Download Microeconomics: Practice Exam B

Microeconomics: Practice Exam B
1. Which of the following industries comes closest to the economist's definition of perfect competition?
a.
b.
c.
d.
airline industry
soft drink industry
fishing industry
fast food restaurants
2. If you were to list market structures from few firms to very many firms, your ordering would be:
a.
b.
c.
d.
monopoly, oligopoly, perfect competition, monopolistic competition
monopoly, oligopoly, monopolistic competition, perfect competition
oligopoly, monopoly, monopolistic competition, perfect competition
oligopoly, monopolistic competition, perfect competition, monopoly
FIGURE 1
3. Americans choose cola over other flavors 70 percent of the time. Analysts say this is because cola's flavor is more
robust and durable. Orange soda, for example, suffers from flavor fatigue faster than cola. Also, because cola contains
caffeine, people may be addicted to the stimulant. Which of the panels in Figure 1 best illustrates this situation?
a. 1
b. 2
c. 3
d. 4
FIGURE 2
4. Libya sold more crude oil in 1985 than it sold five years earlier, but revenues were 17 percent less. Which graph is
Figure 2 is consistent with this set of facts?
a. 1
b. 2
c. 3
d. 4
5. Outside of your textbook, you are unlikely to encounter a perfect market. But if you did . . . at least you would know
what it would look like! Which of the following characteristics does not describe a perfect market?
a.
b.
c.
d.
e.
It allows buyers and sellers to meet together, with full information about supply and demand
There are no barriers to entering or leaving the market
Every buyer is matched with the supplier that can best meet his or her needs
Prices are at exactly the level that would keep supply and demand in equilibrium
Buyers and sellers incur transaction costs
6. The optimal amount of information is acquired when:
a.
b.
c.
d.
e.
marginal benefits are greater than marginal costs
the marginal utility of additional information per dollar of expenditure is less than the marginal utility of
devoting one dollar of expenditure to any other good or activity
the marginal utility of additional information per dollar of expenditure is equal to the marginal utility of
devoting one dollar of expenditure to any other good or activity
marginal costs are greater than marginal benefits
everyone has perfect information
7. The demand for a resource will become more elastic:
a.
b.
c.
d.
the more difficult it is for the resource to be replaced
if the demand for the final product becomes more elastic
if the demand for the final product becomes less elastic
if the competition in the industry decreases
8. Which of the following can serve as an entry barrier?
a.
b.
c.
d.
e.
legal restrictions
patents
control of scarce resources or inputs
economies of scale
all of the above
9. There will be a surplus of a product when:
a.
b.
c.
d.
price is below the equilibrium level
the government sets a price ceiling for the product
the demand and supply curves fail to intersect
consumers want to buy less than producers offer for sale
10. Assuming that Americans change their buying patterns in response to warnings issued by the government, if the
government releases a study that links red meat consumption to poor health, everything else remaining the same, the
price of chicken, a healthy substitute for red meat, will likely?
a. increase
b. decrease
c. stay the same
d. not enough information to answer the question
11. BAD QUESTION!!!
Number of Workers Units
1
40
2
90
3
126
4
150
5
165
6
180
12. Based on the table above, diminishing returns become evident with the addition of the:
a.
b.
c.
d.
e.
first worker
second worker
third worker
fourth worker
sixth worker
13. Firms in perfect competition are:
a.
b.
c.
d.
price takers
price makers
price leaders
price subtractors
14. If the demand for farm products is price inelastic, an increase in the harvest will cause total farm revenue to:
a.
b.
c.
d.
increase
decrease
be unchanged
either increase or decrease, depending upon what happens to supply
15. In a perfectly competitive market the price of good A is $2.00. If a firm decides to raise its price to $2.50, it will:
a.
b.
c.
d.
e.
realize an increase in profits of $.50 per unit
be able to increase the quantity sold
be unable to sell any quantity of good A that is produced
be unable to sell 25 percent of good A that is produced
experience a decrease in profits of $.50 per unit
16. Average Cost is lower in the long run than in the short run because:
a.
b.
c.
d.
prices often fall, allowing savings on purchases
inputs can be combined more efficiently in the long run
competition decreases in the long run
Average Variable Cost falls with output over all ranges of output
Figure 1
17. For a firm at equilibrium, at point A in Figure 1:
a.
