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Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
1.
Other things being equal, demand is MORE elastic when
a) the good is a luxury and not a necessity.
b) the good is broadly defined (a hamburger rather than a Big Mac).
c) the item is NOT a large part of your budget.
d) all of the above.
Answer A
2.
Suppose parking fees Kuwait airport increase. If demand is relatively elastic then
a) total revenue from parking fees will fall.
b) total revenue from parking fees will rise.
c) total revenue from parking fees is constant.
d) the direction of change in total revenue from parking fees cannot be determined.
Answer A
4. The price of a resource with a perfectly inelastic supply, A
a. is pure economic rent.
b. consists of only opportunity cost and has no economic rent.
c. cannot change.
d. is determined by the supply.
5. What does monopolistic competition have in common with perfect competition? A
a. a large number of firms and freedom of entry and exit
b. a standardized product
c. product differentiation
d. the ability to earn an economic profit in the long run
6. In the long run, existing firms exit a perfectly competitive market when D
a. economic profits are zero.
b. economic profits are greater than zero.
c. normal profits are greater than zero.
d. they incur an economic loss.
7. If the price elasticity of supply for a good is 0.5, then C
a. an increase in the price increase the quantity supplied by a larger percentage.
b. the supply is elastic.
c. the percentage change in the quantity supplied is less than the percentage change in price.
d. None of the above answers are correct.
8. If a firm does not produce any output, its C
a. total fixed cost must be zero.
b. economic profit must be positive.
c. total variable cost must be zero.
d. total costs must be zero.
9. Economies of scale occurs when the average total cost of production ____ as output ____. C
a. increases, increases
b. decreases, decreases
c. decreases, increases
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Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
d. remains constant, increases
11. Other things remaining the same, the C
a. higher the interest rate, the greater the quantity of capital demanded.
b. lower the interest rate, the smaller the quantity of capital demanded.
c. higher the interest rate, the smaller the quantity of capital demanded.
d. interest rate and the quantity of capital demanded are not related.
Consider the graphs below to answer the following two questions.
1. h graph(s) below show a relationship with a negative slope?
a.
b.
c.
d.
A and D.
C and D.
A and B.
B and C.
B
2. The production possibility curve (or frontier) is concave due to
a. its negative slope.
b. its shifting out over time.
c. increasing opportunity costs.
d. all of the above.
C
3. Suppose the elasticity of demand for an iPod is – 3.5. This means that
a. the demand for iPods is inelastic.
b. the demand curve for iPods is very steep.
c. a 10 percent increase in the price of iPods will cause the quantity demanded to RISE by 35%.
d. a 10 percent increase in the price of iPods will cause the quantity demanded to FALL by 35%.
D
4. Consider the market for SUVs (like jeep) . If the price of gasoline increases by 150% we would expect the
equilibrium price of SUVs to _____ and the equilibrium quantity to _____.
a. increase; increase
b. increase; decrease
c. decrease; increase
d. decrease; decrease
D
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Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
5. Which of the following events would cause the supply of gum to FALL?
a. A discovery that chewing gum reduces tooth decay.
b. An increase in the price of cinnamon.
c. A rise in income (assuming gum is a normal good).
d. A rising population.
B
6. A time-series graph of mortgage rates would show
a. the mortgage rates in different cities.
b. the relationship between mortgage rates and housing sales.
c. the behavior of mortgage rates over time.
d. that mortgage rates are positively related to ice cream sales.
C
7. Any point outside the PPF (or PPC),
a. is not possible given current resources and technology.
b. represents efficient use of the economy’s resources.
c. represents the inefficient use of the economy’s resources.
d. none of the above.
A
8. An increase in the price of Snapple drinks
a. causes the supply of bottled water to shift right.
b. causes the demand for Snapple drinks to shift left.
c. causes the demand for bottled water to shift right.
d. causes none of the above.
