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Name:__________________________________

Student Number: _________________________

ECONOMICS 1B03 SECTIONS C03, C04

WINTER DAY CLASS Instructor: Hannah Holmes


DURATION OF EXAM: 2 HOURS
MCMASTER UNIVERSITY FINAL EXAMINATION April, 2013

VERSION 1 ANSWERS

THIS EXAMINATION PAPER INCLUDES 13 PAGES AND 50 QUESTIONS. YOU ARE RE-
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The McMaster University Casio FX-991 calculator only may be used.


This examination paper must be handed in with the Scan sheet.
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Answer all questions on the scan sheet.

TOTAL MARKS AVAILABLE: 50


Multiple Choice

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Identify the choice that best completes the statement or answers the question.

1. What are both public goods and common resources?


a. rival
b. nonrival
c. excludable
d. nonexcludable
2. What do goods that are rival include?
a. both natural monopolies and public goods
b. both public goods and common resources
c. both common resources and private goods
d. both private goods and natural monopolies
3. What causes market failure associated with the free-rider problem?
a. a problem associated with pollution
b. benefits that accrue to those who don't pay
c. losses that accrue to providers of the product
d. a project in which costs exceed benefits

4. Market demand is given as QD = 300 – 6P. Market supply is given as QS = 4P. Each identical firm has MC = 6Q
and ATC = 3Q. What quantity of output will a typical firm produce?
a. 5
b. 10
c. 30
d. 60
5. Market demand is given as QD = 300 – 6P. Market supply is given as QS = 4P. Each identical firm has MC = 6Q
and ATC = 3Q. What is a firm’s average total cost?
a. $3
b. $6
c. $15
d. $30
6. Market demand is given as QD = 300 – 6P. Market supply is given as QS = 4P. Each identical firm has MC = 6Q
and ATC = 3Q. What is a firm’s profit?
a. $25
b. $30
c. $75
d. $150
7. Which of the following is consistently the case for a competitive firm?
a. Average revenue equals the price of the good, but marginal revenue is different.
b. Marginal revenue equals the price of the good, but average revenue is different.
c. Average revenue equals marginal revenue, but the price of the good is different.
d. Average revenue, marginal revenue, and the price of the good are all equal to one another.

8. If a firm in a competitive market reduces its output by 20 percent, what is the price of its output likely to do?

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a. decrease by more than 20 percent


b. decrease by less than 20 percent
c. remain unchanged
d. increase

Figure 14-2

9. Refer to Figure 14-2. When price rises from P2 to P3, what does the firm find?
a. Marginal cost exceeds marginal revenue at a production level of Q2.
b. If it produces at output level Q3 it will earn a zero profit.
c. If it produces at output level Q3 it will earn a positive profit.
d. Expanding output to Q4 would leave the firm with losses.

10. Refer to Figure 14-2. Which of the following statements best reflects the situation faced by the firm when price
falls from P4 to P2?
a. Average total cost is lower than at the previous level of output so it increases production.
b. The firm will earn profit equal to (P4 – P2) ? Q2.
c. Marginal revenue is lower than marginal cost at the previous level of output, so it
decreases production.
d. Marginal revenue is higher than marginal cost at the previous level of output, so it
increases production.

11. When total revenue is less than variable costs, what will a firm in a competitive market do?
a. It will continue to operate as long as average revenue exceeds marginal cost.
b. It will continue to operate as long as average revenue exceeds average fixed cost.
c. It will shut down.
d. It will always exit the industry.
12. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above which
average cost?
a. fixed cost
b. variable cost
c. total cost
d. sunk cost

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13. When new firms enter a perfectly competitive market, what will be the likely result?
a. Demand increases.
b. The short-run market supply curve shifts right.
c. The short-run market supply curve shifts left.
d. Existing firms will increase prices in response to the entry of the new firms.