b.
c.
d.
the price of labor is high relative to the price of machines
the Marginal Physical Product of labor is greater than the MPP of machines
the Marginal Physical Product of labor is less than at point B
output is higher than at point B
18. In the short run, fixed cost is to variable cost as:
a.
b.
c.
d.
e.
small is to large
unavoidable is to avoidable
important is to unimportant
diminishing returns are to scale economies
average cost is to marginal cost
19. Allie's Donuts produces about 600 dozen doughnuts per day. Due to bad weather, there is a shortage of wheat and the
price of flour has risen 20 percent. Which of the following curves does NOT shift up?
a. marginal cost
b. average total cost
c. average variable cost
d. average fixed cost
20. For which of the following pairs is the cross-elasticity negative?
a.
b.
c.
d.
e.
college/textbooks
air travel/train travel
natural gas/coal
theater tickets/movie tickets
e. structural steel/structural aluminum
Figure 2
21. According to the demand curve in Figure 2, demand is inelastic for a price change from P 1 to P2 provided that:
a.
b.
c.
d.
P 1 - P 2 = Q 1 - Q2
P 1 x Q1 < P 2 x Q2
P 1 x Q1 = P 2 x Q2
P 1 x Q1 > P 2 x Q2
22. The management of Allie's Donuts estimates that a price increase of $1 (from $3 to $4) would reduce sales from 550
dozen per day to 350 dozen per day. The price elasticity of demand for Allie's at this punt on the demand curve is
about:
a. 1.57
b. 0.64
c. 0.16
d. 0.72
23. Price ceilings likely:
a.
b.
c.
d.
result in the accumulation of surpluses
increase production as producers respond to higher consumer demand at the low ceiling price
result in the development of black markets
None of the above
Figure 3
24. If the government has stated that it will pay whatever it must to obtain 1,000 units of good X, then which demand
curve in Figure 3 is appropriate?
a. 1
b. 2
c. 3
d. 4
Figure 4
25. If there are many empty seats at the university basketball game when the price per ticket is P*, then this situation can
best be represented by which graph in Figure 4?
a. 1
b. 2
c. 3
d. 4
26. In which of the following cases does the supply and demand model predict a lower equilibrium price and a greater
equilibrium quantity?
a. Consumers learn that apples have been sprayed with a carcinogenic substance, some of which remains in the
apple juice and applesauce favored by young children
b. A new growth hormone for dairy cows dramatically increases milk production
c. A chicken virus drastically reduces the supply of eggs
d. Research discovers that oat bran reduces blood cholesterol and reduces the risk of heart disease
27. When economies of scale are present:
a.
b.
c.
d.
e.
costs per unit decline as output expands
the government feels responsible for breaking up the firm
firms always make handsome profits
costs fall as the size of the product is increased
All of the above are correct
28. When a profit-maximizing monopolist produces an output where MR < MC, the firm is:
a.
b.
c.
d.
making a profit
producing too little
breaking even
producing too much
29. A pure monopoly occurs when:
a.
b.
c.
d.
e.
all firms sell homogeneous goods
a firm produces only one good
a single firm produces a good that is similar in use to goods produced by other industries
a few firms produce a good for which other industries offer no substitutes
a single firm produces a product with no close substitutes
30. Which of the following is a unique feature of oligopoly?
a.
b.
c.
d.
mutual interdependence
advertising expenditures
product differentiation
nonprice competition
31. When a few rival groups spend money in competition for a license that grants them a monopoly for the provision of
cable TV for an area, economists label this activity:
a. perfect competition
b. oligopoly
c. monopolistic competition
d. rent seeking
e. speculation
32. In the figure above, a consumer is initially at point A. There is a price change and he moves to B. It follows that:
a.
b.
c.
d.
bananas are a normal good
bananas are an inferior good
mangos are an inferior good
the consumer is confused
33. Producers of computer software are plagued with the problem of "pirating"; that is, many people copy software from
disks legally purchased by others. The industry estimates that for each legal copy of the program, there are two pirated
copies in use. The industry wants strict laws for the enforcement of its "intellectual property rights," but enforcement
is obviously very difficult. Economists call this problem:
a. depletability
b. externality
c. durability
d. nonexcludability
e. all of the above
34. Which of the following characteristics of perfect competition does not apply to monopolistic competition?
a.
