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Microeconomics
Section I
Time –70 Minutes
60 Questions
1. Scarcity is correctly described by which of the
following statements?
I. Scarcity exists if there are more uses for
resources than can be satisfied at one time.
II. Scarcity exists if decisions must be made
about alternative uses for resources.
III. Scarcity would not exist in a society in
which people wanted to help others instead of
themselves.
(A) I only
(B) II only
(C) III only
(D) I and II only
(E) I, II, and III
4. The diagram above shows the demand and supply
curves for a product. The equilibrium price could rise
from P1 to P2 if
(A) consumers’ incomes increased
(B) P2 were set as a legal maximum
(C) subsidies for producers increased
(D) the price of a complementary product
increased
(E) costs of production were substantially
lowered
2. Which of the following situations would necessarily
lead to an increase in the price of peaches?
(A) The wage paid to peach farm workers rises
at the same time that medical researchers find
that eating peaches reduces the chances of a
person’s developing cancer.
(B) While the wages of peach farm workers fall
drastically, the peach industry launches a highly
successful advertising campaign for peaches.
(C) A breakthrough in technology enables peach
farmers to use the same amount of resources as
before to produce more peaches per acre.
(D) The prices of apples and oranges fall.
(E) Weather during the growing season is ideal
for peach production.
5. A perfectly competitive producer of steel rods and
steel beams employs 100 workers with identical skills.
If steel rods and steel beams sell for the same price,
which of the following rules should the producer
always follow to use the 100 workers efficiently?
I. Allocate workers so that the average cost of
producing beams equals the average cost of
producing rods.
II. Allocate workers so that the marginal product
of labor is the same in both rod production and
beam production.
III. Allocate half the workers to rod production
and half the workers to beam production.
(A) I only
(B) II only
(C) III only
(D) II and III only
(E) I, II, and III
3. If the marginal cost curve of a monopolist shifts up,
which of the following will occur to the monopolist’s
price and output?
Price
Output
(A) Decrease
Increase
(B) Decrease
Decrease
(C) Increase
No change
(D) Increase
Increase
(E)
Increase
Decrease
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6. Assume a consumer finds that his total expenditure
on compact disks stays the same after the price of
compact disks declines, other things being equal.
Which of the following is true for this price change?
(A) Compact disks are inferior goods to this
consumer.
(B) The consumer’s demand for compact disks
increased in response to the price change.
(C) The consumer’s demand for compact disks
is perfectly price elastic.
(D) The consumer’s demand for compact disks
is perfectly price inelastic.
(E) The consumer’s demand for compact disks
is unit price elastic.
Questions 10-11 refer to the following diagram and
assume a perfectly competitive market structure.
10. At the price 0A, economic profits are
(A) ABJG (B) ABKH (C) ABLI (D) ACMG (E) C0FM
7. A firm uses workers and seed to grow lettuce. Its
output rises from 100 tons to 200 tons when the number
of workers increases from 25 to 75. Its production
process shows
A. decreasing returns to scale
B. diminishing returns to labor
C. increasing returns to scale
D. increasing returns to labor
E. increasing long-run average cost
11. In the short run, the firm will stop production when
the price falls below
(A) 0A (B) 0B (C) 0C (D) 0D (E) 0E
12. If the chemical industry in an area has been
dumping its toxic waste free of charge into a river,
government action to ensure a more efficient use of
resources would have which of the following effects on
the industry’s output and product price?
Output
Price
(A) Decrease
Decrease
(B) Decrease
Increase
(C) Increase
Decrease
(D) Increase
Increase
(E)
Increase
No change
8. For a firm buying labor in a perfectly competitive
labor market, the marginal revenue product curve
slopes downward after some point because as more of a
factor is employed, which of the following declines?
(A) Marginal product
(B) Marginal factor cost
(C) Marginal cost
(D) Total output
(E) Wage rates
13. A market is clearly not perfectly competitive if
which of the following is true in equilibrium?
