Homework Problems
for
Principles of Microeconomics
(Answers at back of packet)
Professor K. Leppel
I. GRAPHS
1. If a line slopes upward from left to right, its slope is
a. positive.
b. negative.
c. zero.
d. infinite.
2. If a line slopes downward from left to right, its slope is
a. positive.
b. negative.
c. zero.
d. infinite.
3. If a line is vertical, its slope is
a. positive.
b. negative.
c. zero.
d. infinite.
4. If a line is horizontal, its slope is
a. positive.
b. negative.
c. zero.
d. infinite.
5. If the slope of a curve is positive and the curve is getting steeper as you move from left to
right, the curve is
a. concave.
b. convex.
c. linear.
6. If the slope of a curve is positive and the curve is getting flatter as you move from left to
right, the curve is
a. concave.
b. convex.
c. linear.
7. If the slope of a curve is negative and the curve is getting steeper as you move from left to
right, the curve is
a. concave.
b. convex.
c. linear.
8. If the slope of a curve is negative and the curve is getting flatter as you move from left to
right, the curve is
a. concave.
b. convex.
c. linear.
9. If Y = 10 - 5 X,
a. the vertical intercept is 5 & the slope is 10.
b. the vertical intercept is 10 & the slope is 5.
c. the vertical intercept is -5 & the slope is 10.
d. the vertical intercept is 10 & the slope is -5.
10. If Y = 5X - 10,
a. the vertical intercept is 5 & the slope is 10.
b. the vertical intercept is 10 & the slope is 5.
c. the vertical intercept is 5 & the slope is -10.
d. the vertical intercept is -10 & the slope is 5.
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II. RESOURCE UTILIZATION
1. Individuals are forced to make choices because
a. human wants are limited.
c. wants are unlimited & resources are scarce.
b. the supply of resources is infinite.
d. resources are unlimited.
2. When you use your priorities and values to make economic statements about what should be,
you are using
a. macroeconomics.
c. normative economics.
b. microeconomics.
d. positive economics.
3. Suppose you had $1,000 to spend. If you spent it on a vacation trip rather than on new
clothes, your second choice, or 1,000 lottery tickets, your third choice, what was your
opportunity cost of going on a vacation trip?
a. $1,000
c. not buying the new clothes
b. the vacation trip itself
d. not buying the lottery tickets
4. Each of the following is an example of an economic resource except
a. capital.
b. labor.
c. land.
d. money.
5. Which of the following will shift an economy's production possibilities curve inward?
a. An improvement in technology
c. A decrease in land, labor or capital
b. An increase in the unemployment rate.
d. A decrease in the unemployment rate
6. Economic growth can be shown by ____________________ production possibilities curve.
a. an inward shift of the
c. a movement from one point to another along the
b. an outward shift of the
d. a movement to a point inside the
7. A point on the production possibility frontier represents
a. an output that it is not possible to produce.
b. full and efficient use of resources.
c. unemployment or inefficient use of resources.
8. A point above the production possibility frontier represents
a. an output that it is not possible to produce.
b. full and efficient use of resources.
c. unemployment or inefficient use of resources.
9. A point below the production possibility frontier represents
a. an output that it is not possible to produce.
b. full and efficient use of resources.
c. unemployment or inefficient use of resources.
10. When resources are NOT equally well-suited to producing the economy's goods, the
production possibilities curve will be
a. concave.
c. linear and upward sloping.
b. convex.
d. linear and downward sloping.
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11. Consider a country's production possibility curve for guns and butter. If the country is
currently operating at the origin, it is producing
a. a moderate amount of both guns and butter. c. only butter.
b. only guns.
d. no guns or butter.
12. If Mary has a lower opportunity cost in gardening than Sue, then
a. Mary must have an absolute advantage in gardening over Sue.
b. Sue must have an absolute advantage in gardening over Mary.
c. Mary must have a comparative advantage in gardening over Sue.
d. Sue must have a comparative advantage in gardening over Mary.
Use the information in this paragraph to answer questions 13-20. Suppose both Bolivia and
Chile have straight line production possibility curves. Also, suppose if Bolivia used all its
resources to produce only tin, it could produce 10 tons of tin; if it used all its resources to
produce only copper, it could produce 12 tons of copper. If Chile produced only tin it could
produce 8 tons of tin; if it produced only copper, it could produce 15 units of copper.
13. For Bolivia, the opportunity cost of producing 10 units of tin is __________units of copper;
the opportunity cost of producing 1 unit of tin is __________ units of copper.
14. For Chile, the opportunity cost of producing 8 units of tin is _________units of copper;
the opportunity cost of producing 1 unit of tin is __________units of copper.
15. For Bolivia, the opportunity cost of producing 12 units of copper is __________ units of tin.
the opportunity cost of producing 1 unit of copper is __________ units of tin.
