a) I, II and III. b) I c) II and III only. d) I and III only. 2. Refer to the PPF diagram below. PPF

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1 1. Suppose that - at a given level of an economic activity - marginal social cost is greater than marginal social benefit. Which of the following statements is TRUE? I. Social surplus would be higher at a higher level of the economic activity. II. Given the current level of the economic activity, there is a deadweight loss. III. A reduction in the level of the economic activity would reduce social costs by more than social benefits. a) I, II and III. b) I c) II and III only. d) I and III only. 2. Refer to the PPF diagram below. y PPF 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) Scarcity. b) Increasing marginal costs. c) Increasing marginal productivity. d) Diminishing marginal rate of substitution. x! 1 of! 27

2 3. Refer to the diagram below, which illustrates the PPF for two countries who can trade with one another. y E A F PPF1 Which of the following production combinations are INEFFICIENT? I. Country 1 produces at point C; 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 E. a) I, II and III. b) I only. c) III only. d) None of the production combinations are inefficient. B PPF2 C D x 4. Which of the following WILL result in an INCREASE in the demand for good x? I. A decrease in income, if x is inferior. II. An increase in the price of a complement to x. III. An increase in the price of a substitute for x. a) II only. b) III only. c) I and II only. d) I and III only. 5. Suppose that if price increases from 10 to 14, then quantity demanded decreases from 28 units to 20 units. Using the mid-point formula, the own-price elasticity of demand is: a) 1. b) 2. c) 3. d) None of the above.! 2 of! 27

3 Use the diagram below to answer the following TWO questions. Assume that this industry is perfectly competitive, and that there is a negative externality associated with output, such that the marginal external cost is equal to D S Q 6. If a price floor of 6 is introduced in this market, which of the following correctly describes the effect on producer surplus? a) Producer surplus is unchanged by the introduction of the price floor. b) Producer surplus increases by 24, after the introduction of the price floor. c) Producer surplus decreases by 12, after the introduction of the price floor. d) None of the above statements correctly describes the effect of the introduction of the price floor on producer surplus. 7. If a price floor of 6 is introduced in this market, which of the following correctly describes the effect on social surplus? a) Social surplus is unchanged by the introduction of the price floor. b) Social surplus decreases by 8, after the introduction of the price floor. c) Social surplus increases by 8, after the introduction of the price floor. d) None of the above statements correctly describes the effect of the introduction of the price floor on social surplus.! 3 of! 27

4 ! 8. Assume that the market for beer is perfectly competitive, and initially in long run equilibrium. Suppose that the price of wine (a substitute for beer) increases. Which of the following will result, in the short run AND in the long run? a) The equilibrium price of beer will increase in the short run and then decrease in the long run. b) The equilibrium price of beer will increase in the short run and then increase even more in the long run. c) The equilibrium price of beer will decrease in the short run and then increase in the long run. d) The equilibrium price of beer will decrease in the short run and then decrease even more in the long run. 9. Refer to the diagram below, which illustrates the supply curve of a competitive firm. 4 S Q If price is 3, and the firm maximizes profits, what do this firm s VARIABLE COST equal? a) 3. b) 9. c) 18. d) None of the above.! 4 of! 27

5 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 9 7 c f d a b g D D1 Q 10. If demand is D1, then the equilibrium in this market is where: a) Price is 9 per unit and quantity is 40 units. b) Price is 7 per unit and quantity is 60 units. c) Price is 9 per unit and quantity is 60 units. d) Price is 7 per unit and quantity is 40 units. 11. 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) g. b) b. c) c. d) b + g. 12. If demand increases from D1 to D2, then the increase in MARKET SUPLUS is equal to: a) Area d + b. b) Area a + c. c) Area a + b. d) Area a + b + g.! 5 of! 27

6 Use the diagram supply and demand curve diagram illustrated below to answer the following TWO questions. a b c d e S D Q 13. If tax is introduced that reduces the equilibrium quantity to 10 units, then which area will represent the DEADWEIGHT LOSS? a) e. b) e + d. c) e + b + d. d) The deadweight loss will be zero. 14. If tax is introduced that reduces the equilibrium quantity to 10 units, then which area will represent the decrease in CONSUMER SURPLUS? a) c + d + e. b) a + b + c + d + e. c) e + b + d. d) There is no decrease in producer surplus. 15. Which of the following help explain why an individual s demand curve for a normal good might be downward sloping? a) The consumer s preferences are such that she prefers averages to extremes in her consumption bundle (that is, she has a preference for variety in her consumption bundle). b) At lower prices the purchasing power of the consumer s money income will increase, and so the income effect of a price decrease will increase her consumption. c) Both a) and b). d) Neither a) nor b).! 6 of! 27

