line of increase the equilibrium quantity exchanged.
negative slope.
Answer (B) is incorrect because an increase in
supply
[81] Source: CMA 1293 1-29 will decrease the equilibrium price and increase
the
Answer (A) is incorrect because an increase in equilibrium quantity exchanged.
demand should drive the price up if supply is
constant. Answer (C) is incorrect because an increase in
supply will decrease the equilibrium price and
Answer (B) is correct. In a competitive market, increase the equilibrium quantity exchanged.
prices will fall when the demand curve shifts to
the left Answer (D) is correct. An increase in supply is a
or the supply curve shifts to the right. rightward shift in the upward-sloping supply curve.
It
Answer (C) is incorrect because a decline in the causes a decrease in the equilibrium price and
availability of a factor of production, e.g., labor, thus an
increases the cost of output and, if other factors increase in the quantity exchanged, assuming the
are downward-sloping demand curve does not shift. If
constant, decreases the amount produced. A more goods are available at each price but
decrease in supply (shift of the curve to the left) demand is
increases price in a competitive market. unchanged, the price at which demand equals
supply
Answer (D) is incorrect because an increase in the will decline.
Answer (A) is incorrect because there would be no
profit when selling price and total costs are the
[84] Source: CMA 1288 1-28 same.
Answer (A) is correct. A pure monopoly consists of Answer (B) is incorrect because equating selling
a single firm with a unique product. Such a firm price
has to total variable costs leaves nothing to cover fixed
significant price control. For profit maximization, it costs.
produces until its marginal revenue equals its
marginal Answer (C) is incorrect because using only average
cost, unless marginal revenue is less than average fixed costs ignores variable costs, which increase in
variable cost, which will cause the firm to shut total with every unit produced.
down.
In a pure monopoly, price will be higher and Answer (D) is correct. A firm should produce until
output the marginal cost equals marginal revenue. In the
lower than in perfect competition. short run, a firm in perfect competition will
continue
Answer (B) is incorrect because the monopolist is production until marginal cost equals selling price,
in which is also its marginal revenue. The result is the
control of the quantity supplied. Thus, the supply short-run maximization of profits. As long as
can selling
be limited to produce the profit-maximizing price. price exceeds marginal cost, a firm should
continue
Answer (C) is incorrect because a monopolist will producing. In the short run in perfect competition,
increase supply as long as the demand curve is the
inelastic. Inelasticity means that an increase in market price equals marginal revenue because no
price firm
will cause a less-than-proportionate decline in can affect price by its production decisions.
demand.
Answer (D) is incorrect because there is only one [87] Source: CMA 1289 1-9
price when a monopoly exists.
Answer (A) is correct. When a firm experiences
economies of scale, the average unit cost of
[85] Source: CMA 1289 1-7 production decreases as production increases. This
phenomenon is attributable to spreading fixed
Answer (A) is incorrect because $20 is calculated costs
using total fixed costs instead of total costs, which over a greater number of units of output. Both the
includes total variable costs. short-run and long-run average costs are lower
because of economies of scale.
Answer (B) is incorrect because $30 is calculated
using total variable costs instead of total costs, Answer (B) is incorrect because long-run unit
which production costs decline with economies of scale.
includes total fixed costs.
Answer (C) is incorrect because total costs increase
Answer (C) is correct. The average total cost per with increased production; only the average cost
unit per
is calculated by dividing total costs (fixed + unit declines.
variable)
by the number of units produced. Thus, $25,000 Answer (D) is incorrect because changes in the
divided by 500 units produces a unit cost of $50. supply curve do not affect the demand curve.
Answer (D) is incorrect because $25 is the average

of fixed costs per unit and variable costs per unit. [88] Source: CMA 0694 1-2
Answer (A) is incorrect because an indifference

[86] Source: CMA 1289 1-8 curve relates to consumer desires, not to
willingness
to supply different products.
Answer (B) is incorrect because unitary elasticity
Answer (B) is correct. An indifference curve depicts (elasticity = 1.0) results in no change in revenue.
all possible combinations of two products that will
give equal utility or satisfaction to a consumer. The Answer (C) is incorrect because the demand curve
farther the indifference curve is from the origin, will not shift when price decreases; instead, the
the equilibrium point will move to a new position on
higher the level of utility. the
same curve. A price decrease on a product with
Answer (C) is incorrect because an indifference elastic demand (elasticity > 1.0) results in an
curve relates to a consumer's utility or satisfaction. increase
There is no relationship to the income of the in total revenue.
consumer.
Answer (D) is correct. The concept of price
Answer (D) is incorrect because varying levels of elasticity
income and price changes are not incorporated is of great practical concern to management
into accountants because a knowledge of elasticity tells
the indifference curve; these are assumed to be the accountant whether a price change will
constant. increase
or decrease total revenue. If the demand elasticity
is
[89] Source: CMA 0694 1-3 greater than one (i.e., the product is elastic), a
price
Answer (A) is incorrect because 0.20 equals the decrease will cause an increase in total revenue
10% decline in price divided by the 50% change in because the demand increases by a greater
quantity demanded. percentage than the price decreases.
Answer (B) is incorrect because 10.00 assumes a

