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True-False Questions T F 1. T F 2. T F 3. T F 4. T F 5. T F 6. T F 7. T F 8. T F 9. The cost of production is a major determinant of consumer demand.

Managerial economics is primarily concerned with the market demand for an individual firm's output. The quantity of a commodity demanded by a consumer is influenced by the price of the commodity. The demand for an individual firm's output depends on the demand for the industry's output, the number of firms in the industry, and the structure of the industry. The quantity of a commodity demanded by a consumer is influenced by the number of consumers in the market. The quantity of a commodity demanded by a consumer is influenced by the prices of related commodities. The law of demand refers to the relationship between consumer income and the quantity of a commodity demanded per time period. An increase in price of a commodity will generally lead to a decrease in the quantity of the commodity demanded per time period. A commodity is referred to as normal if an increase in its price leads to an increase in the quantity of the commodity demanded per time period.

T F 10. Most goods are normal. T F 11. Inferior goods are generally purchased at low levels of income but not at high levels of income. T F 12. If an increase in the price of one commodity leads to an increase in demand for a second commodity, then the two commodities are complements. T F 13. An individual's demand curve is formulated under the assumption that price is held constant and all other determinants of demand are allowed to vary. T F 14. The substitution effect holds that an increase in the price of a commodity will cause an individual to search for substitutes. T F 15. The income effect holds that a decrease in the price of a commodity is, in some respects, the same as an increase in income. T F 16. A change in the price of a commodity will cause the demand curve for that commodity to shift. T F 17. If a decrease in income causes an individual's demand curve for a good to shift to the left, then the good is inferior. T F 18. If a good is normal, then both the substitution effect and the income effect cause quantity demanded to change in the same direction.

T F 19. There is an inverse relationship between the quantity demanded of a commodity and its price. T F 20. Butter and bread are substitutes. T F 21. A shift in demand is referred to as a change in quantity demanded. T F 22. If the independent individual consumer demand curves for a commodity are horizontally summed, the result is the market demand curve for the commodity. T F 23. If the consumption decisions of individual consumers are not independent, then the horizontal sum of individual consumer demand curves is the market demand curve for the commodity. T F 24. The bandwagon effect refers to the importance of musical backgrounds in TV advertising. T F 25. The bandwagon effect tends to make the market demand curve flatter than the horizontal summation of individual demand curves. T F 26. The snob effect tends to make the market demand curve flatter than the horizontal summation of individual demand curves. T F 27. Monopoly refers to a situation in which there is only one producer of a commodity for which there are many close substitutes. T F 28. If the demand for a firm's output is horizontal, then the firm is a perfect competitor. T F 29. Oligopoly refers to a type of market organization that is characterized by large number of firms selling a differentiated commodity. T F 30. Monopolistic competition is a form of market organization that combines elements of perfect competition and monopoly. T F 31. Under every form of market organization except monopolistic competition, the firm faces a downward-sloping demand curve. T F 32. If consumers expect the price of a commodity to increase in the future, then demand for the commodity will decrease. T F 33. Consumers find it easier to postpone the purchase of a durable good than to postpone the purchase of a nondurable good, so the demand for durable goods is more unstable than the demand for nondurable goods. T F 34. Derived demand refers to the mathematical derivation of a market demand curve from individual consumers' demand curves. T F 35. Derived demand by a firm will generally increase if the demand for the firm's output increases. T F 36. According to the estimated linear demand function presented in Case 3-1, sweet potatoes are normal goods. T F 37. Elasticity is a measure that does not depend on the units used to measure prices and quantities. T F 38. The price elasticity of demand is the same as the slope of a demand curve.