C
9. If flour is an inferior good, then
a. an increase in income will decrease the demand for flour.
b. the demand for flour is negatively related to income.
c. the income elasticity of flour is negative.
d. all of the above.
D
10. Which of the following is a positive statement?
a. Taxes in New York are too high.
b. New York State income taxes are the highest in the nation.
c. New York State income taxes are unfair.
d. New York State should replace its income tax with a higher sales tax.
B
11. In terms of the factors of production, the computer on my desk in CBA is an example of
a. land.
b. labor.
c. capital.
d. entrepreneurship.
C
12. When both demand and supply increase (hint: think about each separately, then put them together)
a. the equilibrium price definitely falls.
b. the equilibrium price definitely rises.
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Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
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c. the equilibrium quantity definitely falls.
d. the equilibrium quantity definitely rises.
D
13. The opportunity cost of attending college includes
a. the cost of food.
b. the higher expected future income from a college degree.
c. the wages forgone from studying and attending class instead of working.
d. all of the above.
C
14. Consider the following statement: “As more women have entered the labor force, the incidence of skin
cancer has increased. Therefore women working causes skin cancer.” This statement is an example of
a. the pitfall of assuming that correlation implies causation.
b. the fallacy of composition.
c. the failure to consider secondary effects.
A
15. Suppose we observe that the price of laser printers has fallen. This could only be due to
(Hint: DRAW THE GRAPH!)
a. an increase in demand and/or a decrease in supply.
b. a decrease in demand and/or an increase in supply.
c. a decrease in demand and/or a decrease in supply
d. an increase in demand and/or an increase in supply.
B
16. Consider bagels and cream cheese. These two goods have a cross elasticity of
a. Bagels and cream cheese are strong complements.
b. Bagels and cream cheese are weak complements.
c. Bagels and cream cheese are strong substitutes.
d. Bagels and crease cheese are weak substitutes.
A
-5.
This means that
17. Other things being equal, supply is LESS elastic when
a. producers have a longer time to adjust production. (a year vs. a day)
b. an item is easily stored.
c. a good is in fixed supply (such as paintings by Rembrandt or Monet).
d. all of the above.
C
18. Which of the following will DECREASE the demand for cereal?
a. an increase in the price of pop tarts.
b. an increase in the price of milk.
c. an increase in the price of cereal.
d. all of the above.
B
19. Which of the following is an explicit cost?
a. The wages a firm pays to its workers.
b. The opportunity cost of an owner/entrepreneur's time invested in the firm.
c. The opportunity cost of the money the business owner/entrepreneur has invested in the firm.
d. None of the above.
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
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Answer A
20. I pay only $5 for a large cheese pizza at Little Caesar’s even though I am willing to pay $10. My consumer surplus is
a. $50
b. $15
c. $7.50
d. $5
Answer D
21. For a perfectly competitive firm, marginal revenue (MR)
a. is constant, given that the firm is a price taker.
b. is less than price, given that selling additional units pulls down the price of all units.
c. is greater than price since the firms demand is perfectly elastic.
d. is u-shaped due to the law of diminishing marginal returns.
Answer A
Use the table below to answer the following TWO questions.
Units of
labor
1
2
3
4
Total
product
10
20
27
25
22. According to the table above, the average product (AP) of 3 units of labor is
a. 7
b. 9
c. 10
d. 27
Answer B
23. According to the table above, the marginal product (MP) of 3 rd unit of labor is
a. 7
b. 9
c. 10
d. 27
Answer A
24. Assume that the total utilities for the 7th and 8th units of a good consumed are 55 and 67, respectively. The marginal
utility (MU) for the 8th unit is
a. 122
b. 67
c. 61
d. 12
Answer D
25. Suppose the first four units of an output produced have total costs of 50, 150, 300, 500, respectively. The marginal cost
(MC) of the SECOND unit of output is
a. 200.
b. 150.
c. 100.
d. 75
Answer C
26. In the short run, a perfectly competitive firm will produce even with an economic loss, as long as
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
a.
b.
c.
d.