5% change in price; the correct decline in price is [91] Source: CMA 0694 1-13
10%. It also does not calculate the change over the
average. Answer (A) is incorrect because a change in
demand
Answer (C) is incorrect because 0.10 is the (increase or decrease) causes the demand curve to
percentage change in price. shift. Changes in demand can occur as a result of
changes in consumer income, in the price of
Answer (D) is correct. A product's price elasticity substitute
of or complementary products, in the number of
demand is measured as the percentage change in consumers, or in the tastes and preferences of
quantity demanded divided by the percentage consumers.
change
in price. If elasticity is determined by calculating Answer (B) is incorrect because a shift in the
percentage changes over the average, the price demand
elasticity is curve represents changes attributable to
something
(150 - 100) ÷ [(150 + 100) ÷ 2] other than price.
3.8 = -----------------------------
($50 - $45) ÷ [($50 + $45) ÷ 2] Answer (C) is correct. The demand curve
represents
the relationship between the prices of a
[90] Source: CMA 0694 1-6 commodity
and the quantity demanded at those prices,
Answer (A) is incorrect because a price decrease holding
on other determinants of the quantity demanded
a product with inelastic demand causes a decrease constant. Movement along a demand curve
in reflects a
total revenue. A price decrease on a product with change (increase or decrease) in the quantity
elastic demand causes an increase in total demanded.
revenue.
Answer (D) is incorrect because a change in one of the firms in an oligopolistic industry, the
demand demand curve for an oligopolist tends to be
(increase or decrease) causes the demand curve to kinked.
shift. Changes in demand can occur as a result of Price decreases are usually matched by price
changes in consumer income, in the price of decreases, but price increases are often not
substitute followed.
or complementary products, in the number of If other firms do not match a lower price, a price
consumers, or in the tastes and preferences of decrease by an oligopolist would capture more of
consumers. the
market. If other firms match the price decrease,
less
[92] Source: CMA 0694 1-14 of the market will be captured.
Answer (A) is correct. Goods or services are Answer (B) is incorrect because price changes will
complements if the price change of one has an have an effect on demand for an oligopolist's
inverse product.
relationship to the demand for the other. For
example, when the price of one good increases, Answer (C) is incorrect because an oligopolist must
the essentially match the price of other firms in the
demand for a complementary good decreases. industry.
Margarine and butter, however, are substitutes
and Answer (D) is incorrect because an oligopolist
their relationship is direct. When the price of one cannot
good increases, demand for a substitute good also shape its demand curve.
increases.
Answer (B) is incorrect because cameras and rolls [94] Source: CMA 1294 1-7
of
film are examples of complementary products. For Answer (A) is incorrect because demand is
instance, when the price of cameras decreases, perfectly
people take more pictures and the demand for elastic when buyers are willing to purchase
rolls however
of film increases. much of a commodity is supplied at a constant
price.
Answer (C) is incorrect because VCRs and video Conversely, a price increase reduces the quantity
cassettes are examples of complementary demanded to zero when demand is perfectly
products. elastic.
A decrease in the price of VCRs will result in
increased demand of video cassettes. Answer (B) is correct. The price elasticity of
demand
Answer (D) is incorrect because razors and razor is the percentage change in quantity demanded
blades are examples of complementary products. divided by the percentage change in price. If the
A elasticity coefficient is greater than one, demand is
decrease in the price of razors will result in elastic, whereas a coefficient of less than one
increased means
demand for razor blades. that demand is inelastic. If the quantity demanded
does not change at all when the price increases,
demand is said to be perfectly inelastic.
[93] Source: CMA 1294 1-6
Answer (C) is incorrect because elasticity means
Answer (A) is correct. An oligopoly consists of a that
few a change in price will cause a greater percentage
firms. Thus, the decisions of rivals do not go change in demand.
unnoticed. Prices tend to be rigid (sticky) because
of Answer (D) is incorrect because the demand for
the interdependence among firms. Because insulin is perfectly inelastic, not merely inelastic.
competitors respond only to certain price changes
by
[95] Source: CMA 1294 1-8
[97] Source: CMA 0695 1-15
Answer (A) is correct. Monopolistic competition
involves a large number of firms offering Answer (A) is incorrect because luxury goods have
differentiated greater price elasticity. They are not necessities.
products. Entry is usually relatively easy, and some
price control exists, but nonprice competition Answer (B) is incorrect because the lack of
using complements can lead to greater elasticity.
advertising and emphasis on brand names is
substantial. In the long-run, prices exceed marginal Answer (C) is incorrect because the population in
cost and there is an underallocation of resources. the
Firms produce less than the ideal output, and the market area has nothing to do with price elasticity.
industry is populated by too many firms that are
too Answer (D) is correct. Price elasticity of demand
small. equals the percentage change in quantity
demanded
Answer (B) is incorrect because monopolistic divided by the percentage change in price. If the
competition is characterized by a large number of elasticity coefficient is greater than one, demand is
sellers who produce differentiated products. elastic. If less than one, it is inelastic. Thus, if an
increase in price is accompanied by little change in
Answer (C) is incorrect because the market is not quantity demand, demand is price inelastic. The
monopolistic, but consumers may believe it to be lack
so of good substitutes is a reason for price inelasticity.
given the differentiation of products. If a person is
convinced by advertising that a certain company is
the only one with a specified quality of product, [98] Source: CMA 0695 1-16
monopoly exists for that person.
Answer (A) is incorrect because indifference curves
Answer (D) is incorrect because monopolistic have a negative slope. They reflect different
competition is characterized by a large number of combinations of goods.
sellers who produce differentiated products.
Answer (B) is incorrect because the farther the
curve
[96] Source: CMA 1294 1-19 from the origin, the higher the total utility.
Answer (A) is incorrect because demand is Answer (C) is incorrect because the principle of
perfectly diminishing marginal utility applies.
elastic when buyers are willing to purchase
however Answer (D) is correct. An indifference curve
much of a commodity is supplied at a constant represents all combinations of two commodities
price. that
give equal utility to a consumer. The farther the
Answer (B) is incorrect because if the quantity indifference curve is from the origin, the higher
demanded does not change at all when the price the
increases, demand is said to be perfectly inelastic. level of utility. Indifference curves slope downward
to
Answer (C) is correct. The price elasticity of the right and are convex to the origin because the
demand utility of each additional unit of a good diminishes.
is the percentage change in quantity demanded Hence, indifference curves cannot intersect and
divided by the percentage change in price. If the are
elasticity coefficient is greater than one, demand is negatively sloped.
elastic. Hence, an elasticity of 2.0 is elastic.
Answer (D) is incorrect because the demand would [99] Source: CMA 0695 1-17
be inelastic if the elasticity coefficient were less
than Answer (A) is incorrect because a homogeneous
one. product is a key assumption of perfect
competition.
right.
Answer (B) is incorrect because customer
indifference regarding choice of seller is a key Answer (B) is incorrect because a rise in income
assumption of perfect competition. causes the demand curve to shift to the right.
Answer (C) is incorrect because small firm output Answer (C) is correct. The demand curve is the
relative to the industry is a key assumption of relationship between the prices of a commodity
perfect (vertical axis) and the quantity demanded at the
competition. various prices (horizontal axis), holding other
determinants of demand constant. A movement
Answer (D) is correct. Perfect competition is along
characterized by a market structure with many an existing demand curve occurs when the price is
buyers changed. A shift in a demand curve may occur
and sellers acting independently, a homogeneous when
or one of the determinants changes. A shift to the left
standardized product, free entry into and exit from represents a decline in demand. A leftward shift
the market, perfect information, no control over may
the be caused by an unfavorable change in the tastes
industry price, and the absence of nonprice and
competition. Moreover, customers are indifferent preferences of consumers, a decline in consumer
about which firm they buy from because price is income (if the commodity is a normal good), a
the decrease in the price of a substitute good, an
only difference between one seller and the next. increase
in the price of a complementary product, or the
expectation of future price decreases.
[100] Source: CMA 0695 1-18
Answer (D) is incorrect because a favorable change
Answer (A) is incorrect because a monopoly in consumers' tastes cause the demand curve to
consists shift
of a single seller. to the right.
Answer (B) is correct. Like perfect competition,

monopolistic competition is characterized by a [102] Source: CMA 0695 1-20
large
number of firms and relative ease of market entry. Answer (A) is incorrect because the increased
However, monopolistic competition is also supply
characterized by differentiated products, some will lead to a lower price.
control over price, and considerable nonprice
competition, e.g., through advertising and Answer (B) is incorrect because an increase in
emphasis supply
on brand awareness. increases quantity demanded, not overall demand.
Answer (C) is incorrect because an oligopoly Answer (C) is incorrect because pork is a substitute
consists of a few firms. Products may be for beef. Hence, the lower price of beef will shift
differentiated or standardized, and entry is demand for pork to the left, resulting in a lower
typically equilibrium price.
difficult.
Answer (D) is correct. If demand is constant, an
Answer (D) is incorrect because products are increase in supply should result in a lower
standardized in pure competition. equilibrium
price. The supply curve shifts to the right; that is,
more is supplied at each price. Thus, the new
[101] Source: CMA 0695 1-19 intersection of the supply and demand curves is at
a
Answer (A) is incorrect because a rise in the price lower point on the demand curve. The result is an
of increase in the quantity demanded.
a substitute causes the demand curve to shift to
the
[103] Source: CMA 1295 1-17 times the $1.50 decline in price; it ignores the
revenue
Answer (A) is incorrect because the 11th worker produced by the extra units.
will
cause total production to increase to 25 units, an Answer (B) is incorrect because $225 is the total
increment of five. increment when the number of workers increases
from 10 to 11.
Answer (B) is incorrect because eight units is the
marginal product of adding two workers to a team Answer (C) is correct. The marginal revenue
of product
ten workers. represents the increase in total revenue resulting
from
Answer (C) is correct. According to the table, 11 the additional production of an additional worker.
workers can produce 25 units, which is an increase The total revenue produced by 11 workers would
of five over the 20 units that 10 workers can be
produce. This additional five units is known as the $1,225 (25 units x $49). With 12 workers producing
marginal physical product generated by the 11th a total of 28 units at $47.50 each, the total
worker. revenue
would be $1,330. The $1,330 of revenue
Answer (D) is incorrect because 25 units will be the represents
total production by all 11 workers, not the an increment of $105 over the revenue generated
marginal by
product added by the 11th. 11 workers.
Answer (D) is incorrect because $47.50 is the new

[104] Source: CMA 1295 1-18 price per unit, not the marginal revenue.
Answer (A) is correct. The total revenue produced

