Name: __________________________ Date: _____________ 1.

Which of the following demonstrates how people respond to incentives that make them better off? A) More students major in economics when they hear that salaries for economists are rising. B) Students are assigned dorm rooms through a lottery system. C) Students are encouraged to donate blood because it is the right thing to do. D) Students and faculty are encouraged to wear college apparel to support the college athletic teams. 2. Which of the following statements is a positive statement? Which is a normative statement? X. The federal minimum wage is increasing to $6.50 an hour. Y. The minimum wage should be high enough that families will not live in poverty. A) X is positive; Y is normative B) X is positive; Y is positive C) X is normative; Y is positive D) X is normative; Y is normative Use the following to answer question 3: Figure: DVD Market

3. (Figure: DVD Market) At a rental price of $3, there will be A) equilibrium in the rental market for DVDs. B) an increase in demand. C) an excess supply of 40 DVD rentals. D) an excess demand of 40 DVD rentals. 4. All other things being constant, a decrease in the price of a good will result in: A) an increase in demand. B) an increase in supply. C) an increase in the quantity demanded. D) more being supplied. 5. Which of the following is true if there is a decrease in the demand for ice cream? A) There is an increase in producer surplus. B) There is a decrease in producer surplus. C) There is no change in producer surplus. D) It's impossible to tell what will happen to producer surplus.

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Use the following to answer question 6: Figure: Demand for Shirts

6. (Figure: Demand for Shirts) The price elasticity of demand for the segment AB, using the midpoint method, is: A) 13. B) 11. C) 0.91. D) 0.1. 7. The average total cost curve in the short run slopes upward due to: A) economies of scale. B) diseconomies of scale. C) increasing returns. D) diminishing returns. 8. If a local California avocado stand operates in a perfectly competitive market, that stand owner will be a: A) price-maker. B) price-taker. C) price-discriminator. D) price-maximizer. 9. If a perfectly competitive firm sells 30 units of output at a price of $10 per unit, its marginal revenue is: A) $10. B) more than $10. C) less than $10. D) $300.

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Use the following to answer question 10: Figure: Profit Maximizing

10. (Figure: Profit Maximizing) The figure shows cost curves for a firm operating in a perfectly competitive market. If the market price is P4: A) marginal revenue and price are the same. B) marginal revenue is less than P4. C) marginal revenue is greater than P4. D) Marginal revenue and price are unrelated in perfect competition. 11. If a perfectly competitive firm is producing a quantity that generates MC = MR, then profit: A) is maximized. B) can be increased by increasing production. C) can be increased by decreasing production. D) can be increased by decreasing the price. 12. A necessary condition of perfect competition is: A) standardized product. B) difficult entry and exit. C) few buyers and sellers. D) cooperation and interdependence between sellers. 13. The shut-down price is: A) the price at which economic profit is zero. B) the minimum level of AVC. C) the intersection of the MC and ATC curves. D) the minimum level of AFC. 14. In the model of perfect competition: A) the consumer is at the mercy of powerful firms that can set prices wherever they prefer. B) individual firms can influence the price, but only slightly. C) no individual or firm has enough power to have any impact on price. D) the price is determined by how many years are left in the product's patent.
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15. Firms in the model of perfect competition will: A) maximize total revenue by using the marginal decision rule. B) increase output up to the point that the marginal revenue is greater than the marginal cost. C) increase output up to the point that the marginal revenue is equal to the marginal cost. D) always attempt to minimize average variable cost. 16. The slope of the total cost curve is: A) marginal cost. B) marginal revenue. C) constant under perfect competition. D) always negative. Use the following to answer question 17: Figure: Profit Maximizing

17. (Figure: Profit Maximizing) The figure shows cost curves for a firm operating in a perfectly competitive market. If the market price is P4: A) firms will leave the industry and the price will fall in the long run. B) there will be economic profits and firms will enter the industry in the long run. C) the market supply curve will shift to the left and price will fall in the long run. D) the firm will produce q4.

