Principles of Microeconomics EC 110 SAMPLE FINAL EXAM ANSWERS TO MULTIPLE CHOICE QUESTIONSARE AT THE END OF THE EXAM.

If you find what you believe is an error in the answer key, please let me know. Name________________________________ StudentNumber________________________
1.Supposeafirminaperfectlycompetitivemarket producesandsells8unitsofoutputandhasamarginalrevenueof $8.00.Whatwouldbethefirmstotalrevenueifitinsteadproducedandsold4unitsofoutput? A. $4 B. $8 C. $32 D. $64 2.Foramonopoly,whendoesmarginalrevenueexceeddemand? A. Whenoutputis lessthanprofitmaximizingoutput. B. Whenoutputisgreaterthanprofitmaximizingoutput. C. Never. D. Noneoftheabove. 3. Whenthereisasurplusinamarket A. thereisdownwardpressureonprice B. thereisupwardpressureonprice C. themarketcouldstillbein equilibrium D. therearetoomanybuyerschasingtoofewgoods. 4. Marginalcostisthechangeiscostthatresultsfromaoneunitincreasein A.price B.cost C.output D.revenue 5. Ifanincreaseinthepriceofgasolineincreasesthedemandforgas/electrichybridcars,then A.hybridcarsareaninferiorgood. B.gasolineandhybridcarsarecomplementsinconsumption. C.gasolineisaninferiorgood. D.gasolineandhybridcarsaresubstitutesinconsumption.

6.Intheabovefigure,atapriceof$5,thefirm'soutputwouldbe_______unitsanditwould________. A. 12incuraneconomicloss B. 5shutdown C. 16breakeven D. 12breakeven 7. Inordertobe successful,acartelmust A. findawaytoencouragememberstoproducemorethantheywouldotherwiseproduce B. agreeonthetotallevelofproductionforthecartel,buttheyneednotagreeontheamountproducedby eachmember C. agreeonthetotallevelofproductionandontheamountproducedbyeachmember D. agreeonthepriceschargedbyeachmember,buttheyneednotagreeonamountsproduced 8.Whichofthefollowingiscorrectaboutfirmsinanoligopoly? A. Eachfirmhascompletecontroloveritsownsellingprice. B. Allfirmsindependentlychargemonopolyprices. C. Noonefirmcontrolsprice,buteachhasaninfluenceontheprice. D. Thereisnocompetitioninoligopolyindustries 9.Acategory5hurricanehitscentralFlorida wreakinghavocwiththeorangecrop.Thedevastationcausesthe A. supplycurvefororangejuicetoshifttotheleft,causingthepriceoforangejuicetofall B. supplycurvefororangejuicetoshifttotheleft,causingthepriceoforangejuicetorise C. supplycurvefororangejuicetoshifttotheright,causingthepriceoforangejuicetorise D. supplycurvefororangejuicetoshifttotheright,causingthepriceoforangejuicetofall 10.Thedownwardslopeofademandcurve A. representsthelawofdemand B. showsthatasthepriceofagoodrises,consumersincreasethequantitytheydemand C. indicateshowquantitydemandedchangeswhenincomesriseandthegoodisnormal D. indicateshowdemandchangeswhenincomesriseandthegoodisnormal 11.Whenapersonhasacomparativeadvantageinproducingagoodorservice,thepersonhasa(n) A.higheropportunitycostinproducingthatproductthansomeoneelse B.constantopportunitycostinproducingthatproduct C.increasingopportunitycostinproducingthatproduct D.loweropportunitycostinproducingthatproductthansomeoneelse 12.Thelongrunisatimeperiodthatis A.fiveyearsorlonger B.longenoughtochangetheleveloflaborhired C.longenoughtochange thesizeofthefirmsplant D.tenyearsorlonger

13. Consumersurplusis A. thequantityofagoodconsumersgetbutdidnothavetopayfor B. theamountaconsumerhastopaylesstheamounttheconsumerwaswillingtopay C. theamount theconsumerwaswillingtopaylesstheamounttheconsumerpaid D. thetotalvalueofagoodtoaconsumer 14. Afirmthatisapricetakerfacesaperfectly A.elasticsupplycurve B.inelasticdemandcurve C.elasticdemandcurve D. inelasticsupplycurve

