Sample Final Exam Questions
(unless told otherwise, assume that demand is downward
sloping and supply is upward sloping.)
Material covered in midterm 1
1. Suppose that - at a given level of an economic activity - marginal cost is equal to marginal
benefit. Which of the following statements is TRUE?
I. Net benefits are maximized.
II. Total benefits equal total costs.
III. Marginal net benefit equals zero.
a)
b)
c)
d)
I, II and III.
I
III only.
I and III only.
2. Suppose that - at a given level of some economic activity - marginal cost is greater than
marginal benefit. The economic agent in question (the decision-maker) can increase net benefits
by decreasing the level of the activity, for which of the following reasons?
a)
b)
c)
d)
Total costs will fall by more than total benefits.
Total benefits will rise by more than total costs.
Neither a) nor b).
Both a) and b).
3. Which of the following statements about opportunity cost is TRUE?
I. Opportunity cost is equal to implicit costs plus explicit costs.
I. Opportunity cost only measures direct monetary cost.
II. Opportunity cost accounts for the alternative uses of resources such as time and money.
a)
b)
c)
d)
I, II and III.
I
III only.
I and III only.
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4. Suppose that you are willing to pay $50 to see a movie on Saturday night. A ticket costs $15,
and the next-best alternative use of your time would be to go to a concert which costs $80 and
you value at $100. Your consumer surplus from seeing the movie is equal to:
a)
b)
c)
d)
$0.
$15.
$20.
$35.
5. Refer to the diagram below, which illustrates the PPF for two countries who can trade with
one another.
y
A
PPF1
B
E
C
F
PPF2
D
x
Which of the following production combinations are EFFICIENT?
I. Country 1 produces at point B; country 2 produces at point E.
II. Country 1 and 2 both produce at point A.
III. Country 1 produces at point D; country 2 produces a point F.
a)
b)
c)
d)
I, II and III.
II only.
III only.
II and III only.
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6. Refer to the PPF diagram below.
y
PPF
x
Which concept can be used to best explain why this PPF is relatively flat at low levels of x, and
relatively steep at high levels of x?
a)
b)
c)
d)
Scarcity.
Increasing marginal costs.
Increasing marginal productivity.
Diminishing marginal rate of substitution.
The following TWO questions refer to the production possibility frontier for a country, illustrated
below.
y
A
PPF
!
x
7. Which concept can be used to best explain why this PPF is relatively flat at low levels of x and
relatively steep at high levels of x?
a)
b)
c)
d)
Scarcity.
Increasing marginal costs.
Increasing marginal productivity.
Diminishing marginal rate of substitution.
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8. If this economy is operating at point A, which of the following statements is TRUE?
I. The opportunity cost of producing more x is zero.
I. The opportunity cost of producing more y is zero.
II. Point A is inefficient.
a)
b)
c)
d)
I, II and III.
III only.
I and II only.
None of the statements are true.
The following TWO questions refer to the diagram below, which illustrates the PPF for two
countries.
y
100
A
PPF2
PPF1
B
!
100
200
x
9. What does the marginal (opportunity) cost of good x equal, for each country?
a)
b)
c)
d)
Two units of y for country 1 and one unit of y for country 2.
One half unit of y for country 1 and one unit of y for country 2.
Two units of x for country 1 and one unit of x for country 2.
One half unit of x for country 1 and one unit of x for country 2.
10. Suppose that - without trade - country 1 produces at point A and country 2 produces at point
B. If the countries are then permitted to trade:
a)
b)
c)
d)
Country 1 will produce less x and country 2 will produce more y.
Country 1 will produce more x and country 2 will produce less y.
Country 1 will produce less x and country 2 will produce less y.
Country 1 will produce more x and country 2 will produce more y.
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11. Which of the following does NOT result in a shift of an economy’s production possibility
frontier (PPF)?
a)
b)
c)
d)
Changes in agricultural productivity as a result of climate change.
Technological change that increases worker productivity.
Increased trade with other countries.
All of the above will result in a shift of the economy’s PPF.
12. You are choosing among the following THREE options on the first Saturday night after final
exams end.
• Option 1: You can work an evening shift at your part-time job, earning $60.
• Option 2: You can pay $30 for dinner out with friends. Your value of the dinner out is $55.
• Option 3: You can stay at home and watch movies alone. You can stream movies for free,
and you value the evening at home watching movies at $40.
The opportunity cost of staying home and watching movies is:
a)
b)
c)
d)
$0.
$25.
$60.
$85.
13. Suppose that you are willing to pay $400 for a dining room table, which is listed on
usedvictoria.com for $250. If you don’t buy that particular table, you will buy one from Ikea,
which you value at $300 and which costs $250. If you pay the listed price for the
usedvictoria.com table, then your consumer surplus is equal to:
a)
b)
c)
d)
$50.
