ECO401 Economics Solved MCQs (2023)

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CHAPTER 1
1. Economics may best be defined as:
A) the interaction between macro and micro considerations.
B) the study of the behavior of people and institutions in the production, distribution, and consumption of scarce goods.
C) the empirical testing of value judgments through the use of induction and deduction.
D) the use of policy to refute facts and hypotheses.
Ans: B

2. The study of economics is primarily concerned with:
A) keeping private businesses from losing money.
B) demonstrating that capitalistic economies are superior to socialistic economies.
C) choices which are made in seeking to use scarce resources efficiently.

D) determining the most equitable distribution of society's output.
Ans: C

3. You should decide to go to a movie:
A) if the marginal cost of the movie exceeds its marginal benefit.
B) if the marginal benefit of the movie exceeds its marginal cost.
C) if your income will allow you to buy a ticket.
D) because movies are inherently good products.
Ans: B

4. Studying economics:
A) helps one become a better-informed citizen and voter.
B) is detrimental to good citizenship because economics emphasizes individualism.
C) is a waste of time since we all participate in the economy whether we understand it or not.
D) is important because economics is the "science of earning money."
Ans: A

5. Economic theories:
A) are useless because they are not based upon laboratory experimentation.
B) which are true for individual economic units are never true for the economy as a whole.
C) are generalizations based upon a careful observation of facts.
D) are abstractions and therefore of no application to real situations.
Ans: C

6. The term "ceteris paribus" means:
A) that if event A precedes event B, A has caused B.
B) that economics deals with facts, not values.
C) other things equal.
D) prosperity inevitably follows recession.
Ans: C

7. Macroeconomics can best be described as the:
A) analysis of how a consumer tries to spend income.
B) study of the large aggregates of the economy or the economy as a whole.
C) analysis of how firms attempt to maximize their profits.
D) study of how supply and demand determine prices in individual markets.
Ans: B

8. Microeconomics is concerned with:
A) the aggregate or total levels of income, employment, and output.
B) a detailed examination of specific economic units which comprise the economic system.
C) the concealing of detailed information about specific segments of the economy.
D) the establishing of an overall view of the operation of the economic system.
Ans: B

9. A normative statement is one which:
A) is based on the law of averages.
B) pertains only to microeconomics.
C) pertains only to macroeconomics.
D) is based upon value judgments.
Ans: D

10. A positive statement is one which is:
A) derived by induction.
B) derived by deduction.
C) subjective and is based on a value judgment.
D) objective and is based on facts.
Ans: D

CHAPTER 2
1. The study of economics exists because:
A) government interferes with the efficient allocation of scarce resources.
B) resources are scarce in relation to human material wants.
C) the market system is an obstacle to the efficient use of plentiful resources to satisfy constrained wants.
D) resources are overly abundant as compared to wants; thus, an allocation problem exists.
Ans: B

2. The scarcity problem:
A) persists only because countries have failed to achieve continuous full employment.
B) persists because material wants exceed available productive resources.
C) has been solved in all industrialized nations.
D) has been eliminated in affluent societies such as the United States and Canada.
Ans: B

A) free gifts of nature.
B) consumption goods.
C) units of money capital.
D) factors of production.
Ans: D

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16. A market is in equilibrium:
A) provided there is no surplus of the product.
B) at all prices above that shown by the intersection of the supply and demand curves.
C) if the amount producers want to sell is equal to the amount consumers want to buy.
D) whenever the demand curve is downsloping and the supply curve is upsloping.
Ans: C

17. If there is a shortage of product X:
A) fewer resources will be allocated to the production of this good.
B) the price of the product will rise.
C) the price of the product will decline.
D) the supply curve will shift to the left and the demand curve to the right, eliminating the shortage.
E) the supply curve will shift to the right and the demand curve to the left, eliminating the shortage.
Ans: B

18. Assuming competitive markets with typical supply and demand curves, which of the following statements is correct?
A) An increase in supply with a decrease in demand will result in an increase in price.
B) An increase in supply with no change in demand will result in an increase in price.
C) An increase in supply with no change in demand will result in a decline in sales.
D) An increase in demand with no change in supply will result in an increase in sales.
Ans: D

CHAPTER 7
1. A nation's gross domestic product (GDP):
A) is the dollar value of the total output produced within the borders of the nation.
B) is the dollar value of the total output produced by its citizens, regardless of where they are living.
C) can be found by summing C + In + S + Xn.
D) is always some amount less than its C + Ig + G + Xn.
Ans: A

2. Which of the following is a final good or service?
A) diesel fuel bought for a delivery truck
B) fertilizer purchased by a farm supplier
C) a haircut
D) Chevrolet windows purchased by a General Motors assembly plant
Ans: C

3. Net exports are:
A) that portion of consumption and investment goods sent to other countries.
B) exports plus imports.
C) exports less imports.
D) imports less exports.
Ans: C

4. Economists define investment to include:
A) any increase in business inventories.
B) the addition of cash to a savings account.
C) the purchase of common or preferred stock.
D) the purchase of any durable good, for example, an automobile or a refrigerator.
Ans: A

5. Transfer payments are:
A) excluded when calculating GDP because they only reflect inflation.
B) excluded when calculating GDP because they do not reflect current production.
C) included when calculating GDP because they are a category of investment spending.
D) included when calculating GDP because they increase the spending of recipients.
Ans: B

6. The ZZZ Corporation issued $25 million in new common stock in 1998. It used $18 million of the proceeds to replace obsolete equipment in its factory and $7 million to repay bank loans. As a result, investment:
A) of $7 million has occurred.
B) of $25 million has occurred.
C) of $18 million has occurred.
D) has not occurred.
Ans: C

7. Consumption of fixed capital (depreciation) can be determined by:
A) adding indirect business taxes to NDP.
B) subtracting NDP from GDP.
C) subtracting net investment from GDP.
D) adding net investment to gross investment.
Ans: B

8. "Value added" refers to:
A) any increase in GDP which has been adjusted for adverse environmental effects.
B) the excess of gross investment over net investment.
C) the difference between the value of a firm's output and the value of the inputs it has purchased from others.
D) the portion of any increase in GDP which is caused by inflation as opposed to an increase in real output.
Ans: C

9. Assume a manufacturer of stereo speakers purchases $40 worth of components for each speaker. The completed speaker sells for $70. The value added by the manufacturer for each speaker is:
A) $110.
B) $30.
C) $40.
D) $70.
Ans: B