by 11 workers would be $1,225 (25 units x $49). [106] Source: CMA 1285 1-18
With 12 workers producing a total of 28 units at
$47.50 each, the total revenue would be $1,330. Answer (A) is correct. As prices are increased, total
The revenue may increase or decrease depending on
$1,330 of revenue represents an increment of $105 the
over the revenue generated by 11 workers. price elasticity of demand (percentage change in
Dividing quantity demanded ÷ percentage change in price).
the $105 increment by the three incremental units If
(28 demand is elastic (elasticity > 1.0), a price increase
- 25) produces marginal revenue of $35 per unit. will tend to reduce total revenues. If demand is
inelastic, a price increase will tend to raise total
Answer (B) is incorrect because $225 is the total revenues. Thus, concern about the effect the price
increment when the number of workers increases increase will have on revenues relates to the price
from 10 to 11. elasticity of demand.
Answer (C) is incorrect because $105 is the total Answer (B) is incorrect because the substitution
increase in revenue for three additional units, not effect is implicit in the concept of elasticity. The
the fewer
marginal revenue per unit. substitutes, the less elastic will be the demand for
a
Answer (D) is incorrect because $47.50 is the new good.
price per unit, not the marginal revenue.
Answer (C) is incorrect because, in
cost-volume-profit analysis, the nature of the
[105] Source: CMA 1295 1-19 supply
curve is not considered.
Answer (A) is incorrect because $42 is the sales
price variance produced by multiplying the 28 Answer (D) is incorrect because utility theory is
units also
implicit in the concept of elasticity. If demand is
elastic, consumers derive less utility from paying a additions of utility to the consumer. For example, a
higher price. Thus, elasticity is Joe's dominant glass of water on a hot day tastes great, the
concern. second
glass less so, and the third even less.
[107] Source: CMA 0696 1-3 Answer (B) is incorrect because total utility will
increase with additional units of product, but the
Answer (A) is incorrect because the demand curve increases are at a declining rate; the principle
in applies
pure competition is perfectly elastic. to marginal utility, not total utility.
Answer (B) is incorrect because a monopolist's Answer (C) is incorrect because diminishing
profit marginal
is maximized when price exceeds marginal utility results in a downward-sloping demand
revenue curve.
and marginal cost.
Answer (D) is incorrect because the utility principle
Answer (C) is correct. In a pure monopoly, the applies not to time but to additional units of
marginal revenue curve is negatively (downwardly) product.
sloped. The reason is that the demand curve faced
by
the monopolist is also negatively sloped; that is, [109] Source: CMA 0696 1-5
price
must decrease to increase sales. However, a price Answer (A) is incorrect because an elasticity of 2.0
cut to increase sales applies not only to the is
incremental units but also to all other units. Each relatively elastic, not perfectly elastic.
additional unit adds its price minus the sum of the
reductions on preceding units to total revenue. Answer (B) is incorrect because an elasticity
Thus, coefficient greater than 1.0 is elastic.
marginal revenue (change in total revenue)
declines as Answer (C) is correct. The price elasticity of
output rises, and the marginal revenue curve will demand
lie measures the responsiveness of a change in
below the demand curve. If marginal revenue quantity
equaled demanded to a change in the price of a product. It
the price change, the marginal revenue and equals the percentage change in quantity
demand demanded
curves would be the same. divided by the percentage change in price. If the
demand coefficient is greater than 1.0, demand is
Answer (D) is incorrect because a monopolist has elastic. If the coefficient is less than 1.0, demand is
no inelastic. If the elasticity coefficient is exactly 1.0,
supply curve. Because a monopolist equates demand has unitary elasticity.
marginal
revenue and marginal cost, but marginal revenue Answer (D) is incorrect because an elasticity
is coefficient greater than 1.0 is elastic.
not price, different demand curves may result in
different prices at the same output level. Thus,
price [110] Source: CMA 0696 1-6
and quantity supplied do not have a unique
relationship. Answer (A) is incorrect because demand is elastic
when the coefficient exceeds 1.0.
[108] Source: CMA 0696 1-4 Answer (B) is correct. Price increases can most
easily be passed along to consumers when
Answer (A) is correct. The principle of diminishing demand is
marginal utility states that equal increments of inelastic. If the demand coefficient is less than 1.0,
additional consumption of a product result in the
smaller
percentage change in quantity demanded is less demand (a leftward shift in the demand curve)
than may
the percentage change in price. If demand does result when future prices are expected to decline.
not However, given a price set below equilibrium,
change at all (i.e., an elasticity of zero), as may be pressure on prices is upward.
true of insulin, the demand for the product is
perfectly Answer (D) is incorrect because the price ceiling
inelastic. will
cause shortages.
Answer (C) is incorrect because demand is
relatively
inelastic when the coefficient is greater than 0.0 [113] Source: CMA 1296 1-2
but
less than 1.0. Answer (A) is correct. Competitive markets are
preferable to other types of markets, such as
Answer (D) is incorrect because the appropriate monopolies, because price is lower and output
technical term is perfectly inelastic. greater. All firms should equate marginal revenue
(MR) and marginal cost (MC). For a competitive
firm, MR equals price at all output levels because
firm is a price taker. However, a monopolist must
Answer (A) is correct. Monopolistic competition is reduce price to raise sales, so its MR curve will
characterized by a large number of firms offering decline with output. Assuming no difference
differentiated products. Entry into the market is between
relatively easy, firms have some price control, and the MC curves of the purely competitive firm and
substantial nonprice competition exists, such as the
advertising. monopolist, the latter's downward-sloping MR
curve
Answer (B) is incorrect because monopolistic will intersect the MC curve at a lower output level
competition is characterized by a relatively large than that for a competitive firm. This lower output
group of sellers. level corresponds to a higher point (a higher price)
on
Answer (C) is incorrect because the market is not the demand curve.
monopolistic. There are many sellers.
Answer (B) is incorrect because a monopolist
Answer (D) is incorrect because products are not produces less and charges a higher price than a
homogeneous in monopolistic competition; pure
although competitor.
products may appear to be similar, they have
differences in service, quality, or other attributes. Answer (C) is incorrect because a monopolist
produces less and charges a higher price than a
pure
[112] Source: CMA 1296 1-1 competitor.
Answer (A) is incorrect because a surplus arises Answer (D) is incorrect because a monopolist
when the price is set above the equilibrium point. produces less and charges a higher price than a
Supply will exceed demand. pure
competitor.
Answer (B) is correct. Price fixing is the setting of
mandatory or artificial prices. It often interferes
with [114] Source: CMA 1296 1-3
the free operation of the market. A price ceiling is
a Answer (A) is incorrect because the demand curve
price below the equilibrium point. The result is a of
shortage because consumer demand will exceed a pure competitor is perfectly elastic. Such a firm
supply. is a
price taker that can sell all of its output at the
Answer (C) is incorrect because a decrease in market
price but none of its output at a higher price. new price may be higher, lower, or unchanged
depending upon the slopes of the demand and
Answer (B) is incorrect because profit is maximized supply
when marginal revenue equals marginal cost. curves. Whatever the new price, the quantity of
products cleared by the market should increase.
Answer (C) is correct. A pure monopolist
constitutes
the industry; that is, the negatively sloped industry [116] Source: CMA 1296 1-19
demand curve is the pure monopolist's demand
curve. Accordingly, the pure monopolist must Answer (A) is incorrect because elasticity of
reduce demand
price to increase sales, and the marginal revenue is unrelated to market structure.
curve will also be negatively sloped. Moreover,
marginal revenue will be less than price (average Answer (B) is incorrect because, if marginal costs
revenue) because the price reductions necessary are
to rising, multiple smaller firms are preferable to a
increase sales apply to all units that might single
otherwise producer.
have been sold at a higher price. This relationship
explains why the marginal revenue curve lies Answer (C) is incorrect because consumer demand
below is
the demand curve. The latter is a function of price unrelated to the market structure of the supplier.
and quantity demanded.
Answer (D) is correct. A natural monopoly exists
Answer (D) is incorrect because the supply curve is because economic and technical conditions exist in
unrelated to the market structure of the the industry or economy that permit only one
producer's efficient
industry. supplier in a locale. A natural monopoly exists
when
economies of scale are very great, that is, when
[115] Source: CMA 1296 1-4 very
large-scale operations are required to achieve low
Answer (A) is incorrect because, under the law of unit costs and prices. In a natural monopoly, the
diminishing returns, if increasing amounts of a unit
variable cost (the long-term average cost) of meeting the
input are applied to a fixed input, there is some entire demand is minimized when the industry
point consists
beyond which additional units of the variable of one firm. Thus, competition would be
input undesirable
will contribute less and less to the total output. because the presence of two or more firms would
prevent the realization of the necessary economies
Answer (B) is incorrect because an opportunity of
cost scale.
is the benefit forgone by not choosing the next
best
use of a scarce resource. [117] Source: CMA 1296 1-27
Answer (C) is incorrect because the principle of Answer (A) is correct. A merger is a business
comparative advantage states that world output is combination in which an acquiring firm absorbs a
maximized when each output is produced by the second firm, and the acquiring firm remains in
nation with the lower opportunity cost. business as a combination of the two. A horizontal
merger is the union of two or more companies
Answer (D) is correct. In a competitive market, that
equilibrium exists when demand is exactly equal to engage in the same or similar activities; in other
supply. If both demand and supply increase in words, two firms in the same industry.
equal
amounts, the market will still be in equilibrium, Answer (B) is incorrect because a merger between
but the a
manufacturer and its supplier or distributor is a only one efficient supplier. It arises when
vertical merger. economies
of scale are very great, that is, when very large
Answer (C) is incorrect because a merger between operations are needed to achieve low unit costs
firms in different industries is a conglomerate and
merger. prices. Thus, the unit cost of meeting demand is
minimized when the industry has one firm.
Answer (D) is incorrect because a merger between
firms in different stages of the production process Answer (B) is incorrect because a cartel is a group
is of
vertical. oligopolistic firms that have joined together for
price-fixing purposes. The practice is illegal except
in
[118] Source: CMA 0697 1-1 international markets.
Answer (A) is correct. A large capital outlay Answer (C) is correct. An oligopoly is characterized
necessary to enter an industry is an entry barrier. by a few firms in the industry (but more than one).
Entry barriers are characteristic of monopolistic Prices tend to be rigid because of the
competition, oligopoly, and monopoly. In these interdependence among firms. Entry is difficult
market structures, the barriers are successively because an oligopolistic industry usually has
more substantial economies of scale. Hence, a new
difficult to overcome, with the strongest barriers entrant
existing in a monopoly structure. needs to begin as a large producer. Other barriers,
such as existing firms' control of technology or raw
Answer (B) is incorrect because the minimum materials, the need for substantial advertising, or
efficient scale is the lowest output at which long- costly licensing requirements, may make entry
term difficult.
average unit cost is minimized. A natural
monopoly Answer (D) is incorrect because monopolistic
occurs when only one firm can produce at the competition is characterized by a relatively large
MES. number of firms in the industry, differentiated
The reason is that economies of scale can continue products, relatively easy entry into the market,
to and
be obtained at output levels in excess of the total large amounts of nonprice competition.
market demand. Accordingly, the lowest unit costs
are achieved when one producer exists.
[120] Source: CMA 0697 1-3
Answer (C) is incorrect because a barrier to entry
may be created by the firms already operating in Answer (A) is correct. The increase in prices at the
the movie theater caused consumers to demand fewer
industry. An example is an ongoing advertising movies at the theater and more movies at the
campaign. video
store (where prices were unchanged). Thus,
Answer (D) is incorrect because the production cross-elasticity of demand existed because the
possibility boundary is a macroeconomic concept. percentage change in quantity demanded of
It videos
depicts the short-run maximum gross domestic was correlated with the percentage change in the
product obtainable given full production and full price of movie theater tickets. The correlation was
employment of existing resources (land, labor, positive, so the goods are substitutes.
capital, and entrepreneurial ability).
Answer (B) is incorrect because superior (normal)
goods are defined as those for which demand is
[119] Source: CMA 0697 1-2 positively correlated with income.
Answer (A) is incorrect because a natural Answer (C) is incorrect because sales of a
monopoly complementary good are negatively correlated
exists when economic or technical conditions with
permit
changes in the price of its complement. For
example, Answer (A) is incorrect because weekday demand
sales of tennis balls decrease with an increase in is
tennis racquet prices. elastic.
Answer (D) is incorrect because public goods are Answer (B) is incorrect because weekend demand
characterized by the difficulty of excluding is
individuals inelastic.
from their benefits. Examples are national defense
and public parks. Answer (C) is correct. The price elasticity of
demand
is the percentage change in quantity demanded
[121] Source: CMA 0697 1-4 divided by the percentage change in price. If the
elasticity coefficient is greater than one, demand is
Answer (A) is incorrect because $90.02 is the total elastic. If the coefficient is less than one, demand
fixed cost. is
inelastic. If elasticity is calculated as the change
Answer (B) is incorrect because $168 is the total over
variable cost. the average, the coefficient for senior citizens
indicates that demand is elastic.
Answer (C) is correct. If seven units can be
produced at an average cost of $36.86 each, (150 - 82) ÷ [(150 + 82) ÷ 2]
multiplying that amount by seven produces the ------------------------------ = 2.05
total (8 - 6) ÷ [(8 + 6) ÷ 2]}
cost of $258.02. The coefficient for weekends indicates that
demand is
Answer (D) is incorrect because $280 is the total inelastic.
cost if average total cost for seven units were
$40.00. (223 - 221) ÷ [(223 + 221) ÷ 2]
------------------------------- = .03
(20 - 15) ÷ [(20 + 15) ÷ 2]
[122] Source: CMA 0697 1-5
Answer (D) is incorrect because weekday demand
Answer (A) is incorrect because $23.50 is the is
variable cost of the eighth unit. elastic, and weekend demand is inelastic.
Answer (B) is incorrect because $23.75 is the