$100.
$150.
$200.
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14. Suppose that you have the following information about demand and supply:
• If price = $10, quantity demanded = 50.
• If price = $6, quantity demanded = 80.
• If price = $3, quantity demanded = 120.
• Quantity supplied is equal to 100, at all prices.
At a price of $7:
a)
b)
c)
d)
There will be excess demand (a shortage) of 50 units.
There will be excess demand (a shortage) of more than 20 units but less than 50 units.
There will be excess supply (a surplus) of less than 20 units.
There will be excess supply (a surplus) of more than 20 units but less than 40 units.
15. Refer to the diagram below, which illustrates a demand curve.
$
20
15
D
10
5
!
2
4
6
8
Q
If the price is $15 per unit, then what will be the quantity demanded?
a)
b)
c)
d)
2.
4.
6.
8.
16. Which of the following will NOT result in an increase in the demand for good x?
a)
b)
c)
d)
A decrease in income, if x is inferior.
An increase in income, if x is normal.
An increase in the price of a complement to x.
An increase in the price of a substitute for x.
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17. If bread and butter are viewed as complements in consumption, then
an increase in the price of milk (an input to the production of butter) will result in:
a)
b)
c)
d)
A decrease in the demand for butter.
An increase the supply of butter.
A decrease the demand for bread.
An increase the price of bread.
18. Refer to the diagram below, which illustrates a supply curve.
$
S
4
3
2
1
!
2
4
6
8
Q
In order for quantity supplied to equal 4 units, the price per unit must be:
a)
b)
c)
d)
$1.
$2.
$3.
$4.
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19. Refer to the diagram below.
$
D
S
10
10
30
!
At a price of $10 per unit:
a)
b)
c)
d)
55
Q
There is excess demand (a shortage) equal to 45 units.
There is excess supply (a surplus) equal to 45 units.
There is excess demand (a shortage) equal to 20 units.
There is excess supply (a surplus) equal to 20 units.
20. Refer to the diagram below, which illustrates a demand curve.
$
20
15
D
10
5
!
2
4
6
8
Q
At what price will quantity demanded equal 6 units?
a)
b)
c)
d)
$5.
$10.
$15.
$20.
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21. If iPhones and and Samsung phone are viewed as substitutes in consumption, then
a decrease in the price of Samsung phones will:
a)
b)
c)
d)
Decrease the quantity demanded for Samsung phones.
Increase the supply of Samsung phones.
Increase the demand for iPhones.
Decrease the demand for iPhones.
22. Suppose that beer and nachos (which consumers view as complements) are both supplied in a
competitive market. If the price of hops (hops are an input to beer production) decreases, then the
short run effect of this in the nachos market is:
a)
b)
c)
d)
An increase in the equilibrium price and a decrease in the equilibrium quantity.
An increase in the equilibrium price and an increase in the equilibrium quantity.
A decrease in the equilibrium price and a decrease in the equilibrium quantity.
A decrease in the equilibrium price and an increase in the equilibrium quantity.
23. Suppose that in the market for good x (a normal good), the following occur simultaneously:
(i) consumer incomes increase and (ii) the price of oil (an input to the production of x) increases.
If the market for x is perfectly competitive, then which statements is TRUE?
a) The equilibrium price of x could either increase or decrease, but equilibrium quantity will
definitely decrease.
b) The equilibrium quantity of x could either increase or decrease, but equilibrium price will
definitely decrease.
c) The equilibrium price of x could either increase or decrease, but equilibrium quantity will
definitely increase.
d) The equilibrium quantity of x could either increase or decrease, but equilibrium price will
definitely increase.
24. Which of the following statements is TRUE?
a) Consumer surplus is the difference between the maximum amount a consumer is willing
to pay, and what he or she actually pays.
b) Producer surplus is the difference between the amount of money a seller is paid, and the
minimum amount that he or she needs to be paid.
c) Market surplus is equal to consumer surplus plus producer surplus.
d) All of the above are true.
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The following THREE questions refer to the diagram below, which illustrates the competitive
market for a good. Assume no externalities, and consider only short run changes.
$
S
c
a
9
d
b
7
D2
g
f
D1
40
60
Q
25. If demand is D1, then the equilibrium in this market is where:
a)
b)
c)
d)
Price is $9 per unit and quantity is 40 units.
Price is $7 per unit and quantity is 60 units.
Price is $9 per unit and quantity is 60 units.
Price is $7 per unit and quantity is 40 units.
26. If demand is D1, and the government introduces a per unit subsidy that increases quantity to
60 units, then which area represents the deadweight loss?
a)
b)
c)
d)
g.
b.
c.
b + g.
27. If demand increases from D1 to D2, then the increase in MARKET SUPLUS is equal to:
a)
b)
c)
d)
Area d + b.
Area a + c.
Area a + b.
Area a + b + g.