10. The total income earned in any year by U.S. resource suppliers is measured by:
A) DI.
B) NI.
C) PI.
D) GDP.
Ans: B

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11. Suppose nominal GDP was $360 billion in 1985 and $450 billion in 1995. The appropriate price index (1985 = 100) was 120 in 1985 and 125 in 1995. It can be concluded that between 1985 and 1995 real GDP:
A) increased by about $60 billion.
B) decreased by about $32 billion.
C) increased by about $100 billion.
D) increased by about $117 billion.
Ans: A

CHAPTER 8
1. The immediate determinant of the volume of output and employment is the:
A) composition of consumer spending.
B) ratio of public goods to private goods production.
C) level of total spending.
D) size of the labor force.
Ans: C

2. The phase of the business cycle in which real domestic output declines is called:
A) the peak.
B) a recovery.
C) a recession.
D) the trough.
Ans: C

3. The production of durable goods varies more than the production of nondurable goods because:
A) durables purchases are nonpostponable and the producers of durables are competitive.
B) durables purchases are postponable and producers of durables are competitive.
C) nondurables purchases are postponable and the producers of nondurables are competitive.
D) durables purchases are postponable and producers of durables have monopoly power.
Ans: D

4. A recession is a period in which:
A) cost-push inflation is present.
B) nominal domestic output falls.
C) demand-pull inflation is present.
D) real domestic output falls.
Ans: D

5. To be officially unemployed a person must:
A) be in the labor force.
B) be 21 years of age or older.
C) have just lost a job.
D) be waiting to be called back from a layoff.
Ans: A

6. The natural rate of unemployment is:
A) higher than the full-employment rate of unemployment.
B) lower than the full-employment rate of unemployment.
C) that rate of unemployment occurring when the economy is at its potential output.
D) found by dividing total unemployment by the size of the labor force.
Ans: C

7. Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are unemployed, the unemployment rate:
A) is 3 percent.
B) is 6 percent.
C) is 7 percent.
D) is 9 percent.
E) cannot be determined from the information given.
Ans: B

8. Cyclical unemployment is a consequence of:
A) a deficiency of aggregate spending.
B) the decreasing relative importance of goods and the increasing relative importance of services in our economy.
C) the everyday dynamics of a free labor market.
D) technological change.
Ans: A

9. Structural unemployment:
A) is also known as frictional unemployment.
B) is the main component of cyclical unemployment.
C) is said to occur when people are waiting to be called back to previous jobs.
D) may involve a locational mismatch between unemployed workers and job openings.
Ans: D

10. Okun's law:
A) measures the tradeoff between the rate of inflation and the rate of unemployment.
B) indicates the number of years it will take for a constant rate of inflation to cause the price level to double.
C) quantifies the relationship between nominal and real incomes.
D) shows the relationship between the unemployment rate and the size of the GDP gap.
Ans: D

11. The consumer price index was 140.3 in 1992 and 144.5 in 1993. Therefore, the rate of inflation in 1993 was about:
A) 6.7 percent.
B) 3.0 percent.
C) 1.2 percent.
D) 13.6 percent.
Ans: B

12. Given the annual rate of inflation, the "rule of 70" allows one to:
A) determine whether the inflation is demand-pull or cost-push.
B) calculate the accompanying rate of unemployment.
C) determine when the value of a real asset will approach zero.
D) calculate the number of years required for the price level to double.
Ans: D

13. Cost-push inflation:
A) is caused by excessive total spending.
B) shifts the nation's production possibilities curve leftward.
C) moves the economy inward from its production possibilities curve.
D) is a mixed blessing because it has positive effects on real output and employment.
Ans: C

CHAPTER 9
1. The view that the market system will ensure full employment is associated with:
A) Keynesian economics.
B) GDP gap analysis.
C) classical economics.
D) the aggregate expenditures model.
Ans: C

2. Say's law indicates that:
A) a stable, inflexible interest rate will guarantee perpetual full employment.
B) falling prices will decrease the purchasing power of a declining level of total money demand.
C) supply creates its own demand.
D) those prices which rise most during prosperity are likely to fall least during depression.
Ans: C

3. The most important determinant of consumer spending is:
A) the level of household debt.
B) consumer expectations.
C) the stock of wealth.
D) the level of income.
Ans: D

4. With an MPS of .4, the MPC will be:
A) 1.0 minus .4.
B) .4 minus 1.0.
C) the reciprocal of the MPS.
D) .4.
Ans: A

5. As disposable income goes up the:
A) APC falls.
B) APS falls.
C) volume of consumption declines absolutely.
D) volume of investment can be expected to diminish.
Ans: A

6. Which of the following is correct?
A) APC + APS = 1.
B) APC + MPS = 1.
C) APS + MPC = 1.
D) APS + MPS = 1.
Ans: A

7. Which one of the following will cause a movement down along an economy's consumption schedule?
A) an increase in stock prices
B) a decrease in stock prices
C) an increase in consumer indebtedness
D) a decrease in disposable income
Ans: D

8. At the point where the consumption schedule intersects the 45-degree line:
A) the MPC is 1.00.
B) the APC is 1.00.
C) saving is equal to consumption.
D) the economy is in equilibrium.
Ans: B

9. (Advanced analysis) If the equation for the consumption schedule is C = 20 + 0.8Y , where C is consumption and Y is disposable income, then the average propensity to consume is 1 when disposable income is:
A) $80.
B) $100.
C) $120.
D) $160.
Ans: B

10. Which of the following is correct?
A) MPC + MPS = APC + APS
B) APC + MPS = APS + MPC
C) APC + MPC = APS + MPS
D) APC - APS = MPC - MPS
Ans: A

11. As aggregate income decreases, the APC:
A) and APS will both increase.
B) will decrease, but the APS will increase.
C) will increase, but the APS will decrease.
D) and APS will both decrease.
Ans: C

12. The relationship between the real interest rate and investment is shown by the:
A) investment-demand schedule.
B) consumption of fixed capital schedule.
C) saving schedule.
D) aggregate supply curve.
Ans: A

13. Investment and saving are, respectively:
A) income and wealth.
B) stocks and flows.
C) injections and leakages.
D) leakages and injections.
Ans: C

CHAPETR 10
1. The multiplier effect means that:
A) consumption is typically several times as large as saving.
B) a small change in consumption demand can cause a much larger increase in investment.
C) a small increase in investment can cause national income to change by a larger amount.
D) a small decline in the MPC can cause equilibrium GDP to rise by several times that amount.
Ans: C

