Microeconomics Multiple Choice Questions

This assignment consists of 31 multiple-choice questions covering various microeconomics concepts. The questions delve into topics such as price discrimination, incentives, the impact of external costs on equilibrium pricing, CEO compensation, and opportunity cost. Each question presents a scenario or concept, requiring students to select the most appropriate answer from the given options.

Short essay question 1-3
1.
Apple has the largest market capitalization of any company in the world; its stock is
worth over $750 billion, well ahead of Alphabet (Google), Microsoft and Amazon.
Apple produces computers, phones, tablets, and other digital devices. It also
provides services, including the App Store and iTunes. Apple holds 10 percent of the
laptop market, 20 percent of the smartphone market, 60 percent of the tablet
market, and 30 percent of the music streaming business.
a) A key part of Apple’s success has been the iPhone. Apple is deciding what price to
set for the iPhone XI when it comes out in 2018. The elasticity of demand for iPhone
X turned out to be -2. Marginal cost is $550. What price does Apple charge? For full
credit, show how you obtained your answer. (5 points)
b) Some lawyers claim that Apple is a monopoly. What would you need to know to
answer this question, based on what you have learned in this course? (9 points)
c) Building upon your answer to part (b), do you think Apple is a monopoly? Explain
why or why not? (6 points)
Answer a
Price is set at a point where marginal revenue equals marginal cost.
Given, marginal Cost = $500
The relation between marginal revenue and elasticity is given by the following
expression
MR = P (1-1/e), Where e is the elasticity
Given, elasticity is -2
Therefore,
MR = P(1-1/2)
= P/2
At equilibrium,
MR=MC
Or, P/2 = 500
Or, P= 1000
Apple would charge a price of $ 1000
Answer b
In order to know whether Apple is a monopoly or not the characteristic of Apple
should be matched with principal characteristics of a monopoly market. The main
features of a monopoly market is as follows
Single Seller

The monopolist is the only seller in the market. It is a single firm, person or
individual that serves the entire demand of the market.
No close substitutes
The product sold by the monopolist is a unique product and it should not have
any close substitutes.
Entry Barriers
In order to maintain sloe position in the market high barriers to entry exists. The
entry f the new firms increases supply in the market and reduces the market share
and concentration.
Ownership of a strategic input
The monopolist has ownership over a strategic input that other suppliers do not
have access.
Price maker
Being a sole supplier in the market, the monopolist exclusively controls price and
output. The monopolist is a price maker in the market unlike the competitive firms
that are price takers.
Answer c
Apple possesses many characteristics of monopolist. The monopolist is price maker
and usually sets a high price. The pricing power of Apple gives the company a
Monopoly like reach. The company ensuring ownership over a strategic input solely
owns the software used by Apple. Though some competitors exits in the laptop and
phone market restricting Apple’s position of a pure monopolist, it is still considered
as a monopolist because of some monopoly alike characteristics.
2 You are the sales manager for VF Corporation. Currently you sell 10,000 pairs of
Timberland boots per year to Macy’s for $80 per pair. Macy’s calls and says they will
increase their order to 12,000 pairs annually if you cut the price to $70 per pair. The
marginal cost of each pair of boots 1is $60.
Assuming you can keep this deal secret from other buyers (so that they do not insist on