15.Theabovefigureshowsthedemandandsupplycurvesforhousing.Whatwouldbetheeffectsofarentceiling equalto$1000permonth? A. nothingbecausetherentceilinghasnoeffectontheequilibriumpriceandquantity. B. ashortageequalto3000apartments. C. asurplusequalto3000apartments. D. asurplusequalto250apartments. 16.Newfirmswillexitaperfectlycompetitivemarketwhen: A. averagevariablecostsarelessthanaveragetotalcosts B. priceisgreaterthanaveragevariablecosts C. marginalrevenueisgreaterthanaveragetotalcostsintheshortrun D. priceislessthanaveragetotalcostsinthelongrun 17.Apointontheproductionpossibilitiesfrontierreflectsan A.attainablepointwithfullemploymentof allresources B.attainablepointwithoutfullemploymentofallresources C.unattainablepointwithfullemploymentofallresources D.unattainablepointwithoutfullemploymentofallresources

18.Sue'sSeaShellsbytheSeaShore isaperfectlycompetitivefirmsellingseashellsatthemarketpriceof $3.50/dozen.Sue'sSeaShellsbytheSeaShorehasfixedcostsof$30/dayandadailyvariablecostscheduleinthetable above.TheprofitmaximizinglevelofoutputforSue'sSeaShellsbytheSeaShoreis A.202dozenseashellsbytheseashoreperday. B.204dozenseashellsbytheseashoreperday. C.206dozenseashellsbytheseashoreperday. D.205dozenseashellsbytheseashoreperday. 19.IfPizzaHutraisesthepriceofasliceofpizzafrom$3.00to$3.25,thequantitydemandeddecreasesfrom1,500 slicesperweekto1,300slicesperweek.Thedemandforslicesofpizzais________andthetotalrevenuereceivedby thisPizzaHut________. A. elasticdecreases B. inelasticdecreases C. elasticincreases D. inelasticdecreases 20.PaulaDeenrunsaseafoodrestaurantinSavannah,Georgia.Hertotalrevenuelastyearwas$150,000.Therenton herrestaurantwas$48,000,herlaborcostswere$42,000,andhermaterials,food,andothervariablecostswere $20,000.PaulaDeencouldhaveworkedasacookbookwriterandearned$40,000peryearorasachefinanother restaurantandearned$35,000.PaulaDeenseconomicprofitisequalto A.$0.0peryear. B.$5,000peryear. C. $35,000peryear. D.$40,000peryear. 21. Adropinthepriceofacompactdiscshiftsthedemandcurveforprerecordtapesleftward.Fromthatyouknow thatcompactdiscsandprerecordedtapesare A. inferiorgoods B. substitutes C. complements D. normalgoods 22.ToaccessInternetservices,consumersmustuseacomputer.Ifcomputerpricesfall,whatistheeffectonthe demandforInternetservices? A.ThedemandforInternetservicesincreases. B.ThedemandforInternetservicesdecreases. C.ThedemandforInternetservicesdoesnotchange. D.ThedemandforInternetservicescouldincrease,decrease,orstaythesamedependingonotherfactors. 23.Anincreaseinpricecausesanincreaseintotalrevenuewhen A.demandiselastic B.demandisinelastic C.demandisunitelastic D.Alloftheabovearepossible.

