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ECO 550 Week 3 Chapter 3, 4 Quiz 2
Question 1
1.For an inferior good:
the income elasticity is positive.
the income elasticity if negative.
the income elasticity is zero.
the income elasticity is unity.
Question 2
1. If cheese spreads and butter are substitutes, an increase in the price of butter will:
shift the demand curve for cheese spreads upward.
shift the demand curve for cheese spreads downward.
shift the demand curve for butter upwards.
shift the demand curve for butter downward.
Question 3
1. As observed in China’s steel appliance market, the rise in the price of refrigerators resulted:
solely from an increase in the demand for refrigerators.
from an increase in the demand for steel from all appliance industries.
from a shortage of steel in the world markets.
from an increase in the price of steel that was the result of increased demand for
refrigerators.
Question 4
1. Bankers supported the Federal Reserve Board’s Regulation Q because:
it allowed them to charge lower interest rates on loans.
it protected them from money market volatilities.
it increased the demand for loanable funds in the market.

2. it allowed them to borrow at a low rate of interest and lend out at a high rate of
interest.
Question 5
1. The own-price elasticity of demand is defined as:
the ratio of a change in quantity demanded and the change in price.
the ratio of the percentage change in quantity demanded to the percentage change in
price.
the ratio of the percentage change in quantity demanded to the percentage change in
input prices.
the ratio of a change in output and the change in input usage.
Question 6
1. A tradesman who purchases diamonds in a country where the price is low and sells them in
another country where the price is high, can be said to be practicing:
arbitrage.
speculation.
derivatives trading.
forecasting.
Question 7
1. An affordable housing law will affect a city’s housing prices only if:
the demand for houses in the city is downward sloping.
the demand for houses in the city is almost horizontal.
the demand for houses in the city is almost vertical.
the demand for houses in the city is backward bending.
Question 8
1. The area above the supply curve and below the market price represents:
the consumer surplus
the producer surplus.
the deadweight loss of the producer.
the deadweight loss of the consumer.

3. Question 9
1. A perfectly elastic demand curve will:
be a vertical straight line.
be a downward sloping straight line.
be a horizontal straight line.
be an upward sloping straight line.
Question 10
1. The contact points where the terms of forward contracts are set are known as:
the underlying markets.
the derivative markets.
the over-the-counter markets.
the futures exchange.
Question 11
1. Suppose a commodity market is initially in equilibrium. An increase in the nation’s skilled labor
force then lowers the marginal cost of producing each unit of output. Which of the following
changes will be observed?
The demand curve will shift upward
The supply curve will shift downward
The demand curve will shift downward
The supply curve will shift upward
Question 12
1. An increase in the price of sodium carbonate, a chemical compound used in detergents, will:
increase the quantity of detergents demanded.
decrease the quantity of detergents demanded.
decrease the demand for detergents.
increase the demand for detergents.
Question 13
1. Which of the following commodities can be considered as an inferior good?
Dwelling in a small apartment located in a suburb

4. Washing clothes in a washer at home
Eating out at an upscale restaurant
Spending vacations at exotic locations
Question 14
1. A demand curve is said to be inelastic if:
ED = 1
ED = 0
ED > 1
ED < 1
Question 15
1. An increase in the supply of oranges in a town drives down its price by 5 percent. Which of the
following changes will be observed in the market?
The demand for oranges will decrease.
The demand for oranges will increase.
The quantity of oranges demanded will increase.
The quantity of oranges demanded will decrease.
Question 16
1. Refer to Figure 4-2. The area EFGH is:
Figure 4-2
The following figure shows the cost curves of a firm producing good X.
Answer
the loss incurred by the firm when market price is $3.5.
the profit earned by the firm when the market price is $3.5.

5. the loss incurred by the firm when the market price is $5.
the revenue earned by the firm when the market price is $5.
Question 17
2. The greater the curvature of the isoquant:
the greater the degree of substitutability between the inputs.
the lower the possibility of substitution between inputs.
the higher the impact of a change in relative prices of inputs.
the lower the prices of inputs.
Question 18
2. Investments with _____ risk usually carry a _____ return.
higher; lower
lower; higher
zero; high
higher; higher
2 points
Question 19
2. The introduction of new technology and changes in organization are:
likely to shift the LRAC curve.
unlikely to help in the short-run.
likely to shift the SRAC upward.
unlikely to affect a firm’s cost curves in the long-run.
Question 20
2. You decide that it is time to buy a big family car. The opportunity cost you consider is:
the cost of the car.
the increase in comfort for your family while traveling.
the return this money would have earned if it was invested otherwise.
the inconvenience you and your family are bearing on account of your old car.

6. Question 21
2. Let the marginal product of capital (MPK ) be 6; the marginal product of labor (MPL) be 2; the
price of labor is given by $10. What will be the price of capital such that the isocost and the
isoquant are tangent to each other?
$30
$3
$60
$6
Question 22
2. _____ is the locus of the minimum points of various short-run average cost curves depicting
different plant sizes.
Long-run marginal cost
Expansion path
Long-run average cost
Isocost
Question 23
2. A manufacturer of towels finds that his returns to scale are constant. Which of the following
conclusions can be drawn?
The long-run total cost curve is horizontal.
The long-run average cost curve is horizontal.
The long-run total cost curve is downward sloping.
The long-run average cost curve is downward sloping.
Question 24
2. The production function shows:
the total cost incurred to produce a certain level of output.
the changes in cost incurred as output level varies.
the relationship between inputs used and output produced.
the impact of a change in production on the firm’s revenues.
Question 25
2. A firm uses two inputs, labor (L) and capital (K) in the production of umbrellas. It can invest
$50,000 in the purchase of the two inputs annually. The firm hires 5 units of capital at $1,000 per

7. unit. If the going annual wage rate is $4,500, calculate the number of workers employed by the
firm. (Assume that the firm spends the entire budget on K and L.)
10
5
15
9
Question 26
2. An isocost line depicts:
the minimum cost required to produce a certain level of output, given input prices.
the input combination to produce a certain level of output.
the input combinations that satisfy a budget constraint, given input prices.
the maximum output that can be produced by a firm given its budget constraint.
2 points
Question 27
2. The gap between average total cost and average variable cost:
is constant at all ranges of output.
is high at high levels of production.
declines as output expands.
depends on the production technology.
Question 28
2. Jeff owns a garage and has 3 mechanics to help him. With the tools used being fixed in the short
run, his production function is given by 5 + 2L = Y , where L is the number of mechanics and Y
is the number of cars they can fix. If Jeff hires a fourth mechanic, what will be the marginal
product of the new mechanic hired?
11
13
2
7
Question 29
2. At outputs less than the minimum of average variable cost:

8. marginal cost is greater than average variable cost.
marginal cost is less than average variable cost.
marginal cost is equal to average variable cost.
marginal cost is parallel to average variable cost.
Question 30
2. In an industry characterized by a natural monopoly, which of the following characteristics will be
observed?
The long-run average cost curve will be upward sloping.
The market price of the product will be very low.
Competition is both impossible and inefficient.
Number of producers operating in this market will be low.