2. The multiplier may be calculated as:
A) 1/(MPS + MPC)
B) MPC/MPS
C) 1/(1 - MPC)
D) 1 - MPC = MPS
Ans: C

3. If the MPS is only half as large as the MPC, the multiplier:
A) is 2.
B) is 3.
C) is 4.
D) cannot be determined from the information given.
Ans: B

4. The multiplier effect:
A) reduces the MPC.
B) magnifies small changes in spending into larger changes in output and income.
C) promotes stability of the general price level.
D) lessens upswings and downswings in business activity.
Ans: B

5. If the MPC is .6, the multiplier will be:
A) 4.0.
B) 6.0.
C) 2.5.
D) 1.67.
Ans: C

6. The multiplier effect indicates that:
A) a decline in the interest rate will cause a proportionately larger increase in investment.
B) a change in aggregate expenditures will change aggregate income by a larger amount.
C) a change in aggregate expenditures will increase aggregate income by the same amount.
D) a small increase in total income will generate a large change in aggregate expenditures.
Ans: B

7. If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is:
A) 4.
B) 5.
C) 3.33.
D) 2.5.
Ans: B

8. Suppose that the level of GDP increased by $100 billion in an economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by:
A) $100 billion.
B) $50 billion.
C) $500 billion.
D) $5 billion.
Ans: B

9. At the equilibrium GDP for an open economy:
A) net exports may be either positive or negative.
B) imports will always exceed exports.
C) exports will always exceed imports.
D) exports and imports will be equal.
Ans: A

10. If the multiplier in an economy is 5, a $20 billion increase in net exports will:
A) increase GDP by $100 billion.
B) reduce GDP by $20 billion.
C) decrease GDP by $100 billion.
D) increase GDP by $20 billion.
Ans: A

11. In a mixed open economy the equilibrium level of GDP exists where:
A) Ca + Ig + Xn intersects the 45-degree line.
B) Ca + Ig = Sa + T + X .
C) Ca + Ig + Xn + G = GDP.
D) Ca + Ig + Xn = Sa + T .
Ans: C

12. The multiplier associated with a change in government purchases is:
A) always equal to 1.
B) smaller than that associated with an equal change in taxes.
C) the same as that associated with a change in investment.
D) less than that associated with a change in investment.
E) greater than that associated with a change in investment.
Ans: C

CHAPTER 11
1. The aggregate demand curve is:
A) vertical if full employment exists.
B) horizontal when there is considerable unemployment in the economy.
C) downsloping because of the interest-rate, wealth or real balances, and foreign purchases effects.
D) downsloping because production costs decrease as real output increases.
Ans: C

2. The interest-rate and real balances effects are important because they help explain:
A) rightward and leftward shifts of the aggregate demand curve.
B) why demand-management policy cannot be used effectively to curb stagflation.
C) the shape of the aggregate demand curve.
D) the shape of the aggregate supply curve.
Ans: C

3. The determinants of aggregate demand:
A) explain why the aggregate demand curve is downsloping.
B) explain shifts in the aggregate demand curve.
C) demonstrate why real output and the price level are inversely related.
D) include input prices and resource productivity.
Ans: B

4. Which one of the following would not shift the aggregate demand curve?
A) a change in the price level
B) depreciation of the international value of the dollar
C) a decline in the interest rate at each possible price level
D) an increase in personal income tax rates
Ans: A

5. All else equal, an increase in imports will shift the aggregate expenditures curve:
A) upward and the aggregate demand curve rightward.
B) upward and the aggregate demand curve leftward.
C) downward and the aggregate demand curve rightward.
D) downward and the aggregate demand curve leftward.
Ans: D

6. The aggregate supply curve:
A) shows the various amounts of real output which businesses will produce at each price level.
B) is downsloping because real purchasing power increases as the price level falls.
C) contains a vertical range where real output is variable and the price level is constant.
D) is explained by the interest rate, wealth, and foreign purchases effects.
Ans: A

7. Other things equal, an improvement in productivity will:
A) shift the aggregate demand curve to the left.
B) shift the aggregate supply curve to the left.
C) shift the aggregate supply curve to the right.
D) increase the price level.
Ans: C

8. Productivity measures:
A) real output per unit of input.
B) per unit production costs.
C) the changes in real wealth caused by price level changes.
D) the amount of capital goods used per worker.
Ans: A

9. The equilibrium price level and level of real output occur where:
A) real output is at its highest possible level.
B) exports equal imports.
C) the price level is at its lowest level.
D) the aggregate demand and supply curves intersect.
Ans: D

CHAPTER 12
1. Discretionary fiscal policy refers to:
A) any change in government spending or taxes which destabilizes the economy.
B) the authority which the President has to change personal income tax rates.
C) changes in taxes and government expenditures made by Congress to stabilize the economy.
D) the changes in taxes and transfers which occur as GDP changes.
Ans: C

2. "Discretionary" fiscal policy is so named because it:
A) is undertaken at the option of the nation's central bank.
B) occurs automatically as the nation's level of GDP changes.
C) involves specific changes in T and G undertaken expressly for stabilization purposes at the option of Congress.
D) is invoked secretly by the Council of Economic Advisors.
Ans: C

3. If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by:
A) increasing government spending by $4 billion.
B) increasing government spending by $40 billion.
C) decreasing taxes by $4 billion.
D) increasing taxes by $4 billion.
Ans: A

4. Assume that aggregate demand in the economy is excessive, causing demand-pull inflation. Which of the following would be most in accord with appropriate government fiscal policy?
A) an increase in Federal income tax rates
B) an increase in the size of income tax exemptions for each dependent
C) passage of legislation providing for the construction of 8,000 new post office buildings
D) an increase in soil conservation subsidies to farmers
Ans: A

5. An appropriate fiscal policy for a severe recession is:
A) a decrease in government spending.
B) a decrease in tax rates.
C) appreciation of the dollar.
D) an increase in interest rates.
Ans: B

6. Which of the following represents the most expansionary fiscal policy?
A) a $10 billion tax cut
B) a $10 billion increase in government spending
C) a $10 billion tax increase
D) a $10 billion decrease in government spending
Ans: B

7. Which of the following fiscal actions would be the most effective in curbing inflation?
A) incurring a budget deficit by borrowing from the public
B) incurring a budget surplus which is used to retire debt held by commercial banks
C) incurring a budget surplus and impounding that surplus
D) incurring a budget surplus which is used to retire debt held by the public
Ans: C

