1.The study of microeconomics includes the study ofYour Answer:How firms, workers, consumers, and investors interact and make decisions in the marketplace.

Correct. Microeconomics is the study of the behavior of individual economic units: consumers, firms, workers and investors.

2.Microeconomic models illustrate, amongst other things,Your Answer:The trade-offs that consumers, workers and firms face and how these trade offs are best made in the marketplace.

Correct. Microeconomics studies the trade-offs and interactions of consumers, workers and firms face in the marketplace.

3.In microeconomics, consumer theory studiesYour Answer:How consumers maximize their well-being by choosing to purchase one basket of goods versus another, or by trading-off current for future consumption, given their limited budgets.

Correct.

4.Prices in a competitive marketYour Answer:Are determined by interactions of buyers and sellers in a market for a certain good or service.

Correct. The competitive market price is the price that prevails when buyers and sellers conduct transactions freely in a market.

5.Economic theory attempts toYour Answer:Explain all the intricate workings of the economy.

Correct Answer:Explain observed events and make predictions using mathematical models of worker, consumer, firm and investor decision making processes.

Incorrect. A theory is not judged by its complexity or the reality of its assumptions but by the power of its predictions.

6.Positive economic analysisYour Answer:Is based on observed cause and effect relationships in the economy.

Correct. Positive economic analysis observes and explains "what is."

7.Which of the following statements is an example of positive economic analysis?Your Answer:The ten percent reduction in the U.S. teen pregnancy rate that occurred from 2000 to 2002 resulted in a higher quality of life for American children during the same time period.

Correct Answer:The 2002 U.S. teen pregnancy rate fell ten percent from 2000 levels, to 76.4 pregnancies per 1,000 females aged 15-19 years, a historic low for the nation.

Incorrect. The term "higher quality of life" implies a qualitative analysis which is generally not included in positive economic analysis.

8.Normative economic analysisYour Answer:Analyzes what policies and economic outcomes are best for society, and is often accompanied by value judgments.

Correct. Normative economics generally addresses questions of "what ought to be."

9.Which of the following statements is an example of normative economic analysis?Your Answer:Children who attend early childhood programs that encourage daily reading habits have higher high school graduation rates than children who do not attend such programs.

Correct Answer:Federally funded public school reading programs should only distribute books from an approved reading list to ensure that students have access to high quality reading material.

Incorrect. This is an example of positive economic analysis.

10.The following statement, "Studies have shown that early childhood reading is positively correlated with successful college admission. To improve college admission success for all members of society, federal and state governments should fund public preschools that emphasize reading as part of the curriculum."Your Answer:Is an example of a normative economic policy recommendation based on positive economic analysis.

Correct. The statement contains both observed cause and effect (positive economic analysis) and the value judgments (normative economic analysis) that college admission success is desirable and that this success should be made available to more people in the society.

11.In microeconomics, we define a "market" asYour Answer:A collection of buyers and sellers that come together and determine the price of products or services through their interaction, or their potential for interaction.

Correct.Markets include buyers and sellers that come together in physical marketplaces or via telephone, telefax, the Internet or other means enabled by communications technology.

12.It is important for firms to determine the market for their products and services becauseYour Answer:Correctly defining the market and its geographic boundaries helps firms identify competing or complementary products, competing firms and the pricing and production trade offs the firms face.

Correct. In microeconomics, costs, price and competition are all important variables for determining profitability and production decisions.

13.In microeconomics, an industry is defined asYour Answer:The supply side of a market, or a collection of firms selling the same or closely related products.

Correct.

14.The same product in a market may be sold at different prices by different firms becauseYour Answer:Both 2 and 3.

Correct. Arbitrage and brand loyalties are both indications that different prices are or can be charged for similar products.

15.The nominal price of a goodYour Answer:Is the absolute, "current-dollar" price of a good, unadjusted for inflation.

Correct. The nominal price is simply the observed price of a good or service.

16.The real price of a goodYour Answer:Is the real, "constant-dollar" price of a good, adjusted for inflation.

Correct. The constant dollar price of a good adjusts for changes in the price due to inflation or deflation.