16. For Chile, the opportunity cost of producing 15 units of copper is __________ units of tin.
the opportunity cost of producing 1 unit of copper is __________ units of tin.
17. __________ (Bolivia, Chile) has the comparative advantage in the production of tin and
__________ (Bolivia, Chile) has the comparative advantage in the production of copper.
18. Bolivia should produce and trade ___________, while Chile should produce and trade
_________.
19. Based on the answers to the previous questions, a unit of tin will trade for more than
__________ and less than __________ units of copper.
20. Based on the answers to the previous questions, a unit of copper will trade for more than
__________ and less than __________ units of tin.
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III. SUPPLY AND DEMAND
1. If the price of a product increases,
a. supply increases.
b. supply decreases.
c. quantity supplied increases.
d. quantity supplied decreases.
2. If the price of a product increases,
a. demand increases.
b. demand decreases.
c. quantity demanded increases.
d. quantity demanded decreases.
3. If the price of a product decreases, there is a
a. leftward shift of the demand curve.
b. rightward shift of the demand curve.
c. leftward movement along the demand curve.
d. rightward movement along the demand curve.
4. If the price of a product decreases, there is a
a. leftward shift of the supply curve.
b. rightward shift of the supply curve.
c. leftward movement along the supply curve.
d. rightward movement along the supply curve.
5. When quantity demanded is greater than quantity supplied, market price will
a. rise.
b. fall.
c. stay the same.
6. If market price is above equilibrium price,
a. equilibrium price will rise.
b. equilibrium price will fall.
c. market price will rise.
d. market price will fall.
7. If the equilibrium price is $10, then a price of $12 could be a ____________________
(ceiling, floor), and a ____________________ (shortage, surplus) would result.
8. If demand decreases, the demand curve shifts to the ____________________ (left, right).
9. If supply decreases, the supply curve shifts to the ____________________ (left, right).
10. If demand increases, the demand curve shifts to the ____________________ (left, right).
11. If supply increases, the supply curve shifts to the ____________________ (left, right).
12. If demand for good increases when income increases, the good is
a. a complementary good.
c. a normal good.
b. an inferior good.
d. a substitute good.
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13. If demand for good decreases when income increases, the good is
a. a complementary good.
c. a normal good.
b. an inferior good.
d. a substitute good.
14. Suppose when the price of good A increases, the demand for good B increases. Then good
A is
a. a complementary good.
c. a normal good.
b. an inferior good.
d. a substitute good.
15. Suppose when the price of good A increases, the demand for good B decreases. Then good
A is
a. a complementary good.
c. a normal good.
b. an inferior good.
d. a substitute good.
16. An increase in the wage rate paid to construction workers will tend to
a. increase the demand for homes.
c. increase the supply of new homes.
b. decrease the demand for homes.
d. decrease the supply of new homes.
17. Changes in demand are caused by changes in each of the following except
a. changes in income.
c. changes in tastes and preferences.
b. changes in prices of related goods.
d. changes in supply.
18. The supply of a good will increase if
a. the cost of an input used to produce the good increases.
b. an advance in technology occurs.
c. the weather becomes less favorable for growing the good.
d. all of the above.
19. If you increase demand and supply, does equilibrium quantity increase or decrease?
20. If you increase supply a little and increase demand a lot, does equilibrium price increase or
decrease?
21. If you increase supply a lot and increase demand a little, does equilibrium price increase or
decrease?
22. If you decrease demand and supply, does equilibrium quantity increase or decrease?
23. If you decrease supply a little and decrease demand a lot, does equilibrium price increase or
decrease?
24. If you decrease supply a lot and decrease demand a little, does equilibrium price increase or
decrease?
25. If you increase demand and decrease supply, does equilibrium price increase or decrease?
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26. If you increase demand a lot and decrease supply a little, does equilibrium quantity increase
or decrease?
27. If you increase demand a little and decrease supply a lot, does equilibrium quantity increase
or decrease?
28. If you decrease demand and increase supply, does equilibrium price increase or decrease?
29. If you decrease demand a lot and increase supply a little, does equilibrium quantity increase
or decrease?
30. If you decrease demand a little and increase supply a lot, does equilibrium quantity increase
or decrease?
IV. MIXED ECONOMY & MARKET FAILURE
1. We have a mixed economy because
a. we produce guns and butter.
b. we consume domestically produced goods as well as imports.
c. we consume both goods and services.
d. there is a private sector and a public (or government) sector.
2. Which is the most accurate statement?
a. All countries have mixed economies.
b. China has a purely communist economy.
c. Russia has a purely socialistic economic system.
d. The United States has a purely capitalistic economy.
