AP-14 | Microeconomics Practice Examination
)
Microeconomics Practice Examination
Section I
Directions:Each of the questions or incomplete statements below is followed by five ans\rers or completions.
Select one
that is best in each case.
I'
Which of the followirig characteristics best represents
a
market economy rather than a command economy?
(A) Exchange of goods and services are controlled by price ceilings and price floors.
(B) A system of laws establishes rules in the exchange of goods and services.
(C) Property rights provide incentives for production and exchange.
(D) Industries are operated and controlled by a central goo.rnm.rrt.
(E) Central government grants monopoly rights to some firms.
2. The production possibility graph
above shows the output combinations of wheat and corn. Which of the lines or
curves are consistent with the principle ofincreasing opportunity cost?
(A) Aonly
(B) B only
(C) C only
The following market information is provided to
Pic6.
$2.50
$3.00
$4.00
$4.50
Quantity
I
Quantity
t4
L3
12
11
2
4
5
6
6.5
a
(D) D only
(E) A, B, and C
producer:
euantity
3
I
10
12
13
Which of the following is true concerning the price and quantity schedules described above?
(A) Quantity I is a demand schedule; Quantities 2 and3 are supply schedules.
GJ Quantity 2 is a demand schedule; Quantities 1 and 3
r"pply schedules.
"t. ty Z' supply schedules.
(C) Quantity 3 is a demand schedule; Quantities 1 and Quanti
(D) Quantities
(E) Quantities
+.
2 and 3 are demand schedules;
1 and 3 are demand schedules;
euantity I is a supply^r"sched-uie.
euantity 2 is a supply schedule.
If a perfecdy.competitive firm operates at its profit-maximizing output and earns zero economic profit (or only
normal profit), that firm is operating at a point where
(A)
AIC>MR:MC>AVC
(B)
ATC<P>MC
(C)
P:MC:ATC
(D)
P<AR
(E)
a
MR:MC<AVC
Microeconomics Practice Examination I AP-15
5. Price floors are frequendy advocated for a good or service to
(A) correct for a positive externality (spillover benefit)
(B) alleviate inflationary pressures
(C) provide for public goods
(D) create incentives for- productive or technical efficienry
(E) sustain an income level for the producer of a good or service
Qaestions
6-7
refer to the following graph showing the demand for oranges.
o
6. An increase
Quantity
in the price of oranges is represented by
(A) movement from point B to pointA
@) movement from pointA to point B
(C) shift from D to D,
(D) shift from D to D,
(E) shiftfrom D, to D,
7. A shift
from D to D, could be
caused by
(A) a decrease in the number of firms supplying oranges
@) a decrease in the cost of producing oranges
(C) a drought affecting the supply of grapefruit, a substitute for oranges
(D) a shortage of oranges in the market
@) a surplus of oranges in the market
8.
fusuming that output increases by one, marginal cost can be computed by which of the following methods?
(A) A change in the total variable cost
(B) A change in the total fixed cost
(C) Total cost minus total fixed cost
(D) Total explicit cost minus total implicit cost
@) Total variable cost minus total fixed cost
9.
In the short run, the price of labor divided by the marginal productivity of labor will yield which of the following?
(A) Average total cost
@) Average variable cost
(C) Marginal cost
(D) The total cost of labor
@) The profit maximizing output level for the firm
AP-16 I Microeconomics practice Examination
10' If
monopolist earning positive economic profit
a
price
(A) Increase
(B) Increase
(C) No Change
(D) No Change
@) Decrease
Questions I
l-12
rcfer to
.i;.ri.n".,
profit
Output
D*r."*
D#;.
fncrease Decrease
ry" Change No Change
Decrease No Chanle
Decrease Decrease
an increase in fixed cost, which of these
)
will occur?
ire following market strucrures.
I. Perfect competition
II. Monopoly
III. Monopolistic competition
IV
Oligopoly
11' A profit-maximizing firm finds that at its current
output the price of the product exceeds the marginal
cost of the
product. In which of the market strucrures
wil a firm Lcrease
(A) I
only
@) rI
only
its output?
(c) II and III
only
(D) trI and rvonry
(E) I, tr,
11I, and
rv
12'' rnwhich market sffucture will a firm be
most concerned with the issue of interdependence for
its output, price, and
profits?