T F 39. The arc price elasticity of demand measures the price elasticity at a point on the demand curve. T F 40. The price elasticity of demand for a firm's output is generally more elastic than the price elasticity of demand for the industry's output of the commodity. T F 41. If price elasticity of demand for a firm's output becomes more elastic, then the firm's marginal revenue will increase. T F 42. If a firm increases the price of its product and total revenue increases, then the price elasticity of demand must be less than minus one. T F 43. If the price elasticity of demand for a firm's output is inelastic, then a decrease in price will reduce the firm's total revenue. T F 44. If the price elasticity of demand for a firm's output is unit elastic, then marginal revenue is equal to zero and total revenue is at a maximum. T F 45. If a firm is a perfect competitor, then its marginal revenue is equal to the price of its commodity. T F 46. If a firm is not a perfect competitor, then its marginal revenue is greater than the price of its commodity. T F 47. An increase in the number of available substitutes for a commodity will decrease the price elasticity of demand for the commodity. T F 48. The long-run price elasticity of demand for a commodity is generally greater then the short-run price elasticity of demand for the commodity. T F 49. The income elasticity of demand for an inferior good is negative. T F 50. For most goods, the income elasticity of demand is negative. T F 51. The cross-price elasticity of demand for two goods is negative if the goods are substitutes. T F 52. The cross-price elasticity of demand measures the percentage change in the demand for one good that results from a one percent change in the quantity demanded of a second good. T F 53. If two goods are very close complements, then the cross-price elasticity of demand between the two goods will be large and negative. T F 54. It is likely that the cross-price elasticity of demand between two goods produced by different firms in the same industry will be positive and large. T F 55. Estimates of demand elasticities are used by firms to determine optimal operational policies. T F 56. If the price elasticity of demand for a firm's output is inelastic, then the firm could increase its revenue by reducing price. T F 57. Decreased barriers to international trade have increased the differences in consumer preferences between countries.

T F 58. The international convergence in tastes has progressed to the point where there are virtually no international differences in consumer preferences. T F 59. Improved telecommunication technology has contributed to the globalization of markets. T F 60. Middle-class life styles are fundamentally different in different countries. T F 61. Electronic commerce currently accounts for no more than 10% of total U.S. retail sales. T F 62. About 90% of the total world revenue accounted for by electronic commerce in 1999 involved business-to-business transactions. T F 63. The growth of electronic commerce has been limited by the fact that it increases the costs to retailers of executing sales. T F 64. Retail firms that have developed electronic commerce distribution channels typically have not maintained their traditional retail outlets. The ability of consumers to do comparison shopping on the Internet is likely to put Multiple Choice Questions 1. Which of the following is not a determinant of a consumer's demand for a commodity? A. B. C. D. 2. Income Population Prices of related goods Tastes

The law of demand refers to the A. inverse relationship between the price of a commodity and the quantity demanded of the commodity per time period. B. direct relationship between the desire a consumer has for a commodity and the amount of the commodity that the consumer demands. C. inverse relationship between a consumer's income and the amount of a commodity that the consumer demands. D. direct relationship between population and the market demand for a commodity.

3.

If the price of a good increases, then A. B. C. D. the demand for complementary goods will increase. the demand for the good will increase. the demand for substitute goods will increase. the demand for the good will decrease. normal goods will increase. inferior goods will increase. substitute goods will increase. complementary goods will increase.

4.

If consumer income declines, then the demand for A. B. C. D.

5.

The quantity demanded of a commodity will decrease if A. B. C. D. the price of a complement increases. income rises and the good is inferior. the price of a substitute decreases. the commodity's price increases. The price of a substitute decreases Income falls and the good is normal The price of a complement increases The commodity's price increases

6.

Which of the following will not decrease the demand for a commodity? A. B. C. D.

7.

Demand curves have a negative slope because A. firms tend to produce less of a good that is more costly to produce. B. the substitution effect always leads consumers to substitute higher quality goods for lower quality goods. C. the substitution effect always causes consumers try to substitute away from the consumption of a commodity when the commodity's price rises. D. an increase in price reduces real income and the income effect always causes consumers to reduce consumption of a commodity when income falls.

8.

If a good is normal, then a decrease in price will cause a substitution effect that is A. B. C. D. positive and an income effect that is positive. positive and an income effect that is negative. negative and an income effect that is positive. negative and an income effect that is negative.