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The following THREE questions refer to the diagram below, which illustrates the competitive
market for a good. Assume no externalities.
$
8
D
c
4
f
2
a
g
!
S
b
8
12
16
Q
28. In the absence of any government regulation, the equilibrium in this market is where:
a)
b)
c)
d)
Price is $4 per unit and quantity is 8 units.
Price is $4 per unit and quantity is 12 units.
Price is $2 per unit and quantity is 8 units.
Price is $2 per unit and quantity is 12 units.
29. In the absence of any government regulation, market surplus at the equilibrium is equal to:
a)
b)
c)
d)
Area c.
Area c + f + b.
Area a + b.
Area c + f + b + a + g.
30. If a price floor is set at $4 per unit, the deadweight loss is equal to:
a)
b)
c)
d)
Area c.
Area c + f + b.
Area a + b.
Area c + f + b + a + g.
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31. Assume that the market for rice is perfectly competitive. Suppose the following two changes
occur simultaneously. (i) The price of quinoa (a substitute for rice) decreases, and (ii) there is a
worldwide drought that reduces the rice harvest by 20%. Which of the following will result, in
the short run?
a) The equilibrium price of rice could either increase or decrease, but equilibrium quantity
will definitely decrease.
b) The equilibrium quantity of rice could either increase or decrease, but equilibrium price
will definitely decrease.
c) The equilibrium price of rice could either increase or decrease, but equilibrium quantity
will definitely increase.
d) The equilibrium quantity of rice could either increase or decrease, but equilibrium price
will definitely increase.
32. Suppose that if price decreases from $15 to $9, then quantity demanded increases from 18
units to 22 units. Using the mid-point formula, the own-price elasticity of demand is:
a)
b)
c)
d)
1/5.
2/5.
3/5.
None of the above.
33. Suppose that the price of a good increases. The increase in producer surplus will be:
a)
b)
c)
d)
Larger if demand is relatively elastic than if demand is relatively inelastic.
Smaller if demand is relatively elastic than if demand is relatively inelastic.
Smaller if supply is relatively elastic than if supply is relatively inelastic.
Larger if supply is relatively elastic than if supply is relatively inelastic.
34. Which of the following statements about producer surplus is FALSE?
I.
If the price at which a competitive firm can sell its output increases, then the increase in
producer surplus will equal the increase in profits.
II. Producer surplus is equal to (P - AVC), multiplied by the quantity produced.
III. Producer surplus equals profits minus fixed costs.
a)
b)
c)
d)
III only.
II only.
I only.
None of the statements are false.
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The following THREE questions refer to the diagram below, which illustrates two firms’
marginal abatement cost curves for a pollutant P. Note that in the absence of any regulation each
firm will emit 80 units of P.
$
16
MCA1
14
12
10
8
MCA2
6
4
2
!
10
20
30
40
50
60
70
80
90
P
35. If an emissions tax of $6/unit is introduced, how much tax will each firm pay, given its
equilibrium level of emissions under the tax?
a)
b)
c)
d)
Each firm will pay $480.
Firm 1 will pay $300; Firm 2 will pay $120.
Firm 1 will pay $150; Firm 2 will pay $60.
Firm 1 will pay $90; Firm 2 will pay $180.
36. If a cap and trade policy is introduced limiting aggregate emission to 100 units, and if each
firm is given half the permit in the initial allocation, which firm will buy permits and which firm
will sell permits?
a) Firm 1 will buy permits and firm 2 will sell permits.
b) Firm 1 will sell permits and firm 2 will buy permits
c) We cannot determine who will buy and who will sell, without information about the
initial distribution of permits.
d) We cannot determine who will buy and who will sell, without information about the price
of permits.
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37. (Remember to refer to the diagram on the previous page) If we wish to reduce aggregate
emissions to 100 units at least cost, how much abatement should each firm undertake?
a)
b)
c)
d)
Each firm should abate 30 units of P.
Firm 1 should abate 20 units and firm 2 should abate 40 units.
Firm 1 should abate 40 units and firm 2 should abate 20 units.
Firm 2 should undertake all the abatement, since its marginal abatements costs are lower
than those of firm 1.
38. Refer to the diagram below, which illustrates the competitive market demand and supply
curves for a good. Assume no externalities.
$
D
S
a
e
b
c
d
QL
QE
QH
Q
!
Assume a per unit subsidy is introduced, that increases output to QH. Which area represents the
deadweight loss of this policy?
a)
b)
c)
d)
a.
b.
c + d.
e.
39. Suppose that, if the price of a good falls from $10 to $8, total expenditure on the good
decreases. Which of the following could be the (absolute) value for the own-price elasticity of
demand, in the price range considered?
a)
b)
c)
d)
1.6.
2.3.
Both a) and b).
Neither a) or b).