(A) Price exceeds marginal cost.
(B) Price exceeds average variable cost.
(C) Price exceeds average fixed cost.
(D) Price equals opportunity cost.
(E) Accounting profits are positive.
9. Which of the following is always true of the
relationship between average and marginal costs?
(A) Average total costs are increasing when
marginal costs are increasing.
(B) Marginal costs are increasing when average
variable costs are higher than marginal costs.
(C) Average variable costs are increasing when
marginal costs are increasing.
(D) Average variable costs are increasing when
marginal costs are higher than average variable
costs.
(E) Average total costs are constant when
marginal costs are constant.
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Questions 14–15 are based on the following
information and diagram.
Assume that the original supply and demand curves of a
commodity are S and D, respectively. Also assume that
the government imposes an excise tax (per unit tax) of t
dollars on the commodity, which shifts the supply curve
to Sl.
17. If a perfectly competitive industry is in long-run
equilibrium, which of the following is most likely to be
true?
(A) Some firms can be expected to leave the
industry.
(B) Individual firms are not operating at the
minimum points on their average total cost
curves.
(C) Firms are earning a return on investment
that is equal to their opportunity costs.
(D) Some factors are not receiving a return
equal to their opportunity costs.
(E) Consumers can anticipate price increases.
18. From the point of view of economic efficiency, a
monopolist produces
(A) too much of a good and charges too low a
price
(B) too much of a good and charges too high a
price
(C) too little of a good and charges too low a
price
(D) too little of a good and charges too high a
price
(E) the socially optimal amount of a good
14. The total amount of tax collected by the government
is equal to
(A) t x Q0
(B) t x Ql
(C) P0P1JK
(D) P0P1GH
(E) P0P2IH
Questions 19–21 are based on the chart below, which
gives a firm’s total cost of producing different levels of
output.
Output
Total Cost
0
$13
1
20
2
25
3
28
4
32
5
43
6
60
15. Which of the following bears the total tax burden?
(A) The consumers bear it.
(B) The producers bear it.
(C) The consumers and the producers each bear
a part of it.
(D) The group that legally pays the tax bears it.
(E) The government bears it.
16. A President’s claim that the United States could
increase its defense budget without sacrificing any of its
domestic programs would be correct if
(A) the United States economy were producing
at its full potential
(B) the United States economy were operating
on its production possibilities frontier
(C) the United States economy were centrally
planned
(D) some resources were not being fully
employed
(E) the production possibilities frontier for the
U.S. economy would shift to the left.
19. The marginal cost of producing the fourth unit of
output is
(A) $ 4
(B) $11
(C) $19
(D) $32
(E) impossible to determine from the
information given
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20. The total variable cost of producing five units of
output is
(A) $ 6
(B) $11
(C) $30
(D) $43
(E) impossible to determine from the
information given
24. In an oligopolistic industry:
A. firms behave strategically
B. output is produced at minimum average total
cost
C. firms make price and output decisions without
regard to the responses of their rivals
D. high profits will attract many new entrants to the
industry
E. firms don’t have the ability to collude
21. The profit-maximizing level of output for this firm
is
(A) 2
(B) 3
(C) 4
(D) 5
(E) impossible to determine from the
information given
22. Compared to perfect competition, monopolistic
competition:
A. provides greater product differentiation at
the cost of some excess capacity.
B. offers less product differentiation but attains
equal productive efficiency.
C. provides greater product differentiation and
achieves greater productive efficiency.
D. offers less product differentiation and lower
productive efficiency.
E. is more efficient in the long-run
25. Refer to the diagrams. Zero long-run economic
profits are most likely to occur in markets illustrated
by:
A. Figure A only
B. Figure B only
C. Figures B and C
D. Figures C and D
E. Figures B and D
23. The table given below shows how many tons can
be produced in India and Canada with one unit of input.
