# ECON 251 Practice Exam 2 Questions from Fall 2013 Exams

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1 ECON 251 Practice Exam 2 Questions from Exams Gordon spends all his income on spatulas and mixing bowls. Spatulas cost \$4 and mixing bowls cost \$12. Gordon has \$60 of income and considers both spatulas and mixing bowls to be normal goods. Use this information for the following 4 questions. 1. Which of the following combinations would be on his budget line? a. 5 mixing bowls and 2 spatulas b. 4 mixing bowls and 3 spatulas c. 3 mixing bowls and 4 spatulas d. 0 mixing bowls and 10 spatulas 2. If the budget line were plotted with the quantity of mixing bowls on the x-axis and the quantity of spatulas on the y-axis, what would the slope of the budget line be? a. -3 b. -1/3 c. 1/3 d When Gordon maximizes his utility, the marginal utility of the last spatula he purchases is 20. If the prices of spatulas and mixing bowls are the same as in the previous two problems, what must be the marginal utility of the last mixing bowl he buys? a. 24 b. 48 c. 60 d When the price of spatulas falls, which of the following occurs? a. The relative price of a spatula rises b. Gordon s real income falls c. Gordon will purchase fewer spatulas d. None of the above Page 1 of 12

2 The table below shows Kory s marginal utility from purchasing hamburgers and fries. A hamburger costs \$5 a piece, a cup of fries costs \$2, and Kory has \$24 of income. Use the table to answer the following three questions. Quantity of Hamburgers Marginal utility from a Hamburger Quantity of Fries (in cups) Marginal utility from a cup of Fries What is Kory s marginal utility per dollar spent on the 3 rd hamburger? a. 4 b. 5 c. 10 d If Kory buys 2 hamburgers and 5 cups of fries, what is his total utility? a. 126 b. 270 c. 112 d What combination of hamburgers and fries maximizes Kory s utility, given his budget? a. 1 Hamburger and 1 cup of fries b. 4 hamburgers and 2 cups of fries c. 3 hamburgers and 1 cups of fries d. 2 hamburgers and 5 cups of fries 8. For Kory, hamburger is a normal good and a cup of fries is an inferior good. If the price of a cup of fries increases from \$2 per cup to \$4 per cup, which of the following statement is true? a. The substitution effect of the price increase would encourage Kory to consume more cups of fries and the Income effect of the price increase would encourage him to consume fewer cups of fries b. The substitution effect of the price increase would encourage Kory to consume fewer cups of fries and the Income effect of the price increase would encourage him to consume fewer cups of fries c. The substitution effect of the price increase would encourage Kory to consume more cups of fries and the Income effect of the price increase would encourage him to consume more cups of fries d. The substitution effect of the price increase would encourage Kory to consume fewer cups of fries and the Income effect of the price increase would encourage him to consume more cups of fries Page 2 of 12

3 9. In general, the marginal rate of substitution measures which of the following? a. The magnitude of the slope of the budget line b. The amount of good x a consumer is willing to give up for one more unit of good y c. The magnitude of the slope of the indifference curve d. All of the above Use the graph below to answer questions the next 2 questions. 10. At point B, the marginal rate of substitution (MRS) is than the relative price of good x. Because of this relationship, it is optimal for the consumer to his current consumption of good y. a. Smaller; increase b. Smaller; decrease c. Larger; increase d. Smaller; stay at 11. Based on the graph above, the consumer will reach a(n) utility level at the consumer equilibrium than at either point A or point B. a. Lower b. Equal c. Higher d. The consumer is already at the consumer equilibrium Page 3 of 12

4 Use the following picture to answer the next 3 questions. (x = the quantity of good X, and y= the quantity of good Y). y δ λ θ IC1 IC2 BL1 BL2 x 12. Which of the following can explain the movement from BL1 to BL2? a. An increase in income b. A decrease in the price of good x c. An increase in the price of good x d. A decrease in the price of good y 13. The substitution effect is the change in the quantity demanded from a change in the. On the graph, the substitution effect can be seen from a movement from. a. Relative price; δ to λ b. Relative price; λ to θ c. Real Income; λ to θ d. Relative price; δ to θ 14. Which of the following statements is true based on the graph above? a. The graphs shows a violation of the law of demand b. Good x is a Giffen good c. Good x is an inferior good d. Good x is a normal good Page 4 of 12

5 15. The table below provides information on revenues in the packaged cookie market. Based on this information, the 4-firm concentration ratio in the industry is equal to, and the Herfindahl-Hirschman Index is equal to. Firm Pepperidge Farm Otis Spunkmeyer Archway Famous Amos Nabisco Mrs. Fields Lofthouse Revenue \$40 million \$20 million \$30 million \$10 millions \$50 million \$25 million \$25 million a. 72.5; b. 90; 3000 c. 25; 6,750 d ; Page 5 of 12

6 The table below shows the resulting quantity (Q) of cookies made depending on the amount of Labor (L) chosen by the firm to employ. L Q MPL APL Based on the table above, what is the marginal product of the 3 th unit of labor? a. 24 b. 40 c. 20 d Based on the same table, at 4 units of labor, the marginal product of labor is than the average product of labor, implying that the average product of labor is. a. Greater; rising b. Less; rising c. Grater; falling d. Less; falling 18. The fact that the marginal product of labor eventually declines as output expands is called a. The law of diminishing returns b. The law of demand c. Diseconomies of scale d. Inefficiency Page 6 of 12