3. If a company is taxed on the pollution it emits,
a. the supply curve will shift to the left, the equilibrium quantity will decrease, and the
equilibrium price will increase.
b. the supply curve will shift to the right, the equilibrium quantity will increase, and the
equilibrium price will decrease.
c. the supply curve will shift to the left, the equilibrium quantity will decrease, and the
equilibrium price will decrease.
d. the supply curve will shift to the right, the equilibrium quantity will increase, and the
equilibrium price will increase.
4. In a pure capitalist economy, "what to produce" is determined by
a. a central planning board.
b. the price mechanism.
c. the issuing of government coupons used along with money to purchase goods.
d. None of these choices are true.
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5. The U.S. economy does a good job with respect to
a. both equity and efficiency.
c. efficiency, but not equity.
b. equity, but not efficiency.
d. neither equity nor efficiency
6. The richest fifth of all American families receives __________ percent of our total income.
a. almost 35
b. about 50
c. more than 60
d. more than 75
7. Compared to their percentage shares in 1968, over the next 40 years, the percentage shares of
each of the lowest four quintiles
a. rose substantially.
c. stayed about the same.
b. rose somewhat.
d. declined.
8. Between 1968 and 2008 the percentage share of income that went to the top quintile
a. decreased substantially.
c. stayed the same.
b. decreased slightly.
d. increased.
9. The government defines the poverty line as
a. the lowest income quintile (20%).
b. those receiving public assistance or eligible for public assistance.
c. anyone who does not have to pay federal income tax.
d. a specified dollar amount of income, depending on family size.
10. In an economy with perfect equality the Gini coefficient is equal to
a. 0
b. 1
c. 100
d. infinity
V. PERCENTAGES AND ELASTICITY
1. If demand is inelastic and price is raised, total revenue will
a. rise
c. stay the same
b. fall
d. possibly rise or possibly fall
2. If demand is elastic and price is lowered, total revenue will
a. rise
c. stay the same
b. fall
d. possibly rise or possibly fall
3. Total revenue will remain the same when the price is changed, if demand has
a. zero elasticity.
b. unit elasticity.
c. infinite elasticity.
4. A 5 percent increase in the price of a product causes the quantity demanded to fall by 15
percent. The demand for the product is
a. inelastic
b. unit elastic
c. elastic
d. perfectly elastic
5. A 5 percent increase in the price of a product causes the quantity demanded to fall by 5
percent. The demand for the product is
a. inelastic
b. unit elastic
c. elastic
d. perfectly inelastic
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6. A 5 percent increase in the price of a product causes the quantity demanded to fall by 1
percent. The demand for the product is
a. inelastic
b. unit elastic
c. elastic
d. perfectly elastic
7. A 5 percent increase in the price of a product leaves the quantity demanded unchanged. The
demand for the product is
a. elastic
b. unit elastic
c. perfectly elastic d. perfectly inelastic
8. If the demand curve for a company's product is horizontal, the elasticity of demand is
a. inelastic
b. unit elastic
c. perfectly elastic d. perfectly inelastic
9. If a business advertises in an attempt to expand the demand and increase the brand loyalty for
its product, it wants to push its product’s demand curve
a. to the right and to make it more elastic.
c. to the left and make it more elastic.
b. to the right and make it less elastic.
d. to the left and make it less elastic.
10. Suppose price increased from $45 to $55 and, in response, quantity demanded fell from 110
to 90. Calculate elasticity; state whether demand is elastic, unit elastic, or inelastic; and
calculate total revenue when price was $45 and $55.
11. Suppose price increased from $45 to $55 and, in response, quantity demanded fell from 105
to 95. Calculate elasticity; state whether demand is elastic, unit elastic, or inelastic; and
calculate total revenue when price was $45 and $55.
12. Suppose price increased from $45 to $55 and, in response, quantity demanded fell from 120
to 80. Calculate elasticity; state whether demand is elastic, unit elastic, or inelastic; and
calculate total revenue when price was $45 and $55.
13. If the elasticity of demand is -5, by what percent would the seller need to reduce her price in
order to increase the quantity sold by 50 percent?
14. If the elasticity of demand is -3, and the seller increased his price by 5 percent, by what
percent would the quantity demanded decrease?
15. If supply is perfectly inelastic, a tax increase is borne
a. only by the buyer
c. mostly by the buyer
b. only by the seller
d. mostly by the seller
16. If the price of iPods decreases by 50 percent and the quantity of songs demanded on iTunes
increases by 25 percent, determine the cross elasticity of demand for iPods and iTunes songs.
17. If the price of laser eye surgery falls by 50 percent and the quantity of contact lenses
demanded falls by 25 percent, find the cross elasticity of demand for these two goods.
