MULTIPLE CHOICE PRACTICE QUESTIONS
Dear class members:
You will remember that I promised you some multiple choice quizzes so you could practice with
them. I added a couple quizzes in doing so, so that you will have more latitude in dropping
quizzes with lower scores. The first 20 questions here, therefore, are questions you have seen
before. I have added some additional questions for your edification and practice.
For more practice questions, see the following web sites.
http://bized.ac.uk/studskil/l3su1sk4.htm
http://www.unn.ac.uk/~egkh1/mchoice/mchoice.htm
http://www.collegeboard.org/ap/economics/html/micro_mcitm001.html
http://www.bized.ac.uk/stafsup/options/qbank/
You will be able to find among the billions of questions that have been written and used many
that require knowledge of things not addressed in class. The multiple choice questions I select,
almost exclusively different from the practice questions below, will test your knowledge on
things emphasized in class.
Enjoy!
Brother Bryson
1. A monopolistic firm may price its product so as to gain less than maximum short-term profit in
order to
a. charge what "the traffic will bear" for its product.
b. overcome the countervailing power of customers for its product.
c. deter the threat of potential competition and/or government regulation.
d. restrict its output to an even greater extent.
Answer: c
2. In regulating the prices of monopolists, the traditional standard is that regulators should allow
firms to charge rates that will
a. equate marginal revenue and marginal cost.
b. cover all allowable operating expenses and yield a “fair return” for the stockholders.
c. result in the same price and output as would occur under perfect competition.
d. permit reasonable market share for the regulated firm.
Answer: b
3. The theory that monopolists might have lower costs than competitive firms was presented by
a. Brickley, Zimmerman, and Smith
b. Baumol.
c. Schumpeter.
d. Coase
e. none of the above.
Answer: c
4. When a firm is the only seller of a product for which there is no close substitute,
a. it will maximize short-run profits by charging the highest price it can get for its product.
b. its demand-AR curve tends to be inelastic.
c. total profits will be maximum where price exceeds average total cost by the greatest vertical
distance.
d. total profits will be maximum at the output rate corresponding to the minimum point of the
firm's LRAC curve.
e. none of these.
Answer: e
5. A monopolist is producing a level of output at which price is $8, marginal revenue is $5, average
variable cost is $6, and marginal cost is $10. In order to maximize profit, the firm should
a. decrease price.
b. increase price.
c. keep price the same.
d. increase output.
e. shut down.
Answer: b
6. When an agent pursues his own interests he is exhibiting
a. strategic misrepresentation
b. opportunism
c. adverse selection
d. reneging
Answer: b
7.When a Savings Bank “screens” potential borrowers, they are trying to avoid exploitation
because of
a. the risk and return trade-offb. false positive signaling
c. asset specificity
d. adverse selection
e. moral hazard
Answer: d
8. Which of the following factors contributed to the moral hazard problem in the U.S. Savings
and Loan industry during the 1980s?
a. Measurement problems on the part of the Federal Government’s system of regulation
b. Deposit insurance programs such as F.S.L.I.C. that encouraged excessive risk taking by
deposit institutions
c. The regulated cap on maximum deposit losses thwarting market discipline
d. All of the above
Answer: d
9. Which of the following best describes a situation characterized by moral hazard?
a. a party’s actions, which impact a transaction’s value to others, are perfectly observable
b. at least one involved party fails to understand the ethics of a given situation
c. a party puts forth less effort than they would if their actions could be effectively monitored.
d. an exchange is made subject to the standard neoclassical, competitive conditions.
Answer: c
10. An insured agent who has not misrepresented the risk he is to the insurance company
a. cannot present a moral hazard situation to his insurance company
b. has not presented an adverse selection problem to the insurance company
c. is guilty of pre-contractual opportunism if he has not kept his asymmetric information
concealed.
d. represents an adverse selection problem and may also represent a moral hazard problem if, as
a result of being insured, he behaves in a manner that increases the likelihood of his making an
insurance claim.
Answer: b
11. Monopolistic competition is like monopoly in that
a. the monopolistically competitive firm must often be regulated
b. the monopolistically competitive firm does not face a horizontal demand curve
c. both industries have the same “robber baron” heritage
d. both industries have interdependence and uncertainty
e. all of the above are true.