7 ! 16. Refer to the diagram below, which illustrates a demand curve D Q If the price of this good is 20, what will be the quantity demanded? a) 0. b) 2. c) 4. d) None of the above. 17. Which of the following statements about the deadweight loss of taxation is TRUE? (Assume no externalities.) I. The deadweight loss arises because the gain in government revenue is less than the decrease in market surplus. II. The smaller the decrease in quantity from a given tax, the larger the deadweight loss. III. The deadweight loss arises because the tax results in an increase social costs and a decrease in social benefits. a) I and II only. b) I only. c) II and III only. d) I, II, and III.! 7 of! 27

8 18. The diagram below illustrates the domestic supply and demand curves for a good D S Q If the world price is 2, and a tariff of 2 is introduced, by how much will imports decrease as a result of the tariff? a) 15 units. b) 20 units. c) 25 units. d) None of the above. 19. Which of the following statements about the relationship between marginal cost and average costs is/are TRUE? I. If average variable cost is decreasing, then marginal cost must be less than average variable cost II. If marginal cost is upward sloping over some range of output, then average variable cost must also be upward sloping in that range of output. III. The marginal cost must pass through the average total cost curve at the minimum point of the average total cost curve. a) I, II, and III. b) II and III only. c) I and III only. d) I and II only.! 8 of! 27

9 ! The following TWO questions refer to the diagram below, which illustrates the market for a good whose production results in a negative externality. MSC a d MPC b e MSB Q2 Q1 Q 20. If there is no regulation in place to correct the externality, which area represents SOCIAL SURPLUS? a) a. b) a - d. c) a + b. d) a + b + e. 21. If the optimal Pigovian tax is introduced in this market, which area represents the CHANGE in SOCIAL SURPLUS resulting from the tax? a) Social surplus increases by area e. b) Social surplus decreases by area e. c) Social surplus increases by area d. d) Social surplus decreases by area d.! 9 of! 27

10 ! 22. The following question refers 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 MC A MC A P If a cap and trade program is introduced that reduces aggregate emissions to 40 units, what will be the equilibrium price of permits? a) 10. b) 8. c) 6. d) We need to know the initial distribution of permits to calculate the equilibrium price of permits. 23. A consumer buys only steak and green lentils. Green lentils are inferior and steak are normal. If the price of steak rises, then: a) The income effect of the price change will increase steak consumption. b) The income effect of the price change will increase lentil consumption. c) The substitution effect of the price change will increase steak consumption. d) The substitution effect of the price change will decrease lentil consumption.! 10 of! 27

11 24. The diagram below illustrates a budget line. y 15 BL Which of the following COULD be the prices of each of the two goods? a) px = 5; py = 1. b) px = 1; py = 5. c) px = 3; py = 15. d) More than one of the above could be the prices. 3 x 25. The diagram below illustrates the indifference curve of a consumer of goods x and y. y F IC x Suppose you are told that absolute value of the slope of the indifference curve is equal to one half. Which of the following is a correct interpretation of this number? a) This consumer is just willing to give up one half a unit of y in exchange for an additional unit of x. b) The consumer must give up one half a unit of y in order to receive an additional unit of x. c) Both a) and b) are true. d) Neither a) more b) are true.! 11 of! 27

12 26. Suppose that the price of good x is 4 per unit and the price of good y is 2 per unit. Then the marginal cost of good x is: a) 2 units of x. b) 1/2 a unit of x. c) 2 units of y. d) 1/2 a unit of y. 27. 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 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 (that is, she has a preference for variety). c) Her marginal rate of substitution is diminishing. d) All of the above are true. 28. Suppose that, given the consumption bundle x = 22 and y = 11, a consumer s MRS is equal (in absolute value) to 2.3. The price of x is 1 and the price of good y is 1, and the bundle x = 22 and y = 11 uses up all the consumers income. The consumer s preferences are strictly convex. Which of the following is TRUE? a) To maximize utility the consumer should buy more x and less y. b) To maximize utility the consumer should buy less x and more y. c) The bundle x = 22 and and y = 11 maximizes the consumer s utility. d) There is insufficient information to determine what the consumer should do to maximize utility. 29. Suppose you are given the following information about a competitive firm: q = 20 units; TR = 100; ATC = 12; AVC = 6; MC = 6. Given this: a) The firm should continue to produce its current level of output in the short run, but should exit the industry in the long run. b) The firm should continue to produce its current level of output in the short and long runs. c) The firm should shut down in the short run, and exit the industry in the long run. d) There is insufficient information to advise the firm.! 12 of! 27

