M1 Problem set and sample questions

Use the following demand and supply functions: Demand: Qd​=50−4P Supply: Qs​=20+2P. If the price is $10, there is a

a. None of the choices is correct.

b. surplus of 30 units.

c. shortage of 10 units.

d. shortage of 30 units.

e. surplus of 40 units.

b. surplus of 30 units.

The market demand curve for a given good shifts when there is a change in any of the following factors except

a. the level of consumers' income.

b. the prices of goods related in consumption.

c. the price of the good.

d. the tastes of consumers.

c. the price of the good.

In a perfectly competitive market,

a. it is difficult for new firms to enter the market due to barriers to entry.

b. the output sold by a particular firm may be quite different from the output sold by the other firms in the market.

c. firms are price-setters.

d. all firms produce and sell a standardized or undifferentiated product.

d. all firms produce and sell a standardized or undifferentiated product.

Consumer surplus

a. is positive for all but the last unit purchased.

b. for a particular unit of consumption is computed by taking the difference between demand price and market price.

c. added to producer surplus provides a measure of the net gain to society from the production and consumption of the good.

d. is the area below demand and above market price over all the units consumed.

e. All of the choices are correct.

e. All of the choices are correct.

When a firm is a price-taking firm,

a. many other firms produce a product that is identical to the output produced by the rest of the firms in the industry.

b. raising the price of the product above the market-determined price will cause sales to fall nearly to zero.

c. All of the choices are correct.

d. the price of the product it sells is determined by the intersection of the market demand and supply curves for the product.

c. All of the choices are correct

Refer to the figure below: In the figure, the equilibrium price and quantity are

a. P=$7 and Q=800.

b. P=$6 and Q=300.

c. P=$4 and Q=300.

d. P=$6 and Q=800.

e. P=$4 and Q=400.

b. P = $6 and Q = 300.

Which of the following is NOT one of features characterizing market structures?

a. the level of capital investment in research and development

b. the degree of product differentiation

c. the likelihood of new firm's entering a market

d. the number and size of firms

a. the level of capital investment in research and development

Which of the following would decrease the demand for tennis balls?

a. an increase in the cost of producing tennis balls

b. a decrease in average household income when tennis balls are a normal good

c. a decrease in the price of tennis rackets

d. an increase in the price of tennis balls

b. a decrease in average household income when tennis balls are a normal good

A risk premium is

a. lower the riskier the future stream of profits.

b. an additional compensation paid to the workers of a business enterprise.

c. subtracted from the discount rate when calculating the present value of a future stream of profits.

d. a measure calculated to reflect the riskiness of future profits.

d. a measure calculated to reflect the riskiness of future profits.

In markets characterized by monopolistic competition,

a. entry into the market is relatively easy so that profit in the long run is zero.

b. a small number of relatively large firms sell a standardized product.

c. entry into the market is restricted so that profit may be positive in the long run.

d. a small number of relatively small firms sell a differentiated product.

a. entry into the market is relatively easy so that profit in the long run is zero.

The principal-agent problem arises when

a. the principal cannot enforce the contract with the agent or finds it too costly to monitor the agent.

b. the principal cannot decide whether the firm should seek to maximize the expected future profits of the firm or maximize the price for which the firm can be sold.

c. both "the principal and the agent have different objectives" and "the principal cannot enforce the contract with the agent or finds it too costly to monitor the agent".

d. the principal and the agent have different objectives.

c. both "the principal and the agent have different objectives" and "the principal cannot enforce the contract with the agent or finds it too costly to monitor the agent".

Use the following demand and supply functions: Demand: Qd​=50−4P Supply: Qs​=20+2P. If the price is $2, there is a

a. surplus of 10 units.

b. surplus of 30 units.

c. shortage of 18 units.

d. shortage of 10 units.

e. None of the choices is correct.

c. shortage of 18 units.

Economic profit

a. is negative when total costs exceed total revenues.

b. is a theoretical measure of a firm's performance and has little value in real world decision making.

c. can be calculated by subtracting implicit costs of using owner-supplied resources from the firm's total revenue.

d. is generally larger than accounting profit.

a. is negative when total costs exceed total revenues.

If the price of a complement for tires decreases, all else equal,

a. quantity demanded for tires will decrease.

b. demand for tires will decrease.

c. demand for tires will increase.

d. quantity supplied for tires will decrease.

e. supply for tires will increase.

c. demand for tires will increase.

Suppose an individual buyer values a pound of butter at $10. If the market price of butter is $8, what is the consumer surplus for this buyer?

a. $3

b. $0

c. $2

d. $5

e. $4

c. $2

A price-setting firm

a. sells a product that is not differentiated from the product sold by its rivals or sells in a limited geographic market area with only one or a few sellers.

b. possesses little market power.

c. can lower the price of its product and sell more units.

d. can raise the price of its product and sell the same number of units.

c. can lower the price of its product and sell more units.

Explanation: A price-setting firm has some degree of market power, which allows it to influence its price. It faces a downward-sloping demand curve, meaning it can sell more units by lowering its price.

