11. Suppose firms in a perfectly competitive industry are making economic profits. As a result I. new firms enter the industry. II. the market price falls. III. the economic profits of the existing firms decrease.
(A) I and III
(B) I and II
(C) II and III
(D) I, II and III

1. Economics is best defined as (A) making choices with unlimited wants but facing a scarcity of resources. (B) controlling a budget for a household. (C) how people make money and profits in the stock market. (D) making choices from an unlimited supply of goods and services.

2. The concept of diminishing marginal rate of substitution indicates that (A) as the consumption of good X increases, individuals are willing to give up an increasing amount of good Y in order to obtain one more unit of good X. (B) along an indifference curve, a consumer prefers the consumption combinations moving to the northwest along the curve. (C) as the consumption of good X increases, individuals are willing to give up a decreasing amount of good Y in order to obtain one more unit of good X. (D) None of the above answers is correct.

3. The demand for factor is driven by the demand for goods and services produced by that factor of production. This phenomenon is referred to as (A) inverse demand. (B) elastic demand. (C) joint demand. (D) derived demand.

4. In an eight-hour day, Andy can produce either 24 loaves of bread or 8 pounds of butter. In an eight-hour day, Bob can produce either 8 loaves of bread or 8 pounds of butter. Andy has a comparative advantage in the production of (A) bread and neither has a comparative advantage in the production of butter. (B) butter, while Bob has a comparative advantage in the production of bread. (C) bread, while Bob has a comparative advantage in the production of butter. (D) both bread and butter.

5. For consumers, goods A and B are complementary goods. The cost of a resource used in the production of A decreases. As a result (A) the equilibrium price of B will rise and the equilibrium price of A will fall. (B) the equilibrium price of B will fall and the equilibrium price of A will rise. (C) the equilibrium prices of both A and B will rise. (D) the equilibrium prices of both A and B will fall. 

6. The price of a gallon of milk falls. Which of the following is a possible cause? (A) Milk is a normal good and people’s incomes rise. (B) a decrease in the price of oatmeal, a complement to milk (C) a discovery that milk cause diabetes (D) a drought that reduces supplies of feed grains fed to cows that produce milk

7. There is a technological advance in the production of a good and simultaneously also an increase in the expected future price. Which of the following will happen? (A) The technological improvement shifts the supply curve rightward while the increase in the expected future price shifts the supply curve leftward. The net effect is not known. (B) The equilibrium price falls because the supply curve shifts leftward. (C) The demand curve shifts rightward and the supply curve does not shift. (D) The equilibrium price will rise because the supply curve shifts rightward.

8. When the price of a movie ticket increases from $5 to $7, the quantity of tickets demanded decreases from 600 to 400 a day. What is the price elasticity of demand for movie tickets? (A) 1.20 (B) 2.32 (C) 0.83 (D) 1.00

9. The table below gives costs at Jan’s Bike Shop. Unfortunately, Jan’s record keeping has been spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production. What is the total cost of producing 50 bikes?  (A) $100 (B) $400 (C) $300 (D) $200  

10. Ernie’s Earmuffs produces 200 earmuffs per year at a total cost of $2,000 and $400 of this cost is fixed. If he increases output to 220 earmuffs, his total cost increases to $2100, and his fixed cost remains $400. What is Ernie’s marginal cost per earmuff? (A) $9.55 (B) $5 (C) $105 (D) $35

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