b.
c.
d.
free entry and exit
homogeneous products
numerous participants
perfect information
35. The local public transportation system recently raised rates and was surprised to be faced with declining revenues.
What can be accurately concluded?
a. The demand for public transportation is elastic
b. The demand curve for public transportation is positively sloped
c. The cross elasticity of demand for public transportation is less than 1
d. The income elasticity of demand for public transportation is greater than 1
e. The demand for public transportation is inelastic
Table 1
Q
8
9
10
11
12
TR
$95
$102
$110
$112
. $115
TC
$90
$93
$100
$105
$110
36. In Table 1, the profit maximizing output is:
a.
b.
c.
d.
9
10
11
12
37. In Table 1, marginal revenue at the profit-maximizing output is how much?
a.
b.
c.
d.
$5
$7
$8
$110
38. Constant returns to scale occur when:
a.
b.
c.
d.
e.
an increase in all resources causes no change in output
the long-run average-cost curve is declining
the marginal-cost curve is declining
an increase in all resources results in an exactly proportionate increase in output
the marginal-cost curve lies below the average-cost curve
39. Using the graph in the figure above, the profit-maximizing monopolist will charge a price:
a.
b.
c.
d.
e.
of more than $3
of $3
between $2 and $3
of $2
less than $2
Annual Pretax Income Tax Policy Alpha Tax Policy Beta Tax Policy Gamma Tax Policy Delta
$0
$0
$0
$0
$1,000
$10,000
$1,000
$1,000
$1,000
$1,000
$50,000
$5,000
$6,000
$4,000
$1,000
$100,000
$10,000
$15,000
$6,000
$1,000
40. Which tax policy described above has a constant rate?
a.
b.
c.
d.
e.
Constant rates are not reflected in the figures above
Tax policy Beta
Tax policy Gamma
Tax policy Alpha
Tax policy Delta
41. In the figure above, S and D represent the current supply and demand of an exhaustible (nonrenewable) resource.
Other things being equal, if current deposits are used up so that new amounts of the resource must come from more
expensive sources, then:
a. demand will shift to the right
b. supply will shift to the left
c. demand will shift to the left and quantity will decline
d. supply will shift to the right and quantity will increase
e. equilibrium quantity will remain unchanged but the price will increase
42. A decline in the price of electricity shifts to the left the demand curve for:
a.
b.
c.
kerosene heaters
light bulbs
electric dryers
d.
e.
television sets
both b and c
43. Due to increased imports of foreign wines, US wine makers allowed a larger number of grapes to dry on the vine; that
is, to become raisins. The resulting fall in raisin prices caused sales of raisins to increase 26% to 300,000 tons. One
can deduce from this that the demand for raisins:
a. is unit elastic
b. is elastic in the relevant range
c. is inelastic in the relevant range
d. may be inelastic or elastic; it cannot be determined from information given
44. NOTE: The point where D1 and MR coincide on the vertical axis is “point C.” Assume that both the monopolistic and
the perfectly competitive firms shown in the figure above are in long-run equilibrium. D1 and D2 are their respective
demand curves. Considering the monopolistic firm, consumer surplus is the area:
a. DFE.
b. IDEH
c. BDEA
d. ACE
e. BCD
45. Alf and Bob have been caught red-handed stealing a car. Facing airtight cases, they will receive a sentence of two
years each for their crime. During his interviews with the two prisoners, the district attorney begins to suspect that he
has stumbled on the two people who were responsible for a multimillion dollar bank robbery some months earlier. The
district attorney also knows, however, that this is just a suspicion. He has no evidence on which he can convict them
of the greater crime unless he can get each of them to confess. The district attorney comes up with the following idea.
He places the prisoners in separate rooms so that they cannot communicate with each other. Each prisoner is told that
he is suspected of having carried out the bank robbery and that if he and his accomplice both confess to that crime,
each will receive sentences of three years. Each is also told that if he alone confesses and his accomplice does not, he
will receive an even shorter sentence of one year while his accomplice will receive a ten-year sentence. The prisoners
know that if neither of them confesses, then they will only be tried for and convicted of the lesser offense of car theft,
which carries a two-year prison term.
