(Test Bank) Managerial Economics Theory, Applications, and Cases

Allen,Doherty,Mansfield, 8

Business

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Author(s): Allen, Doherty, Mansfield

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Test Bank for Managerial Economics Theory, Applications, and Cases , 8e Bruce Allen , Neil Doherty , Edwin Mansfield (All Chapters ) Chapter 1: Introduction MULTIPLE CHOICE 1. Managerial economics uses to help managers solve problems. a. formal models b. prescribed behavior c. quantitative methods d. microeconomic theory e. all of the above ANS: E DIF: Easy REF: 2 TOP: Introduction MSC: Factual 2. Managerial economics draws upon all of the following EXCEPT: a. finance. b. microeconomics. c. accounting. d. marketing. e. sociology. ANS: E DIF: Easy REF: 2 TOP: Introduction MSC: Factual 3. The economic theory of the firm assumes that the primary objective of a firm’s owner or owners is to: a. behave in a socially conscientious manner. b. maximize the firm’s profit. c. maximize the firm’s total sales. d. maximize the value of the firm. e. All of these are primary objectives. ANS: D DIF: Easy REF: 3 TOP: The Theory of the Firm MSC: Factual 4. In managerial economics, managers are assumed to maximize: a. current profits. b. their take -home pay. c. their employees’ welfare. d. the value of their firm. e. social welfare. ANS: D DIF: Easy REF: 3 TOP: The Theory of the Firm MSC: Factual 5. Owner -supplied labor is a cost that is usually: a. included in both accounting costs and economic costs. b. included in accounting costs but not in economic costs. c. included in economic costs but not in accounting costs. d. not included in either accounting costs or economic costs. e. ignored because it is impossible to place a value on it. ANS: C DIF: Easy REF: 5 TOP: Profit MSC: Factual 6. What is the relationship between economic and accounting profit? a. Economic profit is equal to accounting profit. b. Economic profit is greater than accounting profit. c. Economic profit is less than accounting profit. d. Economic profit may be equal to or less than accounting profit. e. Economic profit may be equal t o or greater than accounting profit. ANS: D DIF: Easy REF: 5 TOP: Profit MSC: Factual 7. The difference between accounting and economic profit is: a. caused by confusion over tax laws. b. the value of owned resources in their next best alternative use. c. the result of superior training received by accountants. d. proportionately very small for owner -managed firms. e. a decreasing function of interest rates. ANS: B DIF: Moderate REF: 5 TOP: Profit MSC: Factual 8. Managers make decisions that contribute to the profitability of a firm by: a. exploiting market efficiencies. b. taking on risks. c. engaging in illegal behavior. d. maximizing sales. e. manipulating the share price of the firm’s stock. ANS: B DIF: Moderate REF: 5 TOP: Profit MSC: Factual 9. Economic profits may result from: a. innovation. b. risk taking. c. exploiting market inefficiencies. d. all of the above. e. a and b ANS: D DIF: Easy REF: 6 TOP: Profit MSC: Factual 10. Which of the following would a manager NOT use to create market inefficiencies? a. Establishing a brand name. b. Sophisticated pricing strategies. c. Diversification efforts. d. Output decisions. e. Building market entry barriers. ANS: A DIF: Moderate REF: 6 TOP: Profit MSC: Factual 11. Managers may make decisions that are not consistent with the goals of stockholders. This is referred to as the problem. a. principal –agent b. economic disincentive c. incentive –compromise d. efficiency –inefficiency e. equilibrium ANS: A DIF: Easy REF: 7 TOP: Managerial Interests and the Principal –Agent Problem MSC: Factual 12. Managers may choose to pursue goals other than maximization of a firm’s value. This is referred to as the problem. a. slacker –shirking b. neuropathy c. generation X d. principal –agent e. none of the above ANS: D DIF: Easy REF: 7 TOP: Managerial Interests and the Principal –Agent Problem MSC: Factual 13. The principal –agent problem refers to: a. the threat from foreign competition. b. the need to manage inventory more effectively. c. double -entry bookkeeping. d. the potential costs of separation of ownership and control. e. the time value of money. ANS: D DIF: Moderate REF: 7 TOP: Managerial Interests and the Principal –Agent Problem MSC: Factual 14. As a result of historically high gasoline prices in 2008, traffic volume in the United States (measured in terms of billions of miles driven per month) declined significantly. These ch anges were caused by a of gasoline and . a. surplus; a decrease in the quantity demanded of gasoline b. surplus; a decrease