ECON 251 

Final Exam Pink 
Fall 2009 (Practice Final Exam B for Fall 2010) 

Grapefruit Oranges
Billie 5 4
Jean 4 8

1. Referring to the table above, what is the marginal cost of orange production for Billie?
a. 5/4 of a grapefruit
b. 4/5 of a grapefruit
c. 1/2 of a grapefruit
d. 2 grapefruits

2. Based on the table, Billie has ______________, while Jean has _____________.
a. Comparative advantage in producing grapefruit; absolute advantage in producing
oranges
b. Comparative advantage in producing oranges; comparative advantage in
producing grapefruit
c. Absolute advantage in producing oranges; comparative advantage in producing
grapefruit
d. Absolute advantage in producing grapefruit; comparative advantage in producing
grapefruit

3. Referring to the same table above, what is the largest quantity of grapefruits that Billie
and Jean could produce together if they produce two oranges?
a. 5 grapefruits
b. 7 grapefruits
c. 8 grapefruits
d. 9 grapefruits

The Following graph describes Marc's PPF and Julian’s PPF. Both of them only produce ice
cream and brownies.

Ice cream

Julian

Marc
Brownies

4. Given this graph, which of the following is true?

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 a. Julian has a comparative advantage in the production of ice cream
b. Marc has a comparative advantage in the production of ice cream
c. Marc has an absolute advantage in the production of ice cream
d. Julian has absolute advantage in the production of brownies

5. Ann spent $300 on a plane ticket to go to New York City and attend a U2 concert. If the
plane ticket is non-refundable, then the $300 paid for the air fare represents a(n):
a. Opportunity cost of going to the concert
b. Sunk cost
c. Implicit cost of going to the concert
d. External cost of going to the concert

6. Re-chargeable batteries and cameras are complements in consumption. If the price of

rechargeable batteries increases, which of the following will occur?
a. The demand for batteries increases
b. The demand for batteries decreases
c. The demand for cameras decreases
d. The demand for cameras increases

7. Software developers are an input in the production of computer software. If the wage
paid to software developers increases, which of the following will occur?
a. The supply of computer software decreases
b. The equilibrium price of computer software decreases
c. The equilibrium quantity of computer software increases
d. All of the above will occur

Use the following equations for the next five problems

Demand: P = 16 – 2Qd
Supply: P = Qs + 4

8. What are the equilibrium price and quantity?

a. Q=4; P=$8
b. Q=4; P =$6
c. Q=6; P =$4
d. Q=8; P=$4

9. What is consumer surplus in this market?

a. $6
b. $16
c. $24
d. $32

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 10. If the government imposes a price ceiling of $6 in the market above, the resulting
deadweight loss will be equal to
a. $0
b. $6
c. $8
d. $12

11. With a price ceiling of $6, what is the marginal benefit of the last unit supplied at that
price?
a. $16
b. $12
c. $8
d. $4

12. If the government imposes a price floor of $6 in the market above (instead of a price
ceiling), deadweight loss will be equal to
a. $0
b. $6
c. $8
d. $12

13. Several medical studies have shown that trans fat (unsaturated fat with trans-isomer fatty
acid(s)) increases the risk of coronary heart disease. What effect do you think those
studies may have on equilibrium in the market for snack food that is high in trans fat?
a. Increase the equilibrium price and quantity of those snack foods
b. Decrease the equilibrium price and quantity of those snack foods
c. Increase the equilibrium price but reduce the equilibrium quantity of those snack
foods
d. Decrease the equilibrium price but increase the equilibrium quantity of those
snack foods.

14. Incomes in the U.S. have been falling over the last year, and the price of bread (a
complement in consumption of peanut butter) has been falling. In addition, the price of
peanut brittle (a substitute in production of peanut butter) has increased. If peanut butter
is an inferior good, how have these changes affected the peanut butter market?
a. Demand for peanut butter has increased while supply decreased
b. Demand for peanut butter has decreased while supply increase
c. Demand for peanut butter has increased and supply increased
d. Demand for peanut butter has decreased and supply decreased

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 15. Mary sells DVDs. She decided to raise the price of a DVD from $20 to $35 per DVD.
Then, the quantity that she sells dropped from 35,000 to 10,000 per year. What is the
price elasticity of demand for DVDs?
a. 55/27 = 2.037
b. 5/3 = 1.67
c. 3/5000 = 0.0006
d. 13/9 = 1.444

16. Suppose the elasticity of demand for Gap T-shirts is 1.5. Based on this information,
which of the following is true?
a. Demand for Gap T-shirts is inelastic.
b. An increase in the price of Gap T-shirts will reduce revenue.
c. The demand curve for Gap T-shirts is horizontal.
d. All of the above are true.

