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This midterm exam consist of 32 multiple choice questions and covers the material in Chapters 1 through 8. There are four questions from each chapter.


The flat-screen plasma TVs are selling extremely well.  The originators of this technology are earning higher profits.  What theory of profit best reflects the performance of the plasma screen makers?


To reduce Agency Problems, executive compensation should be designed to:

Correct Answer:    create incentives so that managers act like owners of the firm.


Economic profit is defined as the difference between revenue and ____.


Which of the following will increase (V0), the shareholder wealth maximization model of the firm:

V0(shares outstanding) = Σ∞t=1 (π t ) / (1+ke)t   + Real Option Value.


A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.


The closest example of a risk-free security is


The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:


The ____ is the ratio of ____ to the ____.


If demand were inelastic, then we should immediately:


Producers’ goods are:


Marginal revenue (MR) is ____ when total revenue is maximized.


Suppose we estimate that the demand elasticity for fine leather jackets is .7 at their current prices.  Then we know that:


The method which can give some information in estimating demand of a product that hasn’t yet come to market is:


The standard deviation of the error terms in an estimated regression equation is known as:


All of the following are reasons why an association relationship may not imply a causal relationship except:


Demand functions in the multiplicative form are most common for all of the following reasons except:


The variation in an economic time-series which is caused by major expansions or contractions usually

of greater than a year in duration is known as:


The forecasting technique which attempts to forecast short-run changes and makes use of economic indicators known as leading, coincident or lagging indicators is known as:


The type of economic indicator that can best be used for business forecasting is the:


An example of a time series data set is one for which the:


The optimal currency area involves a trade-off of reducing transaction costs but the inability to use changes in exchange rates to help ailing regions.  If the US, Canada, and Mexico had one single currency (the Peso-Dollar) we would tend to see all of the following EXCEPT:


Trading partners should specialize in producing goods in accordance with comparative advantage, then trade and diversify in consumption because


In an open economy with few capital restrictions and substantial import-export trade, a rise in interest rates and a decline in the producer price index of inflation will


Using demand and supply curves for the Japanese yen based on the $/¥ price for yen, an increase in US INFLATION RATES would


The following is a Cobb-Douglas production function:  Q = 1.75K0.5L0.5.  What is correct here?


Which of the following is never negative?


If the marginal product of labor is 100 and the price of labor is 10, while the marginal product of capital is 200 and the price of capital is $30, then what should the firm?


In a production process, an excessive amount of the variable input relative to the fixed input is being used to produce the desired output. This statement is true for:


What method of inventory valuation should be used for economic decision-making problems?


 ____ are defined as costs which are incurred regardless of the alternative action chosen in a decision-making problem.


If TC = 321 + 55Q – 5Q2, then average total cost at Q = 10 is:


According to the theory of cost, specialization in the use of variable resources in the short-run results initially in:



The different methods by which the sellers inform their potential buyers about the product is called:

knowledge transfer.


product offering.

information dissemination.

Question 2 

Jane regularly sends funds to organizations seeking to save endangered animal species. This is an example of:





Question 3 

   Carla had received very low annual return from her investment portfolio comprising of stocks of five companies for two years. Her decision to continue holding the same portfolio of assets will be an example of:

bounded rationality.



systematically missed opportunities.

Question 4 

In the example of Ireland described in the text, the country’s production set shifted outward over time because:

of technological advancements which improved its potato cultivation and overall agricultural production.

it gained new resources over time which enabled it to specialize and gain comparative advantage in software trade with the U.S. and Europe.

of new resources which allowed it to gain absolute advantage over many of its trading partners.

of reduction in trade barriers with the European Union.

Question 5 

Suppose Zia spends her time picking berries and apples. Her production set is described by the equation  SHAPE  \* MERGEFORMAT , where  SHAPE  \* MERGEFORMAT  is the number of berries and y
the number of apples. Which of the following statements will be true?

25 apples and 10 berries is achievable but inefficient.

10 berries and 2 apples is efficient but unachievable.