'
(A) I
13
'
onlv
@) II
onry
(c) III onry
only
t'
,", I, Ir, rlr, and rv
firm, operates in a perfectly competitive market selling
flower bouquets. The firm has the
short-run information concerning the sellng
1""q"* a crurenr output of 100 bouquets per day. following
weeds' a local
. Average Revenue : $15.00
. Marginal Cost: $10.00
o Average Total Cost :
r Average Variable Cost $10.00
: $5.00
"f
Which of the following actions would be taken by
"i
weed,sto maximize profits
(A) Increase oulpur of the flower bouquets
(B) Increase price of the flower bouquets
(C) Decrease outpur
@) Decrease price to equal the average variable cost
@) papand the scale ofits physical pl"ant size and operation
t-
(D) rv
ffffi&:r*X;fiHff?J3rt
in the short run?
of the following would be the same for perfect competition,
monopory, and
!p f"r,"A (zero) profits would be earned in the long run.
(B) Productive efificiency wourd be achieved
in the loig;.
(c) outputwo il,d be determined at a point wher"
-"riirt l ,..r"nue equals marginal cost.
(D) Allocative efEcienry wourd be achieved
in the sho#run.
@) Output levels will be the same for all models.
15' The marginal revenue product of labor in a perfectly
competitive labor market is downward sloping because
marg-naf productivity eventually decreases
$)
@) marginal revenue decreases
9) 6" marginal productivity divided by the price of labor
(D) marginal cost of labor increases
'
@) firms substitute capital reso'rces for rabor resources
decreases
Microeconomics Practice Examination I AP-17
operaingin a resort town where a teenage laborer can
For Questions 16-17,usethe following data about Tbe Popcom-stvre,
popcomsrore
curiently sells each bag of carmel corn for $2'00 per bag'
rJrirt;;k;.. The
L" r,i"a in a perfeci!
Quantity of
**p.ic.*
Labor
Marginal Productivity
I
15
2
35
)
4
45
50
5
40
6
30
which laborer?
16. The law of diminishing returns sets in after the hiring of
(c)3
(B)2
(A)1
(D)4
@,)
5
how many laborers vnfi'The Popcora storehire?
17. If the prevailing wage rate in the resort town is $70.00 per day,
(c)3
(B)2
({)1
(D)4
(E)/s
to produce the social optimum amounts of
1g. The free rider problem is associated with the market's inability
(A) inferior goods
@) goods that are Price inelasti
(C) goods that produce negative externalities
@) public goods
@) goods for which there are no substitutes
convincing if the goal is to
19. The justification for government regulation of business is most
(A) impose minimum wage standards on firms
@) break uP natural monoPolies
(C) provide optimal output of the product
@) insure a fair profit for the business
(E) increase govefflment revenue
Questions
20-21 rcfet to the following
information'
r
i
,
^^ bushels
produce either 100
peter and sam can produce either fruit or vegetables on the same.amount of land. Peter can
either 200 bushels of vegetables or 100 bushels of fruit'
of vegetables or 200 bushels of fruit wher""r'sr- ."" ptoduce
in the production of vegetables and fruit?
20. Which identifies the absolute advantage and comparative advantage
Absolute
Advantage
Fruit
(A) Sam
(B) Sam
(C) Peter
(D) Peter
@) Peter
2
1
.
ComParative
Advantage
Fruit
Peter
Sam
Peter
Peter
Peter
Absolute
ComParative
Advantage
Vegetables
Sam
Peter
Sam
Peter
Sam
Peter
Peter
Advantage
Vesetable
Peter
Sam
Sam
following terms of production and trade scenarios?
Each can increase their consumption of if they adopt which of the
Ot:11-1U-^t:,*
(A) Peter produces vegetables only and trades.l pu1let.of;eqetables,for I
*d t"d", 1 Puslrel
(B)
P' J
"l.tS""-:9:::ll?::
*'
i,;; ffi;;; l.i; ;y
Fl' ror 3 l*l"l
bushels
;;;;ffi; ;,;;;Ji'*J ;;J;; 1 busher "{"fryi:
"i l"t'',"-"9:fl]::;
(D) il;fi;;;;;;;;G:;;t;atra9es.1P":!"r:rsg"Pb1.',to'"'Jl:l:*ln-:'**'
ft.,i.;;t ""Jt"a"r bushel of fruit for'$ bushels of Peter's vegetables'
@) ffi ffi;;
(c)
1
/
AP-18 | Microeconomics pracice
!
Examination
22. fusume the following:
I.
II.
Itr.