Answer C
6
marginal revenue equals marginal cost. (MR=MC)
price is less than average total cost. (P < ATC)
price is greater than average variable cost. (P > AVC)
price is greater than marginal revenue. (P > MR)
27. With diminishing marginal utility,
a. as more and more units of a good or service are consumed, total utility becomes smaller and smaller.
b. as more and more units of a good or service are consumed, marginal utility becomes smaller and smaller.
c. the marginal utility curve is always upward sloping.
d. marginal utility is constant.
Answer B
28. Which of the following correctly explains why sellers in a perfectly competitive market are price-takers?
a. There are few sellers, and so they have the power to take whatever price they want.
b. Sellers in a competitive market have the power to influence price by colluding with one another and using
quotas to limit overall market output and thus raise price.
c. Individual buyers in a competitive market have the power to influence price, and thus can impose prices
and other conditions on powerless sellers.
d. There are many small sellers, and so the market process generates an equilibrium price that cannot be
influenced by any one seller. Thus they have no choice but to take the price generated by the market
process.
Answer D
29. Total utility rises
a. when marginal utility is negative.
b. as indifference curves move up and to the right.
c. along the same indifference curve, moving from left to right.
d. all of the above.
Answer B
30. In an economic theory, the production possibilities curve (PPC) and the budget line are examples of
a. the outcome or choice resulting from objectives and constraints.
b. firm and consumer objectives.
c. physical and financial constraints.
d. none of the above.
Answer C
31. Which of the following represents the key difference between the short run and the long run?
a. In the short run at least one of a firm's resources is fixed, while in the long run all resources under the firm's
control are variable.
b. The short run corresponds to the anticipated remaining life span of the owner/entrepreneur.
c. In the long run at least one of a firm's resources is fixed, while in the short run all resources under the firm's
control are variable.
d. None of the above.
Answer A
32. When a firm is experiencing economies of scale
a. the long-run average cost curve is declining.
b. the long-run average cost curve is constant.
c. the long-run average cost curve is rising.
Answer A
33. The profit-maximizing rate of output for a firm in a perfectly competitive market is found when which of the following
occurs?
a. Total revenue equals total cost. (TR =TC)
b. Price equals average total cost. (P=TC)
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
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c. Marginal revenue equals marginal cost. (MR=MC)
d. Price equals average variable cost. (P=AVC)
Answer C
34. The firm’s demand curve for a product sold in a perfectly competitive market is
a. inelastic, but not perfectly inelastic.
b. perfectly inelastic.
c. elastic, but not perfectly elastic.
d. perfectly elastic.
Answer D
35. Monopolistic competition differs from perfect competition in that
a. monopolistic competition has barriers to entry.
b. monopolistic competition allows for economic profits in the long run.
c. monopolistic competitive firms sell a product differentiated through marketing and advertising.
d. all of the above.
Answer C
36. A firm will hire a resource
a. until the extra revenue from employing that resource is equal to the extra cost of hiring that resource.
b. as long as the resource brings in a positive amount of revenue.
c. as long as its marginal product is positive.
d. both b and c.
Answer A
37. The demand for automobile workers will rise if
a. the wage of automobile workers rises.
b. the wage of automobile workers falls.
c. the demand for automobiles rises.
d. both b and c.
Answer C
38. Oligopoly is a market structure characterized by
a. a horizontal demand curve.
b. a large number of small firms.
c. one single firm and many buyers
d. interdependence among firms in decision makin
Answer D
39. If UPS hires another worker, UPS will be able to deliver an additional 20 packages an hour. The price of each package
is $5. The marginal revenue product (MRP) of this additional worker is equal to
a. $5.
b. $100.
c. $4.
d. 20 packages.
