- A.By definition, A is the correct answer. Diminishing marginal returns to labor is the idea that the first worker
you hire will increase productivity more than the second. Total output is increasing at a decreasing rate. - D. One of the main differences between a monopoly and a competitive firm is that a monopoly can affect the
market price of the good. Choice A is not true of a monopoly. Choice B could be true both of a monopoly and a
competitive market. Choice C. is not true of a monopoly. Choice E is false for both monopolies and competitive
firms. - E.A monopolistic firm produces a lower quantity of a good at a higher price. Therefore, when the competitive
market becomes monopolistic, the price will increase and the quantity produced will decrease. - E.The answer is E because a negative externality means the firm is producing at the expense of others. The
answer is not A because it will be more efficient to produce a lower quantity. The answer is neither B nor C
because these are not directly related to negative externalities. Choice D is incorrect because it is not true. - E.Although Bob is slower at both tasks he should not give-up because he has a comparative advantage. Bob’s
opportunity cost of making paper airplanes is less than Bill’s. Therefore gains from trade can occur if Bill
specializes in swans and Bob specializes in planes. - A.As income rises, the consumption of a normal or ordinary good increases. Normal goods increase in demand
when individuals’ incomes increase. - C.Advertising is not a determinant of demand. Choices A, B, D, and E are all factors that change demand or
shift the demand curve. - C.The increase in the amount of corn supplied will shift the supply curve to the right. This increase in supply
will result in a new equilibrium in which the price of corn is lower and the quantity supplied is higher than at the
original equilibrium. Choices A, D, and E are incorrect because the price of corn does not increase (as is the case
with A and E), or stay the same (as is the case for D). Choice B is incorrect because it assumes that the quantity
supplied will decrease, but it actually increases. - A.A decrease in the price of a substitute will cause a decrease in the price of widgets, and a decrease in the
number of firms in the industry will cause a decrease in the supply of widgets. Choice B is incorrect because an
increase in the average income of consumers will cause the price of widgets to rise due to an increase in demand.
Choice C is incorrect because a decrease in average income and a decrease in the price of a complement will
cause only the demand curve to shift, not the supply curve. Choice D is incorrect because both changes only
affect the supply curve and not the demand curve. Choice E is incorrect because an increase in the number of
consumers will cause an increase in the price of widgets - B.If clean air is important to the town, the town should be willing to pay to have the chemical plant stop
polluting. In other words, if the costs of bad air are high enough for the town, the town could pay the chemical
plan to stop polluting. This turns the town’s incurred cost of pollution into a monetary cost, and the monetary
amount paid to the plant is the equal to the amount the chemical plant would pay to be able to pollute. This is the
most efficient solution. Choices A and D are incorrect because government regulation is not economically
efficient. - C.The definition of an inferior good is a good that a consumer buys less of when his or her income increases.
- A.Elasticity of demand is determined by the percent change in demand divided by the percent change in price.
Using this equation we have % change in demand/50% = 0.6% change in demand = 30%. - B.The equation for computing the elasticity of demand is the percent change in demand divided by the percent
change in price. Using this equation we have 5%/10% = 0.5.
Microeconomics Full-Length Practice Test 1Microeconomics Full-Length
Practice Test 1