'Iomatoes are.an input in the production
of tomato juice.
juice is a substitute foi tomato juice.
_Orange
Bagels are a complement to tomato and orange juice.
what is the Iikely affect in the orange juice and bagel markets if a drought destroys
OrangeJuice
g331lL pri..
tlgg_
a
significant amount of the tomato crop?
Bagel
(A) Increase
Increase Decrease
(B) Increase
Decrease Increase
(C) Decrease Decrease Increase
(D) Increase
Increase No change
(E) No change No change Increase
euantity
Decrease
Decrease
Increase
No change
Increase
23' A surplus of VHS fl/ideo Home system) tapes, ceteris paribus,would
indicate that which of the following will occur
to quantity demanded and quantity suppfieJ in the VAS tape market?
Quantity Demanded
(A) Decrease
(B) No change
(C) Decrease
(D) Increase
@) Increase
Quantity Supplied
Increase
Increase
No change
Increase
Decrease
24' Noodles
are considered an inferior good and rice a normal_good.
what is likely to happen to the equilibrium price
and quantities of noodles and rice gio.n
increase in famif rncomes?
"r,
Noodles
QTY
(A) Increase
(B) Increase
(C) Decrease
@) Decrease
(E) Decrease
25
'
Rice
Price
QTY
Increase
Decrease
Increase
Increase
Decrease
Decrease
Decrease
Decrease
Increase
Decrease
Price
Decrease
Decrease
Increase
Increase
Increase
Gopd A and Good B have a positive cross elas ticity of demand. If
the resource cost of making Good A increases, then
which of the following will Lappen in the markets of Good A and B?
GoodA
Quantity
(A) fncrease
(B) Increase
(C) Decrease
@) Decrease
(E) Decrease
Good B
Price
Quantity
Increase Decrease
Decrease Increase
Increase Decrease
Increase Increase
Decrease Decrease
26' AtKa$r)'n's current colsumption,
cookie is 8' Milk costs $1.00 per
Price
Decrease
Decrease
Increase
Increase
Increase
her marginal utility of the last glass of milk is 6 and the marginal
utility of her last
"arton
and"cookies
""rt
Sz"oo f.r-package. This information
l"r greater preference fo-r drinking milk than for consuming
(B) is maximizing her total utility of milk, but not of cookies
!t)
a
.ooki.,
(c) experiences diminishing maiginal utility of milk before that of cookies
(D) can increase her total utrlities by purchasing more milk and
fewer cookies
@) possesses a higher total utility foicookies tf,an for milk
iidi""t.,
that Kathryn
Microeconomics Practice Examination I AP-19
27. Diseconomies of scale existwhen
(A) marginal utility is zero
@) a firm produces at a short-nrn output where MR : MC > ATC
(C) the marginal revenue of labor is zero
(D) long-run average total cost increases as output increases
(E) short-run marginal cost increases as output increases
Use the following cost graph for a firm to answer questions 28-29.
28. For this particular firm, which of the following is true at point
(A)
@)
(C)
(D)
@)
29.
b?
Marginal productivity is at its maximum.
The point of diminishing returns has not yet occurred.
Average fixed costs are increasing.
Average productivity is at its maximum.
Marginal cost is equal to marginal productivity.
With increasing output, the distance between the AIC curve and the AVC curve changes
as a
result of
(A) a decrease in average productivity of labor
(B) a decrease in the average fixed cost
(C) specialization and division of labor
@) economies of scale
@) increasing marginal returns
30. Entry of firms that are earning positive economic profits into a perfecdy competitive constant cost industry would
have which of the following effects on price, output, and profits of an existing individual firm?
Price
Output
Profits
(A) Decrease
(B) Decrease
(c) Increase
Increase
Decrease
Decrease
(D) No change
@) Decrease
No change
Decrease
Decrease
Decrease
lncrease
Decrease
Decrease
4
,/'
AP-20 | Microeconomics practice Examination
Qaestions
31-32 refer to this graph illustrating
a
firm that produces
a
specialized carcurator fo/which there are no
substitutes.
20
'16
co
(d
5o
otE
Eb
&o
14
12
10
E
-(g
go
2 4 6 8 ro rz r+lo-lE
g'.gf sltT"P;,sf
Qr
Ss..gslgg;
31' what will be the price of the calculator assuming
the goal of the firm is to maximize its profitsl
(A) Less than $4'00 (B) $z'oo (c)
$z.qo (D) $to.oo @) Greater than $10 but less than $12.00
32' what will be the price of the calculator assuming
the goal of the firm is to maximize its total revenue?