17.The California minimum wage was $5.75 in 2000 and $7.50 in 2007. The consumer price index was 172.2 in 2000 and 207.3 in 2007. The California minimum wage expressed in 2007 dollars wasYour Answer:$7.50 in 2000, meaning the minimum wage in 2007 was unchanged when compared to the minimum wage in 2000.

Correct Answer:$6.92 in 2000, meaning the real minimum wage was about 8.4 percent higher in 2007 than in 2000.

Incorrect. In 2000, the minimum wage in 2007$ was $5.75*(207.3/172.2)=$6.92. The percent change in the real minimum wage from 2000 to 2007 was ($7.50-$6.92)/$6.92=8.4%.

18.The producer price index isYour Answer:The price index that manufacturers use to annually adjust production worker wages.

Correct Answer:Used to measure the aggregate price level of raw materials and other intermediate products bought by firms, and the prices of finished products sold at the wholesale level.

Incorrect. Wage adjustments in the economy are normally based on changes in the Consumer Price Index over time.

19.Microeconomics uses constant dollar prices when analyzing markets becauseYour Answer:Constant dollar price calculations enable microeconomic decision makers to estimate the inflation rate.

Correct Answer:Relative rather than nominal prices drive consumer and producer decisions, and relative price trends are easier to spot once inflation has been removed from the price data.

Incorrect. Inflation is a broad measure primarily studied in macroeconomics.

20.Microeconomic analysis is a powerful planning tool for business becauseYour Answer:Both 2 and 3.

Correct Answer:The models enable decision makers to predict the direction of future market price, production and cost trends in reaction to observed changes in consumer tastes, input prices or government regulations.

Incorrect. No. 2 is correct, but inflation and unemployment are aggregate measures studied in macroeconomics.

1.In microeconomics, the market supply curve illustratesYour Answer:The relationship between the price of a good or service and the quantity that firms are willing to supply at each price.

Correct. The vertical axis illustrates the price and the horizontal axis illustrates the quantity.

2.The market supply curveYour Answer:Slopes upward because the higher the price, the more firms are willing and able to sell in the market.

Correct. Firms are willing to supply more at higher prices.

3.Higher fuel costs have caused the supply curve for the air travel market toYour Answer:Shift up and to the left, as firms offer fewer travel services at each price.

Correct. The higher input costs lead the air travel industry to charge higher prices at each quantity, which is illustrated by a shift up and to the left in the supply curve.

4.An increase in supply is illustrated by a __________ shift in the market supply curve and will occur when _______________Your Answer:Right; input costs fall or an improvement in technology occurs.

Correct. In this scenario firms can offer a higher quantity at each price.

5.In microeconomics, the market demand curve illustratesYour Answer:The relationship between the price of a good and the amount of that good that consumers are willing and able to buy within a certain time period.

Correct. The demand curve illustrates the hypothetical quantity consumers would buy at different prices.

6.The market demand curve slopes downward becauseYour Answer:The lower the price, the higher the quantity demanded, as consumers are willing and able to buy more of a good or service at lower prices.

Correct.

7.An increase in demand for a normal good is illustrated by a __________ shift in the market demand curve and will occur when _______________Your Answer:Right; consumer incomes rise.

Correct. Consumers will, all else remaining constant, demand a higher quantity of a good at each price when their income rises.

8.A decrease in demand for a normal good is illustrated by a __________ shift in the market demand curve and will occur when _______________Your Answer:Left; prices fall for substitute goods.

Correct. This scenario illustrates a decrease in demand as consumers switch to the lower priced substitute good.

9.In microeconomics, the equilibrium price is defined as the price at whichYour Answer:The market clearing price where quantity demanded is equal to the quantity supplied and there are no shortages or surpluses.

Correct. There is no tendency for change in the market price when the quantity demanded is equal to the quantity supplied.

10.The market mechanism is theYour Answer:Tendency for price and quantity produced in the economy to adjust until the market clears and there are no shortages or surpluses.

Correct. Prices will adjust if there are shortages and surpluses until the quantity supplied equals the quantity demanded.