9.

If the consumption decisions of individual consumers are independent, then A. the market demand curve will be flatter because of the bandwagon effect. B. the market demand curve will be steeper because of the snob effect. C. the market demand curve will not be equal to the horizontal summation of the demand curves of individual consumers. D. none of the above is correct.

10.

If the demand curve for a firm's output is perfectly elastic, then the firm is A. B. C. D. a monopolist. perfectly competitive. an oligopolist. monopolistically competitive. are either monopolists or oligopolists. are either monopolistically competitive or perfectly competitive. are either monopolistically competitive or oligopolists. are either perfectly competitive or oligopolists.

11.

Firms in an industry that produces a differentiated product A. B. C. D.

12.

The type of industry organization that is characterized by recognized interdependence and non-price competition among firms is called A. B. C. D. monopoly. perfect competition. oligopoly. monopolistic competition.

13.

The demand by a firm for inputs used in the production of a commodity that the firm offers for sale A. B. C. D. is called a derived demand. is directly related to the demand for the commodity. is negatively sloped. is all of the above.

14.

If the price elasticity of demand for a firm's output is elastic, then the firm's marginal revenue is A. B. C. D. positive, and an increase in price will cause total revenue to increase. positive, and an increase in price will cause total revenue to decrease. negative, and an increase in price will cause total revenue to increase. negative, and an increase in price will cause total revenue to decrease. the demand for the firm's carrots must be horizontal. the demand by individual consumers for carrots must be horizontal. the market demand for carrots must be horizontal. all of the above must be true. the price elasticity of demand for its output is unitary. marginal revenue is equal to zero. quantity demanded has decreased by 10%. all of the above are correct.

15.

If a firm that produces carrots operates in a perfectly competitive industry, then A. B. C. D.

16.

If a firm raises its price by 10% and total revenue remains constant, then A. B. C. D.

17.

The price elasticity of demand for a good will tend to be more elastic if A. the good is broadly defined (e.g., the demand for food as opposed to the demand for carrots). B. the good has relatively few substitutes. C. a long period of time is required to fully adjust to a price change in the good. D. none of the above are true.

18.

If a good is inferior, then A. B. C. D. the income elasticity of demand will be negative. the income elasticity of demand will be zero. the income elasticity of demand will be positive. a decrease in income will cause demand to decrease.

19.

If two goods are complements, then A. B. C. D. the cross-price elasticity of demand will be negative. the cross-price elasticity of demand will be zero. the cross-price elasticity of demand will be positive. an increase in the price of one good will decrease the demand for the other.

20.

The cross-price elasticity of demand between two differentiated goods produced by firms in the same industry will be A. B. C. D. negative and large. negative and small. positive and large. positive and small.

21.

Which of the following is not viewed by firms as an advantage of electronic commerce over traditional commerce? A. B. C. D. Consumers have the ability to easily compare product prices. The cost of executing a transaction is much lower. Firms have the ability to gather useful information about buyers. Firms can reduce their reaction times to changing market conditions and increase their sales reach. travel services. books. computer products. All of the above. pressure on profit margins at the retail level.

22.

Electronic commerce is a significant market channel for the sale of

A. B. C. D. T F 65.

True-False Answers
1 2 3 4 5 6 7 8 9 10 11 12 13 F T T T F T F T F T T F F 14 15 16 17 18 19 20 21 22 23 24 25 26 T T F F T T F F T F F T F 27 28 29 30 31 32 33 34 35 36 37 38 39 F T F T F F T F T T T F F 40 41 42 43 44 45 46 47 48 49 50 51 52 T T F T T T F F T T F F F 53 54 55 56 57 58 59 60 61 62 63 64 65 T T T F F F T F F T F F T

Multiple Choice Answers

1 2 3 4 5

B A C B D

6 7 8 9 10

D C A D B

11 12 13 14 15

C C D B A

16 17 18 19 20

D D A A C

21 22

A D