Econ 2106 Principles of Microeconomics Sample Exam 2 ____ 1. A decrease in a consumer's income a. increases the slope of the consumer's budget constraint. b. has no effect on the consumer's budget constraint. c. decreases the slope of the consumer's budget constraint. d. has no effect on the slope of the consumer's budget constraint. ____ 2. The rate at which a consumer is willing to exchange one good for another, and maintain a constant level of satisfaction, is called the a. relative expenditure ratio. b. value of marginal product. c. marginal rate of substitution. d. relative price ratio. ____ 3. When two goods are perfect substitutes, the marginal rate of substitution a. is constant along the indifference curve. b. decreases as the scarcity of one good increases. c. increases as the scarcity of one good increases. d. changes to reflect the consumer’s changing preferences for the goods. ____ 4. Suppose Rich always uses two packets of sugar with his coffee. Rich's indifference curves for sugar and coffee are a. bowed inward. b. bowed outward. c. straight lines. d. L shaped. ____ 5. A fall in the price of DVD players leads consumers to buy more DVD players. From this information we can conclude that DVD players a. are normal goods. b. are inferior goods. c. are Giffen goods. d. None of the above is correct. ____ 6. Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the substitution effect by itself will a. cause the consumer to buy more of good Y and less of good X. b. cause the consumer to buy more of good X and less of good Y. c. not affect the amount of goods X and Y that the consumer buys. d. result in an upward-sloping demand for good Y if the substitution effect is positive. ____ 7. An outward shift of the budget constraint will cause a consumer to buy a. fewer normal goods and more inferior goods. b. more normal goods and fewer inferior goods. c. more normal goods and more inferior goods. d. fewer normal goods and fewer inferior goods. 1В В Figuree 21-7 ____ 8. Referr to Figure 21--7. Assume th hat the consum mer depicted in the figure faces prices and a income su uch that she optim mizes at point B. According g to the graph h, what chang ge forces the consumer to move m to point A? a. a decrease in th he price of Sk kittles b. a decrease in th he price of M&M's M c. an n increase in the t price of Sk kittles d. an n increase in the t price of M&M's M ____ 9. Assum me that a college student purchases p onlly coffee and Snickers. S Thee substitution effect associaated with a decrease in the pricce of a Snickeers will result in n increase in the t consumpttion of coffee only. a. an b. a decrease in th he consumptiion of coffee only. o c. an n increase in the t consumpttion of Snickeers and a decrrease in the co onsumption of o coffee. d. a decrease in th he consumptiion of Snickerrs and an incrrease in the co onsumption of o coffee. Figuree 21-9 ____ 10. Referr to Figure 21--9. Assume th hat the consum mer depicted in the figure has an incom me of $40. Wh hich of the follow wing price-qu uantity combin nations would be on her demand d curvee for marshmaallows if the price p of choco olate chips is $4? $ a. $22.00, 3 b. $22.00, 9 c. $44.00, 3 d. $44.00, 9 2В В ____ 11. An ex xample of an explicit e cost of o production n would be a. th he cost of forg gone labor earrnings for an entrepreneurr. b. th he lost opporttunity to inveest in capital markets m when n the money is invested in one's bu usiness. c. leease payments for the land d on which a firm’s f factory stands. d. Both a and c arre correct. ____ 12. Which h of the follow wing expressiions is correctt? a. acccounting pro ofit = total rev venue - expliccit costs b. ecconomic profit = total reveenue - impliciit costs c. ecconomic profit = total reveenue - explicitt costs d. Both a and b arre correct. ____ 13. Dolorres used to wo ork as a high school teacheer for $40,000 per year but quit in order to start her own o catering busin ness. To buy th he necessary equipment, e sh he withdrew $20,000 from m her savings, (which paid 3 percent intereest) and borro owed $30,000 from her unccle, whom shee pays 3 perceent interest peer year. Last year y she paid $25,0000 for ingrediients and had d revenue of $60,000. She assked Louis th he accountant and Greg thee economist to o calcullate her profitt for her. a. Louis says her profit is $34,100 and Greg g says her pro ofit is $6,500. g says she lostt $6,500. b. Louis says her profit is $34,100 and Greg g says she lostt $5,000. c. Louis says her profit is $35,000 and Greg g says her pro ofit is 33,500. d. Louis says her profit is $33,5500 and Greg Figuree 13-2 d a totall cost function n for a firm th hat produces cookies. The fiigure below depicts ____ 14. Referr to Figure 13--2. The chang ging slope of the total cost curve reflectss a. decreasing aveerage variablee cost. b. decreasing aveerage total cosst. arginal producct. c. decreasing ma ncreasing fixeed cost. d. in ____ 15. Assum me a certain firm f regards the t number off workers it employs e as vaariable, and th hat it regards the size of itss factorry as fixed. Th his assumptio on is often reaalistic a. in n the short run n, but not in the t long run. b. in n the long run n, but not in th he short run. c. bo oth in the sho ort run and in n the long run n. d. neeither in the short s run nor in the long ru un. 3В В ____ 16. The co ost of produccing an additional