8. If the economy has a full-employment budget surplus, this means that:
A) the public sector is exerting an expansionary impact upon the economy.
B) tax revenues would exceed government expenditures if full employment were achieved.
C) the actual budget is necessarily also in surplus.
D) the economy is actually operating at full employment.
Ans: B

Chapter 13
1. If you are estimating your total expenses for school next semester, you are using money primarily as:
A) a medium of exchange.
B) a store of value.
C) a unit of account.
D) an economic investment.
Ans: C

2. A $200 price tag on a cashmere sweater in a department store window is an example of money functioning as a:
A) unit of account.
B) standard of deferred payments.
C) store of value.
D) medium of exchange.
Ans: A

3. When we say that money serves as a unit of account, we mean that it is:
A) away to keep some of our wealth in a readily spendable form for future use.
B) a means of payment.
C) a monetary unit for measuring and comparing the relative values of goods.
D) declared as legal tender by the government.
Ans: C

4. Fiat money is:
A) composed only of demand deposits.
B) money because the government asserts that it is.
C) money which is "resting" in a commercial bank vault.
D) money which can be redeemed for an intrinsically valuable commodity such as gold.
Ans: B

5. The value of money varies:
A) inversely with the price level.
B) directly with the volume of employment. C) directly with the price level.
D) directly with the interest rate.
Ans: A

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6. In defining money as M1 economists exclude time deposits because:
A) the intrinsic value of time deposits is nil.
B) the purchasing power of time deposits is much less stable than that of demand deposits and currency.
C) they are not directly or immediately a medium of exchange.
D) they are not recognized by the Federal government as legal tender.
Ans: C

7. Which of the following is not part of the M2 money supply?
A) money market mutual fund balances
B) money market deposit accounts
C) currency
D) large ($100,000 or more) time deposits
Ans: D

8.Checkable deposits are:
A) included in M1.
B) not included in either Ml or M2.
C) considered to be a near money.
D) also called time deposits.
Ans: A

9. The asset demand for money:
A) is unrelated to both the interest rate and the level of GDP.
B) varies inversely with the rate of interest.
C) varies inversely with the level of real GDP.
D) varies directly with the level of nominal GDP.
E) varies directly with the rate of interest.
Ans: B

10. The opportunity cost of holding money:
A) is zero because money is not an economic resource.
B) varies inversely with the interest rate.
C) varies directly with the interest rate.
D) varies inversely with the level of economic activity.
Ans: C

11. (Advanced analysis) Assume the equation for the total demand for money is L = 0.4Y + 80 - 4 i, where L is the amount of money demanded, Y is gross domestic product, and i is the interest rate. If gross domestic product is $200 and the interest rate is 10 (percent), what amount of money will society want to hold?
A) $200
B) $120
C) $320
D) $160
Ans: B

12. Which of the following statements is correct?
A) Interest rates and bond prices vary directly.
B) Interest rates and bond prices vary inversely.
C) Interest rates and bond prices are unrelated.
D) Interest rates and bond prices vary directly during inflations and inversely during recessions.
Ans: B

13. When the money market is in equilibrium:
A) the quantity of money demanded equals the quantity of money supplied.
B) the interest rate is neither increasing nor decreasing.
C) bond prices are stable.
D) all of the above hold true.
Ans: D

17. The twelve Federal Reserve Banks:
A) act as fiscal agents for the Federal government.
B) provide for the collection of checks.
C) hold the deposits of commercial banks.
D) do all of the above.
Ans: D

CHAPTER 14
1. Which of the following statements is not correct?
A) The actual reserves of a commercial bank equal its excess plus its required reserves.
B) A bank's assets plus its net worth equal its liabilities.
C) When borrowers repay bank loans, the supply of money is reduced.
D) A single commercial bank can safely lend an amount equal to its excess reserves.
Ans: B

2. A bank which has assets of $85 billion and a net worth of $10 billion must have:
A) liabilities of $75 billion.
B) excess reserves of $10 billion.
C) liabilities of $10 billion.
D) excess reserves of $75 billion.
Ans: A

3. The reserves of a commercial bank consist of:
A) the amount of money market funds it holds.
B) deposits at the Federal Reserve Bank and vault cash.
C) government bonds which the bank holds.
D) the bank's net worth.
Ans: B

4. The ABC Commercial Bank has $5,000 in excess reserves and the reserve ratio is 30 percent. The bank must have:
A) $90,000 in outstanding loans and $35,000 in reserves.
B) $90,000 in demand deposit liabilities and $32,000 in reserves.
C) $20,000 in demand deposit liabilities and $10,000 in reserves.
D) $90,000 in demand deposit liabilities and $35,000 in reserves.
Ans: B

5. Suppose a commercial bank has demand deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves:
A) are $30,000.
B) are $10,000.
C) are $20,000.
D) cannot be determined from the given information.
Ans: C

6. A reserve requirement of 20 percent means a bank must have $1000 of reserves if its demand deposits are:
A) $100.
B) $1,000.
C) $5,000.
D) $12,000.
Ans: C

7. Suppose that a bank's actual reserves are $5 million, its demand deposits are $5 million, and its excess reserves are $3 million. The reserve requirement must be:
A) 40 percent.
B) 20 percent.
C) 10 percent.
D) 5 percent.
Ans: A

8. When a bank loan is repaid the supply of money:
A) is constant, but its composition will have changed.
B) is decreased.
C) is increased.
D) may either increase or decrease.
Ans: B

9. The amount of reserves which a commercial bank is required to hold is equal to:
A) the amount of its demand deposits.
B) the sum of its demand deposits and time deposits.
C) its demand deposits multiplied by the required reserve ratio.
D) none of the above.
Ans: C

10. Which of the following would reduce the money supply?
A) Commercial banks use excess reserves to buy government bonds from the public.
B) Commercial banks loan out excess reserves.
C) Commercial banks sell government bonds to the public.
D) A check clears from Bank A to Bank B.
Ans: C

11. The Federal funds market is the market in which:
A) banks borrow from the Federal Reserve Banks.
B) U.S. securities are bought and sold.
C) banks borrow reserves from one another on an overnight basis.
D) Federal Reserve Banks borrow from one another.
Ans: C

12. If we let m equal the maximum number of new dollars which can be created for a single dollar of excess reserves and R equal the required reserve ratio, then we can say that for the banking system:
A) m = R - 1.
B) R = m/1.
C) R = m - 1.
D) m = 1/R.
Ans: D

