Practice MCQ
Chapter 6
1) In the case of a short-run production function:
A) all of the inputs are variable.
B) the amount of labor employed is held constant.
C) at least one of the inputs is fixed.
D) all of the inputs are fixed.
Answer: C
2) In which of the following situations would a firm be more likely to rely on a capital-intensive
method of production?
A) When the rate of technological innovation is low.
B) When capital is relatively expensive.
C) When the firm's output cannot be produced using the assembly line method of production.
D) When labor supply is limited relative to the available amount of capital.
Answer: D
3) Assume a firm is currently employing 20 units of capital and 100 units of labor in its
production process. Assume also that the marginal product of the 20th unit of capital is 40 units
of output, the marginal product of the 100th unit of labor is 10 units of output and the per unit
prices of capital and labor are $20 and $10, respectively. In this case, in order to minimize its
costs of production the firm should:
A) hire more capital and less labor.
B) hire more labor and less capital.
C) hire less capital and less labor.
D) hire more capital and more labor.
Answer: A
4) The evidence on the potential for input substitution in the service sector suggests that:
A) there may be more opportunities for input substitution than was previously thought, especially
in areas such as health care, financial services, and the even the fine arts.
B) the traditional view that the potential for input substitution is extremely limited is correct.
C) while one or two areas of the service sector may see a small amount of input substitution,
most areas will see little or none.
D) input substitution will only be feasible so long as the production process requires a relatively
small amount of labor to begin with.
Answer: A
5) In which of the following market structures would X-inefficiency be most likely to exist?
A) Perfect competition.
B) Monopolistic competition.
C) Oligopoly.
D) Monopoly.
Answer: D
6) The positively-sloped part of the long-run average total cost curve is due to which of the
following?
A) Diseconomies of scale.
B) Diminishing returns.
C) The firm being able to take advantage of large-scale production techniques as it expands its
output.
D) The increase in productivity that results from specialization.
Answer: A
7) The "minimum efficient scale" of operation in an industry is defined as:
A) the smallest plant size that can be operated by firms in the industry.
B) the scale of operation at which economies of scale are exhausted.
C) the smallest number of firms that could effectively meet demand for an industry's output.
D) the scale of operation by firms in an industry that is least efficient.
Answer: B
Chapter 7
1) Which of the following is not a characteristic of perfect competition?
A) Large number of firms in the industry.
B) Outputs of the firms are perfect substitutes for one another.
C) Firms face downward-sloping demand functions.
D) No barriers to entry or exit.
Answer: C
2) The manager of a perfectly competitive firm has to decide:
A) the quantity of output the firm should produce.
B) the price the firm should charge for its output.
C) the quantity of output the firm should produce and the price it should charge.
D) neither the quantity of output the firm should produce nor the price it should charge because
the market makes both of these decisions.
Answer: A
3) Which of the following statements regarding a price-taking firm is correct?
A) Demand = average revenue > marginal revenue.
B) Demand = marginal revenue > average revenue.
C) Demand = price = average revenue = marginal revenue.
D) Demand = price > average revenue > marginal revenue.
Answer: C
4) Assume a perfectly competitive firm is producing a level of output at which MR < MC. What
should the firm do to maximize its profits?
A) The firm should do nothing — it wants to maximize the difference between MR and MC in
order to maximize its profits.
B) The firm should decrease output.
C) The firm should increase price.
D) The firm should increase output.
Answer: B
5) Assume at the firm's profit-maximizing level of output P = AVC. In this case, the firm will be:
A) earning a positive economic profit.
B) earning economic profit = 0.
C) incurring an economic loss.
D) breaking even.
Answer: C
6) When price is less than average variable cost at the profit-maximizing level of output, a firm
should:
A) continue to produce the level of output at which marginal revenue equals marginal cost if it is
operating in the short run.
B) continue to produce the level of output at which marginal revenue equals marginal cost if it is
operating in the long run.
C) shutdown, because it will lose nothing in that case.
D) shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it
stays in business.
Answer: D
7) Assume a perfectly competitive firm is producing 300 units of output, P = $10, ATC of the
300th unit is $8, marginal cost of the 300th unit = $10, and AVC of the 300th unit = $6. Based
on this information, the firm is:
A) earning an economic profit of $600.
B) earning an economic profit of $1,200.
C) incurring a loss of $600.
D) incurring a loss of $1,200.