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40. Suppose that if price decreases from $11 to $9, then quantity demanded increases from 18
units to 22 units. Using the mid-point formula, the own-price elasticity of demand is:
a)
b)
c)
d)
0.2.
1.0.
2.5.
None of the above.
41. Suppose that the price of a good decreases. The increase in consumer surplus will be:
a)
b)
c)
d)
Larger if demand is relatively elastic than if demand is relatively inelastic.
Smaller if demand is relatively elastic than if demand is relatively inelastic.
Smaller if supply is relatively elastic than if supply is relatively inelastic.
Larger if supply is relatively elastic than if supply is relatively inelastic.
42. Refer to the diagram below, which illustrates the supply and demand curves in an
unregulated competitive market. Assume there is a negative externality, such that the marginal
external cost of output is equal to $2.
$
D
4
3
2
S
1
20
30
40
Q
!
If the optimal Pigovian tax is levied in this market, then the deadweight loss at the taxed
equilibrium will equal:
a)
b)
c)
d)
$40.
$20.
$10.
$0.
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43. Which of the following statements about external costs is TRUE?
a) Economics uses the term “external cost” to describe a spillover effect from market
activity that is too small to matter to society.
b) Economics ignores the environmental impact of market activities by calling such impact
an “external cost.”
c) Economics does not provide guidance for environmental policy since its treats any
environmental cost as an “external cost”.
d) None of the above statements are true.
44. A consumer buys two goods - x and y. If the price of x is $5 and the price of good y is $10,
then which of the following statements about the opportunity cost of consumption is correct?
a)
b)
c)
d)
One unit of good x costs two units of good y.
One unit of good x costs one half a unit of good y.
One unit of good y costs one unit of good x.
None of the above are correct.
45. In the diagram below, a consumer maximizes utility by choosing point A, given BL1.
y
B
C
D
A
BL1
!
BL2
x
Suppose that both good x is normal and good y is inferior, and the budget line shifts to BL2.
Which of the following could be the new optimal consumption choice?
a)
b)
c)
d)
B.
C.
D.
Either B or C or D.
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The following two questions refer to the diagram below, which illustrates the market for a good
whose production results in a negative externality.
$
MSC
MPC
d
a
b
e
MSB
!
Q2
Q1
Q
46. If there is no regulation in place to correct the externality, which area represents the
deadweight loss at the equilibrium quantity?
a)
b)
c)
d)
e.
d.
a - d.
d + e.
47. If a quota is introduced at Q2 units of output, then:
a)
b)
c)
d)
Market surplus will fall by b + e and social surplus will fall by e.
Market surplus will fall by b + e and social surplus will rise by d.
Market surplus will fall by e and social surplus will rise by d.
Both market surplus and social surplus will fall by d.
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The following TWO questions refer to the diagram below, which illustrates two firms’ marginal
abatement cost curves for a pollutant P.
$
16
MCA1
14
12
10
8
MCA2
6
4
2
!
10
20
30
40
50
60
70
80
90
P
48. If an emissions tax of $2/unit is introduced, how much will each firm optimally emit?
a)
b)
c)
d)
P1 = 70, P2 = 60.
P1 = 60, P2 = 40.
P1 = 50, P2 = 20.
P1 = 40, P2 = 0.
49. If a cap and trade policy is introduced limiting aggregate emission to 100 units, which firm
will buy permits and which firm will sell permits?
a) Firm 1 will buy permits and firm 2 will sell permits.
b) Firm 1 will sell permits and firm 1 will sell permits
c) We cannot determine who will buy and who will sell, without information about the
initial distribution of permits.
d) Both firms will buy permits.
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50. Which of the following diagrams could represent the change in a consumer’s budget line if
(i) the price of good y increases AND (ii) the consumer’s income decreases.
y
a)
b)
y
Original BL
Original BL
New BL
New BL
x
x
y
y
c)
d)
Original BL
Original BL
New BL
New BL
x
!
x
51. A consumer buys two goods - x and y. If the price of x is $5 and the price of good y is $10,
then which of the following statements about the opportunity cost of consumption is correct?
a)
b)
c)
d)
One unit of good x costs two units of good y.
One unit of good x costs one half a unit of good y.
One unit of good y costs one unit of good x.
All of the above are correct.
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52. In the diagram below, a consumer maximizes utility by choosing point A, given BL1.
y
B
C
D
A
BL1
!
BL2
x
Suppose that both goods x and y are normal and the budget line shifts to BL2. Which of the
following could be the new optimal consumption choice?
a)
b)
c)
d)
B.
C.
D.
Either B or C or D.
53. If a consumer (who buys two goods) has strictly convex preferences, then:
a) Her indifference curves are relatively steep at low levels of x and relatively flat at high
levels of x.
b) Her preference is to have some of each of the two goods, rather than all of one and none
of the other.
c) Her marginal rate of substitution diminishes.
d) All of the above are true.