(A)
(c)
@)
(D G;;;*than$r0butressthan$12.00
1o)
33' A monopolist and a perfect competitor will both expand
their ourput if which of the following is true?
$:'oo
$7'oo
$7.q0
sto.oo
greater than the average total cost.
!p |ti." isis greater
than the margilal cost.
!? l*.
(C) Marginal revenue
is less tharithe marginal cost.
(D) Marginal revenue is greater than the
iarginal cost.
(E) Total reyenue can increase by lowering
th"e
price.
34' A perfecdy competitive firm's supply curve is
described by which of the followingl
(A) The segment of the average variable cost curve
from its minimum point
segment of the marginal cost curve from the minimum
!ryIltt segment
average variable cost
yhere marginar cosr intersectr th"
tP) rlrr
{om
--'
q) qt. segment after the minimJm marginal cost "rr"r"g. totar cosr
@) The segment of marginal cost from *i.r. marginal
revenue equals marginal cost
Questions
3J-iT
refer to the following information.
walling Ponies opetates in a perfectly
competitive recreational industry o{fering pony rides
ro young children. walling
hires teenage workers in a perfectly.o-plaiJrr.-teenage
labor market and rents ponies from a near-by horse
farm. she
can hire teenage workers to
po"y tiJ"r ror ctriiaren ai
a"y.
"otrdo.t
iiffi*
35. How will Walling decide how many laborers to
employ?
(A) she will hire wor$rs until the marginal revenue
produc of the next laborer is equal to $100 per day.
(B) she will hire a sufificient number of"*ork r,
," pi"a""" rt the point where average cost equals $100 per day.
(c) she will hire workers at the point where the
-rtgi"rl p.a""ri"i.y of the next laborer declines.
@) she will hire workers at the point wh.r. th.-m"rftnai ;;";
product of labor is equal to that of ponies.
@) she will hire at the point where marginal prodil;t;f *"]r l*"bor", i, equar
to average productivity of a1workers.
-
Microeconomics Practice Examination IAP-21
36. At the profit maximizing ouq)ut, suppose that the marginal product of the last laborer is 4 rides per
day.
What is rhe
price ofeach ride?
(A) $4oo
(B) $2s0
(c) $lo0
(D) $50
(E) $25
37. If Walling employs the cost minimizing combination of inputs of labor and ponies, such that the marginal productivity of the last pony is 1 0 tours and that of the last laborer is 4 tours, what is the rental price of each pony?
(A) $400
(B) $2s0
(c)
$1oo
@)
$50
(E) $2s
LORENZ CURVES
U.S. income distribution by quintile
100%
80%
cumulative
percent
of income
60%
40o/o
1992
20%
o%6
38. From 1968 to 1992,rhe United States economy most definitely indicates
(A)
(B)
(C)
(D)
(E)
in the equality of income among its population
in real income among U.S. workers
an increase in the national minimum wage laws
* increase in the progressive income tax
a decrease in income of U.S. workers in foreign countries
a decrease
a decrease
39. The criteria for efficient allocation of
a good or service occurs
if the industry operates at a point where
(A) marginal revenue equals marginal cost
(B) marginal private cost equals marginal private benefit
(C) marginal social cost equals marginal social benefit
(D) marginal revenue and marginal cost are below the average total cost
@) there is no incentive for entry or exiting of firms into the production of the good or service
AP-22 I Microeconom/cs practice Examination
Questions
4041
refer to the following production possibili,ty graph of a single
country.
(billions of bushels per year)
40' This graph shows the output of corn and lumher, where the production
possibility frontier (ppF-l) refiresents the
current output combinations' The movement of the production
possibility fronti.rioppp-2 indicates that
(A) there has been an increase in the demand for lumber
(B) consumers have maintained their current consumption
of corn
,'
(C) more resources are devoted to the production of lumber
than that of corn
(D) there has been a technological derrJlopment in the production
of lumber but not corn
'
(E) the cost ofproducing corn has decreaied
41' Each of the points, (A-G), on production possibility frontiers (ppF-l
and ppF-2) assumes 4rat
(A) resources are variable and can be increased to produce
the preferred amount of corn and lumber
(B) the costs ofthe resources are constanr
(C) totd ourput of lumber and corn remain constant
(D) trade that can change the opportunity cost can occur
@) resources are being efficiently used in both the production of lumber and corn
Quantity
Quantity
Price
Demanded
Supplied
$5
2,000
$10
$15
$20
$25 /
1,800
1,600
1,400
0
300
600
900
1,200
I,200
$30
1,000
1,500
42. An effective (binding) price ceiling in the marker
above would have which of the following effects?