similar price cuts), what would you do in this situation? Explain in detail using MBA 505
concepts why you would or would not accept this offer. (9 points)
Answer
By selling 10,000 pairs at a price of $80 per pair VF corporation earns a revenue
of (10,000*$80)= $80,000. In the new deal where 12,000 pairs is supposed to be sold at
price $70 then the projected revenue will be (12,000* $70) = $84,000. The new price
still greater than the marginal cost of the company, which is $60. It is profitable for VF
Corporation to accept the new deal and offers Macy each pair of boots at a price of $70.
As the corporation can kept the deal with Macy secret, the price for other buyers
will remain same. This will allow the company to device a price discrimination and
maximize profit.
3 As more people do more of their shopping online, department store chains are cutting
back on the number of stores they keep open. This is proving disastrous to some
shopping malls.
a) Suppose you are the operations manager for Sears. Based on material you have
studied in MBA 505 this semester, how do you decide which stores to keep open and
which stores to close? (5 points)
b) Assuming that the shift in shopping from face-to-face to online is permanent, what
will the closing of more department stores mean for the following key economic
indicators for shopping malls in the SHORT and LONG run: price (rent they can charge to
tenants), output (square footage rented), profits (total revenue minus total cost), and
number of malls. Be sure to explain your answer using course concepts. (10 points)
Answer
a) The decision about which stores to keep open and which store to keep close should
be based on the condition of demand and profitability. The stores having high
operation or inventory cost should be closed. Whereas stores facing high demand
and profit should be remained, open.
b) In response to a shift in face to face shopping to online shopping, the stores in the
shopping mall closed With reduction in the number of tenants the price or rent is
likely to be increase. In the short run, Price will decrease at a slower pace whereas
in the long run price will be reduced greatly.
With reduction in the number of tenants the area of square footage rented will be
reduced. In the short run the output, remain unchanged while in the long term
the output will decrease rapidly.
Both the price and out falls leading to a fall in the revenue. Then profit, which is
revenue minus cost, will decrease.
The number of malls will be reduced. With reduction in the number of visitors in the
shopping mall, the profit of the supermall reduces. As Shopping malls are capital
intensive, in the short run number of shopping mall will not be reduced. In the long run
however, the number of shopping malls reduced largely.

multiple questions 4-31
4. Which of the following would cause an unambiguous increase in the price of
Honeycrisp apples?
Select one:
A. A shift to the left in the supply curve and a shift to the left in the demand curve
B. A shift to the left in the supply curve and a shift to the right in the demand curve
C. A shift to the right in the supply curve and a shift to the right in the demand curve
D. A shift to the right in the supply curve and a shift to the left in the demand curve
Ans B
5. Suppose initially that the market for tax preparation is in long run equilibrium and is a
perfectly competitive industry. Suppose now that Congress passes and President Trump
signs tax legislation that allows 99 percent of all taxpayers to fill out their tax returns in
five minutes on one sheet of paper. What will happen to the price of tax preparation
services from H&R Block and similar providers?
Select one:
A. Price will fall in the short run and fall further in the long run
B. Price will fall in the short run but return to its original level in the long run
C. Price will fall in the short run and stay at that lower level in the long run
D. Price will not change in either the short or long run
Ans C
6 .Suppose initially that the market for tax preparation is in long run equilibrium and is a
perfectly competitive industry. Suppose now that Congress passes and President Trump
signs tax legislation that allows 99 percent of all taxpayers to fill out their tax returns in
five minutes on one sheet of paper. What will happen to the price of tax preparation
services from H&R Block and similar providers?
Select one:
A. Price will fall in the short run and fall further in the long run
B. Price will fall in the short run but return to its original level in the long run
C. Price will fall in the short run and stay at that lower level in the long run
D. Price will not change in either the short or long run
Ans C
7 A grocery store offers a six-pack of Mountain Dew at $2, a 12-pack at $3.50 and a 24-
pack at $6. This is an example of
Select one:
A. Peak load pricing
B. Third degree price discrimination
C. First degree price discirmination
D. Second degree price discrimination
Ans B
8. Mergers are closely scrutinized by the government because
Select one:
A. all mergers are undesirable.
B. they always result in lower joint profits of the firms involved.
C. they always result in a more efficient market (i.e., no deadweight loss)