in the demand for gasoline c. shortage; a decrease in the quantity demanded of gasoline d. shortage; a decrease in the demand for gasoline e. shortage; an increase in the demand for gasoline ANS: C DIF: Moderate REF: 7 TOP: Demand and Supply MSC: Applied 15. The market supply curve shows the quantity of a good or service that , holding other possible influences constant. a. households would sell at various prices b. households would buy a t various outputs c. firms would sell at various prices d. firms would buy at various prices e. households would buy at various prices ANS: C DIF: Easy REF: 13 TOP: Demand and Supply MSC: Factual 16. The market demand curve shows the quantity of a good or service that: a. households would sell at various prices. b. households would buy at various outputs. c. firms would sell at various prices. d. firms would buy at various prices. e. households would buy at various prices. ANS: E DIF: Easy REF: 13 TOP: Demand and Supply MSC: Factual 17. The price of computers has fallen, while the quantity purchased has remained constant. This implies that the demand for computers has: a. decreased, while the supply of computers has increased. b. increased. c. decreased, while the supply of computers ha s decreased. d. increased, while the supply of computers has increased. e. become more volatile. ANS: A DIF: Easy REF: 13 TOP: Demand and Supply MSC: Applied 18. J. D. Power, the big management consulting firm, extols the reliability of Dell computers; this causes the: a. demand for Dell computers to increase. b. supply of Dell computers to increase. c. quantity supplied of Dell computers to increase. d. quantity supplied of Dell computers to decrease. e. demand and supply of Dell computers to remain unchanged. ANS: A DIF: Easy REF: 13 TOP: Demand and Supply MSC: Applied 19. ConAgra has introduced a lean mixture of cereal and ground beef that is indistinguishable from ground beef but has about the same amount of fat as chicken. As a result, the: a. demand for chicken increases. b. demand for ground beef decreases. c. demand for chicken decreases. d. demand for cereal decreases. e. supply of chicken increases. ANS: C DIF: Easy REF: 13 TOP: Demand and Supply MSC: Applied 20. In the following figure, there will be an excess supply at any price: a. above Pb. b. below Pb. c. other than Pb. d. below Pa. e. above Pc. ANS: A DIF: Easy REF: 15 TOP: Equilibrium Price MSC: Applied 21. In the accompanying figure, the equilibrium price and quantity are: a. Pa and Qa. b. Pb and Qb. c. Pc and Qc. d. Pa and Qc. e. Pc and Qa. ANS: B DIF: Easy REF: 15 TOP: Equilibrium Price MSC: Applied 22. In the following figure, there will be an excess demand at any price: a. below Pa. b. below Pb. c. other than Pb. d. above Pb. e. above Pc. ANS: B DIF: Easy REF: 15 TOP: Equilibrium Price MSC: Applied 23. California imposes strict new regulations on the blending of gasoline that increase production costs. As a result, the: a. demand for gasoline will increase. b. demand for gasoline will decrease. c. supply of gasoline will increase. d. supply of gasoline will decrease. e. demand for and supply of gasoline will not change. ANS: D DIF: Easy REF: 17 TOP: Demand and Supply MSC: Applied 24. Which of the following would be likely to reduce the demand for residential housing? a. High prices for residential housing units. b. High mortgage interest rates. c. High prices for lumber and other construction materials. d. Low unemployment rates. e. Low prices for residential housing units. ANS: B DIF: Moderate REF: 17 TOP: Demand and Supply MSC: Applied Chapter 2: Demand Theory MULTIPLE CHOICE 1. The market demand schedule shows the quantities that would be purchased, holding all other factors constant, from a group of firms during a given time period: a. at varying prices. b. at varying advertising levels. c. at varying competitors’ prices and advertising levels. d. at varying prices and advertising levels. e. over different time intervals. ANS: A DIF: Easy REF: 29 TOP: Demand Theory MSC: Factual 2. Information on the quantities that would be purchased at different prices, holding all other factors constant , in a given time period from a group of firms is shown in a: a. firm demand curve. b. market demand curve. c. firm demand schedule. d. market supply schedule. e. firm supply curve. ANS: B DIF: Easy REF: 29 TOP: Demand Theory MSC: Factual 3. A graphical representation of the demand function is called a: a. demand schedule. b. demand curve. c. demand function. d. marginal revenue schedule. e. marginal revenue curve. ANS: B DIF: Easy REF: 29 TOP: Demand Theory MSC: Factual 4. The demand curve’s usual slope implies that consumers: a. buy more