variable cost of the ninth unit. [124] Source: CMA 0697 1-17
Answer (C) is correct. Marginal cost is the Answer (A) is incorrect because vertical integration
incremental cost of producing one additional unit. is
Thus, the marginal cost of the ninth unit is the the combination of a company with a supplier or a
increment over the total cost for eight units. The customer.
total
cost for eight units at $34.75 each is $278, and the Answer (B) is incorrect because market
total cost for nine units at $33.75 each is $303.75, concentration is the degree to which a few
so producers
the total cost for nine units is $25.75 greater than dominate an industry.
the
total for eight units. This $25.75 is the marginal Answer (C) is correct. Entry barriers exist in all
cost market structures other than perfect competition.
of the ninth unit. The
fewer the firms in an industry, the greater the
Answer (D) is incorrect because $33.75 is the barriers
average cost per unit for nine units. tend to be. Entry barriers include the existence of
substantial economies of scale (low unit costs can
be
[123] Source: CMA 0697 1-6
achieved only by large producers). They also Answer (B) is correct. Marginal cost is the
include additional
barriers created by existing firms. For example, cost of producing one more unit of output.
large Because
advertising expenditures may be necessary to total cost increased from $250 to $360, the
compete. Control of raw materials or technology is marginal
another barrier. Consequently, patents held by cost of the second unit is $110.
existing firms may serve as an entry barrier
because Answer (C) is incorrect because $150 is the
they prevent potential competitors from using marginal
certain cost of the first unit of production.
technology. Patents are rights granted by the
federal Answer (D) is incorrect because $180 is the
government to inventors to allow them the average
exclusive cost of production for two units.
use of their inventions for a specified period.
Answer (D) is incorrect because a patent is a [127] Source: Publisher