54. Suppose that, given the consumption bundle x = 10 and y = 10, a consumer’s MRS is equal
(in absolute value) to 4. The price of x is $1 and the price of good y is $0.25, and the bundle x =
10 and y = 10 uses up all the consumers income. The consumer’s preferences are strictly convex.
Which of the following is TRUE?
a)
b)
c)
d)
To maximize utility the consumer should but more x and less y.
To maximize utility the consumer should buy less x and more y.
The bundle x = 10 and and y = 10 maximizes the consumer’s utility.
To maximize utility the consumer should buy more of both x and y.
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55. The diagram below illustrates the indifference curve of a consumer of goods x and y.
y
10
A
IC
5
x
!
Assuming the current consumption bundle is the point labelled A, which of the following
statements is TRUE?
a)
b)
c)
d)
This consumer is just willing to give up 2 units of y for an additional x.
This consumer is just willing to give up 1 unit of y for an additional 2 units of x.
This consumer is just willing to give up 1/2 a unit of x for an additional y.
Both a) and c) are true.
56. The diagram below illustrates the effect of a decrease in the price of good y, for a given
consumer.
y
H
G
IC2
BL1
F
BL2
IC1
!
Which of the following statements is TRUE?
a)
b)
c)
d)
x
Goods x and y are substitutes.
Goods x and y are complements.
Goods x and y are neither substitutes or complements.
None of the above statements are true.
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57. The diagram below illustrates the effect of a decrease in the price of good y, for a given
consumer. Which of the following statements is TRUE?
y
c
b
BL1
IC2
a
BL2
IC1
a)
b)
c)
d)
x
Goods x and y are substitutes.
Goods x and y are complements.
Goods x and y are neither substitutes or complements.
None of the above statements are true.
58. If a consumer (who buys two goods) has strictly convex preferences, then which of the
following statements is TRUE? (Assume that x is on the horizontal axis and y is on the vertical
axis.)
a) Her indifference curves are relatively flat at high levels of x and relatively steep at low
levels of x.
b) Her preference is to have some of each of the two goods, rather than all of one and none
of the other.
c) Her marginal rate of substitution diminishes.
d) All of the above are true.
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59. Refer to the indifference curve/budget line diagram below.
y
b
c
a
IC2
d
IC1
!
x
BL1
Suppose that a consumer initially faces budget line BL1, and thus, by choosing consumption
point c, is able to achieve the utility level associated with IC1. If px decreases, then the
substitution effect is the movement from ______ and the income effect is the movement from
______.
a)
b)
c)
d)
a to b; b to c.
b to a; a to d.
c to d; d to a.
d to c; c to b.
60. A consumer buys only steak and green lentils. Green lentils are inferior and steak are normal.
If the price of steak rises, then:
a)
b)
c)
d)
The demand for lentils will increase.
The quantity demanded of lentils will increase.
The demand for lentils will decrease.
The quantity demanded of lentils will decrease.
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61. Refer to the indifference curve/budget line diagram below.
y
150
BLSE
b
100
c
a
IC1
IC2
BL1
BL2
!
50
100
300
x
This consumer has $300 in income and initially faces prices of px = $1 and py = $3. Given this,
she maximized her utility at point a.
If the price of good x rises to $3, how much additional income would the consumer need, in
order to be able to attain her original level of utility given the new prices?
a)
b)
c)
d)
There is insufficient information to determine the additional income needed.
$450.
$300.
$150.
62. Suppose that, given the consumption bundle x = 10 and y = 10, a consumer’s MRS is equal
(in absolute value) to 0.4. The price of x is $0.50 and the price of good y is $0.75, and the bundle
x = 10 and y = 10 uses up all the consumers income. The consumer’s preferences are strictly
convex. Which of the following is TRUE?
a)
b)
c)
d)
To maximize utility the consumer should buy more x and less y.
To maximize utility the consumer should buy less x and more y.
The bundle x = 10 and and y = 10 maximizes the consumer’s utility.
There is insufficient information to determine what the consumer should do to maximize
utility.
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63. Refer to the indifference curve/budget line diagram below.
y
BL1
e
f
c
IC1
d
IC2
x
Suppose that a consumer initially faces budget line BL1, and thus is able to achieve the utility
level associated with IC1. If py increases, then the substitution effect is the movement from
______ and the income effect is the movement from ______.
a)
b)
c)
d)
e to d; d to c.
e to c; e to d.
e to c; c to d.
e to f; f to d.
64. A consumer has $20 per week to spend on coffee and muffins. The price of a cup of coffee
and the price of a muffin both equal $1 each. If the consumer always likes to consume one
muffin for every cup of coffee he drinks, what consumption bundle will maximize his utility?
a)
b)
c)
d)
20 muffins and no coffee.