24. Whenataxisleviedonagood A.themarketpricefallsbecause demanddeclines B.themarketpricefallsbecausesupplyfalls C.awedgeisplacedbetweenthepricebuyerspayandthepricesellersreceive D.themarketpricerisesbecausedemandfalls 25.Whathappenstothedemandforagoodifacomplementspriceincreases? A.Thedemanddecreasesandthedemandcurveshiftsrightward. B.Thedemandincreasesandthedemandcurveshiftsrightward. C.Thereis no impactondemandforthegoodandthedemandcurvedoesnotshift. D.Thedemanddecreasesandthedemandcurveshiftsleftward. 26.Ifamonopolistfacesadownwardslopingmarketdemandcurve,its A. averagerevenueisalwayslessthanmarginalrevenue B. marginalrevenueisgreaterthanthepriceoftheunitsitsells C. averagerevenueislessthanthepriceofitsproduct D. marginalrevenueisalwayslessthanthepriceoftheunitsitsells 27.Producersurplusis A.thedifferencebetweenthemarginalbenefitofconsumingthegoodandthemarginalcostofproducing thegood. B.thedifferencebetweenthewillingnesstopayforthegoodandthemarginalcostofproducingthegood. C.the differencebetweenthemarketpriceandthemarginalcostofproducingthegood. D.thedifferencebetweenthemarketpriceandthewillingnesstopayforthegood. 28.Inaperfectlycompetitivemarket,iffirmsareearninganeconomicprofit,theeconomicprofit A. attractsentrybymorefirms,whichlowersthemarketprice B. canbeearnedbothintheshortrunandlongrun C. islessthanthenormalprofit D. leadstoadecreasesinmarketdemand 29.Amonopolymarket A. generallyfailstomaximizetotaleconomicwellbeing B. alwaysmaximizestotaleconomicwellbeing C. alwaysminimizesconsumersurplus D. generallyfailstomaximizeproducersurplus 30.Holdingallotherthingsconstant,ahigherpriceforskiliftticketswould A.increasethenumberofskiers B.increasethepriceofskis C.decreasethenumberofskissold D.decreasethedemandforotherwinterrecreationalactivities 31. Economicgrowthisshownontheproductionpossibilityfrontieras A. thecurvatureofthePPF B. aninwardshiftin thePPF C. anoutwardshiftinthePPF D. amovementfromonepointonthePPFtoanother 32.RachelRayquitherjobasachefmaking$30,000peryeartostartherownrestaurantinNewYorkCity.Thefirst year,Rachel'srestaurantearned$120,000inrevenue.Rachelpays$50,000peryearinwagestothewaitressesand hostess,$20,000peryeartobuyfoodandothersuppliesplus$10,000forrentandutilities.WhatisRachel'seconomic profitfortheyear? A.$0 B.$10,000 C.$40,000 D.$80,000

33.Perfectlyinelasticdemandmeansthatconsumers A. arewillingtobuyanyquantityofthegoodatagivenprice,butnoneatahigherprice B. decreasetheirconsumptionaspricerises C. increasetheirconsumptionaspricerises D. willbuyacertainquantity,regardlessofprice 34. Whichofthefollowingwouldchangethequantitysuppliedforagoodorservice? A. achangeinthetechnologyusedtoproducethegoodorservice B. achangeinthepriceofinputsusedtoproducethegoodorservice C. achange inexpectationsaboutthepriceofthegoodorservice D. achangeinthepriceofthegoodorservice

35.Inthe abovefigure,atapriceof$7,thefirm'soutputwouldbe_______unitsanditwould________. A.16earnaneconomicprofit B.0shutdown C.16incuraneconomicloss D.10incuraneconomicloss 36 SupposethatthequantityofPepsidemandeddeclinesfrom103,000gallonsperweekto97,000gallonsperweekas aconsequenceofa10percentincreaseinthepriceof Pepsi.Thepriceelasticityofdemand(inabsolutevalue) A.1.66. B.6.00. C.0.60. D.1.40. 37. Inthelongrun,aprofitmaximizingfirmwillchoosetoexitamarketwhen A. fixedcostsexceedtotalcosts B. totalrevenuefromproductionis lessthantotalcosts C. averagefixedcostisrising D. marginalcostexceedsmarginalrevenueatthecurrentlevelofproduction 38. Animplicitcostis A. whenamoneypaymentismadeonlybecauseafactorofproductionisused B. whenafactorofproductionis usedbutamoneypaymentisnotmade C. whenamoneypaymentismade D. notrelevanttoanentrepreneursdecisionmaking 39.Whenoligopolisticfirmsinteractingwithoneanothereachchoosetheirbeststrategygiventhestrategieschosenby otherfirmsin themarket,wehave A.acartel B.theperfectcompetitiveoutcome C.theNashequilibrium D.monopolisticcompetition