Answer: b. Now let me explain why other answers are wrong. Answer a: wrong because the level of
competition is such that no regulation is necessary. c is wrong because the “robber baron” heritage
belongs alone to the large, rather anti-social monopolies in the U.S. of a century ago. d is wrong
because interdependence and uncertainty exist in oligopoly, not monopolistic competition.
12. Monopolistic competition is like pure competition in that
a. both represent cases of imperfect competition
b. both can be characterized by decreasing costs
c. both can block energy only through the granting of patents
d. both industries are characterized by interdependence and uncertainty
e. Baumol invented both industries before the invention of game theory.
Answer: b. Answer a is incorrect because of the two types, only monopolistic competition is a form
of imperfect competition, a term which refers to all industry types other than pure competition.
Answer c is untrue, since of the two industries, only monopolistic competition can block entry, but
that is only through licensing arrangements, not advertizing. Answer e is a nonsense answer; it is
both untrue and irrelevant to this question.
13. How many firms are in the product groups of monopolistic competition
a. few enough so that interdependence remains strong
b. few enough so that entry is always a problem
c. just enough so that if a firm reduces its price he will expect no retaliation
d. just enough so that if a firm reduces its price he will expect quick retaliation
e. all of the above are true except d
Answer: c Answer a is false because there is no interdependence in monopolistic competition.
Answer b is untrue because entry is open (not a problem) in monopolistic competition. Answer d is
wrong because without interdependence, no retaliation will result.
14. In monopolistic competition we speak of a “product group” as being
a. the set of firms which, through vertical coordination, produce first the parts, then a common final
commodity.
b. the set of firms which, through horizontal coordination, produce a group of similar products.
c. the same “industry” all producing complementary products
d. different “industries” all producing roughly substitute products
e. none of the above. Monopolistic competition has nothing to do with product groups.
Answer: d is correct, since in this kind of model, the product of each firm is unique (by
differentiation), so each firm is an industry and all the producers of similar or substitute products are
a “product group.” a might describe a group of products, but not a product group. I don’t what b
means; horizontal coordination is not something that occurs in monopolistic competition. Answer c
can’t be correct, because product groups are made up of similar or substitute products, not
complements. Answer e is incorrect because monopolistic competition is the industry for which
Chamberlain (and I didn’t even mention his name to you or ask you to learn it) developed the term
“product group.”
15. In monopolistic competition, advertizing has the effect of
a. making the marginal cost curves slope down in stage III of production.
b. making the marginal revenue curve slope down
c. wasting money, since the products are all homogeneous anyway
d. causing the demand curve of the individual firm to drift downward over time
e. causing the marginal revenue curves to slope upward
Answer: b. This requires noticing that advertizing makes the demand curve slope down, which also
makes the MR curve slope down (twice as fast). MR is a straight line in pure competition.
Answer a is wrong because marginal cost curves always slope up in stage III because of diminishing
returns. Answer c is wrong since products are homogeneous only in pure competition. d is wrong
because the curve shifts downward due to entry, not advertizing. Answer d is incorrect because
demand curves in this kind of industry always slope down, so MR cannot rise.
16. Which of the following does not correspond to the assumptions of the kinked demand model?
a. A price increase by one producer is matched by other producers
b. A price increase by one producer is not matched by other producers
c. A price cut by one producer is matched by other producers.
Answer: a
17. Which of the following is not true of oligopoly?
a. There are not many firms in the industry
b. Producers of a similar product are not referred to as a “product group”
c. The firms are generally large and independent
d. It is possible for an oligopoly industry to consist of just two firms
e. The managerial environment of oligopoly is characterized by uncertainty
Answer: c
18. A kinked demand curve is
a. highly inelastic for price increases and quite elastic for price cuts
b. highly elastic for price increases and less elastic for price cuts
c. highly elastic for price increases and quite elastic for price decreases
d. infinitely elastic for price increases.
e. none of the above.
Answer: b
19. An oligopolist with a kinked demand curve has an MR curve
a. that rises beyond a certain stage because of diminishing returns
b. that follows twice as fast as the demand curve
c. that cuts the AR curve at its minimum point
d. that has a discontinuous segment
e. that has the same number of kinks
Answer: d
20. The kinked demand curve model explains
a. why firms are motivated to price right at the kink.
b. how the price is determined in the first place
c. what happens when costs rise to the extent that MC is not equal to MR at the point of the kink.
d. the long-term dynamics of the oligopoly market
Answer: a
Use the diagram below to answer the next five questions.