D. they might allow the firms involved to dominate the market and act as a legalized cartel
(monopoly).
Ans D
9 Mergers are closely scrutinized by the government because
Select one:
A. all mergers are undesirable.
B. they always result in lower joint profits of the firms involved.
C. they always result in a more efficient market (i.e., no deadweight loss)
D. they might allow the firms involved to dominate the market and act as a legalized cartel
(monopoly).
Ans D
10. Disney World management has learned that potential visitors from Florida are much
more price sensitive than visitors from other states. Suppose that marginal cost for each
visitor is $10, whereas elasticity of demand for Florida visitors is -4 and elasticity of
demand for all other visitors is -2. How much should Disney World charge each group of
customers?
Select one:
A. Price should be $10 for all visitors, regardless of where they come from
B. Price should be $20 for Florida residents, $13 for all others
C. Price should be $13 for Florida residents, $20 for all others
D. Price should be $20 for all visitors, regardless of where they come from
Ans B
11 Jim's Jet Engines expects to have $20 million in revenue, $16 million in variable costs
and $6 million in fixed costs in 2018. Based on this information, JJE should
Select one:
A. Not operate in 2018 because it will be losing money
B. Operate in 2018 because all fixed costs are also sunk costs
C. Operate in 2018 because revenue covers variable costs
D. Operate in 2018 because it might be able to do better in 2019
Ans C
12, The notebook paper industry is perfectly competitive. The minimum average total
cost of producing a pack of paper in the long run is $1. The current price of a pack of
paper is $0.75. Which of the following statements best describes what will happen in the
notebook paper industry in the future?
Select one:
A. Firms will enter and prices will fall
B. Firms will enter and prices will rise
C. Firms will exit and prices will rise
D. Firms will exit and prices will fall
Ans C
13, Suppose initially that the market for tax preparation is in long run equilibrium and is
a perfectly competitive industry. Suppose now that Congress passes and President
Trump signs tax legislation that allows 99 percent of all taxpayers to fill out their tax

returns in five minutes on one sheet of paper. What will happen to the output of tax
preparation services from H&R Block and similar providers?
Select one:
A. Output will fall in the short run but not in the long run
B. Output will fall in the short run and stay at that lower level in the long run
C. Output will not change in either the short or long run
D. Output will fall in the short run and fall further in the long run
Ans C
14, Hurricane Irma has reduced the global output of grapefruit by 60 percent. If the
elasticity of grapefruit demand is -3, what will happen to the price of grapefruit?
Select one:
A. Price will rise by 180 percent
B. Price will rise by 60 percent
C. Price will rise by 20 percent
D. Cannot determine from this information
Ans C
15, Consider a monopolist with a production process that has massive economies of
scale and average cost exceeds marginal cost. The government has decided to regulate
the monopolist's price. Which answer best describes the economic consequences of
price regulation in this situation?
Select one:
A. if the government sets price equal to marginal cost, the monopoly will go out of
business.
B. the government should not regulate prices in this situation because the monopolist will
produce as much as a competitive industry
C. a tax on the monopolist's profits will result in greater output
D. if the government sets price equal to average cost, the monopoly will go out of business.
Ans A
16, Compared to a tariff, an import quota, which restricts imports to the same amount
as the tariff, will leave the country as a whole
Select one:
A. about the same as a comparable tariff.
B. not as bad off as a comparable tariff.
C. answer depends on elasticity of demand
D. worse off than a comparable tariff.
Ans D
17, In order for a taxicab to be operated in New York City, it must have a medallion on
its hood. Medallions are expensive, but can be resold, and are therefore an example of:
Select one:
A. a fixed cost.
B. a variable cost.
C. an implicit cost.
D. a sunk cost.
Ans A

18, Use the following statements to answer this question:
I. When the government imposes a price ceiling below the equilibrium price, consumers
are always better off.
II. When the government imposes a price ceiling below the equilibrium price, producers
are always better off.
Select one:
A. I and II are false
B. I is false; II is true
C. I is true; II is false
D. I and II are true
Ans C
19, California continues to face a water shortage. The quantity of water demanded by
California households and businesses far exceeds the quantity supplied. To deal with
the situation California has limited building permits and has installed restrictions on
activiites such as watering lawns and gardens. The best economic explanation of the
water shortage is
Select one:
A. the price of water is too low
B. there has not been enough rain and snow
C. farmers get too much water and cities do not get enough
D. California has not done enough to find new sources of water
Ans A
20 Consider a good whose own price elasticity of demand is -0.5 and price elasticity of
supply is 1.5. The fraction of a specific tax that will be passed through to consumers is
________.
Select one:
A. 0.75
B. 0.25
C. 1
D. 0.5
Ans A
21, Boeing claims that jets produced by Bombardier in Canada are subsidized unfairly
and that a tariff of $1 million per Canadian jet be imposed. What are the consequences
for the US economy if such a tariff were initiated?
Select one:
A. Boeing's producer surplus will increase
B. Jet buyers such as Southwest and Delta Airlines will be better off
C. Flyers on Southwest and Delta will see lower fares
D. The federal government will have less revenue
Ans A
22, What happens in a perfectly competitive industry when economic profit is greater
than zero?
Select one:
A. Existing firms may get larger.
B. New firms may enter the industry.

