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Practice Multiple Choice Questions for Midterm Exam

MGCR 293 Managerial Economics – Fall 2019

(Chapters 1, 2, 3, 5, and 18)

Note that: If you believe that an answer could be wrong, please let me know.

1) 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 to or greater than accounting profit.

2) The demand for tickets to a concert is given by Q = 1000P-1.5I2 where P is the price of a
ticket. Assume that per capita income, I, is $2000. At a price, P, of $70 the income elasticity
of demand is
A. 1.5.
B. 2.0
C. 2.5.
D. 3.0.
E. 3.5.

3) If an increase in the price of good A causes the supply curve for good B to shift leftward.
A. A and B are substitutes in consumption.
B. A and B are complements in consumption.
C. A and B are substitutes in production.
D. A and B are complements in production.
E. A and B are not related.

4) A market demand curve is likely to shift to the right when

A. the expected price decreases.
B. prices fall.
C. prices rise.
D. population increases.
E. None of the above.
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5) If the demand for Montreal Gazette ePaper on the App store is described by
Q = 2500 – 400P – I/10, for I = $15,000, and P =$1.50, the marginal revenue of an additional
ePaper sold is
A. MR = $4.0
B. MR = $2.5
C. MR = $1.5
D. MR = $0.5.
E. Not enough information to answer.

6) A firm has the following quadratic total cost function: TC = aQ2 + 10Q + 50. Determine a if
the market price is $50 per unit and the firm’s profit maximizing level of output is 10 units.
A. a = 2.
B. a = 6.
C. a = 8.
D. a = 10.
E. a = 12.

7) The second derivative of the total profit function is:

A. average profit.
B. marginal profit.
C. the slope of the average profit function.
D. the slope of the marginal profit function.
E. the slope of the total profit function.

8) The demand curve for knobs is P = 75 – 6Qd and the supply curve for knobs is
P = 35 + 2Qs. What is the equilibrium price of a knob?
A. $5
B. $10
C. $40
D. $45
E. None of the above.

9) The demand curve for knobs is P = 75 – 6Qd and the supply curve for knobs is
P = 35 + 2Qs. If the price of a knob was set at $50, the knob market would experience
A. equilibrium.
B. excess demand causing a rise in price.
C. excess demand causing a fall in price.
D. excess supply causing a rise in price.
E. excess supply causing a fall in price.
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10) The first derivative of total profit with respect to quantity is:
A. average revenue.
B. marginal revenue.
C. marginal profit.
D. average profit.
E. total profit.

11) If the inverse demand function for a monopoly's product is P = 100 - 2Q, then the firm's
marginal revenue function is
A. -2.
B. 100 - 4Q.
C. 200 - 4Q.
D. 200 - 2Q.
E. 200 – Q.

12) If the equation of a straight line is y = 8 – 2x, the slope is

A. -2 and the x-intercept is -4.
B. -2 and the x-intercept is 4.
C. -2 and the x-intercept is 8.
D. 2 and the x-intercept is -4.
E. 2 and the x-intercept is 4.

13) Marginal profit is maximized when:

A. average profit is equal to marginal profit.
B. total profit is maximized.
C. average profit is increasing.
D. average profit is maximized.
E. average profit is decreasing.

14) Jane, Eric, and Kurt are all buyers of chain saws. Jane's demand function is Qj = 520 - 13P;
Eric's demand function is Qe = 40 - P; and Kurt's demand function is Qk = 200 - 5P.
Together, these three constitute the entire demand for chainsaws. What price will the own-
price elasticity of market demand be -1?
A. $19.
B. $20.
C. $25.
D. $35.
E. $38.
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15) Consumers have been buying fewer CDs as downloadable music has become easier to
purchase and use. We would represent this as
A. a leftward shift of the demand curve for CDs.
B. a rightward shift of the demand curve for CDs.
C. a change in the price of CDs.
D. a leftward shift of the supply curve for downloadable music.
E. a rightward shift of the supply curve for downloadable music.

16) When average profit is at a maximum, marginal profit is

A. zero.
B. increasing.
C. equal to average profit.
D. greater than average profit.
E. less than average profit.

17) A function of one argument is maximizsed when the first derivative

A. is zero and the second derivative is negative.
B. is positive and the second derivative is negative.
C. is zero and the second derivative is positive.
D. is negative and the second derivative is positive.
E. and the second derivative are both zero.

18) The demand curve for wheat in Canada is P = 12.4 – 4Qd where P is the price of wheat
($/bushel) and the supply curve is P = -2.6 + 2Qs; Qs and Qd are the quantity of wheat
supplied and demanded (in billions of bushels). What is the equilibrium price (P*) and
quantity of wheat sold (Q*)?
A. $2.6, 3.4.
B. $2.8, 3.5.
C. $2.4, 2.5.
D. $2.5, 2.4.
E. Cannot be determined with the information given.