as the price of a good is increased. b. buy more as a good is advertised more. c. buy more at higher average incomes. d. buy less as the price of a good is increased. e. have tastes that sometimes change. ANS: D DIF: Easy REF: 29 TOP: Demand Theory MSC: Factual 5. A market demand curve is likely to shift to the right when: a. average income falls. b. prices fall. c. prices rise. d. population increases. e. new firms enter the market. ANS: D DIF: Easy REF: 31 TOP: Demand Theory MSC: Factual 6. A firm’ s demand curve is usually: a. to the right of the market demand curve. b. more inelastic than the market demand curve. c. the same as the market demand curve. d. drawn holding supply constant. e. more elastic than the market demand curve. ANS: E DIF: Moderate REF: 33 TOP: Demand Theory MSC: Conceptual 7. The price elasticity of demand can be interpreted as the: a. percentage change in the quantity demanded divided by the percentage change in the good’s price. b. percentage change in the quantity demanded divided by the percentage change in a substitute good’s price. c. percentage change in the good’s price divided by the percentage change in quantity demanded. d. change in the quantity demanded of a good divided by the change in its price. e. change in the quantity demanded of a good divided by the change in a related good’s price. ANS: A DIF: Easy REF: 36 TOP: Calculate the Price Elasticity of Demand MSC: Factual 8. In the article “Colombia, Brazil Advance Proposal to Withhold 10 Percen t of Export Output” ( The Wall Street Journal, September 23, 1991, p. B6), a Colombian delegate to the International Coffee Organization said that if all its members withheld 10% of export output, the international price would rise 20%. This statement impli es that the price elasticity of demand for coffee is approximately: a. –0.00. b. –5.00. c. –2.00. d. –0.20. e. –0.50. ANS: E DIF: Moderate REF: 36 TOP: Calculate the Price Elasticity of Demand MSC: Applied 9. If the elasticity of per capita demand with respect to population is zero, then a 10% increase in the population will cause the quantity demanded to: a. increase by 25%. b. decrease by 10%. c. remain constant. d. increase by 10%. e. decrease by 25%. ANS: C DIF: Easy REF: 36 TOP: The Own -Price Elasticity of Demand MSC: Applied 10. As we move down a linear demand curve, demand becomes: a. more elastic. b. less elastic at first and then more elastic. c. steeper. d. more elastic at first and then less elastic. e. less elastic. ANS: E DIF: Easy REF: 37 TOP: Calculate the Price Elasticity of Demand MSC: Factual 11. The formula for the arc price elasticity can be written (where Q denotes the change in Q) as: a.  = [Q /(Q1 + Q2)]/[P/(P1 + P2)]. b.  = [Q /(Q1 + Q2)]/[P/(Q1 + Q2)]. c.  = [Q /(P1 + P2)]/[P/(Q1 + Q2)]. d.  = [P /(P1 + P2)]/[Q/(Q1 + Q2)]. e. none of the above. ANS: A DIF: Easy REF: 39 TOP: Calculate the Price Elasticity of Demand MSC: Factual 12. The formula for the point price elasticity can be written as: a.  = (Q / P)(P / Q). b.  = (P / Q)(P / Q). c.  = (Q / P)(Q / P). d.  = (P / Q)(Q / P). e. none of the above. ANS: A DIF: Easy REF: 39 TOP: Calculate the Price Elasticity of Demand MSC: Factual 13. The formula for the arc elasticity of demand can be written as: a. XY = [QX /(Q1X + Q2X)]/[PX/(P1X + P2X)]. b. XY = [QX /(Q1Y + Q2Y)]/[PY/(P1X + P2X)]. c. XY = [QX /(Q1X + Q2X)]/[PY/(P1Y + P2Y)]. d. XY = [PX /(P1X + P2X)]/[QY/(Q1Y + Q2Y)]. e. none of the above. ANS: C DIF: Easy REF: 39 TOP: Calculate the Price Elasticity of Demand MSC: Factual 14. The demand for office chairs in thousands is Q = 80 – P2. At a price of $4, the price elasticity of demand is: a. –0.5. b. –8.0. c. –2.0. d. –4.0. e. –0.25. ANS: A DIF: Easy REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 15. The demand for cough medicine is Q = 10 – 2P. At a price of $2.50, the price elasticity of demand is: a. –2.0. b. –1.0. c. –2.5. d. –0.4. e. –1.5. ANS: B DIF: Easy REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 16. The demand for answering machines is Q = 1,000 – 150P + 25 I. Assume that per capita disposable income I is $200. When the price of answering machines is P = $10, the price elasticity of demand is : a. –3.0. b. –3.33. c. –1.33. d. –0.33. e. –1.0. ANS: D DIF: Easy REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 17. The demand for personal computers has been estimated to be Q = 500,000 – 700P + 200 I – 500S. Assume that per capita income I is $13,000 and the average price of software S is $400. When the price of personal computers is P = $3,000, the price elasticity of demand is: a. –2.625. b. –7.0. c. –1.0. d. –21.0. e. –4.25. ANS: A DIF: Moderate REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 