20 coffees and no muffins.
10 coffees and 10 muffins.
All of the above consumption bundles maximize his utility - he is indifferent among all
those options listed.
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65. Suppose Marv, the owner-manager of Marv’s Hot Dogs, earned $72,000 in revenue last year.
Marv’s explicit costs of operations totaled $36,000. Marv has a Bachelor of Arts degree in
English, and could be earning $40,000 annually as a school-teacher. Calculate Marv’s economic
profits from his hot dog business.
a) -$4,000.
b) $0.
c) $36,000.
d) -$32,000.
The following TWO questions refer to the table below, which shows the relationship between
labour and output for a firm.
Quantity of labour
0
1
2
3
4
5
Total output
0
12
25
36
40
43
66. The marginal product of the fourth unit of labour hired is:
a)
b)
c)
d)
10.
3.
4.
0.
67. If each unit of labour must be paid a wage of $10, then what do (total) variable costs equal, at
an output level of 25 units?
a)
b)
c)
d)
$250.
$50.
$20.
$2.
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68. Suppose that a perfectly competitive firm is currently producing 10 units of output. You also
have the following additional information:
P = $6; MC; = $6; AVC = $3; ATC = $8.
Given this:
a) This firm should continue to produce 10 units in the short run, but should exit the
industry in the long run, unless price rises.
b) This firm should shut down in the short run, and exit the industry in the long run, unless
price rises.
c) This firm should increase its price in order to maximize profits.
d) This firm should increase its output in order to maximize profits.
69. Suppose that a perfectly competitive industry is initially in long run equilibrium. The
government then introduces a $1,000 annual fee that each firm in the industry must pay, no
matter how much output it produces. Which of the following statements is TRUE?
a) Price will increase in the short run, but return to its initial level in the long run.
b) Price will not change in the short run, but will increase in the long run.
c) Price will increase in both the short and the long run, but the increase will be greater in
the short run than in the long run.
d) Price will increase in both the short and the long run, but the increase will be greater in
the long run than in the short run.
70. Suppose you are given the following information about a competitive firm:
P = $10; ATC = $4; MC = $10; q = 20.
Given this:
a)
b)
c)
d)
The firm should continue to produce 20 units of output; this is profit maximizing.
In order to maximize profits, the firm should produce more than 20 units of output.
In order to maximize profits, the firm should produce fewer than 20 units of output.
The firm should shut down in the short run and exit in the long run.
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71. Suppose you are given the following information about a competitive firm:
At the current quantity produced, P = $10; AVC = $4; AVC is at is minimum.
Given this:
a)
b)
c)
d)
The firm should continue to produce its current level of output; this is profit maximizing.
In order to maximize profits, the firm should increase output.
In order to maximize profits, the firm should decrease output.
We do not have enough information to determine what the firm should do to maximize
profits.
72. If a firm’s profit equals $600 and its producer surplus equals $1,000, then its fixed costs:
a)
b)
c)
d)
Equal $400
Equal $600.
Equal $1,600.
Cannot be determined without further information.
73. Which of the following statements about competitive firms is FALSE?
a) A competitive firm maximizes profit by producing the level of output at which price
equal marginal cost.
b) A competitive firm maximizes profit by producing the level of output at which marginal
revenue equals marginal cost.
c) For a competitive firm, marginal revenue is less than price.
d) For a competitive firm, economic profits equal zero in the long run.
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The following THREE questions refer to the table below, which shows the relationship between
labour and output for a firm.
Quantity of labour
0
1
2
3
4
5
Total output
0
12
25
36
40
43
74. If three workers are employed, then the average product of labour is:
a)
b)
c)
d)
12.
11.
36.
40.
75. If each unit of labour must be paid a wage of $12, then what is the marginal cost of the 43rd
unit of output?
a)
b)
c)
d)
$12.
$36.
$3.
$4.
76. What is the marginal productivity of the fourth worker?
a)
b)
c)
d)
3.
4.
10.
12.
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77. Suppose that the marginal produce of labour is always decreasing in number of workers
employed. Which of the following statements about the marginal cost of producing output is
true?
Which of the following statements is true?
a)
b)
c)
d)
Marginal cost is constant in output.
Marginal cost is decreasing in output.
Marginal cost is increasing in output.
Marginal cost is decreasing in output at low level of output, and increasing in output at
high levels of output.
78. Suppose you are given the following information about a competitive firm:
•
•
•
•
P = $10
ATC = $4
MC = $6
q = 20.
Which of the following statements is true?
a)
b)
c)
d)
The firm should continue to produce 20 units of output; this is profit maximizing.
In order to maximize profits, the firm should produce more than 20 units of output.
In order to maximize profits, the firm should produce fewer than 20 units of output.
The firm should shut down in the short run and exit in the long run.
