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Economics 1A: Revision Exercise 1. The figure below represents a monopolistically competitive firm in short-run equilibrium. Use this figure to answer the question. What is the price charged by the monopolistic competitor? a) b) c) d) P1 P2 P3 P4 The price should be where the marginal revenue is equal to the marginal cost which is at Q2 – and the price at Q2 is P2. 2. Under monopolistic competition, long-run economic profits tend toward zero because of a) product differentiation. b) the market being shared between a greater number of firms. c) excess capacity. d) the downward sloping demand curve facing each firm. 3.Which of the following is true for perfect competition, monopolistic competition, and single price monopoly? a) b) c) d) Homogeneous product Zero long-run economic profits Short-run profit-maximising output where MC = MR Easy entry and exit 4. Which one of the following is not a feature of monopoly? a) Information is incomplete. b) Entry is completely blocked. c) The demand for the product of the firm is the same as the market demand curve. d) Collusion is irrelevant. 5. Firms maximise profit where: a) marginal revenue is greater than marginal cost. b) marginal revenue is equal to marginal cost. c) marginal revenue is less than marginal cost. d) average revenue is greater than average cost. 6. In a perfectly competitive market the market price is R12. Use the cost information given in the table below to answer the question that follows Quantity TFC TVC 1 12 35 2 12 70 3 12 105 6 12 140 8 12 175 This firm should... a) b) c) d) break even. shut down. expand production. minimise losses by producing 1 widget. Total Revenue = Price x Quantity 7. Under perfect competition, if the price of a firm’s product is lower than average variable cost, the firm: a) is earning an economic profit. b) is earning normal profit only. c) should increase output. d) should shut down. 8. A perfectly competitive firm: a) has full control over the price of its product. b) supplies a heterogeneous (differentiated) product. c) cannot suffer economic losses in the short run. d) is a price taker. 9) Use the following data to answer the question: What is the average cost of producing 4 units? a) b) c) d) 100 700 175 200 Average Cost = Total Cost / Quantity (R800 / 4 = R200) 10. The production of one good can be increased without decreasing the production of the other good… a) When the economy is producing efficiently b) Within the production possibilities curve c) Beyond the production possibilities curve d) On the production possibilities curve 11. A production possibility frontier shows a) the maximum combination of inputs that can be used to produce output in a typical economy. b) the maximum revenue that can be generated from the sale of output produced by limited resources in an economy. c) the minimum quantities of commodities that can be produced from limited but fully-employed resources in an economy. d) the maximum quantities of commodities that can be produced from limited but fully-employed resources in an economy. 12. Use the following production possibility curve (PPC) of the Land of Oz to answer the question. The Land of Oz can only produce yellow bricks or tin. If the Land of Oz is currently on PPC1, which of the following points will be possible to achieve but an ineffective use of resources? a) b) c) d) A B C D 13. An economist decides to give up her job at a commercial bank, where she earns R800 000 per year. She is offered another full-time job for R850 000 per year or can work for herself from home as a private consultant. What is the opportunity cost of working from home? a) Zero b) R800 000 c) R850 000 d) R1 650 000 14. Use the diagram below, which indicates maximum combinations of good X and good Y that can be produced with available resources, to answer the question. The outward shift of the curve from AC to BC could arise from a) a decrease in the level of unemployment. b) technological progress that affects good X production and good Y production equally. c) an improvement in labour productivity only in the industry producing good X. d) an improvement in labour productivity only in the industry producing good Y. 15. In economics, the four main factors of production are a) land, human capital, physical capital and finance capital. b) land, capital, labour and notes and coins in circulation. c) human capital, physical capital, financial capital and entrepreneurship. d) land, labour, capital and entrepreneurship. 16. Complete the following statement. Households sell their ____________ in the __________ market. They then use their income to buy __________ in the __________ market. a) b) c) d) goods; goods; factors of production; factor factors of production; factor; goods; goods goods; factor; factors of production; goods factors of production; goods; goods; factor 17. Simple economies can be described in terms of three major economic flows. These are a) b) c) d) income, spending and saving. spending, production and saving. income, saving and investment. income, spending and production. 18. The producer surplus is: a) always greater than the consumer surplus. b) the difference between producers’ revenue and their cost of production. c) the difference between the price that producers receive and the lowest prices at which they are willing to supply the different quantities. d) what producers have left after all their expenses have been paid. 19. Suppose the equilibrium price for a tin of baked beans is R5 but that the price is set at R6. Will the price of R6 per tin be maintained? a) b) c) d) Yes, because consumers are buying as much as they want at that price. Yes, because suppliers are fulfilling their plans. No, because there is an excess demand for baked beans at that price. No, because there is a surplus of unsold baked beans at that price. 20. A decrease in the cost of flour used to bake bread, is most likely to a) decrease the demand for bread. b) increase the supply of bread. c) decrease the equilibrium quantity of bread traded. d) decrease the quantity of bread demanded. 21.If the price of powdered milk, a substitute for fresh milk, falls then a) b) c) d) the supply curve of fresh milk will shift to the right. the demand curve for fresh milk will shift to the right. the equilibrium quantity and price of fresh milk will not change. the demand curve for fresh milk will shift to the left. 22. When the price of commodity B rises by 10%, the revenue received by firms that sell B rises by 5%. This is an example of: a) b) c) d) perfectly elastic demand. elastic demand. unitary elasticity of demand. inelastic demand. 23. When the price of café lattes rises from R15 to R20, the quantity demanded decreases from 2000 to 1200 café lattes per day. Use this information to answer the question. How would you classify the demand for café lattes, as calculated above? a) b) c) d) Price inelastic Unitarily price elastic Price elastic Perfectly price elastic 24. The economic problem arises from the coexistence of a) unlimited wants and unlimited resources. b) limited wants and limited resources. c) unlimited wants and limited money in circulation. d) unlimited wants and limited resources.