17. Suppose the elasticity of demand for Gap T-shirts is 1.5, and the elasticity of supply for
Gap T-shirts is 3. If the local government imposes a sales tax of $2 per shirt, which of
the following is true?
a. Gap T-shirt consumers bear most of the tax burden
b. Gap T-shirt producers bear most of the tax burden
c. The tax burden falls entirely on the local government
d. The tax burden is equally split between the consumers and the producers

18. The cross price elasticity between sports cars and restaurant meals is -0.5. If the price of
sports cars increases by 10%, we will observe which of the following in the market for
restaurant meals?
a. A decrease in the demand for restaurant meals
b. An increase in the demand for restaurant meals
c. A 50% decrease in the quantity demanded of restaurant meals
d. A 50% increase in the quantity demanded of restaurant meals

19. Annabelle’s weekly paycheck is $200, and she spends money only on salads and T-shirts.
If the price of one salad is $5 and the cost of one T-shirt is $20, what is the slope of
Annabelle’s budget line? (Assume that the quantity of T-shirts is measured on the x
axis.)
a. -1/4
b. -4
c. 4
d. 40

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 20. Assume that salads are inferior goods and T-shirts are normal goods. If the price of salads
increases, then the substitution effect will __________________ the quantity of salads
that Annabelle consumes, and the income effect will __________________ the quantity
of salads that she consumes.
a. Decrease; increase
b. Decrease; decrease
c. Increase; decrease
d. Increase; increase

21. On the graph below, what is Martha’s marginal rate of substitution where she is
maximizing her utility?

Quantity
of apples

0 4 quantity of oranges

a. 2
b. -2
c. ½
d. We do not have enough information to determinate the marginal rate of
substitution

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 22. Kris spends all her income on jelly beans and doughnuts. Jelly beans cost $4 per pound,
and doughnuts cost $3 per dozen. If the marginal utility of the last pound of jelly beans
Kris consumes is 14, and the marginal utility of the last dozen doughnuts she consumes is
12, how should Kris change her consumption (if at all) to maximize her utility given her
income?
a. Kris should buy more jelly beans and fewer doughnuts
b. Kris should buy more doughnuts and fewer jelly beans
c. Kris should buy more doughnuts and more jelly beans
d. Kris is already maximizing her utility, so she should not change her consumption
of jelly beans or doughnuts.

Number
# of Pizzas
of FC VC TC
(per night)
workers
0 0 A 0 10
1 20 15 B
2 58 20 30
3 75 25 35
4 85 30 40
5 90 35 45

23. Using the information in the table above, what is the marginal product of the 3rd worker?
a. 28
b. 10
c. 17
d. 75

24. Using the information in the table above, the value of fixed costs is ___________ (i.e.,
value for A) and the total cost for 20 pizzas is _____________ (i.e., value for B).
a. $10; $15
b. $20; $25
c. $10; $25
d. $20; $25.

25. If the table above represents costs for a firm in a perfectly competitive industry, and the
price of pizza is $1 per pizza, what level of pizza production maximizes profit?
a. 5 pizzas
b. 20 pizzas
c. 75 pizzas
d. 90 pizzas
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 26. Based on the same table, the firm will choose to shut down in the short run if the price of
pizza falls below what level?
a. $10
b. $1
c. 33 cents
d. 50 cents

27. Which of the following is a characteristic of perfect competition?

a. There are no barriers to entry
b. Firms produce slightly differentiated products
c. There is a small number of firms in the industry
d. None of the above are characteristics of perfect competition

28. When a firm produces 100 units, its total revenue is $5,000. When the firm produces
200 units, its total revenue is $10,000. When the firm produces 300 units, its total
revenue is $15,000. In what type of industry is this firm operating?
a. perfect competition
b. monopolistic competition
c. oligopoly
d. monopoly

29. In which of the following markets do firms make zero profit in the long run?
a. Perfect competition
b. Monopoly
c. Monopolistic competition
d. Both a. and c.

30. If a monopolist is able to perfectly price discriminate, which of the following is true?
a. Consumer surplus is zero
b. the level of output where the monopoly maximizes profit also achieves allocative
efficiency
c. demand is equal to marginal revenue
d. All of the above are true.

31. In equilibrium, a monopoly produces _____________ output and charges a

_______________ price than a perfectly competitive market.
a. More; lower
b. Less; lower
c. Less; higher
d. More; higher

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 32. A monopolist is currently producing where P = MC (price equals marginal cost). What
should the monopolist do to maximize profit?
a. increase output and decrease price
b. increase output and decrease price
c. decrease output and increase price
d. decrease output and decrease price

33. A natural monopoly will emerge when

a. average costs are rising
b. there are economies of scale
c. a marginal cost pricing rule forces the firm to produce where profit is zero
d. any of the above occur

34. The graph below shows the situation facing Firm A in monopolistic competition. If Firm
A maximizes profit, it produces ________ units of output and its economic profit is
___________.