40.Thepriceofsalsarises.Howdoestheincreaseinthepriceofsalsaaffectthesupplyofsalsa? A.Thesupplyof salsaincreases. B.Thesupplyofsalsadecreases. C.Thereisnochangetoeitherthesupplyofsalsaorthequantitysuppliedofsalsa. D.Thereisnochangetothesupplyofsalsabutthequantitysuppliedofsalsaincreases. 41.Theexitoffirmsoutofacompetitivemarketcausesthesupplycurveto: A. shiftleftward B. shiftrightward C. noneoftheabovefortheexitoffirmshasnoeffectonthepositionofthesupplycurve D. shifteitherleftorrightdependingonthenumberoffirmsleavingthemarket 42.Firmsinmonopolisticcompetitioncompeteon A.price B.quality C.advertising D.alloftheabovearecorrect 43. Inproductionofgoodsandservices,tradeoffsexistbecause A. buyersandsellersoftennegotiateprices B. societyhasonlyalimitedamountofproductiveresources C. notallproductionisefficient D. humanwantsandneedsarelimitedataparticularpointintime 44. Ifagoodhasalotofsubstitutes,thenitsdemandis A. elastic B. inelastic C. unitelastic D. elasticorinelastic dependingonwhetherthepriceisincreasingordecreasing 45.Ataxonsellersofmaplesyrupwill A.reducetheequilibriumpriceofmaplesyrupandincreasetheequilibriumquantityofmaplesyrup B.reducetheequilibriumpriceofmaplesyrupand reducetheequilibriumquantityofmaplesyrup C.increasetheequilibriumpriceofmaplesyrupandreducetheequilibriumquantityofmaplesyrup D.increasetheequilibriumpriceofmaplesyrupandincreasetheequilibriumquantityofmaplesyrup 46.Incontrasttoperfectlycompetitivemarkets,monopolists A. donothavetoworryaboutmarketdemand B. sellonlyifdemandisinelastic C. canneverincuraneconomicloss D. canearnaneconomicprofitindefinitely 47.Intheprisonersdilemma, A.theprisonerseasilycolludeinordertoachievethebestpossiblepayoffforboth B.onlyoneplayerhasadominantstrategy C.wheneachplayerchooseshisdominantstrategytheplayersachievethebestjointoutcome D.wheneachplayerchooseshisdominantstrategytheplayersreachaNashequilibrium 48.Firmsenteringaperfectlycompetitivemarketwillcausethepriceoftheproductto: A. decrease B. increase C. remainconstant D. respondmoretoconsumerdemandthansupply 49.Inatypicalcartelagreement, thecartelmaximizesprofitwhenit A. behaveslikeamonopoly B. behaveslikeaperfectlycompetitivefirm C. behaveslikeaduopoly D. isflexibleinenforcingproductiontargets

50.Oligopolyisamarketstructureinwhich A. manyfirmseachproduceaslightly differentiatedproduct B. onefirmproducesauniqueproduct C. asmallnumberoffirmscompete D. manyfirmsproduceanidenticalproduct 51.Afurnituremakercurrentlyproduces100tablesperweekandsellsthemforaprofit.Sheisconsideringexpanding heroperationinordertomakemoretables.Shouldsheexpand? A. Yes,becausemakingtablesisprofitable. B. No,becauseshemaynotbeabletoselltheadditionaltables. C. Itdependsonthemarginalcostofproducingmoretablesandthemarginalrevenue shewillearnfromselling moretables. D. Itdependsontheaveragecostofproducingmoretablesandtheaveragerevenueshewillearnfromselling moretables. 52.Whichofthefollowingisacharacteristicofmonopolisticcompetition? A.Onesellerservingtheentiremarket. B.Wheneachfirmsellsanidenticalproduct. C.Whenfirmsdonotcompeteonaproductsquality,price,andmarketing. D.Whenfirmsarefreetoenterandexitthemarket. 53.Theprisoners'dilemmaprovidesinsightsintothe A. difficultyofmaintainingcooperation. B. benefitsofavoidingcooperation. C. benefitsofgovernmentownershipofmonopoly. D. easewithwhicholigopolyfirmsmaintainhighprices. 54.Foraprofitmaximizingmonopolist, A. P>MR=MC. B. P=MR=MC. C. P>MR>MC. D. MR<MC<P. 55.Asituationinwhichfirmschoosetheirbeststrategygiventhestrategieschosenbytheotherfirmsinthemarketis called A.acompetitiveequilibrium B.anopenmarketsolution C.theNash equilibrium D.thecartelequilibrium

