Final Exam in Microeconomics

December 7, 2009

1) Economics is the study of:

A) How to invest in the stock market

B) How society uses limited resources

C) The role of money in markets

D) How government officials decide which goods and services are produced

Answer is B

2) Normative economics:

A) Is the focus of most modern economic reasoning

B) Answers the question “What ought to be”

C) Predicts the consequences of alternative actions

D) Answers the question, “What is”

Answer is B

3) Which of the following is a question answered with positive economic analysis?

A) Should the college offer free parking for students?

B) Should the college provide more financial aid assistance?

C) If the college increased tuition, will class sizes decline?

D) Should the college cut tuition to stimulate enrollments?

Answer is C

4) Deciding if a power company will generate electricity from wind power or coal answers the economic question of:

A) Who consumes the products produced

B) What products will be produced

C) Where will the products be consumed

D) How will the products be produced

Answer is D

5) A small change in a variable is:

A) An average change

B) A ceteris paribus change

C) An efficient change

D) A marginal change

Answer is D

6) Ceteris paribus means “Let the buyer beware”

A) True

B) False

Answer is D

7) If the vertical variable decreases by 20 and the horizontal variable increases by 10, the slope of the line is:

A) -2

B) 10

C) -1/2

D) 20

Answer is A

8) Steven lives in a big city where there is a shortage of parking. He has a parking spot in his driveway where he parks his car. Which of the following statements is most correct?

A) Steven has a lower opportunity cost of owning a car than his neighbor, who must rent a parking spot.

B) The opportunity cost of using the spot is zero, because Steven owns the house.

C) The opportunity cost of using the parking spot is the price he could charge someone else for using the spot.

D) The opportunity cost depends on how much Steven’s mortgage payment is

Answer is C

9) When applying the marginal principle, you should pick the level at which the activity’s marginal benefit equals its marginal cost.

A) True

B) False

Answer is A

10) According to the principle of diminishing returns, an additional worker decreases total output.

A) True

B) False

Answer is B

11) Typically as the price of the product rises, the quantity supplied increases:

A) True

B) False

Answer is A

12) What happens if the price of the product is below the equilibrium price?

A) The buyers will stop purchasing a “cheap” product

B) The producer will lower the price to sell more product

C) There will be excess demand for the product

D) There will be a surplus of the product

Answer is C

13) When the price of apples goes up:

A) The demand for apples will decrease, ceteris paribus

B) The demand for apples will decrease, ceteris paribus

C) The quantity demanded for apples decreases, ceteris paribus

D) The quantity demanded for apples will increase, ceteris paribus

Answer is C

14) A normal good is defined as a good for which demand decreases when:

A) The price increases

B) Income increases

C) The price decreases

D) Income decreases

Answer is D

15) The concept of elasticity applies to:

A) Supply only

B) Demand only

C) Neither supply nor demand

D) Both supply and demand

Answer is D

16) At a price of $20, a store can sell 24 picture frames a day. If the price falls to $18, the store can sell 36 picture frames a day. Using the initial-value method, the price elasticity of demand is:

A) 0.2

B) 12.0

C) 5.0

D) 2

Answer is C

17) If the price elasticity of demand for tires is 0.8, the demand is inelastic.

A) True

B) False

Answer is A

18) A perfectly elastic demand curve is a horizontal line.

A) True

B) False

Answer is A

19) An increase is supply caused no change in the equilibrium quantity bought and sold. Thus demand must be:

A) Perfectly inelastic

B) Horizontal

C) Elastic

D) Unitary elastic

Answer is A

20) The XYZ store knows that the price elasticity of demand for X is 2.0. If the price to increase by 10%:

A) Quantity demanded of X would rise by 20%

B) Quantity demanded of X would fall by 20%

C) Quantity demanded of X would rise by 5%

D) Quantity demanded of X would fall by 5%

Answer is B

21) If the price of citrus rose and the revenues from citrus production increase, we know that the price elasticity of demand for citrus is:

A) Greater than one

B) Less than one

C) Equal to one

D) Equal to zero

Answer is B

22) The price elasticity of demand is constant along a downward-sloping linear demand curve.

A) True

B) False

Answer is B

movies

Quantity Total Utility

1 50

2 80

3 100

4 110

5 116

6 121

7 123

23) Referring to the above table, the marginal utility of the fifth movie is:

A) zero

B) 12

C) 116

D) 6

Answer is D

Books

24) Which of the following preference rankings is not consistent with figure displayed above?

A) B is preferred to A.

B) C is preferred to B.