18. A manufacturer of infant clothes has found that the demand for its product is given by Q = 100 P ± 1.25A0.5, where P is price and A is advertising expenditures. The price elasticity of demand for these infant clothes is: a. –0.8. b. –1.25. c. –1.0. d. –2.5. e. –0.5. ANS: B DIF: Moderate REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 19. The demand for textbooks is Q = 200 – P + 25U – 50Pbeer. Assume that the unemployment rate U is 8 and the price of beer Pbeer is $2. When the average price of a textbook is P = $100, the price el asticity of demand is: a. –1.0. b. –2.0. c. –0.5. d. –50. e. –5.0. ANS: C DIF: Moderate REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 20. Suppose that the demand curve for compact disks is given by P = 600 – Q and that the supply curve is given by P = 0.5 Q, where Q is the quantity of compact disks and P is their price. What is the price elasticity of demand at the equilibrium price and quant ity? a. –0.05. b. –0.02. c. –0.20. d. –0.50. e. –2.00. ANS: D DIF: Moderate REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 21. The demand for fashion watches is Q = 9 – 0.7P + 2I. Assume that per capita income I is $13. When the price of fashion watches is P = $30, the price elasticity of demand is: a. –0.66. b. –1.0. c. –2.0. d. –0.5. e. –1.5. ANS: E DIF: Moderate REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 22. The demand for fax machines in thousands of units has been estimated to be Q = 1,000 – 1.5P + 5L, where P is the price of the machines and L is the average cost of a 10 -minute midday call from Los Angeles to New York. At a fax machine price of $400 and a phone call cost of $10, the price elasticity of demand for fax machines is: a. –4.0. b. –2.50. c. –0.61. d. –0.25. e. –1.33. ANS: E DIF: Moderate REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 23. The demand for space heaters is Q = 250 – P + 2COOL, where COOL is the absolute value of the difference between the average overnight low temperature and 40°F. Assume that the average overnight low is 0°F. When the price of space heaters is P = $30, the price elasticity of demand is: a. –0.1. b. –1.0. c. –0.66. d. –1.5. e. –6.6. ANS: A DIF: Difficult REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 24. The demand for space heaters is Q = 250 – P + 2COOL, where COOL is the absolute value of the difference between the average overnight low temperature and 40°F. Assume that the average overnight l ow this month is 40°F. When the price of space heaters is P = $50, the price elasticity of demand is: a. –1.38. b. –13.8. c. –0.138. d. –1.50. e. –0.25. ANS: E DIF: Difficult REF: 40 TOP: Calculate the Price Elasticity of Demand MSC: Applied 25. The price elasticity of market demand primarily depends on the: a. number of firms in an industry. b. cost of producing an industry’s output. c. availability of substitutes. d. substitutability of inputs in producing a product. e. supply curves of inputs. ANS: C DIF: Moderate REF: 44 TOP: Calculate the Price Elasticity of Demand MSC: Factual 26. El Niño wind patterns affected the weather across the United States during th e winter of 1997 –1998. Suppose the demand for home heating oil in Connecticut is given by Q = 20 – 2Phho + 0.5 Png – TEMP, where Q is the quantity of home heating oil demanded, Phho is the price of home heating oil per unit, Png is the price of natural gas per unit, and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature. If the current price of home heating oil is $1.20, the current price of natural gas is $2.00, and the av erage winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years, the quantity of home heating oil demanded is: a. 6.6 gallons. b. 16.6 gallons. c. 35.4 gallons. d. 20 gallons. e. none of the above. ANS: A DIF: Difficult REF: 44 TOP: Calculate the Price Elasticity of Demand MSC: Applied 27. El Niño wind patterns affected the weather across the United States during the winter of 1997 –1998. Suppose the demand for home heating oil in Connecticut is given by Q = 20 – 2Phho + 0.5 Png – TEMP, where Q is the quantity of home heating oil demanded, Phho is the price of home heating oil per unit, Png is the price of natural gas per unit, and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature. If the current price of home heating oil is $1.20, the current price of nat ural gas is $2.00, and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years, the TEMP variable tells us that: a. each 1 -degree increase in temperature over the normal average raises home heating oil sales by 1 unit. b. each 1 -degree increase in temperature over the normal average lowers home heating oil sales by 1 unit. c. the