C. There may be pressure on prices to fall.
D. All of the above may occur.
Ans B
23, A new brand of breakfast cereal has been shown to make children get better grades
in school. The inverse demand is P = 25 - .25Q, where Q represents the number of
boxes of cereal sold per day and P represents price per box. If the marginal cost per box
is $2, what is the profit-maximizing QUANTITY the firm should produce?
Select one:
A. 2
B. 13.5
C. 46
D. 92
Ans C
24 If a production process creates pollution, a competitive market produces excessive
pollution because
Select one:
A. zero pollution is optimal.
B. the firms place too high a price on society's cost of inflation.
C. people are not injured by the pollution.
D. the firms do not include the social cost of the pollution in their profit-maximizing
decisions.
Ans D
25, Best Buy receives four thousand Hewlett-Packard ENVY printers every week. They
can sell three thousand a week at a price of $200 but need to lower the price to $150 to
sell all four. thousand. They must charge the same price for all four thousand printers all
week because the price is listed in the weekly circular ad online and in the newspaper.
The marginal revenue from selling four thousand printers instead of three is
Select one:
A. 0
B. $200,000
C. $175,000
D. $150,000
Ans A
26, A large company is thinking about paying each of its production workers an
individual bonus if they meet or surpass last year's output. This pay method would be
most likely to increase productivity when
Select one:
A. Workers are averse to extra effort
B. Workers are averse to risk
C. Workers do not have much control over their production levels
D. Extra effort can lead to large increases in production
Ans D
27 Airlines have much greater demand in busy periods (summer, holidays) than the rest
of the year. They also have greater operating costs (both average and marginal) at
high-demand periods than at low-demand periods. Which pricing policy will result in
higher profits and avoid deadweight loss?

Select one:
A. Second degree price discrimination
B. Peak-load pricing
C. First degree price discrimination
D. Third degree price discrimination
Ans B
28 Because air cargo as an industry involves the generation of pollutants in engine
exhaust, the equilibrium price of air cargo services:
Select one:
A. is above the optimal level, and quantity is below the optimal level.
B. and quantity of trucking services are both above the optimal level.
C. is below the optimal level, and quantity is above the optimal level.
D. and quantity of trucking services are both below the optimal level.
Ans B
29 CEOs are much more likely to receive high-powered incentives such as stock grants
or stock options than ordinary hourly or salaried workers. Which of the following best
explains why CEOs are more likely to be eligible for such incentives?
Select one:
A. CEOs are more effort averse than regular employees
B. CEOs are more risk averse than regular employees
C. CEO effort is easy to observe and measure
D. CEO actions are more directly related to profitability than actions by regular employees
Ans D
30 Your firm owns an old truck that is used to make local deliveries. The truck is fully
depreciated and only costs $1.20 per hour to operate, but you could rent it to another
firm for $15.00 per hour. What is the opportunity cost of operating this truck in your
business?
Select one:
A. $1.20 per hour
B. $13.80 per hour
C. $16.20 per hour
D. $15.00 per hour
Ans D
31 Suzanne sells specialized hair bows to area high school cheerleaders. She is the only
hair bow maker using a patented clip that keeps the large bow from sliding out of the
girls’ hair. Suzanne estimates her elasticity of demand to be -1.2 and her marginal cost
is $4. How much should she charge for the bows if she wants to profit maximize?
Select one:
A. $24
B. $8
C. $4
D. $16
Ans A