C) G is preferred to F.

D) E is preferred to D.

Answer: C

25) The period of time when a firm is able to change all of inputs, or factors of production, is called the:

A) Economic term

B) Short run

C) Accounting term

D) Long run

Answer is D

26) The short run can be defined as any period of time:

A) Less than one year

B) In which some inputs are fixed

C) In which some inputs are variable

D) In which price is fixed

Answer is B

27) Accounting costs include explicit and implicit costs.

A) True

B) False

Answer is B

_________________________________________

Number of Workers Total Output

1 8

2 20

3 35

4 45

5 52

6 57

7 60

28) Referring to the table above, if the firm hires a seventh worker, then:

A) Marginal product is negative

B) Marginal product is less than one

C) Marginal product is 60

D) Marginal product equals 3

Answer is D

29) Again referring to the table above, if four workers are hired:

A) Diminishing marginal returns have started

B) Marginal product equals 5

C) Total product is maximized

D) All of the above

Answer is A

30) Fixed cost is equal to:

A) Total cost plus variable cost

B) Variable cost minus total cost

C) Total cost divided by output

D) Total cost minus variable cost

Answer is D

Workers per day Pizza per day Fixed cost in $ per day Variable cost in $ per day

0 0 400 0

1 25 400 200

2 75 400 350

3 115 400 450

4 145 400 600

5 170 400 800

31) Referring to the table above, when the second worker is hired, the marginal cost per pizza is equal to:

A) $3

B) $75

C) $50

D) $150

Answer is A

32) Again referring to the table above, the total average cost of producing 25 pizzas a day is:

A) $600

B) $8

C) $200

D) $24

Answer is D

33) Again referring to the table above, assuming 5 workers per day, the total cost of producing pizzas per day is:

A) $170

B) $400

C) $800

D) $1200

Answer is D

34) Which of the following is a characteristic of perfect competition?:

A) A small number of large firms

B) Homogeneous products

C) Barriers to entry

D) All of the above

Answer is B

35) In the short run, the marginal cost of the first unit of output is $20, the marginal cost of producing the second unit of output is $16, and the marginal cost of producing the third unit of output is $12. The firm’s total variable cost of producing three units of output is:

A) $12.

B) $16.

C) $20.

D) $48.

Answer: D

36) The figure above shows a firm's marginal cost, average total cost, and average variable cost curves. At Q =100, the average fixed cost is:

A) $30.

B) $40.

C) $50.

D) $60.

Answer is A

37) A perfectly competitive firm can:

A) affect the market price for its good.

B) sell as much as it can produce at the market price.

C) prevent entry of other firms into their market.

D) collude with its competitors to set prices.

Answer: B

38) Figure 9.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $22, the firm's profit maximizing output level is:

A) 500.

B) 650.

C) 900.

D) 1,200.

Answer: B

39) If a firm is in the long run it will not suffer from diminishing returns:

A) True

B) False

Answer: A

40) Total revenue minus total cost is equal to:

A) The rate of return

B) Marginal revenue

C) Profit

D) Net cost

Answer: C

41) The marginal revenue curve for a perfectly competitive firm will be downward sloping.

A) True

B) False

Answer: B

42) The long run supply curve for an increasing cost industry is downward sloping.

A) True.

B) False

Answer: B

Output (Q) Total Fixed Cost Total Variable Cost

0 20 0

1 20 5

2 20 7

3 20 10

4 20 15

5 20 21

Table 9.1

43) Table 9.1 shows the cost structure of a firm in a perfectly competitive market. If the market

price is $3,

A) the firm suffers a loss and is better off shutting down.

B) the firm suffers a loss but is better off producing the output level where MR=MC.

C) the market price is greater than the minimum average variable cost.

D) none of the above

Answer: A

44) In short-run equilibrium for a competitive firm economic profits:

A) will be positive.

B) will be negative.

C) will be zero.

D) may be positive, negative, or zero.

Answer: D

45) Figure 11.1 shows a monopolistically competitive firm's marginal cost curve and the demand

and marginal revenue curves it faces. The marginal revenue from selling the fourth unit of

output is:

A) $4.

B) $6.

C) $12.

D) none of the above

Answer: B

46) A profit maximizing monopolist will produce an output level at which:

A) marginal revenue is zero

B) marginal cost is minimized

C) price equals marginal cost

D) marginal revenue equals marginal cost

Answer: D

47) The firm in figure 10.3 will produce:

A) Q1.

B) Q2.