To achieve gains from specialization:
Uranium (ton)
India
10
Canada
40
Coal (ton)
10
20
26. Increasing the tax rate for the poor without
changing the taxes the rich pay will:
A. Cause the Lorenz Curve to move closer to the
45-degree line.
B. Cause the Lorenz Curve to move further away
from the 45-degree line.
C. It will not have any affect on the Lorenz Curve.
D. It will insure that the Lorenz Curve is on the 45degree line.
E. Decrease the demand for inferior goods
A. India should export Coal to Canada and import
Canadian Uranium.
B. India should export Uranium to Canada and
import Canadian Coal.
C. Canada should produce both Uranium and Coal
and not trade with India.
D. India should produce both Uranium and Coal
and not trade with Canada.
E. They should not trade.
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27. A production possibility frontier that is represented
by a straight line rather than the usual bowed shape
would indicate;
A. Increasing opportunity cost
B. Decreasing opportunity cost
C. Constant opportunity cost
D. Absolute and Comparative Advantage
E. Comparative but not absolute advantage
Figure 3
30. Chasey Company Inc. is the only producer in a
small town. Cost and revenue information for the
Chasey Company are shown in Figure 3. Chasey
Company would set the price of its product at;
A. $7.50
B. $6.00
C. $4.50
D. $3.75
E. $3.00
31. In Figure 3 the Chasey Company would maximize
profits by producing a quantity of;
A. 60
B. 100
C. 120
D. 140
E. 170
Figure 1
28. If the current price for the perfectly competitive
firm represented in Figure 1 is $10.00, what would be
the result of an increase in fixed cost on the firm’s
profit maximizing price and quantity?
A. Price increase and Quantity increase
B. Price increase and Quantity decrease
C. Price constant and Quantity constant
D. Price decrease and Quantity decrease
E. Price decrease and Quantity increase
32. In Figure 3 the Chasey Company will make a profit
of _______;
A. $750
B. $450
C. $300
D. $150
E. $150 loss
29. If a legal price ceiling is established on a good
above the existing equilibrium price, the effect would
be to:
A. Raise the price of the good and lower the quantity
purchased
B. Have no effect on the price or quantity of the good
C. Lower the price of the good and lower the quantity
purchased
D. Raise the price of the good and raise the quantity
purchased
E. Lower the price of the good and increase the
quantity purchased
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Figure 4
Number of workers
0
1
2
3
4
5
6
7
8
Output
0
5
11
19
25
29
31
31
30
33. In Figure 4 the law of diminishing returns sets in
with the addition of the _____ worker.
A. 1
B. 2
C. 4
D. 7
E. 8
Figure 5
37. The profit-maximizing price for a perfectly
competitive firm like the one shown in Figure 5 in the
long run would be;
A. A
B. B
C. C
D. D
E. E
34 Using the data in Figure 4, if workers are paid $35
and the product being produced sells for $10, how
many workers would the Chasey Company hire?
A. 1
B. 4
C. 5
D. 7
E. 8.
38. In Figure 5 at a market price of A, the profitmaximizing output for a perfectly competitive firm is
A. 0
B. 1
C. 2
D. 3
E. 4
35. Other things equal, the demand for labor will be
more elastic:
A. the greater the demand for the product
B. the more substitutable labor is with other inputs
C. the higher the price of capital
D. the smaller the elasticity of product demand
E. the higher the interest rate
39. If a natural disaster occurs that adversely affects
production and shipping,
A. the firm’s supply curve will shift to the right
B. the firm’s demand curve will shift to the right
C. the firm’s demand curve will shift to the left
D. the firm’s supply curve will shift to the left
E. Neither curve will shift, but instead movement
will be along each curve
36. Suppose you consume two goods, a and b, such that
MUa/Pa < MUb/Pb, then you:
A. can never maximize utility.
B. have maximized total utility.
C. can increase utility by buying more of b and less
of a.
D. can increase utility by buying more of a and less
of b.
E. are experiencing the law of diminishing
marginal utility
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40. The government has imposed a tax on the producers
of good X and has subsidized the consumers of good Y.
