2001 Illinois Economics Challenge
Economic Theory
Test 1 – Microeconomics
QUESTION SET 4
1. Which of the following could cause supply to decrease in the short run?
A. A labor union representing the workers who produce this good is able to negotiate higher wages for its members.
B. More producers enter this industry.
C. The price of a close substitute for this good falls.
D. A large group of consumers decide to boycott this good due to the political beliefs of some of the producers.
E. A technological breakthrough in the production of this good lowers the cost of producing it.
2. Which of the following represents a long-run adjustment?
A. A supermarket hires two additional checkout people.
B. A cell-phone manufacturer cuts back on its purchases of printed circuit boards.
C. A food processor sells the real assets of one of its branch plants.
D. The demand for tea falls in response to a fall in the price of coffee.
E. A farmer uses an extra dose of fertilizer on his crop.
3. Which of the following would most likely be considered a free good by an economist?
A. Your high-school education.
B. Network television programs received in your home.
C. Whales.
D. The "prize" in a Cracker-Jack box or in a box of cereal.
E. None of these.
4. What is the opportunity cost of buying a new car?
A. The value of other goods and services you could have purchased with the money you spent on the car.
B. The price you paid for the car.
C. The cost of operating and maintaining the car.
D. The difference between the price of the car and the price of a used car.
E. The difference between what the car costs now and what a similar car like it will cost a year from now.
5. The law of demand essentially says that:
A. The price of a good is the most important determinant of its demand.
B. As a person's income rises, so does his/her demand for goods.
C. As the price of a good falls, people tend to buy more of the good.
D. The amount of a good purchased each year depends mainly on the size of the population.
E. The quantity of a good demanded and its price tend to move in the same direction.
6. One source of Externalities is:
A. A misallocation of resources by markets.
B. The existence of monopoly pricing.
C. Undefined or unenforced property rights.
D. Illegal or covert market transactions.
E. Governmental restraints of trade.
7. A shortage of good A:
A. Indicates that its current price is too high.
B. Is a possible result of a government-imposed price ceiling.
C. Could be eliminated by an decrease in the price of A.
D. Can only be eliminated by producing more of good A.
E. Indicates that government intervention into the market for good A is required.
8. If the average product of labor when three workers build a house is 150 square feet (per day) and the marginal product of a fourth worker is 75 square feet, then the total product with four workers is:
A. 225 square feet.
B. 525 square feet.
C. 675 square feet.
D. 300 square feet.
E. 50 square feet.
9. If a good has a price of zero, it may be concluded that:
A. It has no value to society.
B. It is available in unlimited quantities.
C. It is not scarce relative to the demand for it.
D. Nobody owns it.
E. None of the conclusions offered are correct.
10. If the price of a fixed factor of production rises by 20%, what effect would this have on the marginal costs of a firm using this factor?
A. Marginal costs would fall.
B. Marginal costs would rise by 20%.
C. Marginal costs would rise but by less than 20%.
D. Marginal costs would rise by more than 20%.
E. None.
11. Which of the following requires scarce economic resources?
A. Preserving endangered species.
B. Providing education.
C. Recycling.
D. Producing consumer goods.
E. All of the above.
12. If the market price of a good is greater than the per unit cost of producing it in a competitive market,
A. Businesses are likely suffering economic losses.
B. In the long run the price will likely rise.
C. The supply in the market will likely increase over time.
D. The per unit cost is likely to rise.
E. The market is likely in long-run equilibrium.
13. When the Dow Jones industrial average decreases, commentators refer to a “wave of selling”. But every demand curve calls for a supply curve. Which is the most likely explanation for falling stock prices?