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Use the following to answer question 18: Figure: A Perfectly Competitive Firm in the Short Run

18. (Figure: A Perfectly Competitive Firm in the Short Run) The firm will shut down in the short run if the price falls below: A) G. B) F. C) E. D) P. 19. A decrease in production costs for firms in a perfectly competitive market will cause a(n): A) permanent increase in price. B) economic profit for firms in the short run. C) increase in demand. D) increase in firms' marginal revenue. Use the following to answer question 20: Table: Total Cost for a Perfectly Competitive Firm

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20. (Table: Total Cost for a Perfectly Competitive Firm) If the market price is $6.00, the profit-maximizing quantity of output is ________ units. A) five B) seven C) eight D) nine Use the following to answer question 21: Figure: A Perfectly Competitive Firm in the Short Run

21. (Figure: A Perfectly Competitive Firm in the Short Run) The firm will produce in the short run if the price is ________ the price indicated by ________. A) at least as much as; F B) greater than; E C) greater than; N D) at least as much as; P 22. Which of the following is true? A) If price falls below average variable cost the firm will shut down in the short run. B) Total revenue and marginal revenue are the same in perfect competition. C) Economic profit per unit is found by subtracting MC from price. D) Economic profit is always positive in the long run. 23. In a perfectly competitive market, which of the following statements is true? A) In the long run, price will change to reflect whatever change we observe in average production cost. B) The existence of profits leads firms to exit the industry, while losses lead firms to enter the industry. C) In the long run, economic profits are positive. D) Perfect competition generates prices greater than marginal costs. 24. One of the earliest attempts to curb monopoly power in the United States was the ________. A) breakup of Microsoft Corporation B) breakup of El Paso Natural Gas company C) breakup of the steel industry D) breakup of the Standard Oil company

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25. If there are three gas stations in the town of Smalltown, then the gasoline industry in Smalltown is probably best characterized as: A) perfect competitive. B) monopolistic competitive. C) monopolistic. D) oligopolistic. 26. The failure to produce enough to minimize average total cost is termed: A) economic profits. B) excess capacity. C) advertising. D) excess production. 27. Many customers will walk right past a diner that serves coffee and go to Starbucks and pay more for a cup of coffee. For these customers, cups of coffee are differentiated by: A) style. B) location. C) quality. D) type. 28. Noncooperative behavior is characterized by: A) collusion. B) either homogeneous or heterogeneous products. C) undercutting competitors' prices. D) cartels. 29. In an oligopolistic market structure, collusion between firms usually leads to higher profits than noncooperative behavior. However, formal, collusion doesn't usually occur in the United States because: A) it is illegal. B) there is an incentive for each firm to cheat on a collusive agreement. C) an oligopolistic firm will typically prefer lower profits if the only way to make higher profits is to improve the profit position of its rivals. D) it is illegal and because there is an incentive for each firm to cheat on a collusive agreement. 30. After the first unit sold, the marginal revenue a monopolist receives from selling one more unit of a good is less than the price at which that unit is sold because of: A) diminishing marginal returns. B) increasing marginal cost. C) a downward-sloping demand curve. D) declining average fixed cost. 31. In monopolistic competition: A) firms advertise to increase demand for their product. B) entry of new firms shifts the demand curve for existing firms to the right. C) when some firms exit, the demand curve for the firms that remain in the industry shifts to the left. D) firms earn large economic profits in the long run. 32. A firm that faces a downward-sloping demand curve is a: A) price-setter. B) quantity-minimizer. C) quantity-taker. D) price-taker.

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Use the following to answer question 33: Figure: A Profit-Maximizing Monopoly Firm

33. (Figure: A Profit-Maximizing Monopoly Firm) This profit-maximizing monopoly firm's profit per unit is: A) $5. B) $13. C) $14. D) $20. Use the following to answer question 34: Figure: Monopoly Model

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34. (Figure: Monopoly Model) When the firm is in equilibrium (that is, maximizing its economic profit), its total revenue is the area of rectangle: A) SPDB. B) IPDH. C) 0SBJ. D) 0PDJ. 35. Which of the following would make it difficult for Georgia peach suppliers to collude? A) There are only a few suppliers. B) Each supplier has the same costs. C) Buyers of peaches have a great deal of bargaining power, since peaches are homogeneous. D) There are only a few buyers of peaches. Use the following to answer question 36: Figure: Monopoly Model

36. (Figure: Monopoly Model) The profit-maximizing price is the one indicated by: A) Z. B) P. C) E. D) F. 37. Suppose that a profit-maximizing monopoly firm experiences a substantial technological change that reduces its marginal and average total costs by $40. If in response to its reduction in cost the firm changes its price in a profitmaximizing way, then we can predict that its total output will: A) rise. B) fall. C) remain unchanged. D) It is not possible to make a determination from the information given.

