A) For which demand decreases as price increases.
B) For which demand increases as price increases.
C) That is inferior and has close substitutes.
D) That is a luxury good with high income elasticity.
A Giffen good is an inferior good for which the income effect (strongly negative) outweighs the substitution effect. As price increases, the good becomes relatively more essential, leading to higher demand.
A) Price is greater than average total cost.
B) Price is less than average total cost but greater than average variable cost.
C) Price is less than average variable cost.
D) Price is equal to marginal cost.
If price is less than average variable cost, the firm cannot cover its variable costs and will incur greater losses by continuing production. In this case, shutting down minimizes losses to fixed costs
A) A single seller dominates the market.
B) Many buyers and sellers with identical products.
C) Interdependence among firms.
D) No barriers to entry.
In an oligopoly, a few firms dominate the market. Each firm’s actions (e.g., pricing, production) significantly affect and are influenced by other firms, leading to interdependence.
A) A surplus is created.
B) A shortage is created.
C) The market remains in equilibrium.
D) Producers increase supply.
A price ceiling below the equilibrium price makes the good more affordable, increasing demand. However, at the lower price, producers supply less, resulting in a shortage.
A) Increasing opportunity cost.
B) Constant opportunity cost.
C) Decreasing opportunity cost.
D) Efficient resource allocation.
A bowed-outward PPF reflects that resources are not perfectly adaptable to all uses. Producing more of one good requires increasingly larger sacrifices of the other good, illustrating increasing opportunity cost.
A) They are substitutes.
B) They are complements.
C) They are unrelated.
D) One is normal, and the other is inferior.
A negative cross-price elasticity indicates that an increase in the price of one good reduces the demand for the other, suggesting the two goods are complements (e.g., coffee and sugar).
A) Decrease the demand for the good.
B) Increase the demand for the good.
C) Leave the demand for the good unchanged.
D) Increase the supply of the good.
Normal goods are those for which demand increases as consumer income rises, reflecting a direct relationship between income and demand.
A) Airlines
B) Restaurants
C) Wheat farming
D) Public utilities
Monopolistic competition is characterized by many sellers, product differentiation, and free entry/exit. Restaurants fit this model because they offer differentiated products (varied cuisines) and operate in a competitive environment.
A) AFC increases.
B) AFC remains constant.
C) AFC decreases.
D) AFC fluctuates.
AFC is calculated as total fixed costs divided by the quantity of output. As output increases, fixed costs are spread over more units, causing AFC to decrease. This is called “spreading the overhead.”
A) Total output always decreases when more units of input are added.
B) Marginal output increases indefinitely with additional input.
C) Adding more of one input, while keeping other inputs constant, will eventually result in smaller increases in output.
D) Marginal utility is constant as consumption increases.
The law of diminishing marginal returns occurs in the short run when at least one factor of production is fixed. Adding more of a variable input (e.g., labor) leads to smaller increases in output after a certain point.
A) Price equals marginal cost.
B) Economic profit is zero.
C) Price is greater than marginal cost.
D) The demand curve is perfectly elastic.
A monopolist sets the price above marginal cost to maximize profits, resulting in allocative inefficiency. Unlike in perfect competition, price does not equal marginal cost for a monopolist.
A) Reduce production.
B) Increase production.
C) Keep production constant.
D) Shut down.
When MC is less than price, the firm earns additional profit by producing more units. A profit-maximizing firm will increase production until MC equals price (in perfect competition) or marginal revenue (in other markets).
A) Rival and excludable
B) Non-rival and non-excludable
C) Rival and non-excludable
D) Non-rival and excludable
A public good is characterized by non-rivalry (one person’s consumption does not reduce the amount available for others) and non-excludability (it is difficult or impossible to prevent anyone from using it). Examples include national defense and public parks.
A) Price takers.
B) Price makers.
C) Monopolists.
D) Engaged in collusion.
In perfect competition, no single firm has control over the market price. Instead, the price is determined by market supply and demand. Firms accept this price and can sell any quantity at that price.
A) 0.5
B) 1
C) 2
D) 10
Price elasticity of demand (PED) is calculated using the formula:
The elasticity is 2 (ignoring the negative sign, as elasticity is typically expressed as an absolute value).