A. There is a decrease in the supply of stocks, with no change in the demand curve.
B. There is an increase in the supply of stocks, with no change in the demand curve.
C. There is a decrease in the demand for stocks, with no change in the supply curve.
D. There is an increase in the demand for stocks, with no change in the supply curve.
E. There is a decrease in the supply of stocks, and stocks are a Giffen good.
14. The role of an assumption in an economic theory is to:
A. Add realism.
B. Prove the accuracy of the theory.
C. Cover special cases.
D. Simplify the theory.
E. Confuse historians.
15. Economists would classify all of the following as land except:
A. Two thousand acres of virgin forest.
B. A hydroelectric dam.
C. Crude oil reserves.
D. Iron ore deposits.
E. A corn farm.
16. If an economy is being allocatively efficient, that specifically means the economy is:
A. Using the least-costly production techniques.
B. Producing the products most wanted by the society.
C. Fully employing all economic resources.
D. Maximizing the returns to factors of production.
E. Discovering all possible technological improvements.
17. When economists describe “a market” they mean:
A. An exchange where stocks and bonds are traded.
B. A stall where fresh fish is available.
C. Information networks that allow individuals to communicate with each other.
D. A hypothetical setting where the production of goods or services takes place.
E. A process that coordinates the actions of consumers and producers.
18. Which of the following goods are unlikely to be close substitutes?
A. Milk and cookies.
B. Margarine and butter.
C. Beef and chicken.
D. Tea and coffee.
E. Paper and plastic.
19. Oligopolists engage in collusive control over price in order to:
A. Achieve economies of scale, develop new technologies, and get government contracts.
B. Achieve economies of scale, reduce costs, and prevent price cheating.
C. Increase product demand, increase product supply, and lower cost.
D. Reduce uncertainty, increase profits, and discourage entry by new firms.
E. Obtain funds to bribe government officials.
20. In some markets consumers may buy many different brands of a product. Which of the statements below best represents a situation where demand for a particular brand would be very elastic?
A. “The different brands are almost identical. I always buy the cheapest.”
B. “I use so little of that product that when I do buy it, I don’t pay much attention to the price.”
C. “The brand I buy is so superior to other brands that I hardly consider the others.”
D. “I pinch pennies in buying other products, but like most people I feel I owe it to myself to get the best brand of this product.”
E. “I lost a lot of money in the stock market and must be more sensitive to prices than I used to be.”
21. Assume that a round of golf requires four hours of leisure time, and attending a concert requires two hours. If the price of a round of golf is $10 and the price of a concert is $20, ceteris paribus, Cary will play:
A. Golf, but not attend concerts, because golf is cheaper.
B. Golf twice as often as she attends concerts.
C. Less golf whenever she receives a large raise.
D. Relatively less golf, and attend relatively more concerts, whenever her job requires more time.
E. Golf until the marginal utility of a round reaches zero.
22. The financing of health care through insurance has
A. Reduced the real cost of health care.
B. Reduced real expenditures on health care.
C. Resulted in consumers directly paying less than the full price of health care.
D. Increased the marginal utility of health care services.
E. Had no effect on health care consumption, because insurance is a transfer of resources.
23. Diminishing returns arise as a firm increases production by adding variable inputs to at least one fixed input because:
A. The ability or quality of the variable inputs hired decreases as more are hired.
B. The firm must lower the price of its product when it produces more units of output.
C. The per unit cost the firm must pay for variable inputs increases as more inputs are hired.
D. As more variable inputs are hired, the amount of the fixed input per variable input they have to work with decreases.
E. Advantages of specialization and division of labor are lost.
24. Owners of corporations receive what benefit?
A. They are not taxed for the income the corporation receives.
B. They always control the company.
C. They are sole proprietors of the corporation.
D. Their liability for loss is limited to the value of the stock they own.
E. They receive salaries from the corporation.
25. A firm encountering economies of scale over some range of output will have a:
A. Long run average cost curve that rises.
B. Long run average cost curve that is constant.
C. Long run average cost curve that falls.
D. Long run average cost curve that rises, then falls, then rises.
E. Long run average cost curve that is constant, then rises.
26. The price elasticity of demand is a measure of the
A. Steepness or slope of a demand curve.
B. Absolute changes in quantity demanded and price.
C. Responsiveness of quantity demanded to a change in price.
D. Responsiveness of demand for one good to a change in the price of another good.
E. Responsiveness of demand for a good to a change in income.
27. Which of the following would contribute most to economies of large scale in a firm?
A. Absolute advantages.
B. Rising long-run average costs.
C. Diminishing marginal returns.
D. Deterioration of information and control within the firm.
E. Specialization of production within the firm.
28. Which phrase best describes a pure monopoly?
A. Close substitutes.
B. Efficient advertiser.
C. Price taker.
D. Single seller.
E. Bribe payer.
29. Which industry would be the best example of an oligopoly?
A. Cigarette manufacturing.
B. Cattle ranching.
C. Fast food.
D. Retail clothing.
E. Public education.
30. A study of mass-transit systems in American cities revealed that in the long run, revenues generally decline after substantial fare increases. You conclude that:
A. The demand for mass transit is price-elastic in the long run.
B. The demand for mass transit is price-inelastic in the long run.
C. Corrupt ticket takers work for the transit authority.
D. Mass-transit service deteriorates in the long run as the price increases.
E. There are few substitutes for mass-transit in cities.
ANSWERS TO MICROECONOMICS EXAM 2001
1. A
2. C
3. E
4. A
5. C
6. C
7. B
8. B
9. C
10. E
11. E
12. C
13. C
14. D
15. B
16. B
17. E
18. A
19. D
20. A
21. D
22. C
23. D
24. D
25. C
26. C
27. E
28. D
29. A
30. B
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