11.An increase in wages, capital costs and income in the market for a normal good will lead toYour Answer:A decrease in supply, an increase in demand in the market, and a higher equilibrium price.

Correct. The higher costs lead to a left shift in the supply curve and the higher income leads to a right shift in the demand curve, both of which would lead to a higher price in the market.

12.When a surplus develops in a goods market as a result of a decline in demand, the market will tend to clear becauseYour Answer:The price is allowed to fall, causing a decrease in the quantity supplied and an increase in quantity demanded, until the quantity demanded equals the quantity supplied.

Correct. Falling market prices increase the quantity consumers are willing and able to buy at the same time the large quantity supplied is discouraged.

13.Shifts in the supply curve, all else remaining constant, lead toYour Answer:Both 1 and 3.

Correct. An increase in supply, illustrated by a right shift in the supply curve, would lead to a surplus, all else remaining equal, and so price must be lowered to sell the additional supply. A decrease in supply, illustrated by a left shift in the supply curve, would lead to a shortage, all else remaining equal, and so the price must be raised until the quantity supplied equals the quantity demanded.

14.Shifts in the demand curve, all else remaining constant, lead toYour Answer:An increase in the market equilibrium price if the shift is due to an increase in demand.

Correct. An increase in demand, illustrated by a right shift in the demand curve, would lead to a shortage at the previous equilibrium price, and as consumers bid up the price of the good a higher quantity supplied is encouraged, resulting in a higher equilibrium price and quantity in the market.

15.An increase in both supply and demand, all else remaining constant, will always lead toYour Answer:A shift to the right in both the supply and demand curves, resulting in a higher equilibrium price but the effect on the equilibrium quantity is unknown without further information.

Correct Answer:A shift to the right in both the supply and demand curves, resulting in a higher equilibrium quantity but the effect on the equilibrium price is unknown without additional information.

Incorrect. While an increase in both supply and demand will lead to a higher equilibrium quantity bought and sold in the market, the new equilibrium price depends upon which increase is higher in magnitude. If supply increases by more than demand, prices will fall, and if demand increases by more than supply, prices will rise.

16.The price elasticity of demandYour Answer:Measures the sensitivity of quantity demanded to price, and is calculated using the equation (Q/Q)/(P/P), or (P/Q) (Q/P).

Correct. The equation represents the percentage change in quantity demanded divided by the percentage change in price.

17.When the quantity demanded is very sensitive to changes in price,Your Answer:Both 1 and 3.

Correct. If the percentage change in quantity demanded is greater than the percentage change in price, the magnitude of the price elasticity of demand is greater than 1 and demand is price elastic.

18.Demand will tend to be more price elastic whenYour Answer:There are many substitutes in the market for the good or services, the good or service comprises a large part of the consumer's budget and a long time period is under consideration.

Correct. Demand tends to be more elastic (more sensitive to price changes) when there are many substitutes in the market, the goods or services are a large part of the consumer's budget (the consumer cannot as easily afford price increases, is able to more easily respond to price decreases) and a long time period is under consideration (spending habits are more easily changed in response to price over time).

19.Price elasticity of demand along a linear demand curveYour Answer:Ranges from minus infinity where the demand curve intersects the Y axis to zero at the X axis.

Correct Answer:Both 2 and 3.

Incorrect. While this answer is correct, answer number 3 is also correct.

20.Income elasticity of demandYour Answer:Measures the sensitivity of quantity demanded to income, and is calculated using the equation (Q/Q)/(I/I), or (I/Q) (Q/I).

Correct. The income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income.

1.Consumer behavior theory helps firms understandYour Answer:how consumers always make rational purchasing decisions in three distinct steps.

Correct Answer:how changes in consumer income and price affect demand for goods and services.

Incorrect. Consumers do not always behave irrationally and often make impulse buying decisions.

2.The three basic assumptions underlying consumer preferences areYour Answer:Consumers can compare and rank all possible market baskets of goods and services, their preferences are transitive and consumers prefer more to less.

Correct.

3.An indifference curve measures ______________ and its slope is equal to ____________________Your Answer:the different combinations of two goods or services that yield the same level of satisfaction; the price of one good relative to another.

