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# Financial Markets Test with Multiple Choice Questions Essay

Class Test 1 (Sample Items)

Choose the most correct response. Record your answer on the mark sense sheet provided. Each answer is worth ½ mark.

QUESTION 1

All else equal, a binding price floor will cause less of a surplus if:

(a)both supply and demand are inelastic
(b)both supply and demand are elastic
(c)supply is elastic, but demand is inelastic
(d)supply is inelastic, but demand is elastic

QUESTION 2

The figure shows the market for books before and after an excise tax is introduced. The tax on books is ________, buyers pay ______ of tax per book, and the governments tax revenue is ________ a week.

(a) \$0.40 a book; \$0.40; \$4
(b) \$1.20 a book; \$0.80; \$128
(c) \$0.80 a book; \$1.20; \$12
(d) \$1.20 a book; \$0.80; \$12

QUESTION 3

If the minimum wage is set below the equilibrium wage rate,

(a) a labour shortage occurs.
(b) there is no change in the quantity of labour employed.
(c) the short-run labour supply curve becomes more elastic.
(d) a labour surplus occurs.

QUESTION 4

If honey is measured on the vertical axis, and jam on the horizontal axis, the marginal rate of substitution:

(a) is the rate at which the consumer has to give up honey if more jam is to be bought, given their relative prices. (b) is the rate at which the consumer has to give up jam if more honey is to be bought, given their relative prices. (c) is the rate at which the consumer is willing to give up honey in order to get more jam, and be as satisfied as he or she was before. (d) is the rate at which the consumer is willing to give up honey in order to get more jam and be better off than he or she was before.

QUESTION 5

At the best affordable point:

(a) the budget line intersects an indifference curve.
(b) the marginal rate substitution of x for y is exactly equal to 1. (c) the marginal rate of substitution of x for y is equal to the relative price of x in terms of y (that is, ) (d) the difference between the marginal rate of substitution of x for y and the relative price of x is at a maximum.

QUESTION 6

Stuart, who loves seafood, says, ‘I can’t really tell the difference between Sydney rock oysters and Pacific oysters. They taste equally delicious to me; I just buy a dozen of whichever is cheaper every week.’ In terms of marginal utility theory, Stuart thinks:

(a) the marginal utility per dollar spent on Sydney rock oysters is equal to the marginal utility per dollar spent on Pacific oysters. (b) the marginal utility he gets from Sydney rock oysters is greater than that from Pacific oysters, but Pacific oysters are cheaper. (c) the marginal utility he gets from Pacific oysters is greater than that from Sydney rock oysters, but Sydney rock oysters are cheaper. (d) the marginal utility he gets from Sydney rock oysters is equal to that from Pacific oysters, and so whichever oyster has a lower price gives him a higher marginal utility per dollar spent.

QUESTION 7

According to the marginal utility theory of consumer choice, rational consumers will spend their money with the aim of:

(a) maximizing the total utility they get from their limited income. (b) maximizing the marginal utility they get from each good. (c) equalizing the marginal utility they get from different goods. (d) maximizing the amount they save out of their limited income.

QUESTION 8

A firm’s production function refers to:

(a) the maximum quantity of output that it can produce within a given period. (b) the maximum revenue it can earn from various levels of output. (c) the maximum output that can be produced from various quantities of inputs. (d) the minimum cost of producing various levels of output.

QUESTION 9

When marginal cost is rising, average total cost:

(a) will necessarily be rising.

(b) will necessarily be falling.

(c) may be rising or falling, depending on whether marginal cost is greater or less than average total cost.

(d) may be rising or falling, depending on whether marginal cost is greater or less than average variable cost.

QUESTION 10

Which of the following reflects the law of diminishing marginal rate of substitution? As we continually increase labour one unit at a time,

(a) the addition to output will become larger, if capital is held constant. (b) the addition to output will become smaller, if capital is held constant. (c) larger reductions in capital will be required to keep output constant. (d) smaller reductions in capital will be required to keep output constant. (e) larger increases in labour will be required to keep output constant.

QUESTION 11

The least cost technique of producing a given output occurs where the marginal rate of substitution of labour for capital equals the

(a) ratio of the quantity of labour used relative to the quantity of capital used.

(b) ratio of the price of labour to the price of capital.

(c) minimum point on the isoquant line.

(d) marginal cost of capital

(e) ratio of the marginal cost of capital to the marginal cost of labour.

QUESTION 12

A perfectly competitive firm’s supply curve is the upward-sloping part of its

(a) average product curve, at all points above the point of minimum average variable cost. (b) marginal cost curve, at all points above the point of minimum average fixed cost. (c) marginal revenue curve, at all points above the point of minimum average revenue. (d) marginal revenue curve, at all points above the point of minimum average total cost. (e) marginal cost curve, at all points above the point of minimum average variable cost.

QUESTION 13

For the monopolist facing a downward sloping demand, the marginal revenue never exceeds the price because

(a) the producers of substitutes keep the price low.
(b) the monopolist must lower the price in order to sell more during any given period of time. (c) the monopoly will be a large corporation with high fixed costs. (d) the monopoly must accept the marginal revenue set by the market as a whole. (e) the monopoly has low marginal cost relative to a competitive firm.

QUESTION 14

The table gives the demand schedule for water bottled by Wanda’s Healthy Waters, a single-price monopoly. If the marginal cost is a constant \$4 a bottle, Wanda’s will produce _______ a day and charge ____ a bottle.

(a) 3 bottles; \$7
(b) 4 bottles; \$6
(c) 5 bottles; \$5
(d) 1 bottle; \$9

QUESTION 15

The table below gives the demand and supply schedule for biscuits. The government now levies a \$3 tax on biscuit. As a result, the price of a packet of biscuits will increase to ____ and the tax revenue collected is ____.

(a) \$12; \$160 a week
(b) \$12; \$300 a week
(c) \$13; \$160 a week
(d) \$13; \$240 a week

Price
(\$ per packet)
Quantity demanded (packets / week)
Quantity supplied
(packets / week)

QUESTION 16

Excess capacity in monopolistically competitive firms is described by the fact that

(a) each firm faces a demand that is perfectly elastic.

(b) each firms builds a huge plant.

(c) the existence of slightly differentiated products serving almost the same purpose causes a waste of precious natural resources.

(d) firms produce at an output that is less than the output associated with their minimum average total cost.

(e) marginal cost is too high.

QUESTION 17

When the economic profit is negative in an industry that is monopolistically competitive, then

(a) firms will enter the industry and produce better products. (b) firms will exit the industry, and the demand will increase for the products of the firms that remain. (c) firms will exit the industry, and the demand will decrease for those firms that remain in the industry. (d) firms will enter the industry and the demand will become more elastic for those firms that were originally in the industry. (e) the industry will eventually disappear.

QUESTION 18

If the electricity commission in Queensland practises perfect price discrimination:

(a) its marginal cost curve and its demand curve are identical.

(b) its marginal revenue curve and its demand curve are identical. (c) its marginal revenue curve lies below its demand curve.

(d) its marginal revenue curve lies above its demand curve.

(e) none of the above.

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