Answer: A
Chapter 8
1) In its effort to maximize economic profit, a firm characterized as a price setter must
determine:
A) only the price it should charge.
B) only the quantity it should produce.
C) both the price it should charge and the quantity it should produce.
D) neither the price it should charge and the quantity it should produce as these are both
determined by forces beyond the firm's control.
Answer: C
2) Assume that when price is $20, quantity demanded is 9 units, and when price is $19, quantity
demanded is 10 units. Based on this information, what is the marginal revenue resulting from an
increase in output from 9 units to 10 units?
A) $20
B) $19
C) $10
D) $1
Answer: C
Use Figure 1, which represents the situation faced by a monopolist, to answer the following
questions.
Figure 8.1
3) For the firm in Figure 1, the profit-maximizing (loss-minimizing) price and level of output
are:
A) P2 and Q2.
B) P1 and Q1.
C) P4 and Q1.
D) P3 and Q1.
Answer: C
4) Assuming instead that the market depicted in Figure 1 is perfectly competitive, the
equilibrium price and output would be:
A) P2 and Q2.
B) P1 and Q1.
C) P4 and Q1.
D) P3 and Q1.
Answer: A
5) Which of the following barriers to entry into a market is most beneficial from society's
perspective?
A) Economies of scale.
B) Ownership of an essential productive resource.
C) Brand loyalties.
D) Consumer lock-in and switching costs.
Answer: A
6) Which of the following barriers to entry is is most likely to result in the creation of of new
products and production processes?
A) Patents.
B) Licenses.
C) Ownership of an essential raw material.
D) Significant economies of scale.
Answer: A
7) All of the following are measures of market power except the:
A) Lerner Index.
B) Minimum-Efficient Scale Index.
C) four-firm concentration ratio for an industry.
D) Herfindahl-Hirschman Index.
Answer: B
8) Assume that for a particular firm's output price = $80, marginal cost = $30, average total cost
= $25. Based on this information, the firm's Lerner Index is equal to:
A) 0.313.
B) 0.375.
C) 0.6.
D) 0.625.
Answer: D
Chapter 9
1) The key distinguishing characteristic of an oligopoly is the:
A) presence of long-run economic profits.
B) fact that in all cases firms produce a standardized product.
C) mutual interdependence of the firms in the market.
D) near total absence of advertising.
Answer: C
2) Assume the production of a particular good is characterized by significant economies of scale.
In addition, three different versions of the good can be produced, and large segments of the
population prefer different versions of the good. In this case, the preferred market structure for
this good would be:
A) perfect competition.
B) monopoly.
C) monopolistic competition.
D) oligopoly.
Answer: D
3) Suppose an oligopolistic firm raises the price of its output. Demand for the firm's output will
be relatively price ________ if the other dominant firms in the market ________.
A) elastic; do not raise price
B) unit elastic; do not raise price
C) inelastic; also raise price
D) cannot be determined
Answer: A
4) Suppose an oligopoly consists of two firms. Firm A lowers price and Firm B responds by
lowering its price by the same amount. If average costs and industry output remain the same,
which of the following will occur?
A) The profits of the two firms will increase.
B) The profits of the two firms will decrease.
C) The profits of the two firms will remain the same.
D) Barriers to entry will come tumbling down and new firms will enter.
Answer: B
5) In game theory, a Nash equilibrium is defined as:
A) the dominant strategy of each player.
B) a set of strategies for which all players are choosing their best strategy, given the actions of
the other players.
C) the set of strategies that result in the maximum payoff to each player.
D) the set of strategies chosen when the players in a game can cooperate with each other.
Answer: B
6) The success of a predatory pricing strategy in an oligopolistic market depends on all of the
following except:
A) the number of firms operating in the industry prior to enactment of the policy.
B) how far the predatory price is below cost.
C) the period of time for which the predatory price is in effect.
D) the length of time over which recoupment of profits occurs.
Answer: A
7) Why is the prisoner's dilemma game useful in studying oligopoly behavior?
A) Because oligopolies make out like bandits.
B) To illustrate the problems encountered when making decisions under uncertainty.
C) To show that oligopolies behave as monopolists in the long run and earn positive economic
profits.
D) To illustrate how barriers to entry lead to economic profits.
Answer: B
29) Limit pricing is used primarily to:
A) discourage new firms from entering a market.
B) reduce (limit) the profits of all of the firms in the industry.
C) drive other firms out of a market.
D) establish a minimum price all of the firms in the market will charge.
Answer: A