Correct Answer:the different combinations of two goods or services that yield the same level of satisfaction; the marginal rate of substitution.

Incorrect. The slope of an indifference curve is the rate at which one good can be given up for another good to maintain a constant level of satisfaction.

4.In consumer behavior theory, the Marginal Rate of Substitution (MRS) isYour Answer:The amount of one good which must be substituted for another in order to hold satisfaction constant along an indifference curve.

Correct.

5.Indifference curves have a negative, concave slope becauseYour Answer:The principle of diminishing marginal utility requires that as consumption of one good increases, fewer and fewer of other goods must be given up to keep the level of satisfaction constant.

Correct. The marginal rate of substitution along an indifference curve, -B118, falls as more and more of X is consumed.

6.In consumer behavior theory, two goods are perfect substitutesYour Answer:Both 1 and 2.

Correct.

7.An ordinal utility functionYour Answer:ranks market baskets from the most to the least preferred, with the most preferred being the farthest from the origin.

Correct.

8.Budget constraintsYour Answer:limit the amount of goods and services that a consumer can purchase in a given time period.

Correct. Consumers face budget constraints because of their limited incomes.

9.The budget line illustrates all combinations of market baskets of two goods X and YYour Answer:that can be purchased with a given income level, represented by the equation I=PxX+PyY, where Px and Py are the prices of goods X and Y and I is income.

Correct Answer:that can be purchased with a given income level, represented by the equation Y= (I/Py) - (Px/Py)X, where Px and Py are the prices of goods X and Y and I is income.

Incorrect. The budget line has a downward slope of -(Px/Py) and the Y intercept is the amount of Y that could be purchased if all income were spent on Y, or (I/Py) where X=0.

10.When the price of one good increases and the price of the other good and income are held constant, the budget lineYour Answer:rotates so that the intercept is farther from the origin on the axis representing the good that has experienced an increase in price.

Correct Answer:rotates so that the intercept is closer to the origin on the axis representing the good that has experienced an increase in price.

Incorrect. The slope of the budget line changes to illustrate howfewerof one good can now be purchased with a constant income level.

11.The effect on the budget line of an equal percentage increase in prices and income due to inflation isYour Answer:that the budget lines shift parallel out from the origin with the increase in income, by not by as much as if prices had remained constant.

Correct Answer:none: The budget line does not shift or rotate under this scenario.

Incorrect. Purchasing power and the slope of the budget line do not change when income and prices of both goods increase by the same percentage.

12.Given a consumer's budget constraints, maximizing satisfaction is illustrated byYour Answer:the point along the budget curve that touches the indifference curve illustrated that is the closest to the origin.

Correct Answer:The price is allowed to fall, causing a decrease in the quantity supplied and an increase in quantity demanded, until the quantity demanded equals the quantity supplied.

Incorrect. The consumer will always choose the indifference curve that is farthest from the origin but along the budget line.

13.The slope of the budget line, where good Y is on the vertical axis and good X is on the horizontal axis, is constant and equal toYour Answer:minus 1 times the number of units of X that must be given up I order to be able to purchase one additional unit of Y, or -Y/X.

Correct Answer:Both 2 and 3.

Incorrect. Regardless of price increases, diabetics need insulin to survive.

14.At the point where the indifference curve is tangent to the budget lineYour Answer:The marginal rate of substitution is equal to the ratio of the two goods' prices, and consumer satisfaction is maximized.

Correct. The point of tangency is always where the budget line, with a slope of minus 1 times the ratio of the two prices, touches the indifference curve, with a slope of minus one times the MRS, that is the farthest attainable curve from the origin.

15.Marginal utility measuresYour Answer:the additional satisfaction gained from consuming one additional unit of a good or service, holding consumption of all other goods and services constant.

Correct.

16.As we move along an indifference curve and consume different market baskets containing goods X and Y, the change in satisfaction is equal toYour Answer:zero, and is represented by the equation 0=MRS=Px(X)+Py(Y), where MU=Marginal Utility.

Correct Answer:When the change in one good is positive, there must be a change in the opposite direction so that MUx(X)= -MUy(Y).