contract between the government and an inventor.
There is no collusion. Answer (A) is correct. A firm should employ inputs
such that the marginal products per dollar of input
are
[125] Source: CMA 0697 1-18 equal. Because the wage rate increased by more
than
Answer (A) is incorrect because the purchase of a the rental rate, the marginal product of labor was
grocery store by another similar store, whether or reduced with respect to the marginal product of
not equipment. By using more equipment and less
in the same market, is a horizontal merger, a labor,
combination of two companies that engage in the the company's marginal product for equipment
same or similar activities. will be
reduced and its marginal product for labor will rise
Answer (B) is incorrect because the purchase of a until the two are equal.
grocery store by another similar store, whether or
not Answer (B) is incorrect because the company
in the same market, is a horizontal merger, a should
combination of two companies that engage in the use relatively less labor than before. Labor costs
same or similar activities. went up at a greater rate than equipment costs.
Answer (C) is incorrect because a hot dog Answer (C) is incorrect because the company
producer's purchase of a soft drink manufacturer should
is a not decrease the amounts of both inputs if it
conglomerate merger, a combination of companies wishes to
in maintain output and profitability.
unrelated industries.
Answer (D) is incorrect because the company has
Answer (D) is correct. A vertical merger is a an
combination of two companies, one of which incentive to increase the equipment-output ratio.
supplies
inputs for the other. A brewer's purchase of a glass
company is an example. The glass company could [128] Source: Publisher
supply glass for the brewer's bottles.
Answer (A) is incorrect because revenue should
rise
[126] Source: Publisher as the price falls when elasticity exceeds 1.0.
Answer (A) is incorrect because $100 is the fixed Answer (B) is incorrect because revenue should
cost of production. rise
as the price falls when elasticity exceeds 1.0.
Answer (D) is incorrect because the three
Answer (C) is correct. Price elasticity is the companies
percentage change in quantity demanded divided all have different levels of accounting income.
by
the percentage change in price. An elasticity of 2.5
means that the change in demand will increase by [131] Source: Publisher
250% of any change in price measured in absolute
terms (the minus sign is ignored). Hence, a 5% Answer (A) is incorrect because demand would be
price 1
reduction increases demand by 12.5% (2.5 x 5%). when the price is $6.
Answer (D) is incorrect because the price decline Answer (B) is correct. This type of problem is
will solved
lead to increased demand if elasticity is greater by means of trial and error. Check each of the
than answer alternatives to determine whether both
1.0. points
represent a level of demand for a given price.
Answer
[129] Source: Publisher (B) is correct because total demand would be 3 at
a
Answer (A) is incorrect because Company A has a price of $5, and total demand would be 17 (5 + 9 +
negative economic profit ($30,000 - $60,000 = 3) at a price of $1.
-$30,000).
Answer (C) is incorrect because demand would be
Answer (B) is correct. Economic profit is the excess 6, not 4, when the price is $4, and demand would
of revenues over economic costs, including costs be
for 14, not 12, when the price is $2.
materials, labor, and the cost of capital. Thus,
imputed interest at 12% of shareholders' equity is Answer (D) is incorrect because demand would be
subtracted from the accounting profit. Imputed 6
interest is $60,000 for A, $36,000 for B, and when the price is $4 and 17 when the price is $1.
$108,000 for C. Accordingly, Company B has the
highest economic profit ($60,000 accounting
income [132] Source: Publisher
- $36,000 interest on capital = $24,000).
Answer (A) is incorrect because 1.67 is the inverse
Answer (C) is incorrect because Company C's of the elasticity.
economic profit is $12,000 ($120,000 - $108,000).
Answer (B) is incorrect because 1.06 is the result of
Answer (D) is incorrect because Company B has adding the 6% quantity decline to 1.
the
highest economic profit. Answer (C) is incorrect because the price elasticity
of
demand is found by dividing the 6% quantity
[130] Source: Publisher decline
by the 10% price increase, not by adding them.
Answer (A) is incorrect because Company A's
$30,000 income is less than that of Company C. Answer (D) is correct. The price elasticity of
demand
Answer (B) is incorrect because Company B's is calculated by dividing the percentage change in
$60,000 income is less than that of Company C. quantity demanded by the percentage change in
price. The numerator and denominator are
Answer (C) is correct. Accounting income was computed
given as the change over the average, which results in
for each company. Company C had the highest the
accounting income at $120,000. same percentage regardless of whether there is an
increase or a decrease. Thus, the change in
quantity
of 3,000 units (51,500 - 48,500) divided by the $1 divided by the average price of $3.50 results in
average of 50,000 [(51,500 + 48,500) ÷ 2] equals a
6%. Dividing the 6% quantity decline by the 10% price increase of 28.571%. Dividing 10.526% by
price increase produces an elasticity of 0.6. 28.571% results in an elasticity coefficient of .3684,
or .37 rounded.
[133] Source: Publisher Answer (D) is incorrect because 0.33 would be the
percentage change in price if the original, not the
Answer (A) is incorrect because 1/3 represents the average, price were used in the denominator.
increase in quantity sold.
Answer (B) is incorrect because 3/2 is the inverse [135] Source: Publisher
of
price elasticity. Answer (A) is incorrect because $22 - $18 has a
coefficient of 3.335 (.667 ÷ .2).
Answer (C) is incorrect because 1 is based on the
original quantity and price rather than the average Answer (B) is incorrect because $18 - $14 has a
quantity and price. coefficient of 2.668 (.667 ÷ .25).
Answer (D) is correct. The price elasticity is Answer (C) is incorrect because $14 - $10 has a
calculated by dividing the percentage change in coefficient of 1.2 (.4 ÷ .333).
quantity by the percentage change in price. The
numerator and denominator are computed as the Answer (D) is correct. Inelasticity is a condition in
change over the average. Thus, the change in which the elasticity coefficient is less than one.
quantity Thus,
of 1,000 units (3,500 - 2,500) divided by the the coefficient should be calculated for each of the
average of 3,000 [(3,500 + 2,500) ÷ 2] produces a ranges. As the price drops from $10 to $6, demand
quantity increase of 1/3. The $.50 price decline increases from 600 to 800. The quantity increased
divided by the average price of $1 produces a price by
decline of 50%. Dividing the quantity increase by 28.57% (200 ÷ 700). The price decline was 50%
the ($4 ÷ $8). Dividing 28.57% by 50% produces an
price change (1/3 ÷ .5) equals a price elasticity of elasticity coefficient of .571, which is less than one.
2/3.

Answer (A) is correct. Opportunity cost is defined
Answer (A) is incorrect because 3.00 is the inverse as
of the price increase divided by the original, not the return available from the best alternative
the investment. Since the interest on the $10,000
average, price. would
be $500, that is the opportunity cost of the
Answer (B) is incorrect because 2.71 is the inverse investment in the saloon.
of the correct coefficient.
Answer (B) is incorrect because the dividend
Answer (C) is correct. The price elasticity is would
calculated by dividing the percentage change in be the return on the new investment, not the
quantity demanded by the percentage change in opportunity cost.
price. The numerator and denominator are both
computed as the change over the average, which Answer (C) is incorrect because the $10,000 is the
results in the same percentage regardless of cost of the investment, not the opportunity cost.
whether
there is an increase or a decrease. Thus, the Answer (D) is incorrect because only the $500 of
change return given up is the opportunity cost.
in quantity demanded of 100 units divided by the
average quantity demanded of 950 produces a
quantity decrease of 10.526%. The price increase [137] Source: Publisher
of
Answer (A) is incorrect because the firm will break Answer (C) is incorrect because $200 is higher than
even at 5 units. the minimum average total cost.
Answer (B) is correct. A firm should produce at the Answer (D) is incorrect because $230 is higher
level where marginal cost equals marginal than
revenue. At the minimum average total cost.
6 units, marginal revenue of $190 equals the
marginal
cost. Since average total cost is also $190, the firm [140] Source: Publisher
will break even.
Answer (A) is correct. At a price of $3, the quantity
Answer (C) is incorrect because the firm will lose demanded will be 10, while the quantity supplied
money at 8 units, as the average total cost will be will
less be 30. Thus, there will be a surplus of 20 units.
than revenue.
Answer (B) is incorrect because, at a price floor of
Answer (D) is incorrect because the firm will lose $3, demand will exceed supply by 20 units,
money at 8 units, as the average total cost will be resulting
less in a surplus.
than revenue.
Answer (C) is incorrect because, at a price floor of
$3, demand will exceed supply by 20 units,
[138] Source: Publisher resulting
in a surplus.
Answer (A) is incorrect because marginal costs are
less than marginal revenue; thus, a rational firm Answer (D) is incorrect because, at a price floor of
will $3, demand will exceed supply by 20 units,
increase production. resulting
in a surplus.
Answer (B) is incorrect because marginal costs are
less than marginal revenue; thus, a rational firm
will [141] Source: Publisher
increase production.
Answer (A) is incorrect because the price of a new
Answer (C) is correct. The firm will produce 9 units bicycle is irrelevant since the bicycle purchased
because at that level marginal cost equals marginal was
revenue. At $290 per unit, revenue will be $2,610. not new.
At $205 per unit, expenses will be $1,845, leaving
$765 profit. Answer (B) is incorrect because $15 results from
subtracting both the $30 and $55 from the price of
Answer (D) is incorrect because marginal costs are a
higher than marginal revenue; thus, profit would new bicycle.
be
less than with output of 9 units. Answer (C) is incorrect because $45 results from
deducting the maximum price from the new price
without regard to the price actually paid.
Answer (D) is correct. The consumer surplus is the
Answer (A) is incorrect because $110 is lower than excess of price over the amount a consumer is
the average total cost at all levels of production. willing
to pay. Subtracting the $30 price from the $55
Answer (B) is correct. The equilibrium price will be Jimbo
at the level where marginal cost equals marginal was willing to pay produces a consumer surplus of
revenue. Competitors are in long-run equilibrium $25.
when price equals minimum average cost. All of
this
occurs at a price of $190. [142] Source: Publisher
Answer (A) is incorrect because quantity supplied.
demanded
exceeds quantity supplied at this price.
Answer (B) is incorrect because quantity
demanded Answer (A) is incorrect because perfect inelasticity
exceeds quantity supplied at this price. occurs when the coefficient is zero.
Answer (C) is incorrect because quantity Answer (B) is correct. If the elasticity coefficient is
demanded greater than one, demand is classified as elastic.
exceeds quantity supplied at this price. Since the percentage change in quantity
demanded is
Answer (D) is correct. The equilibrium price is the 10% and the price change is 5%, the elasticity
price at which quantity supplied and quantity coefficient is 2.0 (10% ÷ 5%).
demanded are equal. At a price of $39, supply and
demand are equal at 320 units. Answer (C) is incorrect because unitary elasticity
refers to a condition in which the coefficient is
equal
[143] Source: Publisher to one.
Answer (A) is incorrect because quantity Answer (D) is incorrect because an inelastic
demanded condition exists when the coefficient is less than
exceeds quantity supplied at this price. one.
Answer (B) is incorrect because quantity