79. If the marginal cost of producing output is constant and equal to $5 per unit, and fixed costs
are equal to $600, then average total cost given an output level of 100 is:
a)
b)
c)
d)
$5.
$6.
$11.
$20.
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80. Suppose that a perfectly competitive firm is currently producing 25 units of output.
You also have the following additional information:
•
•
•
•
•
P = $12.
The firms is operating at the minimum point of AVC
AVC = $4.
ATC = $10.
The minimum point of ATC is where ATC = $8.
If the firm wishes to maximize profits, which of the following statements is TRUE?
a) This firm should continue to produce 25 units in the short run, but exit in the long
run.
b) The firm should increase output in the short run, but exit in the long run.
c) The firm should increase output in the short run, and will remain in the industry in
the long run.
d) None of the above.
The following THREE questions refer to the diagram below. Assume perfect competition.
$
MC
10
ATC
AVC
7
4
2
!
q
81. The firm’s shut-down price is ____.
a)
b)
c)
d)
$2.
$4.
$7.
$10.
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82. (Remember to refer to the diagram on the previous page.) The firm’s break-even price is
____.
a)
b)
c)
d)
$2.
$4.
$7.
$10.
83. What will be the long run equilibrium price for this good?
a)
b)
c)
d)
$2.
$4.
$7.
There is insufficient information to calculate the long run equilibrium price.
The following THREE questions refer to the diagram below, which illustrates a competitive
firm’s cost curves.
$
ATC
MC
10
AVC
7
5
4
Q
!
5
15
84. What do this firm’s fixed costs equal?
a)
b)
c)
d)
There is insufficient information to calculate the firm’s fixed costs.
$50.
$30.
$20.
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85. (Remember to refer to the diagram on the previous page.) If this firm can sell its output for
$10 per unit, then its maximum profit is equal to:
a)
b)
c)
d)
$150.
$75.
$60.
$45.
86. (Remember to refer to the diagram on the previous page.) If this firm can sell its output for
$10 per unit, then its maximum producer surplus is equal to:
a)
b)
c)
d)
$150.
$75.
$60.
$45.
87. Which of the following statements about a competitive firm producing positive output is
TRUE?
I. Price equals marginal cost in both the short run and the long run.
II. Price can be less than average total cost in the short run, but not in the long run.
III. If price is less than average total cost (so that the firm makes negative economic profits)
it will shut down in the short run and exit in the long run.
a)
b)
c)
a)
I only.
I and II only.
I and III.
I, II, and III.
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The following THREE questions refer to the diagram below, which illustrates a competitive
firm’s cost curves and the supply and demand diagram for the industry. Assume that all firms in
the industry have identical cost curves.
$
$
MC
40
SRS1
ATC
AVC
25
15
D1
10
!
13 15
q
260
D2
300 455 560
Q
88. If demand is given by D1, then each firm in the industry will produce _____ units of output.
a)
b)
c)
d)
0.
10.
13.
15.
89. If demand is given by D1, then how many firms operate in this industry?
a)
b)
c)
d)
There is insufficient information to determine the number of firms in the industry.
10.
20.
30.
90. If demand shifts from D1 to D2, then, in the short run:
a)
b)
c)
d)
Firms will make positive economic profits.
New firms will enter the market.
The price will remain unchanged at $25.
Some firms will stop producing, since price is below average variable cost.
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91. Which of the following statements about a competitive firm producing positive output is
TRUE?
a)
b)
c)
d)
Price can be less than average variable cost in the short run, but not the long run.
Price can be greater than average total cost in the short run, but not the long run.
If economic profits equal zero, the competitive firm will exit the industry in the long run.
Both a) and b) are true.
92. Suppose that the wages competitive firms must pay to their workers increase. Which of the
following statements is TRUE?
a)
b)
c)
d)
The firms’ marginal costs will rise.
The market supply curve will shift left and price will rise.
In the long run firms will be making zero economic profits.
All of the above are true.
The following FOUR questions refer to the diagram below. Assume perfect competition.
$
MC
ATC
18
AVC
12
10
5
!
25
30
40
q
93. Given a price of $18, the profit-maximizing level of output for this firm is:
a)
b)
c)
d)
5.
25.
30.
40.
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35
94. (Remember to refer to the diagram on the previous page.) Given a price of $18, the firm’s
maximum profit is equal to:
a)
b)
c)
d)
$360.
$240.
$180.
$0.
95. (Remember to refer to the diagram on the previous page.) What will be the long run
equilibrium price for this good?
a)
b)
c)
d)
$10.
$12.
$18.
There is insufficient information to calculate the long run equilibrium price.
96. (Remember to refer to the diagram on the previous page.) What do this firm’s fixed costs
equal?
a)
b)
c)
d)
$0
$40.
$180.
There is insufficient information to calculate fixed costs.