B
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
price, cost
S = MC
$3
$2
D
$1
MR
20
30
Q
40. Consider the graph above. The profit-maximizing price and output for a firm under monopolistic competition is
a. a price of $2 and a quantity of 30.
b. a price of $1 and a quantity of 20.
c. a price of $3 and a quantity of 30.
d. a price of $3 and a quantity of 20.
Answer D
41. When the wage increases, a consumer will work more because the opportunity cost of leisure and nonmarket work
have risen. This is known as the
a. substitution effect.
b. income effect.
c. leisure effect.
d. backward-bending effect.
Answer A
42. For a monopoly, the deadweight loss represents
a. the diversion of consumer surplus to producer profits.
b. the loss of consumer surplus due to the lower output of a monopoly relative to perfect competition.
c. the loss of consumer surplus due to price discrimination.
d. the costs of antitrust regulation.
Answer B
43. For a monopoly,
a. marginal revenue is less than price (MR <P) due to a downward sloping demand curve.
b. marginal revenue equals price (MR=P) due to a perfectly elastic demand curve.
c. marginal revenue is greater than price (MR >P) due to price discrimination.
d. marginal revenue is less than marginal cost (MR < MC), guaranteeing a profit.
Answer A
44. In the anti-trust case of the U.S. vs. Microsoft
a. Microsoft was forced to break up portions of its software, browser and operating system businesses.
b. Microsoft was acquitted.
c. the outcome is currently pending on appeal.
d. the case was settled in 2001, with Microsoft agreeing to certain conditions of behavior.
Answer D
45. When price discrimination occurs
a. the monopolist charges the same profit-maximizing price to all buyers.
b. the firm attempts to convert consumer surplus to economic profit.
c. the buyers with the most inelastic demand will pay the lowest price.
d. both b and c.
Answer B
46. When firms collude to act as a single monopolist, this is known as
a. price discrimination.
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Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
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b. a cartel.
c. monopolistic competition.
d. a natural monopoly.
Answer B
47. A natural monopoly will result when
a. a firm is granted by the government a patent for the exclusive right to make and sell a product.
b. a firm owns most or all of the natural resources needed to produce a product.
c. there are large fixed costs, so the long-run average cost declines over a wide range of output.
d. all of the above.
Answer C
48. Under the Clayton Act, it is illegal for firms to prohibit a purchaser from dealing with that firm’s competitor. This is
known as
a. a cartel.
b. price discrimination.
c. price fixing.
d. tying contracts.
Answer D
49. In order for price discrimination to occur
a. a firm must have some pricing power, i.e. not be a price taker.
b. a firm must be able to identify and separate buyers according to their willingness to pay.
c. a firm must be able to prevent the low-price buyers from reselling to the high-price buyers.
d. all of the above.
Answer D
50. A legal monopoly results from
a. a patent or copyright.
b. large fixed costs.
c. a cartel
d. price discrimination
Answer A
51. A feature of oligopoly that makes it similar to monopoly is
a. marginal revenue is equal to price.
b. zero economic profit in the long run.
c. barriers to entry into the industry.
d. all of the above.
Answer C
52. A bowed out (concave) production possibility frontier (curve) shows that the C
a. opportunity cost of a good is constant as more of the good is produced.
b. opportunity cost of a good decreases as more of the good is produced.
c. opportunity cost of a good increases as more of the good is produced.
d. opportunity cost relationship is linear.
53. In the market for financial capital, government deficits ____ the ____ for financial capital, causing
interest rates to _____. C
a. increase; supply; fall
b. decrease; supply; rise
c. increase; demand; rise
d. decrease; demand; fall
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
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54. Under the substitution effect of a wage change C
a. an increase in the wage leads people to spend more time on leisure and nonmarket work.
b. the labor supply curve has a negative slope.
c. an increase in the wage leads to an increase in the quantity of labor supplied.
d. all of the above.