18. A positive cross elasticity of demand indicates that a good is
a. a complement
b. inferior
c. normal
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d. a substitute
19. A negative cross elasticity of demand indicates that a good is
a. a complement
b. inferior
c. normal
d. a substitute
20. If S2 is more elastic than S1, then S2 is ____________ (steeper, flatter) than S1.
21. The price elasticity of supply is equal to
a. the change in the price divided by the change in the quantity supplied.
b. the change in the quantity supplied divided by the change in the price.
c. the percentage change in the price divided by the percentage change in the quantity supplied.
d. the percentage change in the quantity supplied divided by the percentage change in the price.
22. If your income rises by 20 percent and you decide to increase your purchases of clothing by 5
percent, find your income elasticity for clothing.
23. Suppose the income elasticity of demand for a good is positive. Then the good is
a. a complement
b. inferior
c. normal
d. a substitute
24. Suppose the income elasticity of demand for a good is negative. Then the good is
a. a complement
b. inferior
c. normal
d. a substitute
VI. TOTALS, AVERAGES, AND MARGINALS – PART 1
1. If total utility is increasing, then marginal utility is
a. positive.
b. negative.
c. increasing.
d. decreasing.
2. If marginal utility is negative, total utility is
a. increasing.
b. decreasing.
d. at its minimum.
c. at its maximum.
3. If marginal utility is positive but decreasing, total utility must be
a. increasing and the total utility curve getting steeper as you move from left to right.
b. increasing and the total utility curve getting flatter as you move from left to right.
c. decreasing and the total utility curve getting steeper as you move from left to right.
d. decreasing and the total utility curve getting flatter as you move from left to right.
4. If the marginal utility of a fifth cookie is less than the average utility of the first four cookies,
then the average utility of five cookies will be ___________ the average utility of the first
four cookies.
a. greater than
b. less than
c. the same as
5. If the marginal is greater than the average, then the average must be
a. increasing
b. decreasing
c. at its maximum
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d. at its minimum
VII. DEMAND AND UTILITY
1. According to the utility-maximization condition, you should consume goods such that
a. the average utility is the same for all goods.
b. the marginal utility is the same for all goods.
c. the total utility is the same for all goods.
d. none of the above.
2. Consider two goods, A and B, whose prices are 3 and 4 respectively. Suppose the marginal
utility of good A is 12 utils and the marginal utility of good B is also 12 utils. Suppose also
that you are currently spending all of your money. To maximize your utility, you should
a. you should buy more of each good.
c. you should buy more A and less B.
b. you should buy less of each good.
d. you should buy more B and less A.
3. If you would be willing to spend $5 for a slice of pie and the price of a slice is $3, what is
your consumer surplus?
4. You’re in the desert on an extremely hot day and become quite thirsty. Luckily you come
upon a stand where they’re selling bottled water. You would be willing to pay $10 for the
first bottle, $5 for the second bottle, and $1 for the third. Luckily they’re charging just a
dollar. How many bottles do you buy? How much is your consumer surplus from water
consumption?
5. Consider the demand schedule for CDs shown.
What is your marginal utility from the fourth CD?
What is your total utility from four CDs?
If the price is $2, how much will your consumer
surplus be?
Demand for CDs
Price
Quantity Demanded
10
1
8
2
6
3
4
4
2
5
6. Consumer surplus is the area
a. above the demand curve & below the price. c. below the demand curve & above the price.
b. above the supply curve & below the price. d. below the supply curve & above the price.
7. For the graph below, determine the consumer surplus.
price
12
S
8
3
D
0
10
quantity
12
8. Suppose you are currently spending all your money on two goods, A and B. Suppose also
that the marginal utility per dollar spent on good A is greater than the marginal utility per
dollar spent on good B. To maximize your utility, you should
a. you should buy more of each good.
c. you should buy more A and less B.
b. you should buy less of each good.
d. you should buy more B and less A.
9. If you go to a party where there are many trays of cookies (for which you do not need to pay),
you will eat cookies until
a. your average utility of cookies is zero.
c. your total utility of cookies is zero.
b. your marginal utility of cookies is zero.
d. none of the above.
10. To maximize your satisfaction, purchase goods such that
a. the average utility per dollar is equal for all goods.
b. the marginal utility per dollar is equal for all goods.
c. the total utility per dollar is equal for all goods.
d. none of the above.
VIII. TOTALS, AVERAGES, AND MARGINALS – PART 2
1. If total variable cost is $1500 and total fixed cost is $1000, what is then total cost?
2. If total variable cost is $2000 and total cost is $3000, what is total fixed cost?
3. If total fixed cost is $2000 and total cost is $5000, what is total variable cost?
4. A variable input is an input that can change
a. in the short run but not in the long run.
b. in the long run but not in the short run.
c. in both the long run and the short run.
d. in neither the long run nor the short run.
5. A fixed input is an input that can change
a. in the short run but not in the long run.
b. in the long run but not in the short run.
c. in both the long run and the short run.
d. in neither the long run nor the short run.