average daily temperature has no impact on the sales of home heating oil. d. the average daily temperature has an impact only on the sales of natural gas. e. price elasticity of demand for home heating oil is 2. ANS: B DIF: Difficult REF: 44 TOP: Calculate the Price Elasticity of Demand MSC: Applied 28. El Niño wind pattern s affected the weather across the United States during the winter of 1997 –1998. Suppose the demand for home heating oil in Connecticut is given by Q = 20 – 2Phho + 0.5 Png – TEMP, where Q is the quantity of home heating oil demanded, Phho is the price of ho me heating oil per unit, Png is the price of natural gas per unit, and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature. If the current price of home heating oil is $1. 20, the current price of natural gas is $2.00, and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years, the price elasticity of demand for home heating oil is: a. –0.09. b. –0.36. c. –1.2. d. –2. e. none of the above. ANS: B DIF: Difficult REF: 44 TOP: Calculate the Price Elasticity of Demand MSC: Applied 29. El Niñ o wind patterns affected the weather across the United States during the winter of 1997 –1998. Suppose the demand for home heating oil in Connecticut is given by Q = 20 – 2Phho + 0.5 Png – TEMP, where Q is the quantity of home heating oil demanded, Phho is the price of home heating oil per unit, Png is the price of natural gas per unit, and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature. If the current price of home heat ing oil is $1.20, the current price of natural gas is $2.00, and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years, if the sellers of home heating oil are profit maximizers, they should: a. lower prices. b. raise prices. c. advertise more. d. advertise less. e. none of the above ANS: B DIF: Difficult REF: 44 TOP: Calculate the Price Elasticity of Demand MSC: Conceptual 30. The demand for a product is more elastic the: a. more broadly the product is defined. b. longer the time period covered. c. higher the average income of consumers. d. smaller the share of a consumer’ s income the item represents. e. larger the number of firms in the market. ANS: B DIF: Easy REF: 45 TOP: Calculate the Price Elasticity of Demand MSC: Factual 31. The demand for a product is more inelastic: a. the more narrowly defined the product. b. the longer the time period covered. c. the lower the average income of consumers. d. the better the available substitutes. e. the poorer the available substitutes. ANS: E DIF: Easy REF: 45 TOP: Calculate the Price Elasticity of Demand MSC: Factual 32. The demand for costume jewelry has been estimated to be Q = 100 P –2E2, where E is the price of real gem jewelry. Costume jewelry and real gem jewelry are: a. substitute goods. b. complement goods. c. inferior goods. d. normal goods. e. unrelated goods. ANS: A DIF: Moderate REF: 45 TOP: Calculate the Price Elasticity of Demand MSC: Applied 33. Marginal revenue can be defined as the: a. percent increase in total revenue resulting from a 1% increase in output. b. increase in total revenue resulting from a 1 -unit increase in output. c. total revenue divided by output. d. average revenue multiplied by output. e. average revenue multiplied by output divided by 4. ANS: B DIF: Easy REF: 48 TOP: Total Revenue, Marginal Revenue, and Price Elasticity MSC: Factual 34. Total revenue can be defined as: a. average revenue multiplied by marginal revenue. b. average revenue divided by marginal revenue. c. average revenue multiplied by output. d. average revenue divided by output. e. marginal revenue divided by output. ANS: C DIF: Easy REF: 48 TOP: Total Revenue, Marginal Revenue, and Price Elasticity MSC: Factual 35. Marginal revenue can be defined in terms of price ( P) and elasticity ( ç) as: a. MR = P( + 1/). b. P = MR(1/). c. MR = P. d. MR = P(1 + 1/). e. P = MR(1 – 1/). ANS: D DIF: Easy REF: 48 TOP: Total Revenue, Marginal Revenue, and Price Elasticity MSC: Factual 36. If price is $25 when the price elasticity of demand is –0.5, then marginal revenue must be: a. $50. b. –$25. c. $12.50. d. $37.50. e. $25. ANS: B DIF: Easy REF: 48 TOP: Total Revenue, Marginal Revenue, and Price Elasticity MSC: Applied 37. If price is $12 when the price elasticity of demand is –1, then marginal revenue must be: a. $24. b. $18. c. $12. d. $6. e. $0. ANS: E DIF: Easy REF: 48 TOP: Total Revenue, Marginal Revenue, and Price Elasticity MSC: Applied 38. Total revenue decreases as output increases whenever: a. marginal revenue is less than average revenue. b. marginal revenue is greater than average revenue. c. average revenue is decreasing. d. marginal revenue is negative. e. average