Econ 2106 Principles of Microeconomics Sample Exam 2 Please notice that the second exam will cover chapters 21, 13, 14, 15 rather than 13, 14, 15, 16 which is what I originally indicated. . My mistake for omitting chapter 21. The exam will not include chapter 16. I will devote Tuesday March 23 as a review session. Please come prepared to ask questions about any material in the four chapters the second exam will cover. Figure 21-4 ____ 1. Refer to Figure 21-4. Which of the following statements is NOT true for a consumer who moves from point B to point C? a. The consumer is better off since point C is higher than point B. b. The marginal rate of substitution at points C and B differ. c. The consumer is willing to sacrifice Twinkies to obtain Ho-Ho's. d. The consumer is equally well off. ____ 2. The marginal rate of substitution is a. the slope of a budget constraint. b. always constant. c. the slope of an indifference curve. d. the point at which the budget constraint and the indifference curve is tangent. ____ 3. Olga consumes two normal goods, X and Y, and is currently at an optimum. If the price of good X falls, we can predict with certainty that Olga's real income will rise a. and she will therefore consume more of both goods. b. but the substitution effect will insure that she consumes more X and less Y. c. so she will consume more of good X, but she might consume more, less, or the same of good Y. d. but the substitution effect will negate the positive effect of the rise. ____ 4. A fall in the price of widgets leads consumers to buy more widgets. From this information we can conclude that widgets a. are normal goods. b. are inferior goods. c. are Giffen goods. d. None of the above are correct. 1 ____ 5. When the price of pizza rises, the substitution effect, for normal goods Pepsi and pizza, causes Pepsi to be relatively a. more expensive, so the consumer buys more Pepsi. b. more expensive, so the consumer buys less Pepsi. c. less expensive, so the consumer buys more Pepsi. d. less expensive, so the consumer buys less Pepsi. ____ 6. Assume that a college student purchases only coffee and Snickers. The substitution effect associated with a decrease in the price of a Snickers bar will result in a. an increase in the consumption of coffee only. b. a decrease in the consumption of coffee only. c. an increase in the consumption of Snickers and a decrease in the consumption of coffee. d. a decrease in the consumption of Snickers and an increase in the consumption of coffee. Figure 21-10 ____ 7. Refer to Figure 21-10. If point B is the consumer's optimum and the price of Chocolate Chips is $3 per bag, what is the price of a bag of Marshmallows? a. $3 b. $6 c. $1.50 d. None of the above are correct. ____ 8. When considering household saving, the relative price between "consuming when young" and "consuming when old" is the a. consumption rate. b. interest rate. c. prime rate. d. federal funds rate. ____ 9. The backward bending portion of an individual labor supply curve is indicative of a. dominant income effects at higher levels of income. b. dominant income effects at lower levels of income. c. a desire to reduce work effort (hours) as wage rate falls. d. a desire to increase work effort (hours) as wage rate rises. ____ 10. If leisure were an inferior good, then labor supply curves a. would all be negatively sloped. b. would all be positively sloped. c. would all be vertical. d. could still be positively or negatively sloped. 2 ____ 11. Those things that must be forgone to acquire a good are called a. substitutes. b. opportunity costs. c. explicit costs. d. competitors. ____ 12. Which of the following is an implicit cost? (i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm (ii) interest paid on the firm's debt (iii) rent paid by the firm to lease office space a. b. c. d. ____ (ii) and (iii) (i) and (iii) (i) only All of the above are correct. 13. Explicit costs a. require an outlay of money by the firm. b. enter into the accountant's measurement of a firm's profit. c. enter into the economist's measurement of a firm's profit. d. All of the above are correct. Refer to the following information to answer the following questions. Scenario 13-2 Zach took $500,000 out of the bank and used it to start his new cookie business. The bank account pays 4 percent interest per year. During the first year of his business, Zach sold 12,000 boxes of cookies for $3 per box. Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $14,000. ____ 14. Refer to Scenario 13-2. Zach's accounting profit for the year was a. $-478,000. b. $-56,000. c. $2,000. d. $22,000. ____ 15. Refer to Scenario 13-2. Zach's economic profit for the year was a. $-478,000. b. $-56,000. c. $2,000. d. $22,000. The figure below depicts a total cost function for a firm that produces cookies. Use the figure to answer the following question. Figure 13-2 3 ____ 16. Refer to Figure 13-2. Which of the following statements best captures the nature of the underlying production function? a. Output increases at a decreasing rate with additional units of input. b. Output increases at an increasing rate with additional units of input. c. Output decreases at a decreasing rate with additional units of input. d. Output decreases at an increasing rate with additional units of input. ____ 17. Let L represent the number of workers hired by a firm and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L = 13, Q = 130). Then the marginal product of the 13th worker is a. 8 units of output. b. 10 units of output. c. 122 units of output. d. 130 units of output. ____ 18. Average total cost tells us the a. total cost of the first unit of output, if total cost is divided evenly over all the units produced. b. cost of a typical unit of output, if total cost is divided evenly over all the units produced. c. cost of the last unit of output, if total cost does not include a fixed cost component. d. variable cost of a firm that is producing at least one unit of output. ____ 19. Diminishing marginal product suggests that a. additional units of output become less costly as more output is produced. b. marginal cost is upward sloping. c. the firm is at full capacity. d. All of the above are correct. Use the following information to answer the following questions. Table 13-1 Quantity of Widgets Measures of Cost for ABC Inc. Widget Factory Variable Total Costs Costs Fixed Costs 0 $10 1 $1 2 $3 $13 3 $6 $16 4 $10 5 6 $25 $21 $10 ____ 20. Refer to Table 13-1. The average total cost of producing one widget is a. $1.00. b. $10.00. c. $11.00. d. $22.00. ____ 21. Refer to Table 13-1. The marginal cost of producing the sixth widget is a. $1.00. b. $3.50. c. $5.00. d. $6.00. 4 ____ 22. When a firm is operating at an efficient scale, a. average variable cost is minimized. b. average fixed cost is minimized. c. average total cost is minimized. d. None of the above are correct. ____ 23. Diseconomies of scale occur when a. average fixed costs are falling. b. average fixed costs are constant. c. long-run average total costs rise as output increases. d. long-run average total costs fall as output increases. ____ 24. Which of the following statements is false? a. In the long run, there are no fixed costs. b. Marginal cost is independent of fixed costs. c. Economies of scale is a short-run concept. d. Diminishing marginal product explains increasing marginal cost. ____ 25. When a firm in a competitive market produces 10 units of output, it has a marginal revenue of $8.00. What would be the firm's total revenue when it produces 6 units of output? a. $4.80 b. $6.00 c. $48.00 d. $60.00 ____ 26. Changes in the output of a perfectly competitive firm, without any change in the price of the product, will change the firm's a. total revenue. b. marginal revenue. c. average revenue. d. All of the above are correct. ____ 27. For a competitive firm, a. Total revenue = Average revenue. b. Total revenue = Marginal revenue. c. Total cost = Marginal revenue. d. Average revenue = Marginal revenue. ____ 28. As a general rule, profit-maximizing producers in a competitive market produce output at a point where a. marginal cost is increasing. b. marginal cost is decreasing. c. marginal revenue is increasing. d. price is less than marginal revenue. 5 The graph below depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question. Figure 14-2 ____ 29. Refer to Figure 14-2. When price falls from P3 to P1, the firm finds that a. fixed cost is higher at a production level of Q1 than it is at Q3. b. it should produce Q1 units of output. c. it should produce Q3 units of output. d. it is unwilling to produce any output. ____ 30. When price is below average variable cost, a firm in a competitive market will a. shut down and incur fixed costs. b. shut down and incur both variable and fixed costs. c. continue to operate as long as average revenue exceeds marginal cost. d. continue to operate as long as average revenue exceeds average fixed cost. The figure below depicts the cost structure of a profit-maximizing firm in a competitive market. Use the figure to answer the following question. Figure 14-3 ____ 31. Refer to Figure 14-3. Which line segment best reflects the short-run supply curve for this firm? a. BCD b. CD c. DE d. None of the above are correct. ____ 32. If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue. 6 ____ 33. A competitive firm's marginal cost curve is regarded as its supply curve because a. the position of the marginal cost curve determines the price for which the firm should sell its product. b. among the various cost curves, the