19) A computer company sells a particular desktop model for $900. The company has a cost
function of f(x) = 3x2 + 36x + 6000, where x is the number of units produced. To maximize
profit, how many desktop computers should be produced?
A. x = 100.
B. x = 120.
C. x = 144.
D. x = 155.
E. x = 166.
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20) According to the Law of Demand, the demand curve for a good will
A. shift leftward when the price of the good increases.
B. shift rightward when the price of the good increases.
C. shift rightward when the future price of good decreases.
D. slope downward.
E. slope upward.

21) Kenny’s Cartage hauls crushed stone for $15 a ton and has total costs given by
TC = 100 + 5X + X2. The profit- maximizing level of output is:
A. 5 tons.
B. 2.1 tons.
C. 10 tons.
D. 20 tons.
E. 0 tons.

22) If the consumer's income decreases while the prices of both goods remain unchanged, what
will happen to the budget line?
A. The budget line rotates inward from the intercept on the horizontal axis.
B. The budget line rotates outward from the intercept on the vertical axis.
C. The budget line shifts inward without a change in slope.
D. The budget line shifts outward without a change in slope.
E. None of the above.

23) If marginal revenue exceeds marginal costs, to increase profits a firm should:
A. reduce output.
B. increase output.
C. hold output constant.
D. increase marginal revenue.
E. reduce marginal cost.

24) The price of crude oil rose to over $100 per barrel in early 2019. What would we expect to
see happen to the supply of plastic, which is produced using crude oil?
A. The supply of plastic will increase.
B. The supply of plastic will decrease.
C. The supply of plastic will stay the same because the government requires plastic
producers to meet statutory minimum production levels.
D. The supply of plastic will stay the same because of the profit motives of plastic
producers.
E. None of the above.
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25) On a linear demand curve, the lower the price,

A. the less elastic is demand.
B. the more elastic is demand.
C. the elasticity equals -1.
D. the elasticity equals zero.
E. the elasticity is constant.

26) A firm sets its output where

A. marginal profit minus marginal cost equals zero (Mπ - MC = 0).
B. marginal revenue minus marginal profit equals zero (MR - Mπ = 0).
C. marginal revenue minus marginal cost equals zero (MR - MC = 0).
D. marginal revenue minus marginal cost is greater than zero (MR - MC > 0).
E. marginal revenue minus marginal cost is less than zero (MR - MC < 0).

27) If quantity demanded for sneakers falls by 12% when price increases 4%, we know that the
absolute value of the own-price elasticity of sneakers is
A. 0.3.
B. 0.8.
C. 3.3.
D. 3.0.
E. 4.0.

28) Suppose Jean loses his present job and his monthly income falls from $10,000 to $6000,
while his monthly purchases of good X increase from 200 to 400. What is his income
elasticity of demand for good X?
A. +1.33.
B. -1.33.
C. +1.5.
D. -1.5.
E. -0.75.

29) At a large institution of higher learning, the demand for football tickets at each game is
Q = 180,000 – 6000P. What is the total revenue-maximizing price for this university to
charge per ticket?
A. $15.
B. $20.
C. $25.
D. $30.
E. $35.
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30) At a large institution of higher learning, the demand for football tickets at each game is
Q = 180,000 – 6000P. What is the total revenue-maximizing quantity for this university?
A. 15,000 tickets.
B. 30,000 tickets.
C. 50,000 tickets.
D. 90,000 tickets.
E. 100,000 tickets.

31) The inverse demand function for grapes is described by the equation P = 6 – 2Q; where P is
the price in dollars per crate and where Q is the number of crates of grapes demanded per
week. When P = $4 per crate, what is the own-price elasticity of demand for grapes?
A. -0.5
B. -1.0
C. -2.0
D. -4.0
E. -8.0.

32) The demand for cable television hookups is Q = 100 - 10P0.5 + 2I2 where P is price and I is
per capita income. Cable TV is
A. a normal good.
B. a natural monopoly.
C. an inferior good.
D. a substitute good.
E. a complement good.

33) Which of the following would cause a leftward shift in the demand curve for a good?
A. an increase in income.
B. an increase in the price of a complementary good.
C. an increase in the price of a substitute.
D. the expectation that there will be a shortage in the availability of the good.