14. A monopolist faces market demand given by P = 75 – Q. For this market, MR = 75 – 2Q and MC = Q. What
quantity of output will the monopolist produce in order to maximize profits?
a. 25
b. 35.7
c. 37.5
d. 49.9
15. A monopolist faces market demand given by P = 75 – Q. For this market, MR = 75 – 2Q and MC = Q. What price
will the monopolist charge in order to maximize profits?
a. $25
b. $37
c. $50
d. $75

16. A monopolist faces market demand given by P = 75 – Q. For this market, MR = 75 – 2Q and MC = Q. What is the
deadweight loss due to the monopoly?
a. $156.25
b. $312.50
c. $468.75
d. $937.50
17. When an industry is a natural monopoly, what can we expect?
a. It is characterized by constant returns to scale.
b. It is characterized by diseconomies of scale.
c. A larger number of firms may lead to a lower average cost.
d. A larger number of firms will lead to a higher average cost.
18. When a monopolist increases the amount of output that it produces and sells, what happens to its average revenue
and its marginal revenue?
a. Its average revenue increases and its marginal revenue increases.
b. Its average revenue increases and its marginal revenue decreases.
c. Its average revenue decreases and its marginal revenue increases.
d. Its average revenue decreases and its marginal revenue decreases.

19. Which of the following statements represents a monopoly firm?


a. A monopoly firm is a price taker and has no supply curve.
b. A monopoly firm is a price maker and has no supply curve.
c. A monopoly firm is a price maker and has a downward-sloping supply curve.
d. A monopoly firm is a price maker and has an upward-sloping supply curve.

20. Let P = price; MR = marginal revenue; and MC = marginal cost. For a profit-maximizing monopolist, which of the
following is the correct relationship?
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a. P = MR = MC
b. P = MR < MC
c. P = MR > MC
d. P > MR = MC
21. Consider a profit-maximizing monopoly pricing under the following conditions: The profit-maximizing price
charged for goods produced is $16.The intersection of the marginal revenue and marginal cost curves occurs where
output is 10 units and marginal cost is $8. The socially efficient level of production is 12 units. The demand curve
and marginal cost curves are linear. What is the deadweight loss?
a. $4
b. $8
c. $12
d. $16
22. What situation is described by perfect price discrimination?
a. The monopolist knows the exact willingness to pay of each of its customers.
b. The monopolist charges exactly two different prices to exactly two different groups of
customers.
c. The monopolist maximizes consumer surplus.
d. The monopolist experiences a zero economic profit.

The figure below depicts the demand, marginal revenue, and marginal cost curves of a profit-maximizing
monopolist.
Figure 15-7

23. Refer to Figure 15-7. If the monopoly firm is NOT allowed to price discriminate, what is consumer surplus?
a. $0
b. $500
c. $1000
d. $2000
24. Refer to Figure 15-7. If the monopoly firm perfectly price discriminates, what is consumer surplus?
a. $0
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b. $250
c. $500
d. $1000
25. Refer to Figure 15-7. What is monopoly profit with perfect price discrimination?
a. $500
b. $1000
c. $2000
d. $4000
26. What is one way in which a profit-maximizing firm in a monopolistically competitive market differs from a firm in
a perfectly competitive market?
a. The firm in the monopolistically competitive market is characterized by market share
maximization.
b. The firm in the monopolistically competitive market has no barriers to entry.
c. The firm in the monopolistically competitive market faces a downward-sloping demand
curve for its product.
d. The firm in the monopolistically competitive market faces a horizontal demand curve at
the market clearing price.

27. Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to which of
the following factors?
a. a change in the technology that the firm utilizes
b. a shift of its demand curve
c. a shift of its supply curve
d. increased product differentiation
28. If firms in a monopolistically competitive market are incurring economic losses, which of the following scenarios
would best reflect the change facing incumbent firms (those who are able to stay in the market) as the market
adjusts to its new equilibrium?
a. a downward shift in their marginal cost curve
b. an upward shift in their marginal cost curve
c. a decrease in demand
d. an increase in demand

Scenario 16-3
A monopolistically competitive firm has the following cost structure:

Output 1 2 3 4 5 6 7
Total Cost($) 30 32 36 42 50 63 77

The firm faces the following demand curve:

Price ($) 20 18 15 12 9 7 4
Quantity 1 2 3 4 5 6 7

29. Refer to Scenario 16-3. To maximize profit (or minimize losses), how many units will the firm produce?
a. 2 units
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b. 3 units
c. 4 units
d. 5 units
30. Refer to Scenario 16-3. If the government forces this firm to produce at its efficient scale, how many units will it
produce for what profit (loss)?
a. produce 3 units and make $9
b. produce 4 units and make $6
c. produce 5 units and lose $5
d. produce 6 units and lose $29

31. In the long run, what do we know about the scale at which a perfectly competitive firm operates, compared to a
monopolistically competitive firm?
a. A perfectly competitive firm and a monopolistically competitive firm both operate at
efficient scale.
b. A perfectly competitive firm operates at an efficient scale and a monopolistically
competitive firm operates with excess capacity.
c. A perfectly competitive firm and a monopolistically competitive firm both operate with
excess capacity.
d. A perfectly competitive firm operates with excess capacity and a monopolistically
competitive firm operates at efficient scale.
32. When the loss from a business-stealing externality exceeds the gain from a product-variety externality, what do we
expect will happen?
a. Firms are more likely to operate at efficient scale.
b. There are likely to be too many firms in a monopolistically competitive market.
c. Market efficiency is likely to be enhanced by the entry of new firms.
d. The market structure is likely to be in transition.

33. What is one key difference between an oligopoly market and a competitive market?
a. Oligopolistic firms are price takers while competitive firms are not.
b. Oligopolistic firms are interdependent while competitive firms are not.
c. Oligopolistic firms sell completely unrelated products while competitive firms do not.
d. Oligopolistic firms sell their product at a price equal to marginal cost while competitive
firms do not.

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The information in the table depicts the total demand for premium channel digital cable TV subscriptions in a
small urban market. Assume that each digital cable TV operator pays a fixed cost of $100 000 (per year) to provide
premium digital channels in the market area and that the marginal cost of providing the premium channel service to
a household is zero.

Table 16-1
Quantity Price (per year)
0 $120
3000 100
6000 80
9000 60
12 000 40
15 000 20
18 000 0

34. Refer to Table 16-1. If there is only one digital cable TV company in this market, what price would it charge for a
premium digital channel subscription to maximize its profit?
a. $40
b. $60
c. $80
d. $100
35. Refer to Table 16-1. Assume that there are two digital cable TV companies operating in this market. If they are
able to "collude" on price and quantity of subscriptions to sell, what price P will they charge, and what quantity Q
of subscriptions will they collectively sell?
a. P = $40, Q = 12 000
b. P = $60, Q = 9000
c. P = $80, Q = 6000
d. P = $100, Q = 3000
36. Refer to Table 16-1. Assume that there are two profit-maximizing digital cable TV companies operating in this
market. Further assume that they are not able to "collude" on price and quantity of premium digital channel
subscriptions to sell. How many premium digital channel cable TV subscriptions will be collectively sold (by both
firms) when this market reaches a Nash equilibrium?
a. 3000
b. 6000
c. 9000
d. 12 000
37. Refer to Table 16-1. Assume that there are two profit-maximizing digital cable TV companies operating in this
market. Further assume that they are not able to "collude" on price and quantity of premium digital channel
subscriptions to sell. How much profit will each firm earn when this market reaches a Nash equilibrium?
a. $0
b. $140 000
c. $170 000
d. $220 000

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38. When price is above marginal cost, selling one more unit of output at the going price will increase profit. What is
this concept called?
a. the income effect
b. the price effect
c. the output effect
d. the cartel effect

Two discount superstores (Ultimate Saver and SuperDuper Saver) in a growing urban area are interested in
expanding their market share. Both are interested in expanding the size of their store and parking lot to
accommodate potential growth in their customer base. The following game depicts the strategic outcomes that
result from the game. Growth-related profits of the two discount superstores under two scenarios are reflected in
the table below.