revenue is negative. ANS: D DIF: Easy REF: 51 TOP: Total Revenue, Marginal Revenue, and Price Elasticity MSC: Conceptual 39. Total revenue is rising with increases in output whenever: a. output increases. b. marginal revenue is positive. c. average revenue is positive. d. demand is inelastic. e. average revenue is negative. ANS: B DIF: Moderate REF: 51 TOP: Total Revenue, Marginal Revenue, and Price Elasticity MSC: Conceptual 40. Along a demand curve with unitary elasticity everywhere, total revenue: a. increases as output increases. b. decreases as output increases. c. remains constant as output increases. d. increases and then decreases as output increases. e. decreases and then increases as output increases. ANS: C DIF: Easy REF: 52 TOP: Total Revenue, Marginal Revenue, and Price Elasticity MSC: Conceptual 41. Along a linear demand curve, total revenue is maximized: a. where the slope of a line from the origin to the demand curve is equal to the elasticity. b. where the elasticity is –1. c. near the quantity axis intercept. d. near the price axis intercept. e. where the elasticity is 0. ANS: B DIF: Moderate REF: 52 TOP: Total Revenue, Marginal Revenue, and Price Elasticity MSC: Factual 42. The formula for the income elasticity of demand can be written as: a. I = (Q / I)(I / Q). b. I = (I / Q)(I / Q). c. I = (Q / I)(Q / I). d. I = (I / Q)(Q / I). e. none of the above. ANS: A DIF: Easy REF: 53 TOP: The Income Elasticity of Demand MSC: Factual 43. The income elasticity of demand is defined as the: a. percentage change in the quantity demanded divided by the percentage change in the price level. b. change in the quantity demanded divided by the chan ge in per capita income. c. percentage change in income divided by the percentage change in the quantity demanded. d. change in per capita income divided by the change in the quantity demanded. e. percentage change in the quantity demanded divided by the percentage change in per capita income. ANS: E DIF: Easy REF: 53 TOP: The Income Elasticity of Demand MSC: Factual 44. In Russia, as per capita income rises from $1,980 to $2,020, everything else remaining constant, annual per capita consumption of vodka falls from 525 to 475 liters; this implies an income elasticity of demand for vodka of: a. –0.50. b. –5.0. c. 2.0. d. 5.0. e. 0.50. ANS: B DIF: Easy REF: 53 TOP: The Income Elasticity of Demand MSC: Applied 45. The demand for answering machines is Q = 1,000 – 150P + 25 I. Assume that per capita disposable income I is $200. When the price of answering machines is P = $10, the income elasticity of demand is: a. 2.5. b. 0.11. c. 1.0. d. 25. e. 1.11. ANS: E DIF: Easy REF: 53 TOP: The Income Elasticity of Demand MSC: Applied 46. In 1965, as per capita income among a particular segment of the population fell from $10,200 to $9,800, everything else remaining constant, annual per capita consumption of beer fell from 55 to 45 gallons; this implied an income elasticity of demand for be er of: a. 4.44. b. 4.55. c. 5.0. d. 4.65. e. 0.5. ANS: C DIF: Moderate REF: 53 TOP: The Income Elasticity of Demand MSC: Applied 47. The cross -price elasticity of demand is defined as the: a. percentage change in the quantity demanded of a good divided by the percentage change in the good’s price. b. percentage change in the quantity demanded of a good divided by the percentage change in a different good’s price. c. percentage change in a goo d’s price divided by the percentage change in a different good’s price. d. change in the quantity demanded of a good divided by the change in its price. e. change in the quantity demanded of a good divided by the change in income. ANS: B DIF: Easy REF: 56 TOP: Cross -Price Elasticities of Demand MSC: Factual 48. The formula for the cross -price elasticity of demand can be written as: a. XY = (QX / PY)(PY / QX). b. XY = (PY / QX)(PY / QX). c. XY = (PY / QX)(PY / QX). d. XY = (PY / QX)(QX / PY). e. none of the above. ANS: A DIF: Moderate REF: 56 TOP: Cross -Price Elasticities of Demand MSC: Factual 49. The demand for fax machines has been estimated to be Q = 1,000 – P + 40L, where P is the price of the machines and L is the average cost of a 10 -minute midday call from Los Angeles to New York. At a fax machine price of $400 and a phone call cost of $10, the cross -price elasticity of demand for fax machines with respect to the price of phone service is: a. 0.4. b. 2.5. c. –0.25. d. 4.0. e. 4.25. ANS: A DIF: Moderate REF: 56 TOP: Cross -Price Elasticities of Demand MSC: Applied 50. Makers of disposable diapers must advertise 5% more to offset completely the 2% decline in sales due to heightened environmental concern. The advertising elasticity of demand is: a. 4.0. b. 