6. In the long run,
a. all costs become fixed.
b. all costs become variable.
c. all costs are a combination of fixed and variable.
7. In the short run, when output is zero
a. total cost is zero.
b. total cost is equal to variable cost.
c. total cost is equal to fixed cost.
d. it is impossible to determine total cost.
8. When MC is below ATC,
a. ATC is declining.
b. ATC is constant.
c. ATC is rising.
d. ATC may be rising, falling, or constant.
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9. If the total fixed cost is $5000, what is the average fixed cost of producing 100 units?
10. If the total variable cost of producing 15 units is $30,000, what is the average variable cost
of production?
11. If the total cost of producing 10 units is $20,000, what is the average total cost of production?
12. Suppose it costs $9,000 to produce 5 units. It costs $12,000 to produce 10 units. What is the
marginal cost of the 10th unit?
13. Suppose you are a profit-maximizing firm in a
perfectly competitive product market. The market
price for the product is $30. Based on the data in the
table shown, how much should you produce?
14. Based on the graph shown below, what price is the
shutdown point?
15. Based on the graph shown below, what price is the
breakeven point?
Quantity
of Output
0
5
10
15
20
25
30
Marginal
Cost
-20
10
20
30
40
50
$
MC
ATC
10
AVC
7
12 15
14
Q
16. When the price is above the minimum of the average total cost curve, the profit-maximizing
firm will
a. make a positive economic profit.
c. operate at a loss.
b. break even.
d. shut down.
17. When the price is below the minimum of the average variable cost curve, the profitmaximizing firm will
a. make a positive economic profit.
c. operate at a loss.
b. break even.
d. shut down.
18. When the price is between the minimum of the average variable cost curve and the minimum
of the average total cost curve, the profit-maximizing firm will
a. make a positive economic profit.
c. operate at a loss.
b. break even.
d. shut down.
19. When the price is at the minimum of the average total cost curve, the profit-maximizing firm
will
a. make a positive economic profit.
c. operate at a loss.
b. break even.
d. shut down.
20. To maximize profit, the firm should produce at the output where
a. ATC = AVC.
c. MR = ATC.
b. ATC = MC.
d. MR = MC.
IX. SUPPLY AND COSTS OF PRODUCTION
1. The law of diminishing marginal returns implies
a. the more hours you spend studying economics the less you know.
b. your understanding of economics will be increased by decreasing your marginal study
time.
c. after a certain point, each additional hour spent per day in studying economics contributes
less to your total knowledge.
d. the more hours you spend studying economics per day, the more you will learn with each
added hour.
2. Which of the following is an example of an implicit cost?
a. forgone earnings of a business owner
c. wages paid to employees
b. rent paid on a building
d. all of the above
3. Economic profit is usually
a. greater than accounting profit because accountants include implicit costs in their calculations.
b. less than accounting profit because accountants include implicit costs in their calculations.
c. greater than accounting profit because economists include implicit costs in their calculations.
d. less than accounting profit because economists include implicit costs in their calculations.
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4. A firm with explicit costs of $2,000,000, implicit costs of $1,000,000, and total revenue of
$3,000,000 would have
a. zero accounting profit and zero economic profit
b. $1,000,000 in accounting profit and $1,000,000 in economic profit
c. zero accounting profit and $1,000,000 in economic profit
d. $1,000,000 in accounting profit and zero in economic profit
X. PERFECT COMPETITION
1. The perfect competitor
a. may charge a little below market price to get more customers.
b. may charge a little above market price to imply that her product is superior.
c. will always charge the market price.
d. will do none of the above.
2. If a perfectly competitive firm sells 10 units of output at a price of $10 per unit, its marginal
revenue is
a. $1.
b. $10.
c. $100.
d. none of the above.
3. In the graph below, profit
a. is the area bounded by ACED
b. is the area bounded by ABGF
c. is the area bounded by ACEGF
d. cannot be found on this graph
$
MC
D
A
B
C
E
0
ATC
F
D = MR
G
Q
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4. A perfectly competitive firm
a. always operates at the minimum point of its average total cost curve.
b. always operates at the minimum point of its average variable cost curve.
c. never operates below the minimum point of its average total cost curve.
d. never operates below the minimum point of its average variable cost curve.
5. In perfect competition,
a. any profits in the short run would attract new firms to the market in the long run until
profits are eliminated.
b. any losses in the short run would force some existing firms to leave the market in the long
run until losses are eliminated.
c. both of the above are true.
6. If a perfectly competitive industry has a downward sloping long run supply curve,
a. it must be an increasing cost industry.
b. it must be a decreasing cost industry.
c. it must be a constant cost industry.
d. it may be an increasing, decreasing, or constant cost industry.
7. If a perfectly competitive industry has a upward sloping long run supply curve,
a. it must be an increasing cost industry.
b. it must be a decreasing cost industry.
c. it must be a constant cost industry.
d. it may be an increasing, decreasing, or constant cost industry.