demanded [146] Source: Publisher
exceeds quantity supplied at this price.
Answer (A) is incorrect because an inelastic
Answer (C) is correct. The equilibrium price is the demand
price at which quantity supplied and quantity would lead to increased revenues as prices rise.
demanded are equal. At a price of $42, supply and
demand are equal at 285 units. Answer (B) is correct. Inelasticity refers to the
condition in which the percentage change in
Answer (D) is incorrect because, at $45, the quantity
quantity is less than the percentage change in price. If price
supplied is still greater than the quantity increased 10%, the quantity demanded would
demanded. decline
by less than 10%. Therefore, total revenues would
increase.
Answer (C) is incorrect because an inelastic
Answer (A) is incorrect because quantity demand
demanded would lead to increased revenues as prices rise.
exceeds quantity supplied at this level.
Answer (D) is incorrect because demand, not
Answer (B) is incorrect because quantity revenues, is inelastic.
demanded
exceeds quantity supplied at this level.
Answer (C) is incorrect because quantity
demanded Answer (A) is correct. Elasticity measures the
exceeds quantity supplied at this level. percentage change in quantity demanded
compared
Answer (D) is correct. The equilibrium quantity is to a percentage change in price. The numerator
the (quantity change) and the denominator (price
amount at which quantity demanded and quantity change)
supplied are equal. At a price of $45, the level are computed as the change over the average. The
demanded will be 395, the same as the quantity quantity change between points J and K is 50.
Dividing 50 by the average of 75 produces a Answer (A) is incorrect because more Y would
quantity increase costs more than would be saved by the
increase of 66.7%. The price decline of $4 divided decline in X for a given level of utility.
by the average of $8 is a price change of 50%.
Dividing 66.7% by 50% produces an elasticity of Answer (B) is incorrect because both products
1.33, which is greater than one. A demand greater cannot be increased without violating budget
than one means demand is defined as elastic. constraints.
Answer (B) is incorrect because .75 is the inverse Answer (C) is correct. Utility is maximized when a
of consumer's budget line is tangent to the highest
the elasticity coefficient. possible indifference curve. A consumer should be
indifferent between 2 units of Y (2 x 45 = 90) and 3
Answer (C) is incorrect because .40 results from units of X (3 x 30 = 90). Since the 3 units of X cost
failing to use average quantities and prices. less (3 x $10 = $30) than 2 units of Y (2 x $20 =
$40), the consumer would want more units of X
Answer (D) is incorrect because 2.50 results from and
failing to use average quantities and prices. fewer units of Y.
Answer (D) is incorrect because an increase in X

[148] Source: Publisher will
produce greater utility for a given budget.
Answer (A) is incorrect because, at a price of $40,
demand is 2,000 and supply is 8,000.
Answer (B) is incorrect because, at $38, there is a
surplus of 1,500 units. Answer (A) is incorrect because it produces a total
utility of only 45.
Answer (C) is correct. Equilibrium is defined as the
level at which supply and demand are equal. Answer (B) is correct. The solutions approach is to
Equilibrium occurs at a price of $36 when supply calculate the total utility provided by each of the
and answer combinations using a trial-and-error
demand are both 4,000. approach. 5M and 2N produces a total utility of 48
(8 + 7 + 6 + 5 + 4 + 10 + 8). This answer is the
Answer (D) is incorrect because, at a price of $34, highest of any of the possible combinations.
demand exceeds supply by 1,500 units.
Answer (C) is incorrect because it produces a total
utility of only 45.
Answer (D) is incorrect because it produces a total
Answer (A) is incorrect because a shortage is not utility of only 36.
an
option shown on the chart.
Answer (B) is incorrect because a surplus of 6,000
pounds will occur at a price of $44. Answer (A) is incorrect because the maximum
utility
Answer (C) is incorrect because there is a surplus, is 48.
not a shortage, since supply exceeds demand at a
price of $42. Answer (B) is incorrect because the maximum
utility
Answer (D) is correct. At a price of $42, demand is 48.
will be 2,400 units, while supply will be 7,000
units. Answer (C) is correct. Without violating the budget
Thus, there will be a surplus of 4,500 units. constraint, utility can be maximized at 48.
Maximum
utility occurs when the quantity of M is 5 and N is
[150] Source: Publisher 2.
Answer (D) is incorrect because the maximum Answer (A) is correct. A consumer will equalize the
utility marginal utility for each dollar available. Thus, if
is 48. the
marginal utility of X is half that of Y, then X must
have a price equal to half that of Y. Since Y is $8, X
[153] Source: Publisher must sell for $4.
Answer (A) is correct. All of the answer Answer (B) is incorrect because X must be less
combinations are within the income constraint. than
Thus, Y since it has a lower marginal utility.
the solutions approach is to determine which
combination maximizes total utility. A combination Answer (C) is incorrect because X must be less
of than
6M and 3N produces a total utility of 57 (8 + 7 + 6 Y since it has a lower marginal utility.
+ 5 + 4 + 3 + 10 + 8 + 6).
Answer (D) is incorrect because the price of X will
Answer (B) is incorrect because it produces a total be half, not double, that of Y.
utility of only 54.
Answer (C) is incorrect because it produces a total [156] Source: Publisher

utility of only 46.
Answer (A) is incorrect because it violates the
Answer (D) is incorrect because it produces a total income constraint.
utility of only 54.
Answer (B) is incorrect because total utility is only
43.
Answer (C) is correct. With an income of $54, a
Answer (A) is incorrect because the consumer is consumer can purchase 3 CDs (a total of $36) and
not 2
in equilibrium when she is buying products whose tapes ($18), resulting in a total utility of 51 (15 +
marginal utility are not the same per dollar of 36).
utility.
Answer (D) is incorrect because it violates the
Answer (B) is incorrect because product A is higher income constraint.
priced per unit of utility.
Answer (C) is correct. A rational consumer's [157] Source: Publisher

objective is to maximize the total utility and the
marginal utility on the last dollar of income. Since Answer (A) is incorrect because 47 is less than the
products A and B sell for different prices, they 51 available under the correct option.
should
not have the same utility. B offers the same utility Answer (B) is correct. With an income of $54, a
of 3 consumer can purchase 3 CDs (a total of $36) and
at a price of $4. Thus, it is logical for the consumer 2
to tapes ($18), resulting in total utility of 51 (15 for
purchase more of B, which offers the same utility the 2
at a tapes and 36 for the 3 CDs).
lower price. It can be concluded that she should
buy Answer (C) is incorrect because 55 is available only
less of A and more of B. if the income constraint is violated.
Answer (D) is incorrect because a reduction in Answer (D) is incorrect because 61 is available only
purchases will reduce total utility. if the income constraint is violated.

Answer (A) is incorrect because the total utility is increasing.
only 49 (21 + 28).
Answer (B) is incorrect because returns are
Answer (B) is incorrect because it violates the increasing.
income constraint.
Answer (C) is correct. If output increases at a
Answer (C) is correct. Of the combinations given, greater
answers (B) and (D) violate the income constraint. rate than inputs, the firm is experiencing
A increasing
combination of 3 tapes and 3 CDs will maximize returns to scale, or economies of scale.
utility at 55 (19 + 36).
Answer (D) is incorrect because the firm is
Answer (D) is incorrect because it violates the experiencing economies of scale.
income constraint.

Answer (A) is incorrect because returns are
Answer (A) is incorrect because marginal cost will decreasing when output does not rise as fast as
be inputs.
less than average total cost.
Answer (B) is correct. When output increases at a
Answer (B) is incorrect because marginal cost will smaller percentage than inputs, the firm is
be experiencing decreasing returns to scale, or
equal to average variable cost. diseconomies of scale.
Answer (C) is correct. Since fixed costs are fixed in Answer (C) is incorrect because the firm is
total, they will decline per unit as production experiencing diseconomies of scale.
increases. Thus, average total cost will decrease
when output is increased. Answer (D) is incorrect because returns are not
constant when a doubling of inputs results in less
Answer (D) is incorrect because average total cost than
will decline since fixed costs are constant in total. a doubling of output.
Answer (A) is correct. Since the marginal product Answer (A) is incorrect because the $200,000 of
of implicit costs is not deductible in computing
labor is greater per dollar of cost (10 ÷ $5 = 2 units accounting income.
per dollar) than the marginal product of capital (5
÷ Answer (B) is correct. Implicit costs are amounts
$10 = .5 unit per dollar, the firm should use more that
labor and less capital). would have been received if self-owned resources
had been used outside the firm's business.
Answer (B) is incorrect because capital is more Economic
expensive than labor per unit of output. profit is pure profit, or the excess of revenue over
both explicit and implicit costs. Revenues of $2
Answer (C) is incorrect because a reduction in both million minus explicit costs of $700,000 result in
capital and labor would reduce output. accounting income of $1.3 million. That amount is
reduced by the $200,000 of implicit costs to arrive
Answer (D) is incorrect because it would be more at
advantageous to use more labor and less capital. economic profit of $1.1 million.
Answer (C) is incorrect because economic income