0.4. c. 2.5. d. 0.25. e. 0.20. ANS: B DIF: Easy REF: 57 TOP: The Advertising Elasticity of Demand MSC: Applied 51. The constant price elasticity of demand for cigarettes has been estimated to be –0.5. To reduce smoking by 50%, approximately how much tax needs to be added to a $1 pack? a. $1.00 b. $2.00 c. $3.00 d. $0.50 e. $4.00 ANS: A DIF: Moderate REF: 59 TOP: Calculate the Price Elasticity of Demand MSC: Conceptual Chapter 3: Consumer Behavior and Rational Choice MULTIPLE CHOICE 1. Points along an indifference curve represent bundles of goods that: a. cost the same amount to buy. b. consumers don’t like very much. c. decline in marginal utility. d. deliver equal utility. e. cannot be compared. ANS: D DIF: Easy REF: 66 TOP: Indifference Curves MSC: Factual 2. Indifference curves describe: a. various consumer income levels. b. alternative market prices for goods and services. c. the quantities of a good or service that people are willing and able to buy at alternative prices. d. producer production levels at alternative market prices. e. consumer preferences. ANS: E DIF: Easy REF: 66 TOP: Indifference Curves MSC: Factual 3. Sarah Jones believes that Coke and Pepsi are perfect substitutes. That is, she is equally happy with a Coke or a Pepsi and cannot tell the difference between them. Her indifference curves: a. are linear, with slope equal to –1. b. are upward -sloping. c. are linear, with slope equal to 1. d. cross where she consumes equal amounts of Coke and Pepsi. e. cannot be defined, since she likes both equally well. ANS: A DIF: Easy REF: 66 TOP: Indifference Curves MSC: Applied 4. Which of the following does not affect the shape of a consumer’s indifference curves? a. Age. b. Education. c. Tastes. d. Prices. e. Advertising. ANS: D DIF: Easy REF: 66 TOP: Indifference Curves MSC: Conceptual 5. Consider the indifference map below. This map represents Larry’s preferences ove r two goods, oranges and grapefruits. Larry: a. does not like oranges and will not eat them. b. gets greater utility from additional grapefruits, but not from additional oranges. c. prefers oranges to grapefruits. d. will always choose to consume equal amounts of oranges and grapefruits. e. will always choose to consume a combination of oranges an d grapefruits. ANS: B DIF: Moderate REF: 66 TOP: Indifference Curves MSC: Applied 6. Indifference curves cannot cross because: a. consumers will always substitute 1 unit of a good for 1 unit of another good. b. consumers prefer more to less. c. a single consumption bundle would bring two different levels of utility. d. all of the above. e. b and c ANS: E DIF: Moderate REF: 67 TOP: Indifference Curves MSC: Factual 7. Susan is investing in the stock market. She is choosing among a variety of stocks; each stock has an expected return and a level of risk attached. Susan likes higher returns, but she dislikes risk. If we were to draw indifference curves for Susan over risk and expected return, they would be: a. L-shaped. b. linear. c. upward -sloping. d. downward -sloping. e. vertical lines. ANS: C DIF: Moderate REF: 67 TOP: Indifference Curves MSC: Applied 8. Betty is investing in the stock market. She is choosing among a variety of stocks; each stock has an expected return and a level of risk attached. Betty likes higher returns and she likes risk. If we were to draw indifference curves for Betty over risk and expected return, they would be: a. L-shaped. b. linear. c. upward -sloping. d. downward -sloping. e. vertical lines. ANS: D DIF: Moderate REF: 67 TOP: Indifference Curves MSC: Applied 9. Don consumes bagels and cream cheese. He likes to place 2 ounces of cream cheese on each bagel, no more, no less. In this case, Don’s indifference curves for bagels and cream cheese will be: a. straight lines with slopes equal to –2. b. L-shaped, or right angles. c. upward -sloping. d. horizontal lines. e. vertical lines. ANS: B DIF: Moderate REF: 67 TOP: Indifference Curves MSC: Conceptual 10. At equilibrium, the marginal rate of substitution describes: a. the slope of the budget constraint. b. the number of units of one good that a consumer is willing to trade for an additional unit of another good, holding utility fixed. c. the slope of the demand curve. d. the number of units of one good that a consumer is willing to trade for an additional unit of another good in order to increase utility by 1 unit. e. a and b ANS: B DIF: Easy REF: 68 TOP: The Marginal Rate of Substitution MSC: Factual 11. The marginal rate of substitution: a. remains constant as the consumer moves around an indifference curve. b. is constant if the goods are perfect complements. c. decreases as the consumer moves down a typical indifference