7 19. In the long run, a firm s total costs of production rise from \$1,000 to \$1,500 when the firm increases output from 100 to 175. This firm is experiencing a. Positive economic profit b. Economies of scale c. Negative economic profit d. Diseconomies of scale Deirdre owns a pretzel stand in a perfectly competitive environment. The table below summarizes Deirdre s cost of operating the pretzel stand. Use the table to answer the next 4 questions (all costs are measured in dollars). Quantity TC MC TR MR ATC AVC What is the total cost of producing 15 pretzels, given the information in the table above? a. \$21 b. \$75 c. \$89 d. \$ Fixed costs are, which indicates that Deirdre is operating in the. a. \$0; long run b. \$5; short run c. \$5; long run d. \$9; short run 22. If the market price of pretzels is \$5 each, what is Deidre s marginal revenue from selling the 12 th pretzel? a. \$5 b. \$5.67 c. \$14 d. \$ If the market price of pretzels is \$5 each, what level of output maximizes Deirdre s profit, and what profit does she earn? a. 0 pretzels; negative \$10 b. 3 pretzels; negative \$2 c. 6 pretzels; \$1 d. 9 pretzels; \$2 Page 7 of 12

8 24. A firm will choose to shut down when the market price falls below the in the short run. a. Fixed cost b. Average total cost c. Average variable cost d. Marginal cost 25. If firms in a perfectly competitive industry are earning positive economic profit, how will the number of firms change in the long run, if at all? a. The number of firms will decrease b. The number of firms will remain unchanged c. The number of firms will increase d. The number of firms may increase or decrease, depending on the way costs are affected by the entry and exit of firms 26. Which of the following must be true if firms in a perfectly competitive industry are earning positive economic profit? a. Marginal revenue is greater than marginal cost b. Average variable cost is greater than the price c. Total cost is greater than total revenue d. Price is greater than the average total cost \$ Quantity 27. A firm faces cost and revenue curves as in the graph above. This firm must be a. a monopoly b. earning negative economic profit c. earning positive economic profit d. earning normal profit Page 8 of 12

9 28. Which of the following best describes the process of moving to long-run equilibrium, based on the same graph above? a. Firms will begin to exit the market, which will raise the market equilibrium price and raise profit for firms in the industry until profit reaches \$0. b. Firms will begin to exit the market, which will lower the market equilibrium price and continue to lower profit until profit reaches \$0. c. Firms will begin to enter the market, which will lower the market equilibrium price and lower profit until economic profit equals accounting profit. d. Firms will begin to enter the market, which will raise the market equilibrium price and raise profit until economic profit equals accounting profit. 29. In the long run, which of the following is true for a firm in a perfectly competitive industry? a. Economic profit is \$0 b. Accounting profit is \$0 c. Marginal revenue is maximized d. Consumer surplus is maximized 30. Which of the following is NOT true for a perfectly competitive firm in the long run? a. Demand facing the individual firm is perfectly elastic b. Marginal cost equals average total cost c. Marginal revenue equals marginal cost d. Average variable cost equals average fixed cost Page 9 of 12

10 RichGood Theaters is a monopolist in the cinema business in Lafayette. The figure below shows its demand, marginal cost and marginal revenue curves. Use the figure to answer the next three questions. 31. At which of the following levels of output is demand for movie tickets inelastic? a. 1,000 b. 2,000 c. 3,000 d If RichGood Theaters is an unregulated single-price monopoly, it will maximize its profit by selling number of tickets at price. a. 2,000 tickets, \$10 each b. 3,000 tickets, \$20 each c. 2,000 tickets, \$30 each d. 3,000 tickets, \$10 each 33. What is consumer surplus in the market for movie tickets when RichGood theaters is an unregulated, single-price monopoly? a. \$20,000 b. \$40,000 c. \$45,000 d. \$60,000 Page 10 of 12

11 34. If RichGood Theaters finds a way to practice perfect price discriminate among its customers, how many tickets will it sell? a. 0 b. 1,000 c. 2,000 d. 3, If RichGood Theaters finds a way to practice perfect price discrimination among its customers, consumer surplus will be equal to, and deadweight loss will be equal to. a. \$0; \$30,000 b. \$0; \$0 c. \$45,000; \$0 d. \$45,000; \$10,000 Use the following information for the following six questions: A monopolist faces demand given by the equation: Q d = 800 (1/8)P and has a constant marginal cost of \$1, What is the equation for the monopolist s marginal revenue curve? Assume the monopolist is a single-price monopoly. a. MR = ¼ Q b. MR = (1/16)Q c. MR = Q d. MR = Q 37. To maximize profit, the monopolist will produce units and charge a price of. a. 325; \$1,200 b. 325; \$3,800 c. 400; \$2,600 d. 650; \$1, What is the deadweight created in the market by the presence of a monopoly? a. \$325,000 b. \$422,500 c. \$650,000 d. \$780, What would consumer surplus be under perfect price discrimination? a. \$0 b. \$780,000 c. \$650,000 d. \$980,000 Page 11 of 12

12 40. Natural monopolies occur because the firm experiences significant economies of scale. If the government regulates the natural monopolist to charge a price equal to its marginal cost (MC), which of the following is true? a. The natural monopoly will earn an economic profit of 0. b. The market will experience shortages due to the price cap. c. The natural monopoly will earn a negative economic profit and will exit the industry. d. The natural monopoly will have an incentive to raise its fixed costs. Page 12 of 12

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