unit of output is the firm's a. marginal m cost. b. prroductivity offset. c. vaariable cost. d. av verage variab ble cost. ____ 17. Dimin nishing marginal product suggests s that a. ad dditional unitts of output become b less co ostly as more output is pro oduced. b. marginal m cost is i upward slo oping. c. th he firm is at fu ull capacity. d. ad dding additio onal workers will lower tottal cost. Figuree 13-5 ____ 18. Referr to Figure 13--5. Which of the t following g can be inferrred from the figure above? (i) Marginal cost c is increassing at all leveels of output. Marginal product p is inccreasing at low w levels of ou utput. (ii) Marginal product p is deccreasing at hiigh levels of output. o (iii) a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (ii) only ario 13-5 Scena duces and sellls staplers. Laast year, it pro oduced 7,000 staplers and sold each staapler for $6. In n A certtain firm prod produ ucing the 7,00 00 staplers, it incurred i variiable costs of $28,000 $ and a total cost of $45,000. ____ 19. Referr to Scenario 13-5. 1 The firm m's accounting g profit for th he year was a. $--3,000. b. $--5,000 c. $77,000. d. $117,000. ____ 20. At wh hat level of ou utput will aveerage variablee cost equal av verage total cost? a. When W margina al cost equals average totall cost b. Fo or all levels of o output in which w averagee variable costt is falling c. When W margina al cost equals average variaable cost d. Th here is no lev vel of output where w this occcurs, as long as fixed costss are positive. 4В В ____ 21. For Firm A, when four units of output are produced, the total cost is $175 and the average variable cost is $33.75. What would the average fixed cost be if ten units were produced? a. $4 b. $10 c. $40 d. $135 ____ 22. When firms are said to be price takers, it implies that if a firm raises its price, a. buyers will go elsewhere. b. buyers will pay the higher price in the short run. c. competitors will also raise their prices. d. firms in the industry will exercise market power. ____ 23. If ABC Company sells its product in a competitive market, then a. the price of that product depends on the quantity of the product that ABC Company produces and sells since ABC Company’s demand curve is downward sloping. b. ABC Company's total revenue must be proportional to its quantity of output. c. ABC Company's total cost must be proportional to its quantity of output. d. ABC Company's total revenue must be equal to its average revenue. ____ 24. If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer's elasticity of demand a. will also be -0.3. b. depends on how large a crop the farmer produces. c. will range between -0.3 and -1.0. d. will be infinite. ____ 25. The short-run supply curve for a firm in a perfectly competitive market is a. horizontal. b. likely to slope downward. c. determined by forces external to the firm. d. the portion of its marginal cost curve that lies above its average variable cost. ____ 26. 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. ____ 27. When a profit-maximizing competitive firm finds itself minimizing losses because it is unable to earn a positive profit, this task is accomplished by producing the quantity at which price is equal to a. sunk cost. b. average fixed cost. c. average variable cost. d. marginal cost. 5В В ____ 28. A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price rises to $25 and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, which of the following statements is correct? a. The firm's quantity of output is higher than it was previously. b. The firm's average total cost is higher than it was previously. c. The firm's marginal revenue is higher than it was previously. d. All of the above are correct. ____ 29. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will a. fall in the short run. All firms will shut down and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. b. fall in the short run. No firms will shut down, but some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. d. not fall in the short run because firms will exit to maintain the price. ____ 30. Raiman's Shoe Repair also produces custom-made shoes. When Mr. Raiman produces 12 pairs a week, the marginal cost of the twelfth pair is $84, and the MR of that unit is $70. What would you advise Mr. Raiman to do? a. Shut down the business. b. Produce more custom-made shoes. c. Decrease the price. d. Produce fewer custom-made shoes. ____ 31. Which of the following is an example of a barrier to entry? (i) A key resource is owned by a single firm. (ii) The costs of production make a single producer more efficient than a large number of producers. (iii) The government has given the existing monopoly the exclusive right to produce the good. a. b. c. d. ____ (i) and (ii) (ii) and (iii) (i) only All of the above are examples of barriers to entry. 