Multiple-Choice Answers and Explanations
- D. In a perfectly competitive market all the above are true except D. All firms produce an identical product in
each industry. If this were not the case, then firms would not be price takers and the buyers’ demand for each
good would vary. In that case, perfect competition would not be true of that particular market. - D. Firms in an oligopoly can produce products that are either identical or different. Since the actions of any one
seller in the market can have a large impact on the profits of the entire industry, it is not necessary for the
products to maintain homogeneity. - B.Maple syrup is a complement to pancakes; therefore, it will react similarly to pancakes if prices were to increase.
Increasing the price of pancakes will reduce both the demand for pancakes and maple syrup. This will shift the
demand curve for both goods to the left, eliminating choice D. An increase in prices has a positive effect on the
supply curve. Because the price of pancakes and maple syrup is high, selling both goods is profitable, so firms will
want to produce more and shift the supply schedule outwards. Therefore, choices A and C can be eliminated.
Because it can be assumed that the product is a normal good, the demand schedule will not be vertical, or perfectly
inelastic. An increase in prices will affect the quantity of goods produced, eliminating choice E. - B.Concluding that SUVs are the safest type of car to drive will increase the demand for SUVs, shifting the
demand curve to the right. This will increase the price of SUVs, eliminating choice E. If the sedans were a
complement to SUVs, this will increase the demand and thereby the price of sedans, eliminating answer D. If
sedans were a substitute, it will decrease the demand and the price of sedans, eliminating A. Since this has no
effect on production costs, we can ignore choice C. - E.If the government wants to decrease consumer demand for cigarettes, they will need to increase the cost of
cigarettes to the consumer. An increase in sales taxes of cigarettes will have this desired outcome. A price ceiling
or price floor that is above equilibrium prices will create an excess supply and not drive down consumer demand,
eliminating choices A and B. Increasing taxes for firms affects the supply curve and does not affect the consumer
demand schedule. Therefore, eliminate choices C and D. - C.To produce 1 pound of oranges would take 4 hours. In 4 hours the farmer can produce 2 pounds of tomatoes.
Therefore the opportunity cost—whatever must be given up to in order to acquire something else—would be 2
pounds of tomatoes, eliminating answers A, B, D, and E. - E.Comparative advantage is when a particular country, producer, or individual has a smaller opportunity cost
when producing a particular good. Requiring a smaller number of inputs to produce a given item implies that the
producer has an absolute advantage, eliminating choices A and B. To maximize production given the available
resources means that producer is acting efficiently, eliminating choice C. When the producer is producing less
than what is available, the producer is said to be behaving inefficiently, eliminating choice D. - B.An inferior good is a good for which, when all other things being equal, an increase in income decreases the
quantity of that good demanded. If income were to rise and the quantity demanded rose as well, then the given
item would be said to be a normal good. Eliminate choice A. An inferior good deals with the demand side of
economics. Therefore, we can eliminate answers C, D, and E because they deal with the supply side of economics. - A.Ceteris paribusis a Latin phrase, meaning “other things being equal,” and is used as a given to remind one
that other than the factor being studied, the remaining ones are all held constant. - E.Price (A), technology (B), input prices (C), and expectations (D) will all affect the supply curve; therefore,
those answers can be eliminated. Sales tax will affect the quantity of a good demanded, which is choice E.
Placing a sales tax on ice cream will lower the quantity of ice cream demanded and will shift the demand curve
inwards. - A.Since hotdogs are a substitute for pizza, a decrease in the price of hotdogs will decrease the demand for pizza,
shifting the curve inwards. An increase in the input prices will shift the supply curve inwards as well. - C.Demand is said to be elastic when it responds substantially to any changes in the price, eliminating choice A.
If demand is said to be inelastic, then it will only respond slightly to a change in the price. Elasticity of demand is
the measure of how much demand (not supply) responds to change, eliminating choices B and D.
Microeconomics Full-Length Practice Test 1Microeconomics Full-Length
Practice Test 1