34) Suppose the market demand curve for pizza can be expressed as QD = 100 - 2P + 3Pb, where
QD is the quantity of pizza demanded, P is the price of pizza, and Pb is the price of a burrito.
What is the relationship between burritos and pizza, from the point of view of consumers?
A. They are independent.
B. They are complements.
C. They are substitutes.
D. They are inferior goods.
E. Not enough information to answer the question.
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35) If the marginal cost of making a photocopy is 3¢ and the elasticity of demand is -2, the profit
maximizing price is
A. 3¢.
B. 5¢.
C. 6¢.
D. 7¢.
E. 8¢.

36) The demand function for coffee is p = 50,000 – 2q where q is the number of tons produced
and p is the price per ton. Total revenue from coffee sales be maximized when the output
level is:
A. 12,000.
B. 12,500.
C. 15,000.
D. 20,000.
E. 25,000.

37) When the price of bananas is 50 cents a pound, the total demand is 100 pounds. If the price
elasticity of demand for bananas is – 2.75; what quantity would be demanded if the price rose
to 60 cents a pound?
A. 50
B. 90
C. 60
D. 80
E. 70

38) 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.

39) If the demand curve for comic books is expressed as Q = 10,000P-1, then demand has a
unitary elasticity
A. only when P = 10,000.
B. only when P = 100.
C. always.
D. never.
E. when 100 < P <10,000.
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40) If price is $25 when the price elasticity of demand is –0.5, then marginal revenue must be
A. -50.
B. -25.
C. 50.
D. 25.
E. 40.

41) If a consumer prefers apples to bananas and prefers bananas to citrus fruit, in order to satisfy
assumptions about preferences she has to prefer
A. bananas to apples.
B. citrus fruit to bananas.
C. apples to citrus fruit.
D. citrus fruit to apples.
E. None of the above.

42) 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.

43) Given the production function q = 4L + K, what is the marginal product of labor when
capital is fixed at 50?
A. 1.
B. 2.
C. 3.
D. 4.
E. 5

44) Suppose Jack 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 Jack’s total utility equal to?
A. 15.
B. 30.
C. 120.
D. 240.
E. 960.
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45) Suppose Jack is currently consuming 4 movies and 4 concerts per month. If his utility
function is given by U = 15M0.5C, where M represents the number of movies consumed and
C represents the number of concerts attended, the marginal utility of concert (MUC) for Jack
is equal to
A. 15.
B. 30.
C. 60.
D. 120.
E. 960.

46) Jin has a demand function for meat that is given by the equation Q = 100 - P. If the price of
meat is 95, how much is his consumer surplus?
A. 12.5.
B. 25.
C. 25.
D. 30.
E. 100.
The following information is provided for Questions 47 and 48.
Jane’s utility function over jelly, J, and peanut butter, N, is U = JN. The price of a jar of jelly is
$5. The price of a jar of peanut butter is $10. Jane has a budget of $100 to allocate to these two
items.
47) What is Jane’s budget constraint?
A. 5J + 10N = 100.
B. 10J + 5N = 100.
C. J + 5N = 100.
D. 5J + N = 100.
E. J + N = 100.

48) If Jane maximizes her utility, how much of each good does she consume?
A. J* = 5 jars, N* = 5 jars.
B. J* = 10 jars, N* = 10 jars.
C. J* = 10 jars, N* = 0 jars.
D. J* = 5 jars, N* = 10 jars.
E. J* = 10 jars, N* = 5 jars.
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49) If Jane spends her entire budget, she can afford 47 apricots and 10 cherries. She can also just
afford 20 apricots and 19 cherries. The price of apricots is 18 cents. What is the price of
cherries in cents?
A. 18 cents
B. 25 cents
C. 50 cents
D. 54 cents
E. Not enough information to answer.

50) Wanda Littlemore's utility function is

U(x, y) = x + 63y - 3y2. Her income is 184. If the price of x is 1 and the price of y is 33, how
many units of good x will Wanda demand?
A. 17 units.
B. 22 units.
C. 24 units.
D. 15 unit.
E. 19 units.
51) A farmer uses K units of machinery and L hours of labor to produce C tons of corn, with the
following production function C = 2L + 2K. This production function exhibits
A. constant returns to scale.
B. increasing returns to scale.
C. decreasing returns to scale.
D. both a and b.
E. no clear pattern of returns to scale.

52) A production function is a table, a graph, or an equation showing the:

A. least-cost method of producing output.
B. optimal combination of inputs.
C. maximum output it can expect to produce with a given mix of inputs.
D. combinations of inputs that can be produced with equal costs.
E. optimal production technology that a firm should employ.