Part A
Part B
M
A
B
M’
21. Between points A and B
a. the LAC curve is falling
b. the industry’s output is falling
c. the LAC curve is rising
d. the industry’s output is constant
e. economies of scale permit the larger output
Answer: c
22. The above diagram represents
a. monopolistic competition
b. a purely competitive industry with increasing returns to scale
c. the welfare loss of a rise in price in a competitive industry
d. successive equilibria resulting from the expansion of competitive firms
e. a price increase resulting from the law of diminishing returns
Answer: d
23. The position of the SAC curves show that
a. economies of scale are swamping diseconomies of scale
b. consumers are not demanding greater levels of output as time passes
c. price increases should have come as a surprise to the individual entrepreneur
d. smaller plant sizes and more extensive labor use are popular in this industry
e. a larger scale of plant is a part of the industry’s expansion
Answer: e
24. It is apparent from the diagram that the industry in question is a (an)
a. constant cost industry
b. decreasing cost industry
c. increasing cost industry
d. fluctuating cost industry
e. expansive cost industry
Answer: c
25. The final output of the firm will be at
a. A
b. B
c. M
d. M’
e. none of the above
Answer: B
26. When an agent seeks to pursue his own interests he can best be described as exhibiting
a. strategic misrepresentation. b. opportunism
c. adverse selection
d. reneging.
Answer: b
27. Which of the following is not a solution to adverse selection in a contracting environment?
a. the use of unbiased outside appraisers.
b. target marketing to identify certain socio-demographic and economic groups.
c. altering the selection, or mix, of potential trading partners.
d. incentive-based contracting.
Answer: d
28. When an agent seeks to pursue his own interests he can best be described as exhibiting
a. strategic misrepresentation
b. opportunism
c. adverse selection
d. reneging
Answer: b
29. Two types of Ex Ante opportunism are
a. holdups, strategic misrepresentation
b. holdups, private information
c. adverse selection, strategic misrepresentation
d. adverse selection, reneging
Answer: c
30. A good example of adverse selection is found in the used car market. The problem, in this
setting, is due to:
a. no optimal price existing
b. the majority of used cars being "lemons" which are of low quality
c. an excess supply in the market which is the sign of efficiency
d. sellers having an informational advantage
e. informational asymmetry favoring the buyer
Answer: d
31. The slope of a line
a. is unrelated to rates of change.
b. is not the ratio rise/run.
c. is not the derivative of a function.
d. is not the value of a marginal quantity.
e. is not constant for a curvilinear function.
Answer: e
32. Which of the following is not considered a public good for citizens in any large U.S. city?
a. national defense
b. health care
c. police protection
d. fire protection.
Answer: b
33. When there is an allocation of goods or services such that there exists no other feasible
allocation that lowers the well being of any party and raises the well being of (at least) one party, it
(that allocation) is said to be:
a. Profit-maximizing
b. A virtual corporation
c. Efficient
d. In equilibrium
Answer: c
34. One good example of a public good is national defense. The government overcomes the market
failure problem by:
a. Excluding various people from coverage
b. Forcing people to pay through taxes, thus making it illegal to free ride
c. Passing laws that prevent overconsumption and the “tragedy of the commons”
d. Relying on the generosity and goodwill of every American citizen
Answer: b
35. A cost or benefit imposed involuntarily on another party which is not regulated by any system of
prices is referred to as:
a. Transaction cost
b. A tax deduction
c. Externalities
d. Moral hazard
e. A bottleneck
Answer: c
36. If sellers try to charge a price which is above the equilibrium level, then it can be predicted that
a. a shortage will result and the quantity supplied will rise.
b. competition will be adversely affected.
c. surplus conditions will result and forces will be set in motion to cause prices to fall.
d. buyers will refuse to purchase anything.
e. none of these.
Answer: c
37. If ice cream is a normal good and average consumer income in the ice cream market increases by
10% then
a. There will be a movement down, to the right, along the demand for ice cream curve.
b. There will be movement up, to the left, along the demand for ice cream curve.
c. The ice cream demand curve will shift up and to the right.
d. The ice cream demand curve will shift down and to the left.
Answer: c