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36
The following TWO question refers to the diagram below, which illustrates a competitive firm’s
cost curves, and the supply and demand diagram for the industry. Assume that all firms in the
industry have identical cost curves.
$
$
MC
40
SRS1
ATC
AVC
25
15
D1
10
!
13 15
q
260
D2
300 455 560
Q
97. If demand increases from D1 to D2, then, in the long run, how many firms will be in this
industry?
a)
b)
c)
d)
20.
25.
35.
40.
98. If demand increases from D1 to D2, then, in the short run price will ______, and in the long
run price will _____.
a)
b)
c)
d)
Rise to $40; remain at $40.
Rise to $40; fall to $25.
Rise to $40; fall to $15.
Rise to $40; either rise or fall, depending on whether firms enter or exit.
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37
99. Refer to the diagram below.
$
$
MC
S1
b
ATC
AVC
S2
a
c
D1
D2
q
!
Q
Which of the following labeled points is a long run equilibrium?
I. Point a.
II. Point b.
III. Point c.
a)
b)
c)
d)
I only.
I and II only.
I and III only.
I, II, and III.
100. Which of the following statements about a single-price monopoly is FALSE?
a)
b)
c)
d)
The monopolist will never charge a price on the inelastic portion of the demand curve.
Marginal revenue equals marginal cost at the profit-maximizing level of output.
Price equals marginal cost at the profit-maximizing level of output.
Marginal revenue is less than price, since the monopolist must lower its price to all
consumers to sell an additional unit of output.
101. Suppose that at a monopolist’s current output choice, marginal cost equals price. Which of
the following statements is TRUE?
a)
b)
c)
d)
The monopolist is currently maximizing profits.
The monopolist should produce more output to maximize profits.
The monopolist should produce less output to maximize profits.
We do not have enough information to know whether or not the monopolist is
maximizing profits.
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102. Refer to the diagram below, which illustrates the demand, marginal revenue, and marginal
cost curves for a single-price monopolist.
$
10
6
MC
4
D
30
60
100
Q
MR
!
The profit-maximizing price and quantity for this monopolist are:
a)
b)
c)
d)
P = $4, Q = 60.
P = $6, Q = 60.
P = $4, Q = 30.
P = $6, Q = 30.
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The following TWO questions refer to the diagram below, which illustrates the demand,
marginal revenue, and relevant cost curves for a monopolistically competitive firm.
$
MC
ATC
10
6
4
!
10
25 30
60
q
103. How many units of output should this firm produce, in order to maximize profits?
a)
b)
c)
d)
10.
25.
30.
60.
104. In the long run, what price will this firm charge for its output?
a)
b)
c)
d)
$10.
A price less than $10 and greater than $6.
$6.
A price less than $6 and greater than $4.
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The following TWO questions refer to the diagram below, which illustrates the demand,
marginal revenue, and marginal cost curves for a profit-maximizing single-price monopolist.
$
MC
a
f
b
g
c h
j
D
Q
!
MR
105. Which area represents the deadweight loss due to the monopoly?
a)
b)
c)
d)
g + h.
f + g.
f + c.
f + g + c+ h.
106. Which area represents the monopolist’s producer surplus?
a)
b)
c)
d)
a + b + f.
a + b + f + c.
a + b + f + c + j.
a + b + j.
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41
The following TWO questions refer to the diagram below.
Figure 1
$
Figure 2
$
MC
MC
ATC
ATC
D
MR
Figure 3
$
MR
q
D
q
Figure 4
$
MC
MC
ATC
ATC
D
D
MR
q
!
MR
q
107. Which of the four diagrams illustrates a long run equilibrium for a monopolistically
competitive firm?
a)
b)
c)
d)
Figure 1.
Figure 2.
Figure 4.
Figures 2 and 4.
108. Which of the four diagrams illustrates a monopolistically competitive firm able to make
positive economic profits in the short run?
a)
b)
c)
d)
Figure 1.
Figure 2.
Figures 1 and 2.
None of the above.
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42
109. Which of the following statements about the comparison between monopolistic competition
in the long run and monopoly in the long run is FALSE?
a)
b)
c)
d)
Marginal revenue is less than price for both monopoly and monopolistic competition.
Price is greater than marginal cost for both monopoly and monopolistic competition.
Price is greater than average total cost for both monopoly and monopolistic competition.
Neither monopoly or monopolistic competition produce at the minimum point of the
average total cost curve.
110. Which of the following statements about the comparison between perfect competition and
monopolistic competition is TRUE?
I.
Both perfectly competitive and monopolistically competitive firms produce where
marginal revenue equals marginal cost.
II. Both perfectly competitive and monopolistically competitive firms produce where price
equals marginal cost.
III. Both perfectly competitive and monopolistically industries are characterized by free
entry and zero profits in the long run.
a)
b)
c)
d)
I only.
I and III only.
I and II only.
I, II and III.
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