Incorrect. The indifference curve holds satisfaction constant.

17.In consumer behavior theory, the equal marginal principle states thatYour Answer:utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods.

Correct. Satisfaction is maximized when the budget line is tangent to the indifference curve, or when MRSxy=MUx/Muy=Px/Py (see equation 3.5 in the textbook) or, rearranged, MUx/Px=MUy/Py.

18.A consumer has maximized the amount of satisfaction he can obtain from consuming two goods, given his budget constraints. If the marginal utility of consuming the last unit of good X was 25, and the price of X is $5, and the marginal utility of consuming another unit of Y was 15,Your Answer:then the consumer will consume more of X and less of Y in the next time period because the MUx>MUy.

Correct Answer:then the price of Y must be $3.

Incorrect. The marginal utility per dollar must be equalized, not the marginal utility. When Py=$3 then MUx/Px=MUy/Py.

19.If the marginal utility of consuming the last unit of good X was 25, and the price of X is $5, and the marginal utility of consuming another unit of Y was 15, and the price of Y is also $5, thenYour Answer:the marginal utility per dollar for X is greater than for Y, and so the consumer should choose a market basket with more X and less Y in order to increase satisfaction.

Correct. Total satisfaction will increase as the consumer purchases more of the good that yields more satisfaction per dollar and less of the other good.

20.The increase in a Laspeyres price index over time is greater than the actual cost of living increase becauseYour Answer:A Laspeyres index is a chain-weight index measuring changes in the cost of living over time using a bundle of goods and services chosen in the current year and does not take into account consumers substituting purchases towards items that have become relatively cheaper than other goods over time to maintain satisfaction.

Correct Answer:A Laspeyres index is a fixed weight index measuring changes in the cost of living over time using a bundle of goods and services chosen in the base year and does not take into account consumers substituting purchases towards items that have become relatively cheaper than other goods over time to maintain satisfaction.

Incorrect. A Lespeyres price index is a fixed weight index that uses a bundles of goods and services chosen in the base year.

3.If, on an indifference map, a normal good Y is represented on the vertical axis and good X is represented on the horizontal axis, as the price of Y fallsYour Answer:the absolute value of the slope of the budget line increases, the consumer purchases more Y, and the marginal rate of substitution increases.

Correct. The budget line rotates and shifts up and the consumer will substitute towards the lower priced Y, causing the MRS to increase.

4.As the price of a product in the market basket falls, we move down and to the right along the demand curve for that good andYour Answer:Both 1 and 3.

Correct.

5.If a consumer is choosing from market baskets containing the normal goods X and Y, as the price of good X fallsYour Answer:the consumer may purchase more of good Xandgood Y, depending upon the consumer's preferences, as the lower price of X increases the consumer's purchasing power.

Correct. For a normal good X, the consumer will purchase of that good when prices fall, but the increase in purchasing power enables the consumer to purchase more of both X and Y.

6.When the income-consumption curve for a good has a positive slopeYour Answer:the income elasticity of demand is positive and the good is considered a normal good.

Correct. The quantity demanded for a normal good increases with an increase in income, and (Q/Q)/ (I/I) is positive.

7.Holding all else constant, the demand curveYour Answer:shifts right with an increase in income for a normal good and shifts right with a decrease in income for an inferior good.

Correct. Demand for a normal good shifts right with an increase in income. For an inferior good, the income elasticity of demand is negative, and so the demand curve shifts in the opposite direction of income.

8.If an Engel curve begins with a positive slope then becomes negatively sloped at higher income levels,Your Answer:the good has a positive income elasticity of demand at low levels of income but a negative income elasticity of demand at higher levels of income.

Correct.

9.The substitution effect measures the change in the quantity demanded of a good as a result of a change in the relative price of the good, and is measured byYour Answer:the increased quantity purchased as the consumer moves to a point on thenewindifference curve tangent to thenewbudget line.

Correct Answer:the difference between the original quantity purchased and the quantity represented by the point of tangency of a budget line with a slope of thenewprice ratio to theoriginalindifference curve.