20 apples and 5 berries is an inefficient level of production.

30 berries and 5 apples is an efficient level of production.

Question 6 

When the slope of a country’s production set declines, it implies:

the production set has shrunk.

the marginal cost of producing the good measured on the Y-axis has fallen.

the marginal cost of producing the good measured on the Y-axis has increased.

the marginal cost of producing the good measured on the X-axis has fallen.

Question 7 

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.

it allowed them to borrow at a low rate of interest and lend out at a high rate of interest.

Question 8 

Suppose the adoption of a new software reduces the marginal cost of publishing books. For a given demand curve for books, this will be represented by:

an upward movement along the supply curve of books.

a downward movement along the supply curve of books.

an upward shift in the supply curve of books.

a downward shift in the supply curve of books.

Question 9 

Starting from a pure exchange equilibrium, an increase in the demand for a commodity will result in:

a fall in the market price.

a rise in the market price.

a rise in the equilibrium output.

a fall in the equilibrium output.

Question 10 

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?





Question 11 

Which of the following is a property of an isoquant?

It is concave to the origin.

Its slope is given by the ratio of the marginal products, for example, (marginal product of capital) ÷ (marginal product of labor), where capital and labor are measured on the Y and X-axes respectively.

It gives the lowest-cost way of producing a certain level of output.

Isoquants cannot intersect each other.

Question 12 

Refer to Figure 4-1. If the firm produces 2,000 dolls per month when the market price is $4:

it will incur a loss.

it will earn maximum profit.

it will minimize cost on inputs.

it will earn the highest revenue.

 Question 13 

Refer to Figure 5-1. Which of the following points represents the long-run equilibrium price-output combination?





Question 14 

Which of the following conditions define the short-run for any industry?

Firms do not incur a fixed cost.

Firms incur both fixed as well as variable costs.

Firms can easily enter and leave the market.

Firms can enter but cannot leave the market.

Question 15 

Suppose beer producers in Munich became aware of the low price of one barrel of beer in the domestic market relative to that in the United States. What will be the impact of this price difference?

Beer production in Munich will decline.

Price of beer in the domestic market will increase.

Beer production in the U.S. will increase.

Beer consumption in the domestic market will increase.

Question 16 


Question 17 

Refer to Figure 6-4. Calculate the profit earned by the monopolist when the marginal cost of production is $15 per unit.





Question 18 

Which of the following is a possible explanation for the fall in prices after an industry is monopolized by combining a group of competitors?

A monopolist faces a downward sloping demand curve. Hence, output expansion leads to lower prices.


A monopolist may reduce prices to make it difficult for other firms to compete.

A monopolist can increase profits by reducing price when its cost of production declines due to increased size of the new firm. The fall in price is less than the decline in cost.

Question 19 

Refer to Figure 4-2. Identify the supply curve of the firm.



Question 20 

High barriers to entry protect the market power of existing firms and discourage the formation of firms which:

invest heavily in research and development activities.

use illegal procedures to capture the market.

are inefficiently small and cannot realize economies of scale.

are large enough to dominate the existing firms.

Question 21 

The principle of backward induction proves that in price-fixing oligopoly games:

the players honor the agreement if the game is repeated.

the players honor the agreement if the game is played five times.

the players dishonor the agreement if the game is not played more than twice.

the players dishonor the agreement if the game is repeated a number of times, as determined prior to the start of play.

Question 22 

Refer to Figure 7-1. What will be the dominant firm’s profit maximizing output?





Question 23 

   In a mixed strategy situation, like the “heads or tails” game, the players can maximize their income by randomly choosing head or tail each with a probability of:





Question 24 

Refer to Table 7-3. What will be the Nash equilibrium if there is no interaction between the two students?

Student A will confess while Student B will remain silent.

Student B will confess while Student A will remain silent.

Both the students will confess.

Both the students will remain silent.

Question 25 

Which of the following games will have a solution in mixed strategies?

A price-fixing game

A Prisoner’s dilemma

A drafting game used by racing cars.

A product choice game with asymmetric profits


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