8. If a perfectly competitive industry has a horizontal long run supply curve,
a. it must be an increasing cost industry.
b. it must be a decreasing cost industry.
c. it must be a constant cost industry.
d. it may be an increasing, decreasing, or constant cost industry.
XI. MONOPOLY
1. If a monopolist has a straight-line demand curve, its marginal revenue curve will be
a. the same as the demand curve.
b. twice as steep as the demand curve.
c. half as steep as the demand curve.
2. Which type of firm(s) can make a positive economic profit in the long run?
a. both the monopolist and the perfect competitor
b. neither the monopolist nor the perfect competitor
c. the perfect competitor but not the monopolist
d. the monopolist but not the perfect competitor
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3. Which type of firm(s) can make a negative economic profit or loss in the short run?
a. both the monopolist and the perfect competitor
b. neither the monopolist nor the perfect competitor
c. the perfect competitor but not the monopolist
d. the monopolist but not the perfect competitor
4. Which of the following represents a possible reason for monopoly?
a. control over an essential resource
c. legal barriers
b. economies of scale
d. all of the above
5. Which of the following statements is/are true about profit-maximizing firms?
a. Both the perfect competitor and the monopolist produce where P = MC.
b. Neither the perfect competitor nor the monopolist produces where P = MC.
c. The perfect competitor produces where P = MC but the monopolist does not.
d. The monopolist produces where P = MC but the perfect competitor does not.
6. Natural monopolies are monopolies that are based on
a. extensive economies of scale in production.
b. licenses or franchises.
c. patents.
d. sole control of a resource essential to the industry.
7. When natural monopolies are regulated, it is typically by equating
a. marginal cost to average total cost
b. marginal revenue to average total cost
c. price to average total cost
d. price to marginal cost
8. When monopolies maximize profits, output is based on where MR=MC and the price comes
from the __________ curve.
a. demand
b. marginal cost
c. marginal revenue
d. average total cost
XII. MONOPOLISTIC COMPETITION
1. A monopolistically competitive industry has
a. many firms producing a differentiated product.
b. many firms producing an identical product.
c. a few firms producing a differentiated product.
d. a few firms producing an identical product.
18
2. If an industry has no or low barriers to entry and a large number of firms, it is
a. monopolistically competitive.
b. perfectly competitive.
c. monopolistically competitive if products are differentiated, and perfectly competitive if
products are identical.
d. monopolistically competitive if products are identical, and perfectly competitive if
products are differentiated.
3. Monopolistic competition differs from perfect competition only with respect to
a. the number of firms in the industry
c. barriers to entry
b. product differentiation
d. economies of scale
4. If a monopolistic competitor is producing an output for which marginal revenue is $40 and
marginal cost is $32, to maximize profits the firm should
a. increase the level of output.
b. decrease the level of output.
c. keep the level of output constant.
5. Assume a monopolistically competitive firm is producing at an output level at which marginal
revenue is $15 and marginal cost is $18. The profit-maximizing firm should
a. increase the level of output.
b. decrease the level of output.
c. keep the level of output constant.
6. In monopolistic competition, in long run equilibrium,
a. firms have positive economic profits.
b. firms have zero economic profits.
c. firms have economic losses.
d. some firms have positive economic profits, some losses, and some break even.
7. In long run equilibrium, the monopolistic competitor produces an output level that is
a. less than the output where ATC is minimized.
b. equal to the output where ATC is minimized.
c. greater than the output where ATC is minimized.
8. In long run equilibrium, the monopolistic competitor charges a price that is
a. less than the minimum of its average total cost.
b. equal to the minimum of its average total cost.
c. greater than the minimum of its average total cost.
9. Which of the following is/are requirements of price discrimination?
a. Firm must have some control over price.
b. Firm must be able to separate consumers into different identifiable groups.
c. The different groups must have different elasticities.
d. All of the above.
19
10. A firm that engages in price discrimination
a. charges a higher price to members of the group with the lower elasticity.
b. charges a lower price to members of the group with the lower elasticity.
c. charges the same price to all groups regardless of elasticity.
XIII. OLIGOPOLY
1. Which of the following is NOT characteristic of oligopoly?
a. fairly high barriers to entry
c. firms have horizontal demand curves
b. few firms
d. interdependence of firms
2. According to the kinked demand curve model of oligopoly,
a. competitors follow both price increases and decreases.
b. competitors follow neither price increases nor decreases.
c. competitors follow price increases but not price decreases.
d. competitors follow price decreases but not price increases.
3. In the kinked demand curve model, the oligopolist maximizes profit
a. to the left of the kink
b. to the right of the kink
c. at the kink
4. In equilibrium, an oligopolist can have economic losses in
a. the short run and long run.
c. the short run only.
b. neither the short run nor the long run.
d. the long run only.