13. If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired demand deposits, then the relevant monetary multiplier for the banking system will be:
A) 31/2.
B) 4.
C) 5.
D) 10.
Ans: C

14. If the reserve ratio were 100 percent, the value of the monetary multiplier would be:
A) 0.
B) 1.
C) 10.
D) 100.
Ans: B

CHAPTER 15
1. Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?
A) loans to commercial banks
B) Federal Reserve Notes in circulation
C) Treasury deposits
D) reserves of commercial banks
Ans: A

2. Reserves must be deposited in the Federal Reserve Banks by:
A) only commercial banks which are members of the Federal Reserve System.
B) all depository institutions, that is, all commercial banks and thrift institutions.
C) state chartered commercial banks only.
D) federally chartered commercial banks only.
Ans: B

3. The Federal Reserve Banks buy government securities from commercial banks. As a result, the demand deposits:
A) of commercial banks are unchanged, but their reserves increase.
B) and reserves of commercial banks both decrease.
C) of commercial banks are unchanged, but their reserves decrease.
D) and reserves of commercial banks are both unchanged.
Ans: A

5. The monetary authorities can change the money supply by:
A) changing bank reserves through the sale or purchase of government securities.
B) changing the quantities of required and excess reserves by altering the legal reserve ratio.
C) changing the discount rate so as to encourage or discourage commercial banks in borrowing from the central banks.
D) doing all of the above.
Ans: D

6. "Open-market operations" refers to:
A) purchases of stocks in the New York Stock Exchange.
B) the purchase or sale of government securities by the Fed.
C) central bank lending to commercial banks.
D) the specifying of margin requirements on stock purchases.
Ans: B

7. The Federal Reserve System regulates the money supply primarily by:
A) controlling the production of coins at the United States mint.
B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans.
C) altering the reserves of commercial banks, largely through sales and purchases of government bonds.
D) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply.
Ans: C

8. An increase in the reserve ratio:
A) increases the size of the spending income multiplier.
B) decreases the size of the spending income multiplier.
C) increases the size of the monetary multiplier.
D) decreases the size of the monetary multiplier.
Ans: D

9. Assume the economy is operating at less than full employment. An easy money policy will cause interest rates to ________. which will ___________ investment spending.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
Ans: B

10. An increase in the money supply will:
A) lower interest rates and lower the equilibrium GDP.
B) lower interest rates and increase the equilibrium GDP.
C) increase interest rates and increase the equilibrium GDP.
D) increase interest rates and lower the equilibrium GDP.
Ans: B

11. The sale of government bonds by the Federal Reserve Banks to commercial banks will:
A) increase aggregate supply.
B) decrease aggregate supply.
C) increase aggregate demand.
D) decrease aggregate demand.
Ans: D

12. To reduce the Federal funds rate, the Fed can:
A) buy government bonds from the public.
B) increase the discount rate.
C) increase the prime interest rate.
D) sell government bonds to commercial banks.
Ans: A

CHAPTER 20
1. The income and substitution effects explain why:
A) the elasticity of demand can be unity.
B) product demand curves are downsloping.
C) product supply curves are upsloping.
D) equilibrium is always achieved in a competitive market.

2. The price elasticity of demand coefficient indicates:
A) buyer responsiveness to price changes.
B) the extent to which a demand curve shifts as incomes change.
C) the slope of the demand curve.
D) how far business executives can stretch their fixed costs.

3. The demand for a product is inelastic with respect to price if:
A) consumers are largely unresponsive to a per unit price change.
B) the elasticity coefficient is greater than 1.
C) a drop in price is accompanied by a decrease in the quantity demanded.
D) a drop in price is accompanied by an increase in the quantity demanded.

4. Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demanded increases from 110 to 118. Then the price elasticity of demand is:
A) 4.00.
B) 2.09.
C) 1.37.
D) 3.94.

5. If the demand for product X is inelastic, a 4 percent increase in the price of X will:
A) decrease the quantity of X demanded by more than 4 percent.
B) decrease the quantity of X demanded by less than 4 percent.
C) increase the quantity of X demanded by more than 4 percent.
D) increase the quantity of X demanded by less than 4 percent.

6. A perfectly inelastic demand schedule:
A) rises upward and to the right, but has a constant slope.
B) can be represented by a line parallel to the vertical axis.
C) cannot be shown on a two-dimensional graph.
D) can be represented by a line parallel to the horizontal axis.

7. Suppose Aiyanna's pizzeria currently faces a linear demand curve and is charging a very high price per pizza and doing very little business. Aiyanna now decides to lower pizza prices by 5 percent per week for an indefinite period of time. We can expect that each successive week:
A) demand will become more price elastic.
B) price elasticity of demand will not change as price is lowered.
C) demand will become less price elastic.
D) the elasticity of supply will increase.

8. For a linear demand curve:
A) elasticity is constant along the curve.
B) elasticity is unity at every point on the curve.
C) demand is elastic at low prices.
D) demand is elastic at high prices.

9. If a demand for a product is elastic, the value of the price elasticity coefficient is:
A) zero.
B) greater than one.
C) equal to one.
D) less than one.

10. Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is:
A) 0.8.
B) 1.2.
C) 1.6.
D) 8.0

11. Moving upward on a downward-sloping straight-line demand curve, we find that price elasticity:
A) is constant.
B) increases continuously.
C) decreases continuously.
D) may either increase or decrease.

12. Which of the following statements is not correct?
A) If the relative change in price is greater than the relative change in the quantity demanded associated with it, demand is inelastic.
B) In the range of prices in which demand is elastic, total revenue will diminish as price decreases.
C) Total revenue will not change if price varies within a range where the elasticity coefficient is unity.
D) Demand tends to be elastic at high prices and inelastic at low prices.

13. Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by 10 percent, the quantity demanded will increase by:
A) 2 percent and total expenditures on bread will rise.
B) 2 percent and total expenditures on bread will fall.
C) 20 percent and total expenditures on bread will fall.
D) 20 percent and total expenditures on bread will rise.

14. If the demand for farm products is price inelastic, a good harvest will cause farm revenues to:
A) increase.
B) decrease.
C) be unchanged.
D) either increase or decrease, depending on what happens to supply.

15. If a price reduction reduces a firm's total revenue:
A) the demand for the product is inelastic in this price range.
B) the product is an inferior good.
C) in this price range the elasticity coefficient of demand is greater than 1.
D) this price decline will increase the firm's profits.