32. If the distribution of water is a natural monopoly, then (i) multiple firms will each have to pay large fixed costs to develop their own network of pipes. (ii) allowing for competition among different firms in the water-distribution industry is efficient. (iii) a single firm can serve the market at the lowest possible average total cost. a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (iii) only 6В В ____ 33. A monopolist's average revenue is always a. equal to marginal revenue. b. greater than the price of its product. c. equal to the price of its product. d. less than the price of its product. ____ 34. Marginal revenue can become negative for a. both competitive and monopoly firms. b. competitive firms, but not for monopoly firms. c. monopoly firms, but not for competitive firms. d. neither competitive nor monopoly firms. ____ 35. Which of the following statements is true of 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. Scenario 15-2 A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $30, its average revenue is $60, and its average total cost is $34. ____ 36. Refer to Scenario 15-2. The firm's profit-maximizing price is a. $30. b. between $30 and $34. c. between $34 and $60. d. $60. ____ 37. The following table shows quantity, price, and marginal cost information for a monopoly. What price should the firm charge to maximize its profit? Q 0 1 2 3 4 5 6 a. b. c. d. P 10 9 8 7 6 5 4 MC -3 4 5 6 7 8 $4 $5 $6 $7 7В В ____ 38. One problem with government operation of monopolies is that a. a benevolent government is likely to be interested in generating profits for political gain. b. monopolies typically have rising average costs. c. the government typically has little incentive to reduce costs. d. a government-regulated outcome will increase the profitability of the monopoly. ____ 39. A perfectly price-discriminating monopolist is able to a. maximize profit and produce a socially-optimal level of output. b. maximize profit, but not produce a socially-optimal level of output. c. produce a socially-optimal level of output, but not maximize profit. d. exercise illegal preferences regarding the race and/or gender of its employees. ____ 40. 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. ____ 41. A firm cannot price discriminate if it a. has perfect information about consumer demand. b. operates in a competitive market. c. faces a downward-sloping demand curve. d. is regulated by the government. ____ 42. If one were to compare a competitive market to a monopoly that engages in perfect price discrimination, one could say that a. in both cases, total social welfare is the same. b. total social welfare is higher in the competitive market than with the perfectly price discriminating monopoly. c. in both cases, some potentially mutually beneficial trades do not occur. d. consumer surplus is the same in both cases. ____ 43. Monopolistic competition differs from perfect competition because in monopolistically competitive markets a. there are barriers to entry. b. all firms can eventually earn economic profits. c. each of the sellers offers a somewhat different product. d. strategic interactions between firms is vitally important. ____ 44. In the short run, a firm in a monopolistically competitive market operates much like a a. firm in a perfectly competitive market. b. firm in an oligopoly. c. monopolist. d. monopsonist. ____ 45. As firms exit a monopolistically competitive market, profits of remaining firms a. decline and product diversity in the market decreases. b. decline and product diversity in the market increases. c. rise and product diversity in the market decreases. d. rise and product diversity in the market increases. 8В В ____ 46. Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to 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. an increase in the firm’s average cost of production. ____ 47. An important difference between the situation faced by a profit-maximizing monopolistically competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run, a. price may exceed marginal revenue, but in the long run, price equals marginal revenue. b. price may exceed marginal cost, but in the long run, price equals marginal cost. c. price may exceed average total cost, but in the long run, price equals average total cost. d. there are many firms in the market, but in the long run, there are only a few firms in the market. ____ 48. Monopolistically competitive firms have excess capacity. To maximize profits, firms will a. increase their output to lower their average total cost of production and eliminate the excess capacity. b. produce where price equals marginal cost to eliminate the excess capacity. c. produce where average revenue equals marginal cost to eliminate the excess capacity. d. maintain the excess capacity. ____ 49. Which of the following best describes the idea of excess capacity in monopolistic competition? a. Firms produce more output than is socially desirable. b. The output produced by a typical firm is less than what would occur at the minimum point on its ATC curve. c. Due to product differentiation, firms choose output levels where P > ATC. d. Firms keep some surplus output on hand in case there is a shift in the demand for their product. ____ 50. When firms in a monopolistically competitive market engage in price-related advertising, defenders of advertising argue that a. the quality of products sold in the market always increases. b. customers are less likely to be informed about other characteristics of the product. c. new firms are discouraged from entering the market. d. each firm has less market power. 9В В 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. 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: ANS: D C A D D A B D C B C A B C A A B B A D A A B D D A D D C D D C C C B D D C A C B A C C C B C 10В В 48. ANS: D 49. ANS: B 50. ANS: D 11В В
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