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38. A monopoly is producing where average total cost equals $30, marginal revenue is $40, and the price is $50. If ATC is at its minimum level and the ATC curve is U-shaped, in order to maximize profits this firm should: A) increase output. B) reduce output. C) do nothing; it is already maximizing profits. D) shut down. 39. Damage to the environment occurs because: A) most businesses just don't care about the environment. B) consumers want goods and services at the lowest prices, no matter what other costs may be involved. C) in the process of providing goods and services we enjoy, pollution occurs. D) pollution occurs naturally, with or without human activity. 40. The principal government agency in the United States responsible for enforcing national environmental policies is the: A) Department of Agriculture. B) Department of the Interior. C) Environmental Protection Agency. D) Department of Justice. 41. The marginal cost of pollution emissions ________ as the quantity of pollution emissions ________. A) decreases; increases B) increases; increases C) increases; decreases D) remains constant; decreases 42. Bluefin tuna travel in schools throughout the world's oceans. Fishing boats from many nations harvest bluefin tuna as the schools migrate through their national waters. The schools of bluefin tuna are best described as: A) a private good. B) a public good. C) an artificially scarce resource. D) a common resource. 43. The socially optimal quantity of pollution occurs where: A) the marginal social benefit of pollution is equal to the marginal social cost of pollution. B) the marginal social benefit of pollution is greater than the marginal social cost of pollution. C) the marginal social benefit of pollution is less than the marginal social cost of pollution. D) there is no pollution. 44. A common resource is a good or service for which exclusion is: A) possible and which is rival in consumption. B) possible and which is nonrival in consumption. C) not possible and which is rival in consumption. D) not possible and which is nonrival in consumption. 45. Pigouvian taxes are taxes designed to reduce: A) the marginal cost of production. B) the marginal benefit of consumption. C) external costs. D) external benefits.

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46. A public good is ________ and ________ in consumption. A) excludable; rival B) nonexcludable; nonrival C) excludable; nonrival D) nonexcludable; rival 47. According to the Coase theorem, when negative externalities are present a market will: A) always reach an efficient solution. B) reach an efficient solution if transaction costs are low. C) reach an efficient solution only if the government intervenes in the market. D) reach an efficient solution only if the negative externalities are offset by positive externalities. 48. All of the following are examples of external cost except: A) the smoke nuisance of a factory. B) zoning restrictions on your property. C) land defilement from strip mining. D) weeds on your next-door neighbor's lawn. 49. If the marginal benefit received from pollution is greater than its marginal cost, then: A) society's well-being can be improved if the quantity of pollution decreases. B) society has achieved its socially optimal level of pollution. C) the market is producing too much pollution. D) the market is producing too little pollution. 50. Regardless of whether or not they pay for them, people cannot be excluded from receiving the benefits of: A) private goods. B) public goods. C) common resources. D) public goods and common resources. Use the following to answer question 51: Figure: The Socially Optimal Quantity of Pollution

51. (Figure: The Socially Optimal Quantity of Pollution) In the figure, without government intervention: A) firms will continue to pollute until the marginal social benefit is zero. B) firms will continue to pollute C) the optimal quantity of pollution will occur. D) The outcome cannot be determined without more information.
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Use the following to answer question 52: Figure: MSB and MSC of Pollution

52. (Figure: MSB and MSC of Pollution) The accompanying graph shows the marginal social cost and marginal social benefit of pollution. If the current level of pollution is at Q1: A) not enough pollution is being emitted, as the MSB > MSC. B) not enough pollution is being emitted, as the MSB < MSC. C) too much pollution is being emitted, as the MSB > MSC. D) the socially optimal amount of pollution is being emitted, as the MSB = MSC. Use the following to answer question 53: Figure: Efficiency and Pollution

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53. (Figure: Efficiency and Pollution) If this market produced ________ tons, then ________. A) 30; it would be efficient B) 45; marginal social cost would be less than marginal social benefit C) 20; marginal social benefit would be less than marginal social cost D) 20; the marginal social benefit would be $7. 54. Consider the market for livestock and assume there is a marginal external cost associated with raising livestock. Without government regulation, at the market equilibrium price and quantity of livestock: A) not enough livestock will be raised. B) the price will be less than the marginal social cost. C) the price will be less than the marginal social benefit. D) the price will be less than the marginal cost to livestock farmers. 55. Suppose the small town of Falls Valley estimates the marginal cost of providing one more treatment for mosquito control at $100,000. The town should provide the additional mosquito control only if the marginal: A) benefit for any individual citizen is at least $100,000. B) benefit for all individual citizens adds up to at least $100,000. C) social cost of mosquito control is more than $100,000. D) social cost of mosquito control is less than $100,000.

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Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. A A D C B B D B A A A A B C C A B D B D D A A D D B C C D C A A B D C B A A C C B D A C C B B B D D A A
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53. A 54. B 55. B

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