5. Consider the industry in the table shown.
Determine the four-firm concentration ratio and the
Herfindahl-Hirschman index.
Firm
1
2
3
4
5
6
7
Market Share (%)
30
20
20
10
10
5
5
6. Suppose an industry consists of four firms with shares of 10%, 20%, 30%, and 40%.
Determine the Herfindahl-Hirschman index.
Is the industry highly concentrated, moderately concentrated, or unconcentrated?
If the two smallest firms merged, what would the new Herfindahl index be?
Would the merger be challenged by the antitrust division of the Justice Department?
7. A merger between Bank of America and Citibank would be classified as
a. horizontal.
b. vertical.
c. conglomerate.
d. independent
20
XIV. FACTOR MARKETS
1. Which of the following would be called a "derived demand"?
a. the demand for goods
c. the demand for services
b. the demand for labor
d. all of the above
2. The additional revenue obtained by selling the output produced by one more unit of a
resource is its
a. average resource cost.
c. marginal resource cost.
b. marginal physical product.
d. marginal revenue product.
3. The additional output produced by employing one more unit of a resource is its resource is its
a. average resource cost.
c. marginal resource cost.
b. marginal physical product.
d. marginal revenue product.
4. The additional cost associated with the employment of one more unit of a resource is its
a. average resource cost.
c. marginal resource cost.
b. marginal physical product.
d. marginal revenue product.
5. The firm’s demand schedule for a resource is the downward sloping section of its
___________ curve.
a. marginal physical product
c. marginal revenue
b. marginal resource cost
d. marginal revenue product
6. The firm will hire workers until
a. marginal physical product = marginal resource cost
b. marginal physical product = marginal revenue product
c. marginal revenue = marginal physical product
d. marginal revenue product = marginal resource cost
Use the information in this paragraph to answer questions 7 - 10. Consider a firm that is
perfectly competitive in both its product market and the labor market. The market price of the
product is $5. The first worker the firm would hire would have a marginal physical product of
20, the second worker would have a marginal physical product of 18, the third worker would
have a marginal physical product of 16, and the fourth worker would have a marginal physical
product of 14.
7. How many workers would the firm hire if the wage rate was 90?
8. What would the wage bill be if the wage rate was 90?
9. How many workers would the firm hire if the wage rate was 70?
10. What would the wage bill be if the wage rate was 70?
21
XV. RENT, INTEREST, AND PROFIT
1. If you are willing to do a particular job for $10 and you are getting paid $15, what are your
transfer earnings and what is your rent?
2. Is the relation between the interest rate and the quantity demanded of loanable funds direct or
inverse?
3. Is the relation between the interest rate and the quantity supplied of loanable funds direct or
inverse?
4. If the money rate of interest is 6% and the inflation rate is 4%, what is the real rate of interest?
5. If the real rate of interest is 6% and the inflation rate is 4%, what is the money rate of interest?
6. Suppose the interest rate is 4% compounded annually. If you put $100 in the bank and left it
there for 20 years, to the nearest dollar, how much money would you have?
7. Suppose the interest rate is 5% compounded annually. If you wanted to have $1,000 in four
years, to the nearest dollar, how much money would you have to put in the bank now?
8. If the interest rate is 5%, what is the present value of an annuity that pays $2,000 every year
forever?
9. Given any specified interest rate, the present value of which of the following is the greatest?
a. $1000 received one year from now.
c. $1000 received ten years from now.
b. $1000 received three years from now.
d. $1000 received twenty years from now.
10. Is the present value of a specified amount of money to be received in the future greater if the
interest rate is higher or lower?
11. Given any specified interest rate, the present value of which of the following is the greatest?
a. $1,000 received five years from now.
c. $10,000 received five years from now.
b. $3,000 received five years from now.
d. $20,000 received five years from now.
12. You should make an investment if the present value of the cost is __________________
(greater than, less than) the present value of the benefits.
22
XVI. INTERNATIONAL TRADE
1. What is a tax on imports called?
2. What is a limit on the import of certain goods called?
3. Which of the following is/are natural barriers to trade? (Pick all that apply.)
a. contracting costs
b. negotiating costs
c. quotas
d. tariffs
e. transportation costs
4. Which of the following is/are artificial barriers to trade? (Pick all that apply.)
a. contracting costs
b. negotiating costs
c. quotas
d. tariffs
e. transportation costs
5. Compared to the no-trade situation, when there is free trade,
a. The price paid by U.S. consumers is higher.
b. The quantity purchased by U.S. consumers is lower.
c. There is a gain in U.S. consumer surplus.
d. There is a gain in U.S. producer surplus.
e. All of the above.