curve. d. cannot be defined if the goods are perfect substitutes. e. none of the above ANS: C DIF: Easy REF: 68 TOP: The Marginal Rate of Substitution MSC: Factual 12. John spends his budget on food and clothing each month. His utility function is given by TU = 100 C0.25F 0.75. The marginal rate of substitution of clothing for food is: a. 0.33F/C. b. 0.25FC. c. 0.33F2C. d. 25F/C. e. 0.66C/F. ANS: A DIF: Moderate REF: 69 TOP: The Marginal Rate of Substitution MSC: Applied 13. A consumer buys 12 units of entertainment and 84 units of “all other things.” The consumer’s income elasticity of demand is greater than 1 for entertainment and less than 1 for all other things. If income increases by 10%, then the consumer’s marginal rate of substitution at the utility -maximizing market bundle will: a. increase. b. decrease. c. be equal to 1. d. remain constant. e. There is insufficient information to answer the question. ANS: A DIF: Difficult REF: 69 TOP: The Marginal Rate of Substitution MSC: Applied 14. A consumer buys 12 units of entertainment, measured on the horizontal axis, and 84 units of “all other things.” The consumer’s income elasticity of demand is equal to 1 for both goods. If income increases by 10%, then the consumer’s marginal rate of substi tution at the utility -maximizing market bundle will: a. increase. b. decrease. c. be equal to 1. d. remain constant. e. There is insufficient information to answer the question. ANS: D DIF: Difficult REF: 69 TOP: The Marginal Rate of Substitution MSC: Applied 15. The consumer’s optimal consumption of X and Y is characterized by: a. (MU X)(MU Y) = PXPY . b. MU X = PX. c. MU X / MU Y = PY / PX . d. MU X / PY = MU X / PX . e. MU X / MU Y = PX / PY . ANS: E DIF: Easy REF: 70 TOP: The Marginal Rate of Substitution MSC: Factual 16. The marginal rate of substitution of X for Y is defined as: a. PX/PY . b. PX PY . c. MU X MU Y . d. MU X/MU Y . e. MU X/PX . ANS: D DIF: Moderate REF: 70 TOP: The Marginal Rate of Substitution MSC: Factual 17. Points along an indifference curve represent bundles of goods that: a. cost the same amount to buy. b. consumers don’t like very much. c. decline in marginal utility. d. deliver equal utility. e. cannot be compared. ANS: D DIF: Easy REF: 70 TOP: The Concept of Utility MSC: Factual 18. Suppose Al is currently consuming four movies and four concerts per month. If his utility function is given by U = 15M0.5C, where M represents the number of movies seen and C represents the number of concerts attended, what is Al’s total utility equal to? a. 15. b. 30. c. 120. d. 240. e. 960. ANS: C DIF: Easy REF: 70 TOP: The Concept of Utility MSC: Applied 19. Suppose Al is currently consuming five movies and two concerts per month. If his utility function is given by U = 15MC, where M represents the number of movies seen and C represents the number of concerts attended, Al’s total utility is equal to: a. 10. b. 15. c. 30. d. 75. e. 150. ANS: E DIF: Easy REF: 70 TOP: The Concept of Utility MSC: Applied 20. Suppose Al is currently consuming four movies and four concerts per month. If his utility function is given by U = 15 M0.5C, where M represents the number of movies consumed and C represents the number of concerts attended, what is the marginal utility of t he next concert Al will attend? a. 15. b. 30. c. 60. d. 120. e. 960. ANS: B DIF: Moderate REF: 70 TOP: The Concept of Utility MSC: Applied 21. Points along a budget constraint describe: a. market baskets that cost the same amount of money. b. market baskets that bring the consumer equal utility. c. quantities of a good that the consumer is willing and able to buy at alternative market prices. d. alternative prices that a producer might ch arge for a good. e. alternative levels of utility that a consumer might get from consuming a given market basket. ANS: A DIF: Easy REF: 71 TOP: The Budget Line MSC: Factual 22. Consider the following budget constraints. These constraints represent the market baskets that Edith can afford to buy at alternative: a. prices of good X. b. levels of income. c. prices of good Y. d. preferences over goods X and Y. e. prices of goods X and Y. ANS: B DIF: Easy REF: 71 TOP: The Budget Line MSC: Factual 23. Nancy has $100 to spend on books and compact disks. Books cost $10 and compact disks cost $20. The slope of Nancy’s budget constraint (where the quantity of books is on the horizontal axis) is: a. –0.5. b. –2. c. –5. d. –10. e. none of the above. ANS: A DIF: Easy REF: 71 TOP: The Budget Line MSC: Applied 24. Consider the following budget constraint. Dennis spends all his money on sweaters and sweatshirts. If the price of sweaters is $15, how much money does Dennis have in hi s budget?