marginal cost curve is the only one that slopes upward. c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price. d. the firm is aware that marginal revenue must exceed marginal cost in order for profit to be maximized. ____ 34. In a perfectly competitive market, the process of entry and exit will end when, for firms in the market, a. price is equal to average variable cost. b. marginal revenue is equal to average variable cost. c. economic profits are zero. d. All of the above are correct. ____ 35. When firms are neither entering nor exiting a perfectly competitive market, a. total cost must equal total revenue. b. economic profits must be zero. c. average revenue must equal average total cost. d. All of the above are correct. ____ 36. Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will a. increase price in the short run, but not in the long run. b. increase price in the long run, but not in the short run. c. increase price both in the short and the long run. d. not affect price in either the short or the long run. ____ 37. An industry is a natural monopoly when (i) government assists the firm in maintaining the monopoly. (ii) a single firm owns a key resource. (iii) a single firm can supply a fixed number of goods or services at a smaller cost than could two or more firms. a. b. c. d. (i) only (iii) only (i) and (ii) (ii) and (iii) ____ 38. The fundamental cause of monopoly is a. incompetent management in competitive firms. b. the zero-profit feature of long-run equilibrium in competitive markets. c. advertising. d. barriers to entry. ____ 39. A natural monopolist's ability to price its product is a. constrained by the market demand curve. b. constrained by market supply. c. not affected by market demand. d. enhanced by regulatory control of the government. 7 ____ 40. Because a monopolist is the sole producer in its market, it can necessarily alter the price of its good (i) without affecting the quantity sold. (ii) without affecting its average total cost. (iii) by adjusting the quantity it supplies to the market. a. b. c. d. ____ 41. A monopolist's marginal revenue is less than price because (i) to sell additional units of the good, the price charged on all units must decrease. (ii) with the sale of an additional unit, the monopolist receives less revenue for each of the previous units it planned to sell. (iii) of the upward-sloping average revenue curve. a. b. c. d. ____ (ii) only (iii) only (i) and (ii) (i) and (iii) (i) and (ii) (ii) and (iii) (i) and (iii) All of the above are correct. 42. Competitive firms differ from monopolies in which of the following ways? (i) Competitive firms do not have to worry about the price effect lowering their total revenue. (ii) Marginal revenue for a competitive firm equals price, while marginal revenue for a monopoly is less than the price it is able to charge. (iii) Monopolies must lower their price in order to sell more of their product, while competitive firms do not. a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) All of the above are correct. ____ 43. A monopoly firm can sell 150 units of output for $12.00 per unit. Alternatively, it can sell 151 units of output for $11.95 per unit. The marginal revenue of the 151st unit of output is a. $-11.95. b. $-4.45. c. $4.45. d. $11.95. ____ 44. The difference in total surplus between a socially efficient level of production and a monopolist's level of production is a. offset by regulatory revenues. b. called a deadweight loss. c. usually small and insignificant. d. All of the above are correct. ____ 45. If a monopolist is able to perfectly price discriminate, a. consumer surplus is always increased. b. total surplus is always decreased. c. consumer surplus and deadweight losses are transformed into monopoly profits. d. the price effect dominates the output effect on monopoly revenue. 8 ____ 46. It is not uncommon to find that prescription drugs sell for more in the United States than they do in other countries. Which of the following statements about this issue is most likely to be true? a. Drug companies are engaging in price discrimination, and this practice certainly reduces global social welfare. b. Global social welfare could be improved if the price in the United States were reduced to the price charged in other countries. c. Global social welfare could be improved if the price in the other countries were increased to the price charged in the United States. d. Drug companies are engaging in price discrimination, but this might improve global social welfare if it gives more people access to the drugs. 9 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. ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: A C C D C C C B A B B C D D C A A B B C D C C C C A D A D A D A C C D A B D A B A D C B C D 10