13 30. 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 a BL2 IC2 IC1 x a) Both goods x and y are normal. b) Good x is inferior and good y is normal. c) Good x is normal and good y is inferior. d) None of the above statements is true. 31. Suppose Jarrah, the owner-manager of Jarrah s Doggy Daycare, earned 200,000 in revenue last year. Jarrah's explicit costs of operations were 100,000. Jarrah has a Bachelor of Arts degree in Performance, and could be earning 30,000 annually as an actor. Calculate Jarrah s ECONOMIC PROFITS from his Doggy Daycare business. a) 200,000. b) 130,000 c) 100,000. d) 70,000.! 13 of! 27

14 ! 32. Which of the following diagrams COULD represent the change in a consumer s budget line if (i) the price of x and y both decrease AND (ii) the consumer s income increases. a) y b) y Original BL Original BL New BL New BL x x y c) d) Original BL y Original BL New BL New BL x x 33. Which of the following statements about producer surplus is FALSE? I. If the price at which a competitive firm can sell its output decreases, then the decrease in producer surplus will equal the decrease in profits. II. Producer surplus is equal to total revenue minus fixed costs. III. Producer surplus equals profits plus fixed costs. a) III only. b) II only. c) I only. d) None of the statements are false.! 14 of! 27

15 34. Refer to the indifference curve/budget line diagram below. Suppose that a consumer initially faces budget line BL1, and thus is able to achieve the utility level associated with IC1. If py decreases, then the substitution effect is the movement from and the income effect is the movement from. y e f d c BL1 IC1 IC2 x a) d to f; d to e. b) f to d; d to e. c) e to c; c to d. d) d to f; f to e. 35. Which of the following statements about perfectly competitive firms is TRUE? I. A firm will optimally produce positive output in the short run if profits are less than zero, as long as producer surplus is greater than zero. II. A firm will exit the industry in the short run, if profits are less than zero. III. A firm will shut down in the short run, if price is less than average total cost. a) I, II and III. b) I only. c) I and II only. d) II and III only.! 15 of! 27

16 36. Refer to the indifference curve/budget line diagram below. y 90 c BL1 b a BL2 IC IC1 x This consumer initially faces prices of px = 8 and py = 6, and - given this - she maximizes her utility at point a. Now suppose the price of good y decreases so that the new budget line is BL2. How much money would we have to take away from this consumer, such that she could just afford her to attain her original level of utility given the new prices? a) 80. b) 160. c) 240. d) There is insufficient information to answer the question.! 16 of! 27

17 The following TWO questions refer to the table below, which shows the relationship between labour and output for a firm. Quantity of labour Total output The marginal product of the fifth unit of labour hired is: a) 0. b) 1. c) 2. d) If each unit of labour hired is paid 15, then the average variable cost of producing 9 units of output is: a) 5. b) 15. c) 30. d) 90.! 17 of! 27

18 The following FOUR questions refer to the diagram below. Assume perfect competition. MC ATC 50 AVC q 39. Given a price of 50, the profit-maximizing level of output for this firm is: a) 10. b) 30. c) 40. d) Given a price of 50, the firm s maximum profit is equal to: a) b) 800. c) 700. d) What will be the long run equilibrium price for this good? a) 25. b) 30. c) 50. d) There is insufficient information to calculate the long run equilibrium price.! 18 of! 27

19 42. (Remember to refer to the diagram on the previous page.) What do this firm s fixed costs equal? a) 0 b) 250. c) 350. d) There is insufficient information to calculate fixed costs. 43. Refer to the diagram below. ATC MC AVC 8 0 q What is the shut-down price for this firm? a) 0. b) Greater than 0 but less than 8. c) 8. d) There is insufficient information to determine the shut-down price. 44. Consider and industry which is characterized by (i) positive economic profits and, (ii) barriers to entry and exit in the long run. This industry is best described as: a) A single-price monopoly. b) Perfectly competitive. c) Both a) and b). d) Neither a) nor b).! 19 of! 27