Incorrect. This measurement would include both the substitution and the income effect of the price change.

10.The income effect measures the change in the quantity demanded of a goodYour Answer:as a result of the change in relative prices and purchasing power, holding satisfaction constant.

Correct Answer:as a result of the change in the purchasing power and is calculated as the total effect on quantity demanded minus the substitution effect.

Incorrect. The level of satisfaction that can be obtained changes in the opposite direction of the price change, due to a change in purchasing power.

11.A consumer maximizes satisfaction by consuming 4 units of clothing (represented on the vertical axis of an indifference map) and 2 units of food (represented on the horizontal axis). If the price of food increases from $5 to $6, the price of clothing remains at $5 and the budget remains $30, the consumer will move to an indifference curve with a _________________________ level of satisfaction and the new marginal rate of substitution will be equal to _____________________________.Your Answer:lower; 5/6

Correct Answer:lower; 6/5

Incorrect. When satisfaction is maximized given a certain budget, the marginal rate of substitution is equal to the price of the good represented on the X axis divided by the price of the good represented on the Y axis, or 6/5 in this example.

12.On an indifference map, clothing costs $5 per unit and is represented on the vertical axis and food costs $5 per unit and is represented on the horizontal axis. The price of food falls because good weather creates a bumper harvest. If, at the new satisfaction maximizing market basket, the marginal rate of substitution is 3/5, what is the new, lower price of food?Your Answer:$3.00

Correct. When the consumer purchases the satisfaction maximizing market basket the marginal rate of substitution is equal to P-food/P-clothing, the slope of the budget curve and the indifference curve at the point of tangency, or $3/$5.

13.The market demand curve isYour Answer:the horizontal sum of the individual demand curves of all consumers in the market; it will shift right as the number of consumers in the market increase.

Correct

14.If a firm's marketing executive has estimated the price elasticity of demand for the good the firm sells at -1.5,Your Answer:the executive understands that demand is price inelastic and an increase in price will cause total consumer expenditures on the good to rise.

Correct Answer:the executive understands that demand is price elastic and an increase in price will cause total consumer expenditures on the good to fall.

Incorrect. When the absolute value of the price elasticity of demand is demand is greater than 1 demand is price elastic, and an increase in price causes total revenue to fall and vice versa.

15.If a firm finds that its price elasticity of demand is equal to -0.5, a firm can expect that an increase in price willYour Answer:increase total sales and revenue but the effect on profits is unknown.

Correct Answer:increase sales and profitability, as total revenue will rise and total costs will fall.

Incorrect. With inelastic demand and an increase in price, the percentage decrease in quantity demanded is less than the percentage increase in price, which raises revenue, lowers total costs since a lower quantity is being produced, and increases profitability.

16.If a firm finds that its price elasticity of demand is equal to -2.5, a firm can expect that an increase in price willYour Answer:increase sales and total revenue but the impact on profitability is unknown without further information.

Correct Answer:decrease total sales and revenue but the effect on profits is unknown without further information.

Incorrect. When demand is price elastic total revenue falls with a price increase.

17.Consumer surplus is equal toYour Answer:the difference between the price a consumer is willing to pay for a good and the actual price paid for the good: If the consumer is willing to pay $7 and the price is $5, then consumer surplus for that transaction is $2.

Correct.

18.Aggregate consumer surplus, when the price at the vertical intercept of the demand curve is $20, the equilibrium market price is $10 and the equilibrium quantity is 20, is equal toYour Answer:1/2($20x$10x20)=$2000

Correct Answer:1/2($10x20)=$100

Incorrect. Consumer surplus is equal to the area of the triangle below the demand curve and above the price, or 1/2($10x20)=$100

19.A network externality occurs whenYour Answer:the appeal of and demand for a good increases as more consumers purchase the goods or services due to the "bandwagon effect."

Correct. Demand for a good or service can vary directly with the number of consumers purchasing the good or service.

20.If the income elasticity of demand for a good is 1.5,Your Answer:quantity demanded will increase by $1,500 for each $1000 increase in income.

Correct Answer:quantity demanded will increase by 7.5% with a 5% increase in income.