Answer Key: Chapter 20
1. B
2. A
3. A
4. C
5. B
6. B
7. C
8. D
9. B
10. B
11. B
12. B
13. B
14. B
15. A

CHAPTER 21
1. Which of the following is correct? When the price of normal good Z falls:
A) both income and substitution effects cause the consumer to buy more.
B) both income and substitution effects cause the consumer to buy less.
C) the income effect causes the consumer to buy less, but the substitution effect causes her to buy more.
D) the income effect causes the consumer to buy more, but the substitution effect causes her to buy less.

2. The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three Pepsis is 38 units of utility. The marginal utility of the third Pepsi:
A) is 26 units of utility.
B) is 6 units of utility.
C) is 8 units of utility.
D) 38 utils.

3. The "substitution effect" indicates that:
A) a decline in money income will cause the consumer to buy more inferior goods and fewer superior goods.
B) consumer equilibrium can only be achieved when the consumer is buying substitute goods.
C) when the price of a product falls, the lower price will induce the consumer to buy more of that product at the expense of other products.
D) when the price of a product falls, a consumer will be able to buy more of it with a specific money income.

4. A product has utility if it:
A) takes more and more resources to produce successive units of it.
B) violates the law of demand.
C) satisfies consumer wants.
D) is useful.

5. The law of diminishing marginal utility states that:
A) total utility is maximized when consumers obtain the same amount of utility per unit of each product consumed.
B) beyond some point additional units of a product will yield less and less extra satisfaction to a consumer.
C) price must be lowered to induce firms to supply more of a product.
D) it will take larger and larger amounts of resources beyond some point to produce successive units of a product.

6. Marginal utility is the:
A) sensitivity of consumer purchases of a good to changes in the price of that good.
B) change in total utility realized by consuming one more unit of a good.
C) change in total utility realized by consuming another unit of a good divided by the change in the price of that good.
D) total utility associated with the consumption of a certain number of units of a good divided by the number of units consumed.

7. Where total utility is at a maximum, marginal utility is:
A) negative.
B) positive and increasing.
C) zero.
D) positive but decreasing.

8. Which of the following statements is correct?
A) Utility and usefulness are synonymous.
B) The marginal utility derived from successive units of a product tends to be similar for all consumers.
C) Because utility is not measurable, the utility-maximizing rule provides no useful insights as to consumer behavior.
D) A product may yield utility, but not be functionally useful.

9. Suppose that MUx/Px exceeds MUy/Py. To maximize utility the consumer who is spending all her money income should buy:
A) less of X only if its price rises.
B) more of Y only if its price rises.
C) more of Y and less of X.
D) more of X and less of Y.

10. If a rational consumer is in equilibrium, which of the following conditions will hold true?
A) MUa = MUb = MUc = ... = MUn.
B) The marginal utility of each good purchased will be zero.
C) The marginal utility of the last dollar spent on each good purchased will be the same.
D) The total utility obtained from each good purchased will be the same.

11. An increase in the price of product A will:
A) increase the marginal utility per dollar spent on A.
B) decrease the marginal utility per dollar spent on A.
C) not affect the marginal utility per dollar spent on A.
D) cause utility-maximizing consumers to buy more of A.

12. The diamond-water paradox arises because:
A) essential goods may be cheap while nonessential goods may be expensive.
B) the marginal utility of certain products increases, rather than diminishes.
C) essential goods are always higher priced than nonessential goods.
D) we sometimes fail to use money as a standard of value.

13. The utility-maximizing rule:
A) is inconsistent with the law of demand.
B) implies a perfectly elastic demand curve.
C) implies a leftward shifting demand curve.
D) is consistent with the law of demand.

Answer Key: Chapter 21
1. A
2. C
3. C
4. C
5. B
6. B
7. C
8. D
9. D
10. C
11. B
12. A
13. D

CHAPTER 22
1. Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?
A) payments of wages to its office workers
B) rent paid for the use of equipment owned by the Schultz Machinery Company
C) depreciation charges on company-owned equipment
D) economic profits resulting from current production

2. Costs to an economist:
A) consist only of explicit costs.
B) may or may not involve monetary outlays.
C) never reflect monetary outlays.
D) always reflect monetary outlays.

3. Implicit costs are:
A) regarded as costs by accountants but not by economists.
B) payments which a firm makes to other firms or individuals who supply resources to it.
C) nonexpenditure costs.
D) costs which vary proportionately with output.

4. Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were:
A) $100,000 and its economic profits were zero.
B) $200,000 and its economic profits were zero.
C) $100,000 and its economic profits were $100,000.
D) zero and its economic loss was $200,000.

5. The basic difference between the "short run" and the "long run" is that:
A) all costs are fixed in the short run, but all costs are variable in the long run.
B) the law of diminishing returns applies in the long run, but not in the short run.
C) at least one resource is fixed in the short run, while all resources are variable in the long run.
D) economies of scale may be present in the short run, but not in the long run.

6. The law of diminishing returns indicates that:
A) as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.
B) because of economies and diseconomies of scale a competitive firm's long-run average total cost curve will be U-shaped.
C) the demand for goods produced by purely competitive industries is downsloping.
D) beyond some point the extra utility derived from additional units of a product will yield the consumer smaller and smaller extra amounts of satisfaction.

7. Marginal product:
A) diminishes at all levels of production.
B) may initially increase, then diminish, but never become negative.
C) may initially increase, then diminish, and ultimately become negative.
D) is always less than average product.

8. "If a variable input is added to some fixed input, beyond some point the resulting extra output will decline." This statement describes:
A) economies and diseconomies of scale.
B) X-inefficiency.
C) the law of diminishing returns.
D) the law of diminishing marginal utility.

9. The total output of a firm will be at a maximum where:
A) MP is at a maximum.
B) AP is at a minimum.
C) MP is zero.
D) AP is at a maximum.

10. Fixed cost is:
A) the cost of producing one more unit of capital, say, machinery.
B) any cost which does not change when the firm changes its output.
C) average cost multiplied by the firm's output.
D) usually zero in the short run

11. Marginal cost is the:
A) rate of change in total fixed cost which results from producing one more unit of output.
B) change in total cost which results from producing one more unit of output.
C) change in average variable cost which results from producing one more unit of output.
D) change in average total cost which results from producing one more unit of output.

12. When average fixed costs are falling:
A) average total cost must be falling.
B) average variable cost may be either rising or falling.
C) marginal cost must be falling.
D) average variable costs must be rising.

13. Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and average variable costs of $150. The firm's total fixed costs are:
A) $5,000.
B) $500.
C) $.50.
D) $50.

14. Other things equal, if the prices of a firm's variable inputs were to fall:
A) one could not predict how unit costs of production would be affected.
B) marginal cost, average variable cost, and average fixed cost would all fall.
C) marginal cost, average variable cost, and average total cost would all fall.
D) average variable cost would fall, but marginal cost would be unchanged.

15. In comparing the changes in TVC and TC associated with an additional unit of output, we find that:
A) no generalization about the changes in TC and TVC can be made.
B) the changes in TC and TVC are equal.
C) the change in TC is greater than the change in TVC.
D) the change in TVC is greater than the change in TC.

Answer Key: Chapter 22
1. D
2. B
3. C
4. B
5. C
6. A
7. C
8. C
9. C
10. B
11. B
12. B
13. A
14. C
15. B

CHAPTER 23
1. Which of the following industries most closely approximates pure competition?
A) agriculture
B) farm implements
C) clothing
D) steel

2. In which of the following industry structures is the entry of new firms the most difficult?
A) pure monopoly
B) oligopoly
C) monopolistic competition
D) pure competition

3. An industry comprised of a very large number of sellers producing a standardized product is known as:
A) monopolistic competition
B) oligopoly
C) pure monopoly
D) pure competition

4. A purely competitive seller is:
A) both a "price maker" and a "price taker."
B) neither a "price maker" nor a "price taker."
C) a "price taker."
D) a "price maker."

5. The demand schedule or curve confronted by the individual purely competitive firm is:
A) relatively elastic, that is, the elasticity coefficient is greater than unity.
B) perfectly elastic.
C) relatively inelastic, that is, the elasticity coefficient is less than unity.
D) perfectly inelastic.

6. If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:
A) may be either greater or less than $5.
B) will also be $5.
C) will be less than $5.
D) will be greater than $5.

7. For a purely competitive firm total revenue:
A) is price times quantity sold.
B) increases by a constant absolute amount as output expands.
C) graphs as a straight upsloping line from the origin.
D) has all of the above characteristics.

8. A purely competitive seller's average revenue curve coincides with:
A) its marginal revenue curve only.
B) its demand curve only.
C) both its demand and marginal revenue curves.
D) neither its demand nor its marginal revenue curve.

9. A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating:
A) price and average total cost.
B) price and average fixed cost.
C) marginal revenue and marginal cost.
D) price and marginal revenue.

10. A firm reaches a break-even point (normal profit position) where:
A) marginal revenue cuts the horizontal axis.
B) marginal cost intersects the average variable cost curve.
C) total revenue equals total variable cost.
D) total revenue and total cost are equal.

11. When a firm is maximizing profit it will necessarily be:
A) maximizing profit per unit of output.
B) maximizing the difference between total revenue and total cost.
C) minimizing total cost.
D) maximizing total revenue.

12. Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation:
A) should close down in the short run.
B) is maximizing its profits.
C) is realizing a loss of $60.
D) is realizing an economic profit of $40.

13. Suppose you find that the price of your product is less than minimum AVC. You should:
A) minimize your losses by producing where P = MC.
B) maximize your profits by producing where P = MC.
C) close down because, by producing, your losses will exceed your total fixed costs.
D) close down because total revenue exceeds total variable cost.

14. In the short run a purely competitive firm will always make an economic profit if:
A) P = ATC.
B) P > AVC.
C) P = MC.
D) P > ATC.

15. A firm finds that at its MR = MC output, its TC = $1000, TVC = $800, TFC = $200, and total revenue is $900. This firm should:
A) shut down in the short run.
B) produce because the resulting loss is less than its TFC.
C) produce because it will realize an economic profit.
D) liquidate its assets and go out of business.

Answer Key: Chapter 23
1. A
2. A
3. D
4. C
5. B
6. B
7. D
8. C
9. C
10. D
11. B
12. D
13. C
14. D
15. B

CHAPTER 24
1. Pure monopoly means:
A) any market in which the demand curve to the firm is downsloping.
B) a standardized product being produced by many firms.
C) a single firm producing a product for which there are no close substitutes.
D) a large number of firms producing a differentiated product.

2. Pure monopolists may earn economic profits in the long run because:
A) of advertising.
B) marginal revenue is constant as sales increase.
C) of barriers to entry.
D) of rising average fixed costs.

3. Which of the following is a characteristic of pure monopoly?
A) close substitute products
B) barriers to entry
C) the absence of market power
D) "price taking"

4. A natural monopoly occurs when:
A) long-run average costs decline continuously through the range of demand.
B) a firm owns or controls some resource essential to production.
C) long-run average costs rise continuously as output is increased.
D) economies of scale are obtained at relatively low levels of output.

5. What do economies of scale, the ownership of essential raw materials, and patents have in common?
A) They must all be present before price discrimination can be practiced.
B) They are all barriers to entry.
C) They all help explain why a monopolist's demand and marginal revenue curves coincide.
D) They all help explain why the long-run average cost curve is U-shaped.

6. If a nondiscriminating imperfectly competitive firm is selling its 100th unit of output for $35, its marginal revenue:
A) may be either greater or less than $35.
B) will also be $35.
C) will be less than $35.
D) will be greater than $35.

7. For an imperfectly competitive firm:
A) total revenue is a straight, upsloping line because a firm's sales are independent of product price.
B) the marginal revenue curve lies above the demand curve because any reduction in price applies to all units sold.
C) the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold.
D) the marginal revenue curve lies below the demand curve because any reduction in price applies only to the extra unit sold.

8. A monopolistic firm has a sales schedule such that it can sell 10 prefabricated garages per week at $10,000 each, but if it restricts its output to 9 per week it can sell these at $11,000 each. The marginal revenue of the tenth unit of sales per week is:
A) -$1,000.
B) $9,000.
C) $10,000.
D) $1,000.

9. With respect to the pure monopolist's demand curve it can be said that:
A) the stronger the barriers to entry, the more elastic is the monopolist's demand curve.
B) price exceeds marginal revenue at all outputs greater than 1.
C) demand is perfectly inelastic.
D) marginal revenue equals price at all outputs.

10. Because the monopolist's demand curve is downsloping:
A) MR will equal price.
B) price must be lowered to sell more output.
C) the elasticity coefficient will increase as price is lowered.
D) its supply curve will also be downsloping.