Suppose Marv, the owner-manager of Marv's Hot Dogs, earned $82,000 in revenue last year. Marv's explicit costs of operation totaled $36,000. Marv has a Bachelor of Science degree in mechanical engineering and could be earning $40,000 annually as mechanical engineer.1

a. Marv's implicit cost of using owner-supplied resources is $230,000.

b. Marv's economic profit is $6,000.

c. Marv's implicit cost of using owner-supplied resources is $36,000.

d. Marv's economic profit is $36,000.

b. Marv's economic profit is $6,000.

Economic profit is the difference between

a. accounting profit and explicit costs.

b. accounting profit and the opportunity cost of the market-supplied resources used by the firm.

c. total revenue and the opportunity cost of all of the resources used in production.

d. total revenue and the implicit costs of using owner-supplied resources.

c. total revenue and the opportunity cost of all of the resources used in production.

Explanation: Economic profit is the difference between a firm's total revenue and its total opportunity cost, which includes both explicit costs (out-of-pocket expenses) and implicit costs (the opportunity cost of using the firm's own resources).

If the market price of a good is $150 and the supply price of the good is $70, what is the producer surplus if any?

a. $220

b. $150

c. $70

d. $80

e. $0

d. $80

Which of the following will cause a change in quantity supplied?

a. a technological change

b. a change in the number of firms in the market

c. a change in input prices

d. a change in the market price of the good

d. a change in the market price of the good

Economic theory is a valuable tool for business decision making because it

a. identifies for managers the essential information for making a decision.

b. assumes away the problem.

c. creates a realistic, complex model of the business firm.

d. provides an easy solution to complex business problems.

a. identifies for managers the essential information for making a decision.

Economic profit

a. is a theoretical measure of a firm's performance and has little value in real world decision making.

b. can be calculated by subtracting implicit costs of using owner-supplied resources from the firm's total revenue.

c. is negative when total costs exceed total revenues.

d. is generally larger than accounting profit.

c. is negative when total costs exceed total revenues.

Economic profit is the difference between

a. total revenue and the opportunity cost of all of the resources used in production.

b. total revenue and the implicit costs of using owner-supplied resources.

c. accounting profit and the opportunity cost of the market-supplied resources used by the firm.

d. accounting profit and explicit costs.

a. total revenue and the opportunity cost of all of the resources used in production.

When economic profit is positive,

a. total revenue exceeds total economic cost.

b. the firm's owners have successfully solved the principle-agent problem.

c. the firm's owners experience a decrease in their wealth.

d. foreign companies experience loss of market share

a. total revenue exceeds total economic cost.

Consider a firm that employs some resources that are owned by the firm. When accounting profit is zero, economic profit

a. must also equal zero.

b. is sure to be positive.

c. must be negative and shareholder wealth is reduced.

d. cannot be computed accurately, but the firm is breaking even nonetheless.

c. must be negative and shareholder wealth is reduced.

Which of the following statements is false?

a. Explicit costs of using market-supplied resources entail an opportunity cost equal to the dollar cost of obtaining the resources in the market.

b. When economic profit is zero, the firm's owners could not have done better putting their resources in some other industry of comparable risk.

c. If economic profit is positive, accounting profit must also be positive.

d. If economic profit is negative, accounting profit must also be negative.

e. None of the above statements is false.

d. If economic profit is negative, accounting profit must also be negative.

If the price of a complement for tires decreases, all else equal,

a. quantity demanded for tires will decrease.

b. quantity supplied for tires will decrease.

c. demand for tires will increase.

d. demand for tires will decrease.

e. supply for tires will increase.

c. demand for tires will increase.

The market demand curve for a given good shifts when there is a change in any of the following factors EXCEPT

a. the price of the good.

b. the level of consumers' income.

c. the prices of goods related in consumption.

d. the tastes of consumers.

a. the price of the good.

Which of the following would DECREASE the demand for tennis balls?

a. An increase in the price of tennis balls

b. A decrease in the price of tennis rackets

c. An increase in the cost of producing tennis balls

d. A decrease in average household income when tennis balls are a normal good

d. A decrease in average household income when tennis balls are a normal good

If input prices increase, all else equal,

a. quantity supplied will decrease.

b. supply will increase.

c. supply will decrease.

d. demand will decrease.

c. supply will decrease.

Which of the following would increase the supply of corn?

a. an increase in the price of pesticides

b. a decrease in the demand for corn

c. a fall in the price of corn

d. a severe drought in the corn belt

e. a decrease in the price of wheat

e. a decrease in the price of wheat

When Sonoma Vineyards reduces the price of its Cabernet Sauvignon from $15 a bottle to $12 a bottle, the result is an increase in

a. the demand for this wine.

b. the supply of this wine.

c. the quantity of this wine demanded.

d. the quantity of this wine supplied.

c. the quantity of this wine demanded.

Which of the following will cause a change in quantity supplied?

a. a change in input prices

b. a technological change

c. a change in the number of firms in the market

d. a change in the market price of the good

d. a change in the market price of the good

When the average price of smart phones falls, the result is

a. an increase in supply of smart phones.

b. an increase in the quantity of smart phones supplied.

c. an increase in the quantity of smart phones demanded.

d. a decrease in the quantity of smart phones demanded.

c. an increase in the quantity of smart phones demanded.