(A) An increase in the demand for the product.
@) Att increase in the supply for the pioduct.
(C) An increase in the marginal utility.
(D) A decrease in the producer surplus.
@) A decrease in the deadweight loss.
43.
ftffilf"Icurrendy
in an unregulated market equilibrium (Qd
:
Qs) but produces a negative externality. In this
(A) overproducing the commodity at a rower cost to trre consumer
(B) overproducing the commodity at a higher price to rhe consumer
!9) qd..: producing the commodity at al*owei price ro rhe consumer
(D) misallocating resourcessuch that the marginal benefit
exceeds the marginal cost
(E) allocating resources such that the marginai social benefit ir
to thJmarginal social cost
"qJ
Microeconomics Practice Examination I AP-23
44.
In a market where the marginal cost of production is less than the marginal social benefit, which of the following
policies would be likely to promote efficient allocation of the good?
(A) A per unit excise tax
(B) A subsidy
(C) A value added tax
@) A price ceiling
@) Price regulation where price is equated with the market Qd
:
Qs
45. A ski resort has decided to increase the price of lift tickets in order to increase the total revenues of the resort. The
decision v'ill have the desired affects for the ski resort if the price elasticity of demand is
(A)
elastic
@) unit elastic
(C) inelastic
(D) equal to the price elasticity of supply
(E) greater than the income elasticity of demand
46. Theprice elasticity of demand for wheat is inelastic, but not perfectly inelastic. If there is a loss of the wheat.roo Jrr"
to weather and there is a simultaneous research firdi"g that consuming wheat products improves the health of
feople,
then which of the following is likely to occur in the market for rrheat and the iotal r.n ttrr"s of wheat gro*.rri
Equilibrium
Price
(A) Increase
(B) Increase
(c) Increase
Equilibrium
Quantity
Total
Increase
Increase
Increase
No change
No change
Decrease
@) Indeterminate
Indeterminate
Indeterminate
Indeterminate
(E) Decrease
Decrease
Revenues
47. Government officials desire a policy to discourage the consumption of Good A by imposing an excise tax on the
good. The policy will be most effective if which of the following conditions exists for Good Ai
I. Price elasticity of demand is inelastic.
II. Price elasticity of demand is elastic.
III. Price elasticity ofsupplyis inelastic.
fV Price elasticity ofsupplyis elastic.
(A) Condition I only
(B) Conditions I and III only
(C) Conditions I and W only
(D) Conditions II and III only
@) Conditions II and IV only
+8. In the short run, which of the following conditions must be true if marginal cost equals average total cost?
(A) Marginal cost is greater than average variable cost.
(B) Demand is equal to average total cost.
(C) Diminishing marginal returns will occur after the production of thb next unit.
@) Average fixed cost has reached its lowest level.
(E) Marginal revenue is equal to marginal cost.
+9. When average productivity is equal to marginal productivity then which of the follorn'ing is also true for the output level?
(A) Total revenues of the firm will be ar rheir maximum point.
@) Marginal revenue equals marginal cost.
(C) Normal prof,ts will be e{arned.
-:i
(D) Marginal cost is equal to average variable cost.
@) Average fixed cost will be at its lowest level.
AP-24 I Microe_conomics practice Examination
50' A family experiences a steady increase in income and finds
it spends less on Good X. Good X represents which
elasticity characteristic?
(A) A price elasticity of demand between 0 and 1
(B) A negative cro5s price elasticity of demand
(C) A negative income elasticity of demand
@) Anegative elasticityof supply
@) A unit price elasticity of dimand equal to 1
51. The law of diminishing marginal utility explains which of the
following?
(A) A downward qlope of the marginal product of labor
(B) The downward srope of an nJiviault demand for a
product
(c) The decreasing value of an additional worker in a fixJd
space
(D) The concave frontier of a production possibility
mod.i
(E) An inferior good
52' Assume a firm with fixed input shuts down in the short run
with no output. which of the following is true?