Incorrect. Income elasticity of demand is based on percentage changes: Absolute changes in income cannot be used to estimate the effect of a change in income on quantity demanded.

1.A firm's cost minimizing production decisions are made byYour Answer:understanding the firm's input-output function (production technology) and the input prices the firms faces, and then deciding how much of each input to use for a given level of output.

Correct.

2.The factors of productionYour Answer:Are inputs the firm must use in the production process, and include labor, materials and capital.

Correct.

3.The firm's production functionYour Answer:Both 1 and 3.

Correct.

4.The short run describes a period of time that lastsYour Answer:Period of time over which one or more factors of production cannot be changed.

Correct.

5.A short run production functionYour Answer:Focuses on the additional output resulting from increasing the amount of inputs, holding at least one input constant.

Correct. Often capital is held constant and labor is allowed to vary when studying short run production functions.

6.If two laborers each produce an average of 300 units, and when a third laborer is hired output increases to 810 units,Your Answer:Both 2 and 3.

Correct. Average product is 270, which is lower than the 300 average product produced with two laborers.

7.The average product of labor is maximized when the marginal product of laborYour Answer:equals the average product of labor.

Correct. APL rises until it intersects MPL and then APL falls. Therefore, when they intersect, that is when APL = MPL, APL is maximized.

8.In the typical production function in the economy, the marginal product of labor first rises and then falls becauseYour Answer:All of the above.

Correct.

9.Diminishing marginal returns occurs becauseYour Answer:as more laborers are hired, workers increasingly share use of other fixed inputs, and so their ability to be increasingly productive is limited.

Correct.

10.The production isoquant measuresYour Answer:all possible combinations of two inputs that yield the same level of output.

Correct.

11.If capital is represented on the vertical axis and labor on the horizontal axis, the marginal rate of substitution (MRTS) is equal toYour Answer:(-K/L) or (MPK/MPL), where MPKis the marginal product of capital and MPLis the marginal product of labor.

Correct Answer:minus one times the slope of the isoquant, or the marginal product of labor divided by the marginal product of capital (MPL/MPK).

Incorrect. The MRTS is equal to minus one times the slope of the isoquant, (-K/L), which is equal to (MPL/MPK).

12.A movement along the isoquant curve is represented by the equationYour Answer:(MPK)K + (MPL)L = 0.

Correct.

13.If capital is represented on the vertical axis and labor on the horizontal axis, the marginal rate of substitution (MRTS) falls in valueYour Answer:All of the above.

Correct.

14.If the marginal rate of technical substitution MRTS is equal to 4, thenYour Answer:the marginal product of capital is equal to 2 and the marginal product of labor is equal to 8.

Correct. MRTS is equal to the marginal product of labor divided by the marginal product of capital.

15.If along an isoquant capital is reduced by 1 unit and labor is increased by 4,Your Answer:four laborers are needed to replace the output lost by reducing capital by one, and so the marginal rate of technical substitution is equal to 4.

Correct Answer:four laborers are needed to replace the output lost by reducing capital by one, and so the marginal rate of technical substitution is equal to 1/4.

Incorrect. The MRTS is equal to 1/4, -(K/L), or -(-1/4).

16.When two inputs are perfect substitutesYour Answer:The production isoquant is a straight line with a negative slope and the MRTS is constant regardless of the level of inputs.

Correct.

17.A fixed-proportion production functionYour Answer:has an L-shaped isoquant, since input combinations are fixed for each level of production.

Correct Answer:All of the above.

Incorrect. This answer is correct, but so are numbers 1 and 3.

18.Increasing output by changing the scale of the operation refers to the process ofYour Answer:increasing all total output by holding one input constant and then determining how much of the other input is required to double output.

Correct Answer:increasing all production inputs by the same proportion to increase output.

Incorrect. Scaling up requires increasing all production inputs at the same time.

19.A firm experiencing constant returns to scale finds thatYour Answer:a doubling of production inputs results in a doubling of total output.

Correct.

20.A firm experiencing constant returns to scale finds thatYour Answer:the isoquants are equally spaced on the isoquant map as output is increased proportionally.

Correct.