56 ThemarketforFossilTshirtshasamarketdemandfunction Qd =530 12Pandassupplyfunction Qs = 150+8P.Findtheequilibriumpriceandquantity.Thendrawthedemandandsupplycurves,makingsureyou properlyindicatetheequilibrium.Finally,findthepriceelasticityofdemandbetweentheequilibriumpriceanda marketpriceof$25. IfFossilwishestodecreasethepriceofitsTshirtsto$25,whatimpactwouldthishaveon Fossilstotalrevenue? Explain. Makesureyoushowhowyoucalculatetheelasticityvalue.

Bullseye 400 (20,20) (60,10) 300 (10,60) (15,15)

Hallmart

400 300

57.InanisolatedtowninAlabama,therearetwodiscountstores,BullseyeandHallmart. Theyarecompetingto sellthenewXboxgamesystem(andhaveanamplesupplyofthem).Theywanttomaximizeprofits,andneedto decidewhatpricetochargeforsimplicity,assumethattheycanonlycharge$400or$300.Thetableaboveisa payoff matrixthatdetailstheirpossible pricedecisions [thenumbersinboldarepricesthattheycanchoose] andthepayoffs(measuredprofitforthemonth, in thousands) fromtheirchoices).Thesearedepictedinthepayoff matrixintheusual (row,column) format.Baseduponthisinformation: A. DeterminethebestresponsesforHallmartandBullseye BESURETOSHOWALLWORK B. FindtheNashequilibrium(ifitexists) C. Isthereadominantstrategy?Explainbriefly. D. WouldtherebesomethingthatHallmartandBullseyecoulddotoimprovetheirsituation? Be suretonoteanyproblemsthatmightariseiftheyresorttothisoption.Explain.

58.

TheabovegraphrepresentsCelestialDollarscoffee,the only coffeeshopinTuscaloosa. Usingthefigure above,answerthefollowingquestions. A. Basedonthe abovediagram,whatis CelestialDollars profitmaximizinglevelofoutputandwhatprice doestheychargefortheirspecialty,amochalatte? B.Basedonthe abovediagram,whatisCelestialDollars totalrevenueandtotalcost? C. GiventhequantityandpriceyouobtainedinpartA,calculatetheprofitorlossCelestialDollars receives.

Labor (workers) 0 1 2 3 4

Output (bikes) 0 20 32 40 45

Total Total Fixed Variable Total Cost Cost Cost (Dollars) (Dollars) (Dollars) 150 150

59.ThetableabovegivescostsforbicyclerepairsatPackysBikeShop.Eachworkerispaid$150aday.Laborcosts aretheonlyvariablecostsofproduction. A. Usingthisinformation,beginbyfillinginthetable. B.Nextcalculate,averagetotalcost(ATC),averagevariablecost(AVC)andmarginalcost(MC)ifthefirm produces40repairs. [hint 1:makesurethatyouknowwhatvaluestouseincalculatingaverageandmarginal costs hint2: youmaywanttocalculateMCforallofthepossibleoutputlevels] Now,assumethatthebikeshopoperatesinaperfectlycompetitivemarketandthemarketpriceis$30.00.Basedupon thisinformation,determinetheprofitmaximizingoutput,aswellastheprofitatthatoutputlevel.Giventhisresult, whatshouldyouexpecttohappeninthebikeshopmarket.

ANSWERSTOMULTIPLECHOICEQUESTIONS

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C C A C D A C C B A D C C C A D A C A A B A B C D

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D C A A C C B D D C C B B C D A D B A C D D A A C C D A A C