6. Compared to the free-trade situation, when there are tariffs or quotas,
a. The price paid by U.S. consumers is lower.
b. The quantity purchased by U.S. consumers is higher.
c. There is a gain in U.S. consumer surplus.
d. There is a gain in U.S. producer surplus.
e. All of the above.
23
XVII. INTERNATIONAL FINANCE
1. Suppose a country exports $100 million worth of goods and $50 million worth of services. It
imports $125 million worth of goods and $75 million worth of services. What is the country's
balance of trade? Does the country have a surplus or deficit?
2.
If a country exports more goods and services than it imports, it has a balance of trade
__________________ (surplus, deficit).
If a country imports more goods and services than it exports, it has a balance of trade
__________________ (surplus, deficit).
3. Consider the following information.
A country had exports of $100 billion, and imports of $90 billion.
It sends $15 billion dollars in transfers to other countries and receives $5 billion dollars in
transfers from other countries.
It has $70 billion in income receipts from investments in other countries and pays out $75
billion dollars for investments to other countries.
What is the country’s current account balance?.
Does the country have a surplus or deficit on the current account? ____________________
4. If a country has a deficit on its current and capital accounts, it will have a ________________
(surplus, deficit) on its financial account.
If a country has a surplus on its current and capital accounts, it will have a _______________
(surplus, deficit) on its financial account.
5. Suppose a country has a current account balance of -$120 million, a financial account balance
of $100 million, and a capital account balance of -$4 million dollars. What is the country's
statistical discrepancy?
6. Suppose one US dollar is worth 100 Japanese yen.
How much does a 2 million yen car cost in US dollars?
How much does a $30,000 car cost in yen?
24
Homework Answers
I. Graphs
1.
a
2.
b
3.
d
4.
c
5.
b
6.
7.
8.
9.
10.
a
a
b
d
d
II. Resource Utilization
1.
c
2.
c
3.
c
4.
d
5.
c
6.
b
7.
b
8.
a
9.
c
10. a
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
d
c
12; 1.2
15; 1.875
10; 0.833
8; 0.533
Bolivia; Chile
tin; copper
1.2; 1.875
0.533; 0.833
III. Supply and Demand
1.
c
2.
d
3.
d
4.
c
5.
a
6.
d
7.
floor; surplus
8.
left
9.
left
10. right
11. right
12. c
13. b
14. d
15. a
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
d
d
b
increase
increase
decrease
decrease
decrease
increase
increase
increase
decrease
decrease
decrease
increase
25
IV. Mixed Economies and Market Failure
1.
d
6.
b
2.
a
7.
d
3.
a
8.
d
4.
b
9.
d
5.
c
10.
a
V. Percentages and Elasticity
1.
a
2.
a
3.
b
4.
c
5.
b
6.
a
7.
d
8.
c
9.
b
10. -1; unit elastic; 4950, 4950
11. -0.5; inelastic; 4725, 5225
12. -2; elastic;
5400, 4400
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
VI. Totals, Averages, and Marginals- Part 1
1. a
2. b
3. b
4. b
5. a
VII. Demand and Utility
1.
d
2.
c
3.
2
4.
3; 13
5.
4; 28; 20
6.
7.
8.
9.
10.
c
20
c
b
b
26
10
15
b
-0.5
0.5
d
a
flatter
d
0.25
c
b
VIII. Totals, Averages, and Marginals – Part 2
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
2500
1000
3000
c
b
b
c
a
50
2000
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
2000
600
20
7
10
a
d
c
b
d
X. Perfect Competition
1.
c
2.
b
3.
b
4.
d
5.
6.
7.
8.
c
b
a
c
XI. Monopoly
1.
b
2.
d
3.
a
4.
d
5.
6.
7.
8.
c
a
c
a
XII. Monopolistic Competition
1.
a
2.
c
3.
b
4.
a
5.
b
6.
7.
8.
9.
10.
b
a
c
d
a
IX. Supply and Costs of Production
1. c
2. a
3. d
4. d
27
XIII. Oligopoly
1.
c
5.
80; 1950
2.
d
6.
3000; highly concentrated; 3400; yes
3.
c
7.
a
4.
c
XIV. Factor Markets
1.
b
6.
d
2.
d
7.
2
3.
b
8.
180
4.
c
9.
4
5.
d
10.
280
XV. Rent, Interest, and Profit
1.
10; 5
7.
$823
2.
inverse
8.
$40,000
3.
direct
9.
a
4.
2%
10.
lower
5.
10%
11.
d
6.
$219
12.
Less than
XVI. International Trade
1.
tariff
4.
c, d
2.
quota
5.
c
3.
a, b, e
6.
d
XVII. International Finance
1.
-50 million dollars; deficit
4.
surplus; deficit
2.
surplus; deficit
5.
$24 million dollars
3.
-5 billion dollars; deficit
6.
$20,000; 3 million yen
28