53) Whenever average product is increasing with increasing use of an input:

A. total product is increasing at a decreasing rate.
B. total product is increasing at an increasing rate.
C. marginal product is more than average product.
D. marginal product is positive.
E. all of the above.
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54) If output is produced according to Q = (KL)3/4, then this production process exhibits:
A. increasing returns to scale
B. decreasing returns to scale
C. first increasing and then decreasing returns to scale
D. constant returns to scale
E. first decreasing and then increasing returns to scale

55) Fun is a landscaping firm that specializes in topiary. Last year, the firm had 60 employees
and served 120 customers. This year, it had 70 employees and served 140 customers. What is
the marginal product of labor?
A. 2.
B. 3.
C. 4.
D. 5.
E. None of the above.

56) The law of diminishing marginal returns states that:

A. the marginal product of labor declines as all inputs are increased.
B. production functions exhibit decreasing returns to scale.
C. the marginal product of labor returns as more capital is used.
D. the marginal product of a factor eventually diminishes as more of the input is used,
holding other inputs fixed.
E. the marginal product of a factor always diminishes as more of the input is used, holding
other inputs fixed.

57) The marginal rate of technical substitution between two inputs:

A. shows the rate at which one input can be traded for another, holding output constant.
B. shows the efficient combination of inputs.
C. increases as we move down an isoquant.
D. shows the rate at which output can be increased by using more of both inputs.
E. shows the rate at which output decreases when using less of one of the inputs.

58) Lines that represent bundles of inputs that cost the same total amount are called:
A. total cost curves.
B. isocost curves.
C. cost curves.
D. isoquants.
E. isoprofit curves.
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59) Pen firm produces pens according to Q = 4L - 0.15L2. If labor costs $5 and pens sell for $2
per one unit, the optimal quantity of labor is
A. 5
B. 7
C. 8
D. 9
E. 10

60) Output is produced according to Q = 4LK, where L is the quantity of labor input and K is the
quantity of capital input. If the price of K is $10 and the price of L is $5, then the cost-
minimizing combination of K* and L* capable of producing 32 units of output is:
A. L* = 8 and K* = 1.
B. L* = 4 and K* = 2.
C. L* = 2 and K* = 2.
D. L* = 2 and K* = 4.
E. L* = 1 and K* = 8.

61) The optimal combination of two inputs, K and L, can be characterized by

A. PK × MPK = PL × MPL.
B. MPK = MPL.
C. PL × MPK = PK × MPL.
D. MPK / MPL = PL / PK.
E. none of the above

62) A firm produces output using one fixed factor and one variable factor. The firm's short run
production function is q = 455x – 5x2; where x is the amount of variable factor used. The
price of output is $3 per unit and the price of the variable factor is $15 per unit. In the short
run, how many units of x should the firm use?
A. 22
B. 90
C. 31
D. 45
E. None of the above.

63) Average product will fall as long as

A. marginal productivity is falling.
B. it exceeds marginal product.
C. it is less than marginal product.
D. the number of workers is increasing.
E. marginal product is maximized.
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64) The slope of the total utility curve equals

A. the ratio of the marginal utility and the average utility.
B. the change in a good divided by the change in total utility.
C. the average utility.
D. the marginal utility.
E. the marginal rate of technical substitution.

65) How much labor does a firm require to produce q = 1000 when capital is fixed at 5 and they
have a production function equal to q = 200L0.5K0.5?
A. L = 5.
B. L = 2.5.
C. L = 2.
D. L = 3.
E. L = 3.5.

66) What is the MRTSLK for a firm with the following production function, q = 200L0.5K0.5 with
L = 4 and K = 16?
A. MRTSLK = 4.
B. MRTSLK = 2.
C. MRTSLK = 1.
D. MRTSLK = 8.
E. MRTSLK = 16.

67) Let the production function be q = ALaKb. Returns to scale are equal to
A. a ∗ b.
B. a + b.
C. La + Kb.
D. A ∗ L.
E. a/b.

68) In the long run, all inputs of production are

A. variable.
B. fixed.
C. materials.
D. rented.
E. Both fixed and variable.
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69) Which of the following statements best summarizes the law of diminishing marginal returns?
A. In the short run, as more labor is hired, output diminishes.
B. In the short run, as more labor is hired, output increases at a diminishing rate.
C. In the short run, the amount of labor a firm will hire diminishes as output increases.
D. In the short run, as more labor is hired, capital is not constant.
E. The law of diminishing marginal returns happens only in the long run.

70) For a linear production function, q = f(L, K) = 4L + 2K, what is the short-run production
̅ = 50?
function given that capital is fixed at 𝐾
A. q = 4L + 100.
B. q = 4L + 50.
C. q = 4L.
D. q = 104.
E. q = 50.