[161] Source: Publisher will be less than accounting income when there
are
Answer (A) is incorrect because returns are implicit costs.
seventh unit would be equal to the increment in
Answer (D) is incorrect because implicit costs total
reduce costs over what it costs to produce 6 units. Fixed
accounting income rather than increase it. costs are not considered since they do not, by
definition, increase with changes in production.
Total
[164] Source: Publisher variable costs increase from $1,800 to $2,800, an
increment of $1,000. The $1,000 is the marginal
Answer (A) is correct. If total variable cost is $600 cost
when 4 units are produced, the average would be of the seventh unit.
$150 ($600 ÷ 4).
Answer (B) is incorrect because $200 is the [167] Source: Publisher

average
when 5 units are produced. Answer (A) is incorrect because $30,000 represents
only the fixed costs.
Answer (C) is incorrect because $250 is based on a
cost of $1,000, which was for 5 units. Answer (B) is incorrect because $50,000 represents
only the variable costs.
Answer (D) is incorrect because $600 is the total
cost, not the average cost. Answer (C) is incorrect because the total fixed
costs
are $30,000, not $3.
Answer (D) is correct. A firm's total costs consist of
Answer (A) is incorrect because $150 represents both variable and fixed costs. If the average fixed
only the variable costs. cost for 10,000 units is $3, the total fixed costs are
$30,000. Adding the $30,000 of fixed costs to the
Answer (B) is incorrect because $250 represents $50,000 of variable costs produces total costs of
only the fixed costs. $80,000.
Answer (C) is correct. The average total cost

includes both fixed and variable costs. Fixed costs [168] Source: Publisher
total $1,000, which would be $250 per unit when
production is 4. Add the $250 of average fixed cost Answer (A) is incorrect because the average
to the $150 of average variable cost ($600 ÷ 4) to variable
arrive at a $400 average total cost. cost is added to, not subtracted from, the average
fixed cost.
Answer (D) is incorrect because $600 represents
the Answer (B) is incorrect because $3 is the variable
total of variable costs rather than the average cost. cost, not the total cost.
Answer (C) is incorrect because $4 is only the fixed

[166] Source: Publisher cost per unit, not the total cost.
Answer (A) is incorrect because $100 is the Answer (D) is correct. At a production level of
marginal 1,000
cost of the fourth unit. units, the average fixed cost is $4 ($4,000 ÷ 1,000
units). Adding the $4 of average fixed cost to the
Answer (B) is incorrect because $300 is the $3
average of average variable cost produces a total cost of
variable cost of 6 units. $7.
Answer (C) is incorrect because $400 is the average

variable cost for 7 units. [169] Source: Publisher
Answer (D) is correct. The marginal cost of the Answer (A) is incorrect because the marginal cost
cannot be accurately determined from the shut down as long as selling price exceeds variable
information cost.
given, but is most likely equal to the $80 of unit
variable cost. Answer (D) is incorrect because a firm in pure
competition should continue increasing production
Answer (B) is incorrect because the average total as
cost is $120. long as the marginal cost is less than selling price.
Answer (C) is incorrect because the average fixed

cost is $40. [172] Source: Publisher
Answer (D) is correct. If total variable cost is $400 Answer (A) is incorrect because the monopolist is
for 5 units, the average variable cost is $80. The not at the profit-maximizing level when marginal
average fixed cost is $40 ($200 ÷ 5), and the revenue is lower than marginal cost.
average total cost is $120 ($80 + $40).
Answer (B) is incorrect because a firm should not
shut down as long as marginal revenue exceeds
[170] Source: Publisher variable cost.
Answer (A) is correct. For profit maximization, a Answer (C) is incorrect because the firm should
firm not
operating under pure competition should equate increase production when marginal cost is greater
price than marginal revenue.
to marginal cost. Since price and marginal cost are
both $20, the firm should not change output. Answer (D) is correct. A monopolist should not
continue producing at the current level when
Answer (B) is incorrect because a firm should not marginal
decrease output when price is at least equal to revenue is less than marginal cost. Decreasing
marginal cost. output
will result in increased profits.
Answer (C) is incorrect because there is no
incentive
to increase production when marginal cost is equal [173] Source: Publisher
to
selling price. Answer (A) is incorrect because the demand curve
would be perfectly elastic.
Answer (D) is incorrect because a firm should not
shut down as long as price exceeds variable cost; Answer (B) is incorrect because the demand curve
any would be perfectly elastic.
excess of price over variable cost provides a
contribution toward the coverage of fixed costs. Answer (C) is correct. The demand curve faced by
a
firm operating under perfect competition is
[171] Source: Publisher perfectly
elastic (horizontal) because the firm is a price
Answer (A) is incorrect because a firm in pure taker. It
competition should increase production as long as must sell at the market price. If the firm tries to
the increase its price, demand will drop to zero.
marginal cost is less than selling price.
Answer (D) is incorrect because the curve would
Answer (B) is correct. A firm should continue be
increasing production as long as marginal cost is perfectly elastic.
less
than selling price. Profit is maximized when
marginal [174] Source: Publisher
cost equals selling price.
Answer (A) is incorrect because the average
Answer (C) is incorrect because a firm should not revenue
for 11 units is $7. Answer (A) is incorrect because, at a price of
$1,000, only 1 unit will be sold.
Answer (B) is incorrect because the average
revenue Answer (B) is incorrect because, at a price of $600,
for producing 11 units is $7. only 2 units will be sold.
Answer (C) is correct. If the revenue for 11 units is Answer (C) is correct. Profits will be maximized at
$77, and the revenue for 10 units is $60, there is a
marginal revenue of $17 on the eleventh unit. production level of 3 units. To sell 3 units, the price
would have to be set at $500.
Answer (D) is incorrect because total revenue is
$77; Answer (D) is incorrect because, at a price of $400,
marginal revenue is $17. sales will be 4 units, but profits will be lower than
at 3
units.
Answer (A) is incorrect because increasing price [178] Source: Publisher

will
result in lower demand for a normal good. Answer (A) is incorrect because $1,600 would be
the total revenue based on the price that the
Answer (B) is correct. A monopolist should fourth
continue customer would be willing to pay.
increasing production until marginal cost is equal
to Answer (B) is correct. The first customer is willing
marginal revenue. Thus, decreasing price and to
increasing production will enhance profitability. pay $1,000, the second customer $600, the third
customer $500, and the fourth customer $400, for
Answer (C) is incorrect because decreasing price a
and output will reduce profits. total revenue of $2,500.
Answer (D) is incorrect because increasing price Answer (C) is incorrect because $2,800 would be
will the revenue if five customers paid their maximum
reduce demand. amount.
Answer (D) is incorrect because it is based on the

[176] Source: Publisher maximum amount that the first customer is willing
to
Answer (A) is incorrect because, at this level, pay for 4 units.
marginal costs are less than marginal revenues.
Answer (B) is incorrect because, at this level, [179] Source: Publisher

marginal costs are less than marginal revenues.
Answer (A) is incorrect because it produces lower
Answer (C) is correct. Profit on 1 unit would be profits than would the sale of 6 units.
$500 ($1,000 of revenue minus $500 cost). Profit
for Answer (B) is correct. A monopolist will keep
2 units would be $680 ($1,200 - $520). For 3 units, producing as long as marginal revenues exceed
profit would be $920 ($1,500 - $580). This is the marginal costs. This condition exists at 6 units, but
maximum profit since, at production levels of 4 or not
more, marginal cost exceeds marginal revenue. at 7. Thus, the optimal output is at 6 units with a
unit
Answer (D) is incorrect because profit is less than price of $400. Any other level will result in lower
when 3 units are produced. profits.
Answer (C) is incorrect because, at these levels,

[177] Source: Publisher marginal revenues are less than marginal costs;
thus,
profits are less than at 6 units. Answer (A) is correct. Without price
discrimination,
Answer (D) is incorrect because, at these levels, profits would be $1,560 ($2,400 of revenues for 6
marginal revenues are less than marginal costs; units - $840 costs). With price discrimination,
thus, profits
profits are less than at 6 units. would be $2,550 ($3,800 of revenues for 8 units -
$1,250 costs).
[180] Source: Publisher Answer (B) is incorrect because $1,400 is the