Toal Cost Variable Cost Fixed Cost
(e)F;il- o
,*r*
(C) Positive
(D) 0
@) Positive
o
0
(B)o
o -_
positive
0
positive
positive
positive
Fot Questions J 3-54 tefer to the payoff matrix b.elow-that gives
the profits associated with suategic choices of two firms
offering transportation services in tire same small mid-wesiern
city. The first entry in each cell is the profit forVicki; the
second entry is the profit for Chuck
Chuck's Cab
Vicki's
Vans
53
'
Morning
Morning $1,000, $700
Evening $750, $950
Evening
$700, 6b0
$900, $800
Which of the following is true concerning Chuck's and Vicki's
decision to offer their
(A) Vich has a dominanr strateg.y to provide morning service.
-gy
(B) Chuck has a dominant st
to provide errerrin"g,l*i.".
(C) Chuck has a dominant,t "t gy to provide mornirig
,;;;;.
"t
@) Vi"t i has a dominant rtr"t gyio provide evening;;"".
(E) Both Chuck and Vicki porr.i, dominant strategi-es.
services?
54' If each chooses their own profit strategy without collusion,
then which of the following represenrs their profits?
Chuck's Cab
\[cki's Vans
(A) $700
$1,000
(B) $ooo
$700
(c)
$qso
(D) $soo
(E) $e00
$750
$900
$800
Microeconomics Practice Examination I AP-25
55. A monopolistic competition firm will face a less elastic demand for labor than a perfect competition firm because
(A) the demand curve for the product is less elastic for an imperfect competitor
(B) imperfect competitors employ more capial goods than labor
(C) imperfect competitors experience diminishing returns faster than do competitive firms
@) there are fewer substitutes in imperfect competition than in perfect competition
@) both marginal productivity of the laborer and the price of the good decreases
Use the following graphs to answer questions 56-57
Graph
I
$
AR;=Dt
Graph
Graph 4
3
P
ATCI
P1
quantity (firm)
56. Assuming entry and exiting in the market, which of the graphical illustrations above would signal firms to exit the
market in the long run?
(A) l only
@) 2 only
(C) 4 only
@) land3oniy
(E) 3and4only
57. Assuming the absence of spillover costs or benefi.ts, which firm is producing at the socially optimum output in the long
run?
(A) l only
(B) 2 only
(C) land2only
(D) 1,2,and4only
@)t,Z,3,and4'
{
,,.::
AP
-26 I Microeco-n6mics Practice Examination
58' According to the graph, the effect of a regulatory policy that would establish a socially
optimum price would mean
(A) th. firm would minimize its losses and exit the market
(B) tlle firm would produce at the lowest average total cost
(c) the firm would eatn,afair return equal to tie perfect comperitor
(D) th. firm would produce at an outp;t level thai guarantee economic profit
@) tht firm would produce at an output point wheie marginal revenue equals marginal cost
Dollars
per year
^p ^
Units ofoutput peryear
59' Assume that this demand and
suffi stnlr slo;vs the output of Good X that produces a positive externality. Assuming no government regulation, which of the following is true concerning the output
of Good X?
(A) There is sufficient allocation of the good because MpB : Mpc at )L.
@)TThere is sufEcient allocation of the good because the marginal social bJnefit (MSB) is greater than the equilibrium
price at
\.
(C) There is 6ufficient allocation because the marginal social benefit (MSB) will
equal the marginal private cosr
(MPC).
@) There is an inefficient allocation of resources because the marginal social benefit (MSB) is greater than the
marginal private cost (MpC) at [.
@) There is an inefficient allocatio.rtb"."or. there is a shortage at the market equilibrium, Xo.
60' A monopolist finds that at its current
.
outpy_t-the_ price of the product is greater than its marginal revenue, but its
marginal cost is equal to marginal r.rrenrr.. which of the following is true!
(A) The monopolisr is maximizing total revenue.
(Q ]lt. monopolist is overproducing the product.
q) Tl. monopolist is producing at a point of maximum profit.
q) gr. monopolist will be guaranteed at most a fair return on its profit.
(E) The monopolist is producing at a point of socially optimum ourput.