55. suppose the demand for peaches sold from one roadside stand in Georgia is elastic. This fact
means that a 7 percent increase in the price charged by the owner of this stand would lead to C
a. a greater than 7 percent increase in the quantity demanded at this stand.
b. a less than 7 percent increase in the quantity demanded at this stand.
c. a greater than 7 percent decrease in the quantity demanded at this stand.
d. a less than 7 percent decrease in the quantity demanded at this stand
Answer each question in the space provided. Be sure to answer each question completely.
1. Consider the demand schedule for cigarettes in Kuwait below.
Price per pack
$1
$3
$5
$7
Quantity
(millions)
70
60
50
40
a. Calculate the price elasticity of demand for cigarettes when the price per pack rises from $3 to $5.
Show your work to receive full credit.
% change in Q = -10/55
% change in P = 2/(4)
Ed = -.363636 inelastic
b. Gov. has proposed an increase in the cigarette tax for next year’s budget. Given you answer in (a),
what is your prediction of how this tax hike would affect tax revenue (rise or fall)? Explain your
answer.
Given that demand is inelastic, the percentage increase in price is larger than the percentage decrease
in quantity demanded. So with a tax hike, total revenue and thus tax revenue will RISE. We can
also see this by looking at the table. Total revenue at $3 is (3)(60)= $180 million. Total revenue at
$5 is (5)(50) = $250 million.
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
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2. What do we mean by scarcity and opportunity cost? How are the two terms related?
Scarcity is the problem that all resources are limited while wants are unlimited. Opportunity cost is the
choice forgone when we make a decision about how to use scarce resources. They are related in that
because resources are scarce, we must make choices about how to use them. Since we must make
choices, we always give up the use of resources in some other way, and that is the opportunity cost.
3. The price of oil is determined by a world market for oil where the price has risen from $20/barrel in 1996 to
about $60/barrel in 2006. During the same period, the economies of China and India (the two most populous
countries in the world) have grown by SHOW AND EXPLAIN on the graph below how the economic
growth of these countries has contributed to rising oil prices.
With the economic growth of China and India we see that rising incomes and population of oil users
rising and this will increase demand (shift right on the graph), causing equilibrium price and quantity to
rise. Supply does not shift (oil production has not fallen between 1996 and 2006).
4. Consider the graph of the market for USED textbooks below. SHOW AND EXPLAIN how an increase in the
price of NEW textbooks leads to an increase in the price of USED textbooks.
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
12
New and used textbooks are substitutes, so the rise in the price of new textbooks leads to an increase in
demand for the used textbooks. Demand shifts right on the graph, and equilibrium price and quantity
increase in the market for used textbooks.
Answer each question in the space provided. Be sure to answer each question completely.
5.
Consider the graph below:
sweaters
5
3
IC3
IC2
IC1
40
100
cups
of coffee
Suppose the price of coffee is $1/cup and the price of sweaters is $20.
a. How much is the consumer’s budget? (show your work)
The budget is $100. We get this by observing the consumer can by 5 sweaters and $20 and nothing
else (5x20=100) or they can buy 100 cups of coffee for $1 each and nothing else (1 x100 = $100)
b.
.
c.
Which indifference curve (IC1, IC2, IC3) represents the LOWEST total utility?
IC1 is the LOWEST total utility. IC3 is the HIGHEST total utility
What is the quantity of sweaters and coffee consumed in equilibrium?
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
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The consumer equilibrium is where the IC is tangent to the budget line, at 3 sweaters and 40 coffees
The state of Colorado was one of 21 states without a helmet law for motorcycles. When I was a graduate student at the
6. Consider the graphs of a perfectly competitive market below:
P
MC
ATC
D = MR = P
$7
$5
$3
150
a.
200
Q
What is the profit maximizing price and quantity of the FIRM?
P = $7, Q= 200 (FIRM!) where MR =MC.
b.