Table 16-5
SuperDuper Saver
Increase the size of store Do not increase the size of
and parking lot store and parking lot
Ultimate Increase the size
Saver of store and SuperDuper Saver = $50 SuperDuper Saver = $25
parking lot Ultimate Saver = $65 Ultimate Saver = $275
Do not increase
the size of store SuperDuper Saver = $250 SuperDuper Saver = $85
and parking lot Ultimate Saver = $35 Ultimate Saver = $135

39. Refer to Table 16-5. When this game reaches a Nash equilibrium, what will the dollar value of growth-related
profits be?
a. Ultimate Saver $35 and SuperDuper Saver $250
b. Ultimate Saver $65 and SuperDuper Saver $50
c. Ultimate Saver $135 and SuperDuper Saver $85
d. Ultimate Saver $275 and SuperDuper Saver $25
40. Refer to Table 16-5. The owners of SuperDuper Saver and Ultimate Saver meet for a friendly game of golf one
afternoon and happen to discuss a strategy to optimize growth-related profit. What should they both agree to do?
a. increase their store and parking lot sizes
b. refrain from increasing their store and parking lot sizes
c. be more competitive in capturing market share
d. share the context of their conversation with the Competition Bureau

Table 18-1
Number of Marginal Product Value of Marginal Marginal
Workers Output of Labour Product of Labour Wage Profit
0 0
1 100 $1000 $500 $500
2 80 800 500
3 60 500 100
4 280 400 500
5 20 500

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41. Refer to Table 18-1. What is the market price of the final good?
a. $5
b. $6
c. $8
d. $10

42. Refer to Table 18-1. What is the marginal product of the fourth worker?
a. 30
b. 40
c. 60
d. 100
43. Refer to Table 18-1. To maximize its profit, how many workers will the firm hire?
a. 2
b. 3
c. 4
d. 5
44. Up to what point does a competitive, profit-maximizing firm hire workers?
a. where the marginal product equals zero
b. where the VMPL equals zero
c. where the marginal product equals the wage
d. where the value of the marginal product equals the wage
45. What does a budget constraint show?
a. the prices that a consumer chooses to pay for products he consumes
b. the purchases made by consumers
c. the consumption bundles that a consumer can afford
d. the bundles of consumption that makes a consumer equally happy

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Figure 21-2

46. Refer to Figure 21-2. Which of the graphs in the figure reflects an increase in the price of good Y only?
a. graph (a)
b. graph (b)
c. graph (c)
d. graph (d)
47. Refer to Figure 21-2. Which of the graphs in the figure reflects an increase in consumer's income?
a. graph (a)
b. graph (b)
c. graph (c)
d. graph (d)

Figure 21-3

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48. Refer to Figure 21-3. In graph (a), if income is equal to $120, what is the price of good Y?
a. $1
b. $2
c. $3
d. $4
49. Refer to Figure 21-3. In graph (b), if income is equal to $240, what is the price of good Y?
a. $42
b. $44
c. $46
d. $48
50. George consumes two goods, milk and cookies. He has maximized his utility given his income. Milk costs $2 per
gallon and he consumes it to the point where the marginal utility he receives from milk is 4. Cookies cost $8 per
bag and the relationship between the marginal utility that George gets from eating a bag of cookies and the number
of bags he eats per month is as follows:

Bags of Cookies 1 2 3 4 5 6
Marginal Utility 20 16 12 8 4 0

How many bags of cookies does George buy each month?


a. 1
b. 2
c. 3
d. 4

END OF EXAMINATION

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