P
100 MC

90 ATC
80
75
50

75 100 125
MR Q

a. 75, $1,125
b. 100, $3,000
c. 75, -$1,125
d. 100, -$3,000

35. The monopolistically competitive firm from the problem above produces with excess
capacity of what?
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 a. 25 units
b. 125 units
c. 50 units
d. 1.67 units

36. Which of the following is NOT true of a monopolistically competitive firm that
maximizes profit in the long run?

a. MR = MC
b. P = ATC
c. P = min ATC
d. Profit = 0

Use the matrix below to answer the remaining questions

High Player 2 Low

$ 5 mil. $ 4 mil.
High

$ 4 mil. $3 mil.
Player 1

$1 mil . $ 5 mil.
Low
$ 1 mil. $ 2 mil.

37. Which of the following combinations of strategies represents a Nash equilibrium for the
game represented above?
a. 1 chooses H and 2 chooses H
b. 1 chooses L and 2 chooses L
c. both a and b are Nash equilibria
d. none of the above

38. Are there any dominant strategies in the game above?

a. Yes, H is a dominant strategy for 1
b. Yes, H is a dominant strategy for 2
c. Yes, L is a dominant strategy for 2
d. Both a and b are true.
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39. In an oligopoly, each firm believes that if it raises its price, its competitors will not raise
their prices, but if it cut its price, its competitors will cut their prices. In this case, a firm
faces
a. the entire market demand curve
b. the down-sloping demand curve
c. the horizontal demand curve
d. a kinked demand curve

40. When consumption of a good results in an external benefit, the unregulated competitive
market equilibrium output is:
a. greater than the efficient level of output.
b. less than the efficient level of output.
c. the efficient level of output.
d. not attainable.

41. When consumption of a good results in an external benefit,

a. Marginal social cost is greater than marginal private cost
b. Marginal private benefit is greater than marginal social benefit
c. Marginal social benefit is greater than marginal private benefit
d. None of the above

42. As part of its production process, A-1 Electric Company emits noxious fumes into the air
which cause breathing problems for members of the local community. Which of the
following suggestions could help to decrease the level of pollution emission?
a. charge the firm a tax equal to the marginal external cost of pollution
b. subsidize the firm by an amount equal to the external cost of pollution
c. decrease the amount of taxes the firm must pay
d. increase the level of pollution allowed in the community

43. The proposition that if property rights exist, a small number of parties are involved, and
there are low transaction costs, then private transactions are efficient is called
a. the Pigovian tax
b. the Coase theorem
c. a sequential game
d. the tragedy of the commons

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 44. Purdueland has only 2 people Renna and Lauren. The following table shows their
marginal benefits by using lighthouses. What is the marginal benefit to society of
having 4 lighthouses in Purdueland?

capacity MB of Renna MB of Lauren

1 100 88

2 88 80

3 76 72

4 64 64

5 52 56

6 40 48

a. $60
b. $64
c. $76
d. $128

45. If it costs $88 to build a lighthouse, how many lighthouses will be provided by the
government if the government provides the efficient number of lighthouses?
a. 2 lighthouses
b. 3 lighthouses
c. 5 lighthouses
d. 6 lighthouses

46. Which of the following is an example of a public good?

a. Street lighting on campus
b. Comcast cable and internet services
c. An amusement park that charges an entrance-fee
d. Both a and c

47. A __________ is nonrival and nonexcludable, while a _________ is rival and

nonexcludable.
a. Private good; public good
b. Public good; private good
c. Public good; common resource
d. Common resource; private good

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 48. The figure below shows Income Lorenz curves of country A and country B. According to
the graph, which of the following is NOT true?

a. Country A has higher Gini ratio than country B.

b. The income is distributed more equally in country A than in country B.
c. The richest 20% of households in country B have a greater portion of total income
than the richest 20% in country A.
d. None of the above.

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 49. Consider the 10-person economy below. What percentage of total income in the
economy is controlled by the top quintile?
Person Income

Amy $18,000

Ben $22,000

Cyd $15,000

Eve $25,000

Fez $40,000

Gen $28,000

Hal $32,000

Ivy $12,000

Jon $42,000

Kam $35,000

a. 30%
b. 22%
c. 42%
d. 25%

50. If the Gini ratio in an economy has increased over time, which of the following can
explain this? 
a. There has been an increase in the number of people going to college that is
increasing the wage of college graduates 
b. There has been an increase in the demand for college graduates in the labor
market that is increasing their wages 
c. There has been a decrease in the level of discrimination in the economy that is
equalizing wages 
d. None of the above would explain an increase in the Gini ratio over time  

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