The district attorney didn't take economics classes as an undergraduate, so he never learned about the "prisoner's
dilemma" as it refers to a "Nash equilibrium," where two players, each with two choices, takes the best possible action
given the other player's action.
Here are possible outcomes:
(1) Neither player confesses.
(2) Both players confess.
(3) Alf confesses, but Bob does not.
(4) Bob confesses, but Alf does not.
Which of the following describes the Nash equilibrium in this scenario:
a. (1)
b. (2)
c. either (1) or (2)
d. either (3) or (4)
46. Suppose that many years of experience (which improves pitching ability and enhances popularity) earns one veteran
baseball pitcher substantially more income than a rookie. The difference in income can be attributed to:
a. luck.
b. age.
c. an increase in human capital.
d. discrimination.
e. endowments.
47. External costs can arise when:
a.
b.
c.
d.
demand is too low.
firms use resources without having to pay for them.
the market price of a product is greater than is necessary for an optimal allocation of resources.
market supply is too low
48. If the price of product X falls and this causes the demand for product Y to shift to the right, then we can conclude:
a.
b.
c.
d.
e.
X and Y are complements.
X and Y are bads.
X and Y are substitutes.
X is a bad and Y is a good.
X and Y are goods.
49. The supply curve of books (which are produced using paper made from trees) will shift to the left in response to:
a.
b.
c.
d.
Decline in college tuition
An increase in home building
An increase in the supply of lumberjacks
An end to government regulations that limit timber harvesting in national forests
50. The factor that leads to zero economic profits for monopolistically competitive firms in the long run is:
a.
b.
c.
d.
e.
excess capacity.
price wars among firms.
easy entry.
excessive advertising.
collusive behavior.
Good A Good B
Choice 1:
100
0
Choice 2:
90
20
Choice 3:
70
40
Choice 4:
40
60
Choice 5:
0
80
51. According to the Production Possibilities Schedule above, which of the following statements is true?
a.
b.
c.
d.
e.
Moving from choice 2 to choice 3, the opportunity cost of 20 more B is 20 units of A.
There are increasing opportunity costs associated with getting more
Moving from choice 3 to choice 4, the opportunity cost of 20 more B is 30 units of A.
Moving from choice 1 to choice 2, the opportunity cost of 20 more B is 10 units of A
All of these are true.
52. If a change in price causes no response at all in the quantity of the product demanded, then demand for the product is:
a.
b.
c.
d.
e.
elastic.
infinitely elastic.
relatively inelastic.
perfectly inelastic.
unitary elastic.
53. In 1968, in England, economists criticized the system of procuring blood supply only through voluntary donation and
distribution to hospitals at no charge. The substance of this criticism was that:
a. the gift of blood is a human gift, a gesture beyond price.
b. poor people are encouraged to give too much blood when they can sell it.
c. both demand and supply are price elastic, so the zero price on blood encourages inefficient use and
insufficient supplies.
d. education and moral exhortation are sufficient to produce an adequate supply of blood.
54. Which of the following is most likely to affect the supply of labor in any particular industry?
a.
b.
c.
d.
the size of the available working population.
the nonmonetary attractiveness of the job.
the amount of ability and training necessary to enter the job.
all of the above.
55. A ceiling on interest rates is likely lead to:
a.
b.
c.
d.
an increase in lending activity.
more rapid capital formation by business.
increases in hiring of labor.
a shortage of loanable funds.
56. Which of the following is LEAST like a monopoly?
a.
b.
c.
d.
e.
Legos.
The U.S. Postal Service.
A cable TV company.
An electric utility company.
The Federal Reserve.
57. A household is defined as:
a.
b.
c.
d.
e.
families of two or more people.
employed people and their dependents.
one or more persons who occupy a unit of housing
individuals who live in single family homes.
families that include single people.
58. If the price elasticity of demand for US automobiles is higher in Europe than it is in the US and transport costs are
zero, we might expect:
a. the same price for autos in the United States and Europe.
b. a higher price for autos in the United States than in Europe.
c. a less profitable price for autos in the United States than in Europe
d. a decrease in real GDP.
e. a price in Europe that is less than the costs of producing the car in Europe
59. In war, a government will often draft men, most of whom would otherwise be employed. An economist (not an
accountant), compiling the real cost of war, would be sure to include the:
a. value of the civilian goods no longer produced by the soldiers.
b. cost of feeding and clothing the soldiers.
c. dollar cost of the payroll.
d. higher prices of civilian goods due to wartime shortages.
e. cost of transporting the soldiers to combat.