20 45. Which of the following statements about a perfectly competitive firm producing positive output is TRUE? I. A competitive firm maximizes profit by producing the level of output at which price equal marginal cost. II. A competitive firm maximizes profit by producing the level of output at which marginal revenue equals marginal cost. III. For a competitive firm, economic profits equal zero in the long run. a) I only. b) I and III only. c) II and III only. d) I, II, and III. 46. Which of the following statements about a monopolistically competitive firm producing positive output is TRUE? I. A monopolistically competitive firm maximizes profit by producing the level of output at which price equal marginal cost. II. A monopolistically competitive firm maximizes profit by producing the level of output at which marginal revenue equals marginal cost. III. For a monopolistically competitive firm, economic profits equal zero in the long run. a) I only. b) I and III only. c) II and III only. d) I, II, and III. 47. Suppose that a perfectly competitive industry is initially in long run equilibrium. The government then introduces a 5 per unit tax in this market? 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.! 20 of! 27

21 48. The following question refers to the diagram below, which illustrates a competitive firm s cost curves. Assume that this firm can sell its output for 30 per unit, and assume that the firm chooses the level of output that maximizes its profits. 50 MC ATC AVC 10 q Which of the the following statements is TRUE? a) The firm is making negative profits and negative producer surplus, so should shut down in the short run and exit in the long run. b) The firm is making negative profits but positive producer surplus, so should continue to operate in the short but should exit in the long run. c) The firm is making negative profits and positive producer surplus, so should continue to operate in the short run but exit in the long run. d) None of the above are true. 49. Consider and industry which is characterized by (i) differentiated products and, (ii) free entry and exit in the long run. This industry is best described as: a) A single-price monopoly. b) Monopolistically competitive. c) Perfectly competitive. d) None of the above! 21 of! 27

22 The following THREE 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. ATC MC SRS AVC 50 D2 20 q D Q 50. If demand is D1, then - to maximize profits - each firm in the industry will produce units of output. a) 20. b) 60. c) 90. d) If demand is D1, and if each firm maximizes its profits, what does each firm s producer surplus equal? a) 3,600 b) 3,150. c) 3,000. d) None of the above. 52. If demand increases from D1 to D2, how many firms will enter this industry in the long run? a) 5. b) 10. c) 15.! 22 of! 27

23 d) None of the above. The following TWO questions refer to the diagram below, which illustrate a competitive market and the cost curves of a representative firms in this market. MC S1 S2 ATC a AVC c b D1 D2 q Q 53. Which of the labeled points is a long run equilibrium? a) Only points a and c. b) Only points b and c. c) Only points a and b. d) Points a, b, and c are all long run equilibria. 54. Which of the labeled points is a short run equilibrium? a) Only points a and c. b) Only points b and c. c) Only points a and b. d) Points a, b, and c are all short run equilibria. 55. Consider and industry which is characterized by (i) homogenous products and, (ii) free entry and exit in the long run. This industry is best described as: a) A single-price monopoly. b) Monopolistically competitive. c) Perfectly competitive. d) None of the above! 23 of! 27

24 The following TWO questions refer to the diagram below, which illustrates the demand, marginal revenue, and marginal cost curves for a single-price monopolist. MR MC ATC D q 56. The profit-maximizing price for this monopolist is: a) P = 12. b) P = 10. c) P = 7. d) None of the above. 57. The profit maximizing quantity for this monopolist is: a) 4 units. b) 6 units. c) 8 units. d) 10 units.! 24 of! 27

25 58. The following question refers to the diagram below, which illustrates the demand, marginal revenue, and relevant cost curves for a monopolistically competitive firm. MC 10 ATC ! In the long run, how will the diagram above change? q a) There will be no change; this diagram illustrates a long run equilibrium. b) In the long run there will be entry into this industry, causing this firm s average total cost curve to shift upwards. c) In the long run there will be entry into this industry, causing this firm s demand and marginal revenue curve to shift inwards. d) Both b) and c) will occur in the long run. 59. Which of the following statements about the comparison between monopolistic competition and single-price monopoly is TRUE? I. Both monopolistically competitive firms and single price monopolies produce where marginal revenue equals marginal cost. II. Neither monopolistically competitive firms or single price monopolies produce where price equals marginal cost. III. Both monopolistically competitive and single price monopolies can earn positive economic profits in the long run. a) I only. b) I and III only. c) I and II only. d) I, II and III.! 25 of! 27

26 60. The following question refers to the diagram below. Figure 1 MC ATC Figure 2 MC ATC MR D q MR D q Figure 3 Figure 4 MC MC ATC ATC MR D q MR D q Which of the four diagrams illustrates a long run equilibrium in a monopolistically competitive industry? a) Figure 1. b) Figure 2. c) Figures 1 and 2. d) Figures 1, 2, and 4.! 26 of! 27

27 ! 27 of! 27