C) Q3

D) Q4

Answer: B

48) From society’s point of view, a monopolist produces too little because price :

A) is less than marginal cost

B) is less than average cost

C) exceeds average cost

D) exceeds marginal cost

Answer: D

49) The government does not have legal authority to break up monopolies into smaller companies.

A) True

B) False

Answer: B

50) Which of the following is an example of price discrimination?

A) Firm A sells its output for less than Firm B

B) Firm C doubles the price of its output given a large increase in market demand

C) Firm D is the only seller of a product

D) Firm E charges students 50% less than non-students

Answer: D

51) Which of the following is shared by both monopolistically competitive markets and perfectly competitive markets?

A) high barriers to entry

B) identical products across sellers

C) large number of sellers

D) firms face downward sloping demand curves

Answer: C

52) In some monopolistically competitive markets, products are differentiated by location.

A) True

B) False

Answer: A

Firm Market Share (%)

1 40

2 30

3 12

4 10

5 5

6 3

Table 12.1

53) The three-firm concentration ratio for the market depicted in Table 12.1 is:

A) 82%

B) 40%

C) 10%

D) 92%

Answer: A

54) The big advantage to consumers of product differentiation is that it :

A) allows for a large number of firms

B) provides variety

C) prevents monopoly

D) improves technology

Answer: B

55) A market in which there are only a few firms and each is able to influence the market price is termed:

A) perfect competition

B) monopolistic competition

C) oligopoly

D) monopoly

Answer: C

56) A dominant strategy is one that is the best choice regardless of other firms decisions.

A) True

B) False

Answer: A

57) Low price guarantee mean lower prices for consumers.

A) True

B) False

Answer: B

58) In a regulated natural monopoly, the government will try to set the price so that it is equal to :

A) marginal revenue

B) marginal cost

C) average total cost

D) average variable cost

Answer: C

59) The practice of requiring a consumer to purchase two or more products together, rather than separately is called:

A) free riding

B) cartelling

C) price discrimination

D) tie-in sales

Answer: D

60) If the regulators set the natural monopoly’s price below average total costs the firm will earn positive economic profits.

A) True

B) False

Answer: B

61) There exists asymmetric information in a market:

A) if both sides of the market have the same information about the good.

B) only if buyers have better information about the good than sellers.

C) only if sellers have better information about the good than buyers.

D) if either buyers or sellers have better information than the other group.

Answer: D

62) Which one of the following is an example of asymmetric information?

A) A supermarket repackages packages of stale meat and sells them.

B) A homeowner knowingly sells a house that has hidden electrical problems.

C) A company hires an employee who has an addiction to sleeping pills.

D) all of the above

Answer: D

Markets Plums (high quality)

Supplied

Lemons (low quality)

Supplied

% Buyers Believe are

Lemons (low quality) 1

2

3

5

10

15

25

30

15

70%

25%

50%

Table 14.3

63) Table 14.3 represents 3 markets for used stereos. Which of the markets in Table 15.3 are in equilibrium?

A) 1 only

B) 2 only

C) 2 and 3

D) none of the above

Answer: C

64) The marginal cost of a unit of labor in a perfectly competitive labor market is equal to:

A) the average marginal revenue product of all workers hired

B) the market wage rate

C) the price of the output

D) the average variable cost of production

Answer: B

65) One reason that college graduates earn higher wages than non -graduates is because college graduates:

A) acquire additional skills to allow them to work in more industries than non-graduates.

B) always work in more dangerous jobs than non-graduates.

C) are always more intelligent than non-graduates.

D) are less equipped to deal with technological change, as their skills are technology -specific.

Answer: A

Table 17.1

Number of workers Units of output

2 100

3 180

4 230

5 260

6 285

7 300

8 310

66) Refer to Table 17.1. The marginal product of the third unit of labor is:

A) 30.

B) 80.

C) 60.

D) 160.

Answer: B

67) Refer to Table 17.1. If the price of output is $10 per unit, the marginal revenue product of the fourth unit of labor is:

A) $50.

B) $60.

C) $500.

D) $600.

Answer: C

68) Refer to Table 17.1. If the price of output is $2 per unit and the wage rate is $60, ____________________________________________________________________ workers should be hired.

A) five

B) six

C) seven

D) eight

Answer: A

69) Which of the following is not an example of moral hazard?

A) People take poor care of their health because they have health insurance.

B) People drive recklessly because they have medical insurance.

C) People don't lock their doors because they have theft insurance.

D) All of the above are examples of moral hazard.

Answer: D

70) Repair guarantees are a sign the seller thinks they have a lemon.

A) True

B) False

Answer: FALSE