difference in revenues, not profits.
Answer (A) is incorrect because the only cost that
might be related to marginal revenue would be Answer (C) is incorrect because $1,560 is the profit
marginal cost. at 6 units.
Answer (B) is incorrect because the only cost that Answer (D) is incorrect because $2,550 is the profit
might be related to marginal revenue would be at 8 units.
marginal cost.
Answer (C) is incorrect because the only cost that [183] Source: Publisher
might be related to marginal revenue would be
marginal cost. Answer (A) is correct. Marginal revenue product is
marginal revenue ($8) times the marginal product
Answer (D) is correct. If a monopolist can practice (12
price discrimination, any marginal revenue will be units), or $96.
equal to the price charged to the next customer.
Answer (B) is incorrect because the marginal
revenue
[181] Source: Publisher product is the total for 12 units at $8 each.
Answer (A) is incorrect because 6 units produce Answer (C) is incorrect because $10 is the cost of
less the additional production, not the output.
profit for the price-discriminating monopolist than
does the sale of 8 units. Answer (D) is incorrect because $8 is the marginal
revenue product for 1 unit, but 12 units were
Answer (B) is incorrect because 7 units produce produced.
less
profit for the price-discriminating monopolist than
does the sale of 8 units. [184] Source: Publisher
Answer (C) is correct. Even a price-discriminating Answer (A) is incorrect because less labor should
monopolist must evaluate the relationship be
between used.
marginal cost and marginal revenue. The $300 of
marginal revenue at 8 units is greater than the Answer (B) is correct. When marginal cost ($20)
related exceeds marginal revenue ($18), the firm should
marginal cost of $230 ($1,250 - $1,020). The $250 cut
marginal revenue on the ninth unit is less than the back the factors of production. Thus, less labor
$290 marginal cost ($1,540 - $1,250). Thus, profit should be hired since the last hour produces a $2
is loss
maximized at 8 units. ($20 - $18).
Answer (D) is incorrect because the marginal Answer (C) is incorrect because the additional
revenue revenues of $18 do not equate to profits since
is less than the marginal cost. there
are additional costs.
[182] Source: Publisher Answer (D) is incorrect because the additional

revenues of $18 do not equate to profits since marginal cost, but this is not true for the third
there worker.
are additional costs. Thus, only two workers would be hired.
Answer (B) is incorrect because marginal costs

[185] Source: Publisher would exceed marginal revenues.
Answer (A) is incorrect because a buyer would not Answer (C) is incorrect because marginal costs
be willing to pay above $46,296 when the interest would exceed marginal revenues.
rate is 8%.
Answer (D) is incorrect because marginal costs
Answer (B) is correct. The present value of $50,000 would exceed marginal revenues.
one year in the future is $46,296 at 8% interest.
Thus, a buyer should be willing to pay that amount
or [188] Source: Publisher
less.
Answer (A) is incorrect because two workers would
Answer (C) is incorrect because a buyer would not not be as profitable as four workers.
be willing to pay above $46,296 when the interest
rate is 8%. Answer (B) is incorrect because three workers
would not be as profitable as four workers.
Answer (D) is incorrect because a buyer would not
be willing to pay above $46,296 when the interest Answer (C) is correct. At a wage rate of $35 and
rate is 8%. with a price increase to $6, the marginal revenue
of
the fourth worker exceeds the marginal cost, but
[186] Source: Publisher this
is not true for the fifth worker. Thus, four workers
Answer (A) is incorrect because two workers would would be hired.
result in lower profits than would hiring five
workers. Answer (D) is incorrect because the marginal
revenue
Answer (B) is incorrect because three workers produced by the fifth worker would be less than
would result in lower profits than would hiring five the
workers. marginal cost.
Answer (C) is incorrect because four workers

would [189] Source: Publisher
result in lower profits than would hiring five
workers. Answer (A) is incorrect because the marginal
product
Answer (D) is correct. With five workers (at total is 3 units, not $3.
wages of $75), production would be 44 units, and
revenues would be $176 ($4 x 44). Profit would be Answer (B) is incorrect because marginal revenue
$101 ($176 - $75). Any lesser number of workers is
would produce lower profits. Note that the for 3 units, not 1.
marginal
revenue of the fifth worker ($16) is greater than Answer (C) is incorrect because the marginal
the product
$15 marginal cost. for the fourth unit of resource is 3 units of output,
not
2.
Answer (D) is correct. Since the fourth unit of
Answer (A) is correct. At a wage rate of $35, the input
marginal revenue of the second worker exceeds results in a marginal product of 3 units, the
the marginal
revenue product will be $15 (3 units x $5).
and more capital because capital offers a greater
marginal product per dollar (45 ÷ $15 = 3 per
[190] Source: Publisher dollar)
than does labor (10 ÷ $5 = 2 per dollar).
Answer (A) is incorrect because 3 units would be
more profitable than 1. Answer (D) is incorrect because an increased use
of
Answer (B) is correct. A firm will produce as long capital would increase profits.
as
the marginal revenue exceeds the marginal cost.
At [193] Source: Publisher
long-run equilibrium, marginal cost will equal
marginal Answer (A) is incorrect because the resources have
revenue. At 3 units, the marginal product is 4 units equal MRPs per dollar of input, so there is no
of advantage to expanding one resource at the
output, or $20. Thus, marginal revenue equals expense
marginal cost. of the other.
Answer (C) is incorrect because the marginal Answer (B) is incorrect because the resources have
revenue equal MRPs per dollar of input, so there is no
is less than the $20 marginal cost. advantage to expanding one resource at the
expense
Answer (D) is incorrect because the marginal of the other.
revenue
is less than the $20 marginal cost. Answer (C) is incorrect because a reduction in both
resources would reduce profits.
[191] Source: Publisher Answer (D) is correct. Because both resources have
equal MRPs, and they are positive, the firm should
Answer (A) is incorrect because $15 is total use more of each resource.
revenue
for 15 units.
Answer (B) is incorrect because $14.40 is total

revenue for 18 units.
Answer (C) is incorrect because the marginal

revenue
product is negative, not positive.
Answer (D) is correct. Revenue totals $15 at 15

units
but will decline to $14.40 if the price drops to $.80.
Thus, the marginal revenue product is a negative
$.60
($14.40 - $15.00).
Answer (A) is incorrect because labor is too costly

relative to capital.
Answer (B) is incorrect because a reduction in both

inputs would reduce profits.
Answer (C) is correct. The firm should use less

labor

CMAPart1A (Mircoeconomics)

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PART 1 A B. Market demand curve.

[1] Source: CMA 1285 1-15 D. Law of diminishing returns.

C. Supply will decrease as price increases.

B. Consumer tastes and preferences. A. Perfectly inelastic.

C. Input prices. B. Elastic.

D. The distribution of income among households. C. Inelastic.

C. That is subject to economies of scale. C. Inelastic.

D. That always produces economic profits. D. Unit elastic.

C. Declining average costs. B. There are many firms participating in the

D. Firms are price takers.

B. Quantity demanded will move farther down the A. Economic efficiency.

[16] Source: CMA 1288 1-29

[17] Source: CMA 1288 1-30

A. Differentiated products. A. Economies of scale.

B. Sticky prices. B. Opportunity cost.

C. Kinked demand curves. C. Technological efficiency.

D. Homogeneous products. D. The initial cost of the current facility.

C. The demand curve will shift to the right. A. Is relatively elastic.

D. The demand curve will shift to the left. B. Is relatively inelastic.

C. Responds as an inferior good.

[25] Source: CMA 1289 1-11 A. Is relatively elastic.

A. One firm selling a product with no close C. Is relatively inelastic.

C. Significant barriers to entry. [29] Source: CMA 0690 1-22

A. Is relatively elastic. D. Is perfectly inelastic.

D. The price of cars decreases. [35] Source: CMA 0690 1-30

C. An automobile assembly plant has lower per- D. Wage increases.

A. Have no influence on the number of firms in the

[42] Source: CMA 1290 1-7

A. Mutual interdependence. B. Difficult, with significant obstacles.

B. Significant research and development programs. C. Rare, as significant capital is required.

C. Product differentiation. D. Relatively easy, with only a few obstacles.

C. An explicit or out-of-pocket cost.

B. Lead to shortages. [45] Source: CMA 1290 1-9

B. Use of by-products. B. Fast food industry.

C. Efficient use of capital equipment. C. Steel industry.

D. Diminishing returns. D. Auto industry.

A. Identified with a one-firm industry with A. Equal to price in monopolistic competition.

B. An important part of the analysis of C. Greater than price in pure competition.

C. The analysis of pure competition.

A. An indicator of monopolistic power.

D. Consistent with monopolistic competition. A. Demand for apples is elastic.

B. Demand for apples is inelastic.

B. Price and consumer tastes.

D. Supply and demand. A. Average total cost curve.

B. Fixed cost curve.

C. Greater tax revenues for the federal

C. Not be predictable with only these facts. B. Average product.

D. Rise only in the case of an inelastic demand C. Total cost.

[55] Source: CMA 0691 1-14

D. Are limited to man-made goods. D. The point of diminishing marginal productivity.

A. Completely elastic supply function. A. Increasing fixed costs.

B. Completely fixed total supply. B. Technological efficiency.

C. Fixed demand schedule. C. Decreasing returns.

D. Artificial market price. D. Economies of scale.

A. Greater consumption of the product.

B. Of the law of diminishing returns.

B. Cause supply to increase. [67] Source: CMA 1292 1-7

A. One seller of the product.

D. Heterogeneous products. A. Employment must fall.