Is the firm earning an economic profit or loss? How much is it? (show your work)
The firm is earning a profit, since at Q=200, the P>ATC. Profit = (7)(200) – (5)(200) = $400
c.
What will happen to the market supply and firm demand curve in the long run? SHOW THIS ON THE
GRAPH.
With the economic profit, firms enter and market supply increases, or shifts right. This causes the price
to fall, so the FIRM demand curve shifts down until MC=MR=ATC and the firm earns a normal profit.
7.
What is the difference between explicit and implicit costs? Does zero economic profit mean a firm is earning no
money? Why or why not?
Explicit costs are costs paid out in money such as wages, rent, materials, etc. Implicit costs are the
opportunity costs of resources used, such as the owner’s time or capital even if no money changes
hands. No, zero economic profit is a normal profit, meaning total revenue is equal to the sum of explicit
and implicit costs so that the opportunity costs are covered as well as expenses.
8.
Why is a monopoly inefficient? What are the potential benefits to monopolies?
Monopolies are inefficient because the profit-maximizing output is too low relative to the efficient
output. The result is a deadweight loss, which is a loss of consumer surplus not redistributed to producer
profit. Monopolies are potentially beneficial in encouraging innovation and creativity (with patents and
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
14
copyrights) and in the case of a natural monopoly with high fixed costs and large economies of scale,
may be the most efficient solution.
9.
Consider the table below
Price of yogurt smoothie = $2.00
Units of Labor
0
1
2
3
4
5
6
7
8
a)
Total Product
(# of
smoothies per
hour)
0
10
22
32
40
48
53
57
60
Marginal
Product (MP)
of labor
--
Marginal
Revenue
Product
(MRP)
--
Fill in the MP and MRP columns in the table above.
The MP is the change in total product with each unit of labor: 10, 12, 10, 8, 8, 5, 4, 3; The MRP = MP
x P = 20, 24, 20, 16, 16, 10, 8, 6
b)
How much labor will the firm hire if the wage = $7/hour?
if the wage = $12/hour?
Firms hire as long as the MRP is > or = to the wage. At $7/hour the firm will hire up to 7 workers.
The 8th worker has a MRP = $6 which is less than the cost of $7 so the 8th worker will not be hired.
At $12/hour the firm will hire up to 5 workers. The 6th worker has a MRP=$10 which is less than
$12.
10. Consider the graph below:
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
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P, cost
P2
ATC
P1
MR
a.
MC
D
Q (households)
Q1
Q2
Why does the graph above depict a natural monopoly?
The graph depicts a natural monopoly because of the large economies of scale: the ATC declines over
the entire range of output, so it makes sense to only have 1 firm.
b.
In the absence of regulation, what is the profit-maximizing price and quantity for this monopoly?
Profit maximizing quantity is at Q1 where, MR = MC. Profit maximizing price is at P2, the highest
price the firm can charge at the quantity Q1.
c.
What price and quantity would result under regulation?
. Under regulation the will set P = MC = ATC. So price is P1 and quantity is Q2. The firm earns a
normal profit
11. Contrast monopoly and monopolistic competition in terms of the number of firms, the product, firm entry/exit, and long
run economic profit. (You can do this with a table if you wish.)
Monopoly is one firm while monopolistic competition has many firms, no one firm having too much
market power. A monopoly has a unique product with no close substitutes while monopolistic
competition involves firms with substitutable but differentiated products. A monopoly market has
barriers to entry while monopolistic competition has free entry/exit. Because of the barriers, a
monopoly may earn economic profits in the long run, while in monopolistic competition, profits
encourage firm entry, so there are no long run economic profits.
Econ 110 Dr. Anwar Al-Shriaan Review for the Final exam
1. Consider the graph below
a. What is the profit maximizing price and output of the monopoly?
Q = 4 million, P = $20
b. What is the profit maximizing price and output under perfect competition? (HINT UNDER
PERFECT COMPETITION D=MR)
Q = 6 million, P = $10
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