If these policies result in the production of the efficient
amounts of both goods, it is likely the government is
correcting for:
A. Good X is being produced by a monopoly
whereas good Y is being produced in a perfectly
competitive firm
B. spillover costs in producing X and spillover
benefits in consuming Y
C. spillover benefits in producing X and spillover
costs in consuming Y
D. spillover benefits in producing X and
consuming Y
E. spillover costs in producing X and consuming Y
43. If supply and demand both increase, we can
correctly conclude that
I. Equilibrium price will rise
II. Equilibrium price is indeterminate
III. Equilibrium quantity will rise
IV. Equilibrium quantity is indeterminate
A.
B.
C.
D.
E.
44. For a firm that both sells its output and buys its
inputs in purely competitive markets, the labor demand
curve:
A. slopes downward and the labor supply curve is
perfectly elastic
B. slopes downward and the labor supply curve is
upward sloping
C. is perfectly inelastic and their labor supply is
downward sloping
D. is perfectly elastic and the labor supply curve is
upward sloping
E. is perfectly elastic and the labor supply curve is
perfectly inelastic
Figure 7
Assume that the following information is for Good A.
Price of Good
A
$5.00
$4.00
$3.00
$2.00
$1.00
Income of
Consumers of
Good A
$200
$175
$150
$125
$100
I only
I and III only
II and IV only
II and III only
I and IV only
Quantity
demanded of
Good A
20
40
60
90
100
41. What would be the effect on total revenue of
changing the price from $5.00 to $4.00, based on the
information in Figure 7?
A. Increase by $160
B. Increase by $100
C. Increase by $60
D. Decrease by $700
E. Decrease by $300
45. If an increase in the price of one good increases the
demand for another good, then these two goods are
A. regular goods
B. substitute goods
C. public goods
D. complementary goods
E. independent goods
46. The necessity for a monopoly to lower its price in
order to sell more units of its product explains why
A. monopolies are common among public utilities
B. the marginal revenue curve is below the demand
curve for a monopoly
C the marginal cost curve for a monopoly slopes
upward
D. monopolies are able to maintain market power
E. monopolies differ from monopolistically
competitive firms.
42. Based on the information in Figure 7 it can be
correctly concluded that good A is
A. A normal good
B. An inferior good
C. A exterior good
D. A good with a positive externality
E. A good with a negative externality
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47. Game theory, and price leadership are explanations
for the profit-maximizing behavior of a firm under
which of the following market structures?
A. Pure monopoly
B. Oligopoly
C. Monopolistic competition
D. Perfect competition
E. All of the above market structures
50. If one firm in a perfectly competitive industry
experiences a technological breakthrough that lowers
only that firm’s cost of production, which of the
following correctly describes the effect on this firm’s
price, quantity, and profit?
Price
Quantity
Profit
A. decrease
decrease
decrease
B. decrease
increase
increase
C
no change
decrease
increase
D
no change
increase
increase
E
increase
increase
increase
51. In the factor market, which of the following would
happen if the workers became more productive and at
the same time the price of the product fell?
A. The value of the marginal product of labor
would increase
B. The value of the marginal product of labor
would decrease
C. The value of the marginal product of labor
would be indeterminate
D. The demand for labor would shift to the right
E. The demand for labor would shift to the left
52. Which of the following would contribute to a
reduction in consumer surplus?
A. imposition of an effective price floor
B. imposition of an effective price ceiling
C. an increase in supply
D. a decrease in equilibrium price
E. all of the above would contribute to a reduction
in consumer surplus
Figure 9
48. Which graph in Figure 9 shows the long-run profit
maximizing position for a monopolistic competitor?
A. A
B. B
C. C
D. D
E. E
53. Karen’s Karmel Korn produces a type of caramel
corn candy. Caramel, an ingredient in caramel corn,
increases in price by 10%. Which of the following
correctly describes the effect that this increase will have
on the cost of production?