Microeconomics Practice Examination I Ap-27
Microeconomics Practice Examination
Section ll
?::::::I:3::19y"::1,r:,*y::
nttyour
nme on the first ouestion and divi{J **
of the.follo-wing ques :ons.It is slssested that},ou spend aoproximately
In answeringthe
questions, you should emphasize the line ol
of reasoning that generated your results; it is
not.trorrgi to list the results ofjrour
must have all axes and curves clearly labeled and must showdirectio""l
p"tr;.h bl".k orh
1' Starkliee Farm,grows Douglas fir
"h*g.L'Ur"
"
trees, used primarily by households and businesses for Christmas trees. Stark
operates in a perfecdy competitive market and is currentiy producing at the profit
maximizing output, earning posi-
tive economic profits.
(a) Drlw
|o|e9tly
labeled side-by-side graphs for the Christrnas tree market and for Stark 1iee Farm
and show
each of the following:
(t llte equilibrium
price and quantity for the tree industry, labeled
(ii) The piice for christrnas
Farm labeled
as
trees from stark rhee
m,-t,
er.r.
as pno,
and
en
uLriil il iiiiilffi
/
produced by Srark 1iee
(iii) Starktee Farm,s profits
(b) Given your results in (a), wtrat
lo"s,.+ adjustrnent can be expected in the Christrnas tree market? Explain.
(c) Draw side-by-side graphs showing
the Christrnas tree industry in long-run equilibrium and the price and output
for StarkTiee Farm.
(d) Given your
(e)
2
'
analysis in (c), assume now that there is an increase in the taste and preferences
of consumers to
purchase artificial Christnas trees rather tllan Douglas fir trees. Show on ,re*
gr"ph for the Christrnas tree
" o..", in
}4ytoy the effect on product price and the quantity of Douglas fir Christrna,
the short run.
Following the change in the equilibnu_m qrice identified in (i), StarkTlee Farm continues
to produce.
(i) Explain why it would be rational for Stark Tiee Farm to continue to produce in the short run.
(i0 will starkT'ee Farm conrinue to operate in the long run? E4plain.
White Glove-Company is a firm offering moving, transfe! and storage services for households
and delivery of furniture for retail businesses. F''ach job is piiced ,t $zoo. Ttt"
laborers in a ferfectly competitive labor
market for $2,000 per month. Whit. Glo-te has the following"o*p"rry"hires
prtduction function indicatng thonomber
tlat
can be hired and the number of moving jobs each
Number of Laborers
*otf.i
of laborers.
can perform in a month.
Number ofMovingJobs
I
2
25
4
75
135
155
5
r65
6
160
3
(a) What are two
characteristics of a perfecdy competitive labor market, such as rhe one in which white
Glove
Company operates?
(b) After which laborer do diminishing returns begin or does marginal productivity fall? Explain
why this happens.
(c) How will white Glove company determine tlie number of wJrkers to hire?
(dJ How many workers will the firm hire to maximize profits in the short run? Explain your ansrper.
(e)
Assume thatWhite Glo."e
lgmnaly rents physical capital (vans and trucks) "t thi l."ri cosr combination of inputs.
the White Glove Comparry determine the optimum combination
of physical capital (vans'and
trucks) and labor?
(i) How will
(ii) If the p-arginal productivity of the last unit of capital is 20 and the firm employs
the number of labor
i+dicatbd in your answer to (d), what must be the cost;per unit of the physical inpolr if White Glove
Company is minimizing the cost of the output produced? Explain your answer.
AP-28 I Microeconomics Practice Examination
3. The City of Cedar provides Rapid Bus System (RBS)
as
the only public form of transportation to citizens of the
community. The unregulated RBS operates under the conditions of a monopoly that is depicted below.
Rapid Bus System
MC
Quantity
(a) Does the Rapid Bus S)rstenz constitute a natural monopoly? Explain your answer.
(b) Using the graph above do the following:
(i) Identify the price and output for an unregulated profit-maximizing Rapid Bus System.
(ii) Identify the price that the city council would set to achieve allocative efficienry.
(iii) Identify the price that the city council would set to achieve a fair return.
k) Assume that the city council knows that the income elasticity of demand for the bus is -2.0 Explain the effect
an increase in per capita income on ridership (number of riders).
(d) The city council possesses information concerning the elasticity of demand for the Rapid Bus System.
identified two different routes as with the following elasticities of demand.
(i)
(ii)
.
.
Route
.
.
Route
1,
Ed -- -0.2
:
It
of
has
Route 2, Ed
-3.0
Explain how elasticity of demand is calculated.
If the objective is to increase revenue, should the city council increase, decrease, or make no changes in the
bus fares of:
1
Route 2
(iii) Explain two conditions needed for the
Rapid Bus System to price discriminate with these two routes.