11. When total revenue is increasing:
A) marginal revenue may be either positive or negative.
B) the demand curve is relatively inelastic.
C) marginal revenue is positive.
D) marginal revenue is negative.

12. For a pure monopolist marginal revenue is less than price because:
A) the monopolist's demand curve is perfectly elastic.
B) the monopolist's demand curve is perfectly inelastic.
C) when a monopolist lowers price to sell more output, the lower price applies to all units sold.
D) the monopolist's total revenue curve is linear and slopes upward to the right.

13. If a pure monopolist is operating in a range of output where demand is elastic:
A) it cannot possibly be maximizing profits.
B) marginal revenue will be positive but declining.
C) marginal revenue will be positive and rising.
D) total revenue will be declining.

14. A nondiscriminating pure monopolist finds that it can sell its fiftieth unit of output for $50. We can surmise that the marginal:
A) cost of the fiftieth unit is also $50.
B) revenue of the fiftieth unit is also $50.
C) revenue of the fiftieth unit is less than $50.
D) revenue of the fiftieth unit is greater than $50.

15. The MR = MC rule:
A) applies only to pure competition.
B) applies only to pure monopoly.
C) does not apply to pure monopoly because price exceeds marginal revenue.
D) applies both to pure monopoly and pure competition.

Answer Key: Chapter 24
1. C
2. C
3. B
4. A
5. B
6. C
7. C
8. D
9. B
10. B
11. C
12. C
13. B
14. C
15. D

CHAPTER 25
1. Monopolistic competition is characterized by a:
A) few dominant firms and low entry barriers.
B) large number of firms and substantial entry barriers.
C) large number of firms and low entry barriers.
D) few dominant firms and substantial entry barriers.

2. Monopolistic competition resembles pure competition because:
A) both industries emphasize nonprice competition.
B) in both instances firms will operate at the minimum point on their long-run average total cost curves.
C) both industries entail the production of differentiated products.
D) barriers to entry are either weak or nonexistent.

3. Nonprice competition refers to:
A) competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts.
B) price increases by a firm which are ignored by its rivals.
C) advertising, product promotion, and changes in the real or perceived characteristics of a product.
D) reductions in production costs which are not reflected in price reductions.

4. Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because:
A) the number of firms in the industry is larger.
B) monopolistically competitive firms cannot realize an economic profit in the long run.
C) of product differentiation and consequent product promotion activities.
D) monopolistically competitive producers are mutually interdependent in their pricing strategies.

5. Monopolistically competitive and purely competitive industries are similar in that:
A) both are assured of short-run economic profits.
B) both produce differentiated products.
C) the demand curves facing individual firms are perfectly elastic in both industries.
D) there are few, if any, barriers to entry.

6. The monopolistically competitive seller's demand curve will become more elastic the:
A) more significant the barriers to entering the industry.
B) greater the degree of product differentiation.
C) larger the number of competitors.
D) smaller the number of competitors.

7. The price elasticity of a monopolistically competitive firm's demand curve varies:
A) inversely with the number of competitors and the degree of product differentiation.
B) directly with the number of competitors and the degree of product differentiation.
C) directly with the number of competitors, but inversely with the degree of product differentiation.
D) inversely with the number of competitors, but directly with the degree of product differentiation.

8. In long-run equilibrium a monopolistically competitive firm's price will:
A) be less than both MC and ATC.
B) exceed ATC, but equal MC.
C) exceed MC, but equal ATC.
D) exceed both MC and ATC.

9. The term "oligopoly" indicates:
A) a one-firm industry.
B) many producers of a differentiated product.
C) a few firms producing either a differentiated or a homogeneous product.
D) an industry whose four-firm concentration ratio is low.

10. Barriers to entry in oligopolistic industries may consist of:
A) economies of scale.
B) patents.
C) ownership of essential resources.
D) all of the above.

11. Oligopolistic industries:
A) are characterized by a relatively large number of small sellers.
B) may produce either standardized or differentiated products.
C) always produce differentiated products.
D) always produce standardized products.

12. Prices are likely to be least flexible:
A) in oligopoly.
B) in monopolistic competition.
C) where product demand is inelastic.
D) in pure competition.

13. Concentration ratios:
A) may overstate the degree of competition because they ignore imported products.
B) may overstate the degree of competition because interindustry competition is ignored.
C) may understate the degree of competition because they ignore imported products.
D) provide detailed insights as to the price and output behavior of firms which comprise the various industries.

14. Assume six firms comprising an industry have market shares of 30, 30, 10, 10, 10, and 10 percent. The Herfindahl Index for this industry:
A) is 2,525.
B) is 1,600.
C) is 2,200.
D) is 80.
E) cannot be determined from the information given.

15. Game theory can be used to demonstrate:
A) that oligopolistic firms are mutually interdependent.
B) that independent pricing will lead to low-price policies.
C) that oligopolists can increase their profits through collusion.
D) all of the above.

16. The kinked-demand curve of an oligopolist is based on the assumption that:
A) competitors will follow a price cut but ignore a price increase.
B) competitors will match both price cuts and price increases.
C) competitors will ignore a price cut but follow a price increase.
D) there is no product differentiation.

17. The kinked-demand curve model of oligopoly is useful in explaining:
A) the way that collusion works.
B) why oligopolistic prices and outputs are extremely sensitive to changes in marginal cost.
C) why oligopolistic prices might change only infrequently.
D) the process by which oligopolists merge with one another.

18. If competing oligopolists completely ignore oligopolist X's price changes, then X's:
A) demand curve will be less elastic than if the other oligopolists matched X's price changes.
B) demand curve will be more elastic than if the other oligopolists matched X's price changes.
C) marginal revenue curve will have a vertical gap.
D) demand and marginal revenue curves will coincide.

19. The kinked-demand curve model of oligopoly:
A) assumes a firm's rivals will ignore a price cut but match a price increase.
B) embodies the possibility that changes in unit costs will have no effect upon equilibrium price and output.
C) assumes a firm's rivals will match any price change it may initiate.
D) assumes a firm's rivals will ignore any price change it may initiate.

20. A kink may exist in an oligopolist's demand curve because:
A) products are differentiated.
B) an abrupt change in price elasticity occurs.
C) the firm will ignore price cuts by rivals, but will match their price increases.
D) there is a gap in marginal costs.

Answer Key: Chapter 25
1. C
2. D
3. C
4. C
5. D
6. C
7. C
8. C
9. C
10. D
11. B
12. A
13. C
14. C
15. D
16. A
17. C
18. B
19. B

20. B