A. only marginal cost will increase
B. only marginal cost and average total cost will
increase
C. marginal cost, average variable cost, average
total cost will increase
D. marginal cost, average total cost, and average
fixed cost will increase
E. marginal cost, average variable cost, average
total cost, and average fixed cost will increase
49. Which of the following is a progressive tax?
A. Every taxpayer pays $10.00
B. Every taxpayer pays 10% of his/her income
C. Higher income taxpayers pay a higher percent
of their income in tax
D. Higher income taxpayers pay a lower percent of
their income in tax
E. None of the above correctly describes a
progressive tax
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54. The derived demand concept suggests that an
increase in the demand for computers will:
A. increase the demand for computer software
B. decrease the demand for typewriters
C. increase the price of computers
D. increase the demand for microchip design
engineers
E. increase the supply of computer manufacturers
58. Which of the following correctly describes a
perfectly competitive firm’s short run supply curve?
A. marginal cost curve
B. rising portion of the marginal cost curve
C. rising portion of the marginal cost curve above
equilibrium
D. rising portion of the marginal cost curve above
average variable cost
E. rising portion of the marginal cost curve above
average total cost
55. There are two generally recognized measures of
economic efficiency; one measures efficiency from a
production perspective and the other measures
efficiency from an allocation perspective. Which of the
following correctly states these two measures of
efficiency, and in the order mentioned in the question?
A. P = minimum ATC, and P = AR
B. P = minimum ATC, and P = MC
C. P = MC, and P = minimum ATC
D. P = MC, and P = AR
E. MC = MR, and MRP = VMP
59. A price discriminating monopolist would differ
from a non-price discriminating monopolist in which of
the following ways?
Profit
Consumer surplus
A higher w/ price
higher w/ price
discrimination
discrimination
B higher w/ price
lower w/ price
discrimination
discrimination
C lower w/ price
lower w/ price
discrimination
discrimination
D lower w/ price
higher w/ price
discrimination
discrimination
E
the same with both
the same with both
60. Suppose the only three members of society will
receive marginal benefits from a proposed public
project equal to $300, $500, and $800, respectively.
However, each must pay taxes of $400 to pay for the
total cost. In the absence of vote trading, a majority rule
vote will:
A. pass this project and resources will be allocated
efficiently
B. pass this project and resources will be
overallocated to the project
C. defeat this project and resources will be
allocated efficiently
D. defeat this project and resources will be
underallocated to the project
E. not enough information to determine what
would happen.
Figure 14
Quantity
Average
Average Marginal
of Output Variable Cost Total Cost Cost
0
1
2
3
4
5
6
7
8
50
45
41.7
40
40
40.8
42.1
44.3
250
145
108.4
90
80
74.1
70.7
69.3
50
40
35
35
40
45
50
60
56. Refer to Figure 14. The average fixed cost of
producing 4 units of output is:
A. 35
B. 40 C.50 D. 90 E. 200
57. Refer to Figure 14. If the product’s price is
constant at $47.00, to maximize profits this firm will
produce:
A. zero, the firm will lose money by producing any
level of output
B. zero in the short run, but 6 in the long run
C. zero in the long run, but 6 in the short run
D. 1 in the short run, but 7 in the long run
E. 7 in the long run, but 1 in the short run
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49. C
50. D
51. C
52. A
53. C
54. D
55. B
56. E
57. C
58. D
59. B
60. A
Answer Key
1. D
2. A
3. E
4. A
5. B
6. E
7. B
8. A
9. D
10. B
11. D
12. B
13. A
14. B
15. C
16. D
17. C
18. D
19. A
20. C
21. E
22. A
23. A
24. A
25. E
26. B
27. C
28. C
29. B
30. A
31. B
32. C
33. C
34. C
35. B
36. C
37. D
38. A
39. D
40. B
41. C
42. B
43. D
44. A
45. B
46. B
47. B
48. B
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