60. A firm should purchase an extra machine if the rate of return on the machine is:
a.
b.
c.
d.
e.
less than the interest rate.
less than or equal to the interest rate.
greater than or equal to the interest rate.
greater than the expected profit.
exceeds its derived demand.
61. The economic justification for public subsidies to university research is based on:
a.
b.
c.
d.
e.
the value of this research to the university.
the higher salaries graduate students earn as a result of working with professors involved in research.
the external benefits of research and development, in particular, higher rates of economic growth.
higher income earned by those who provide services to university researchers (equipment, supplies, etc.).
the absence of consumer marketability.
Table 1
Quantity
2
4
6
8
10
AFC
$2.50
1.25
0.83
0.63
0.50
AVC
$18
14
18
30
50
MC
$10
14
42
94
170
62. Table 1 shows the short-run cost curves of a perfectly competitive firm. If the market price of its output is $50, the
firm will produce _____ units and earn a total profit of:
a. 8: $48
b. 8; $154
c. 8; $245
d. 6; $48
e. 6; $187
Use the following table to answer Questions 63-64
Quantity Sold
1
2
3
4
5
Price Per Unit
$16
15
14
13
12
Marginal Revenue
$16
14
12
10
8
Marginal Cost
$4
6
8
10
12
63. The price the monopoly will charge is:
a.
b.
c.
d.
e.
$13
$17
$12
$16
$15
64. If this were a competitive industry, how many units would be sold?
a.
b.
c.
d.
e.
1 unit.
2 units.
3 units.
4 units.
5 units.
65. In which of the following statements are the terms demand, supply, quantity demanded and quantity supplied used
correctly?
a. Changes in demand and supply cause changes in the equilibrium price.
b. If the demand rises, supply rises.
c. Oranges are cheaper in Florida and therefore the demand is greater in Florida.
d. When the quantity demanded exceeds supply, the equilibrium price will rise.
e. None of these choices are correct.
66. If a 10% increase in the price of good Y brings forth a 25% increase in the quantity demanded of good x, then the
cross-price elasticity of demand is equal to ___ and good Y and good X are ____:
a. 2.5; substitutes.
b. 0.4; substitutes.
c. unit-elastic; not related.
d. 0.4; complements.
e. 2.5; complements.
67. BAD QUESTION!!!
68. Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profitmaximizing firm's total fixed cost is $600 and its total variable cost is $400. If the price of the product is $5 per unit,
the firm should produce:
a. zero units of output.
b. less than 100 units of output.
c. 100 units of output.
d. more than 100 units of output.
e. an indeterminate amount, given the information.
69. As long as marginal physical product is greater than average physical product:
a.
b.
c.
d.
e.
marginal physical product is increasing.
average physical product is decreasing.
average physical product is increasing.
total product is constant.
all these answers apply to the first stage of production.
70. The demand curve for loanable funds is downward sloping because:
a.
b.
c.
d.
e.
people save more at higher interest rates.
more investments are profitable at low interest rates than at high interest rates.
future income is more valuable now at higher interest rates than at low interest rates.
usury laws increase the quantity of funds demanded at low interest rates but do not affect the quantity of
funds demanded at high interest rates.
both a and b
Microeconomics: Practice Exam B Answers
1. C
2. B
3. A
4. C
5. E
6. C
7. B
8. E
9. D
10. A
11. BAD QUESTION!!!
12. C
13. A
14. B
15. C
16. B
17. C
18. B
19. D
46. C
20. A
47. B
21. D
48. B
22. A
23. C
49. B
24. B
50. C
25. B
51. E
26. B
52. D
27. A
53. C
28. D
54. D
29. E
55. D
30. A
56. A
31. D
57. C
32. B
33. D
58. B
34. B
59. A
35. A
60. C
36. B
61. C
37. C
62. E
38. D
63. A
39. A
64. E
40. D
65. A
41. B
66. A
42. A
67. BAD QUESTION!!!
43. D
68. C
44. E
69. C
45. B
70. B