MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FIGURE 1-2

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1 Questions of this SAMPLE exam were randomly chosen and may NOT be representative of the difficulty or focus of the actual examination. The professor did NOT review these questions. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economics is generally NOT concerned with A) the concept of opportunity cost. B) the distribution of income among households. C) restricting the level of human wants. D) the rate of growth of productive capacity. E) the allocation of resources among alternative uses. The diagram below shows two production possibilities boundaries for Country X. FIGURE 1-2 2) Refer to Figure 1-2. If Country X is currently producing at point A, it could move to point B if A) some resources were switched from the capital goods industries to the consumption goods industries. B) some resources were switched from the consumption goods industries to the capital goods industries. C) the cost of producing consumer goods were to increase. D) the cost of producing capital goods were to increase. E) Country X is no longer able to produce the quantity of capital goods at point A. 3) On a diagram of a production possibilities boundary, the concept of scarcity is illustrated by the A) area within the boundary. B) unattainable points outside the boundary. C) negative slope of the boundary. D) points on the boundary. E) distance from the origin to the boundary. 1

2 4) Labour services are bought and sold in a A) goods market. B) product market. C) factor market. D) mixed market. E) foreign exchange market. 5) Comparison of economic systems indicates that A) capitalist economies are clearly superior in distributing income. B) most countries have mixed economies. C) all countries have largely traditional economies. D) most nations have either a purely socialist economy or a purely capitalist economy. E) socialist economies are clearly superior in producing consumer goods. 6) The opportunity cost of producing good A is defined to be A) the retail price of good A. B) the cost of having to get by using something else in place of good A. C) the cheapest method of producing good A. D) what must be sacrificed of other goods to get an additional unit of good A. E) the money cost of the factors of production used in good A. 7) Suppose economists at the World Bank discover a positive correlation between family income and female education levels in developing countries. We can say that A) an increase in family income causes an increase in female education levels. B) an increase in female education levels causes an increase in family incomes. C) the correlation is inconsistent with a theory that an increase in female education levels causes an increase in family income. D) the observed correlation is consistent with a theory that an increase in female education levels causes an increase in family income. E) there is a causal relationship between family income and female education. 2

3 FIGURE 2-4 8) Refer to Figure 2-4. The slope of the non-linear function changes as we move along the curve. The slope is A) negative and decreasing, indicating a diminishing marginal response. B) constant at all points, indicating a constant marginal response. C) positive and decreasing, indicating a diminishing marginal response. D) positive and increasing, indicating an increasing marginal response. E) negative and increasing, indicating an increasing marginal response. 9) The scientific approach to economic inquiry involves all of the following EXCEPT: A) observing the real world. B) formulating a model to generate predictions. C) controlling for the possibility of error. D) testing the reality of the assumptions of the model. E) testing the predictions with empirical data. 10) An index number is used to A) compare two different variables in the same situation. B) measure the absolute value of a variable. C) compare two different variables in two different situations. D) designate a specific value for further reference. E) compare the same variable in two different situations. 11) Which of the following best describes the relationship between positive and normative statements in economics? A) Economists generally agree with each other regardless of whether a question is positive or normative. B) Positive and normative statements are alternate ways of describing the desirability of certain economic policies. C) Normative statements are those with which all economists agree; positive statements may give rise to some disagreement. D) Normative statements evaluate the desirability of certain economic changes; positive statements do not. E) Neither positive nor normative statements are concerned with the desirability of certain economic changes. 3

4 FIGURE ) Refer to Figure 3-1. A shift of the demand curve for energy-efficient light bulbs from D to D2 could be caused by A) a change in preferences away from ordinary bulbs to energy-efficient bulbs. B) an increase in the price of ordinary light bulbs. C) an expectation that new government regulation will require the use of energy-efficient light bulbs only. D) a news bulletin stating that energy-efficient light bulbs emit a harmful gas. E) a decrease in the price of energy-efficient light bulbs. 13) A demand curve is A) a numerical table showing the inverse relationship between quantity demanded and price, other things being equal. B) a functional statement of the demand relationship. C) a graph showing the relationship between quantity demanded and the price of a commodity, other things being equal. D) an abstract concept underlying the graph of a demand curve. E) a timetable showing the quantity demanded at different time periods. 14) A change in the demand for some commodity can result from all of the following EXCEPT: A) a change in population. B) a change in average household income. C) a change in the price of the commodity. D) a change in the distribution of income. E) a change in tastes in favour of the commodity. 15) Quantity demanded is a flow variable, which means that it must be expressed A) in units of the good per day. B) in units of the good per week. C) as so much per period of time. D) as so much at a specific moment in time. E) in units of the good per year. 4

5 FIGURE ) Refer to Figure 3-6. If the initial demand and supply curves are D1 and S1, equilibrium price and quantity are represented by point A) A. B) B. C) C. D) D. E) not shown in the figure 17) At any given price for some product, the quantity supplied does NOT change with the A) number of suppliers in the industry. B) prices of other products that firms could produce. C) prices of factors of production. D) level of technology. E) needs and wants of consumers. 18) The quantity exchanged in the market will be below the equilibrium quantity A) if there is either excess supply or demand. B) only if price is below the equilibrium price. C) in no imaginable situation. D) only if there is excess demand. E) only if there is excess supply. 19) Normal goods A) have negative income elasticity of demand. B) have negative elasticity of supply. C) are sometimes also inferior goods. D) do not have elasticity of demand. E) have positive income elasticity of demand. 5

6 FIGURE ) Refer to Figure 4-2. In part 3 of the figure, the elasticity of demand between prices $10 and $20 is A) 0. B) less than 1. C) exactly 1. D) greater than 1. E) infinity. 21) When the percentage change in quantity demanded resulting from a price change is less than the percentage change in price, demand is said to be A) inelastic B) elastic. C) perfectly elastic D) unit elastic. E) zero elastic. 6

7 Demand Schedule for Ski Tickets Price Quantity Demanded ($) (no. of tickets) TABLE ) Refer to Table 4-2. Using the data provided to plot the demand curve for ski tickets results in a demand curve. Price elasticity along this demand curve is therefore as price is falling. A) downward sloping and linear; continuously decreasing B) rectangular hyperbola; constant at a value of 1 C) downward sloping and linear; continuously increasing D) vertical; constant at a value of 0 E) horizontal; constant at a value of 8 7

8 FIGURE ) Refer to Figure 4-2. In part 1 of the figure, the elasticity of demand for prices below $10 is A) 0. B) less than 1. C) 1. D) greater than 1. E) infinity. 24) Refer to Figure 4-2. In part 3 of the figure, the elasticity of demand between prices $5 and $10 is A) 0. B) less than 1. C) exactly 1. D) greater than 1. E) infinity. 8

9 FIGURE ) Refer to Figure 4-3, which shows a demand shift and the short-run and long-run supply curves for some product. The diagram illustrates the general principle that A) supply is less elastic in the long run. B) both demand and supply are less elastic in the long run. C) demand is less elastic in the long run. D) demand is more elastic in the long run. E) supply is more elastic in the long run. 26) In competitive markets, price floors and price ceilings usually lead to A) more equitable distributions of commodities. B) shortages. C) a reduction in quantities exchanged. D) surpluses. E) production control by the government. 27) Which of the following statements best differentiates price ceilings and price floors? A) Price floors cause shortages to appear, whereas price ceilings have the opposite effect. B) Price ceilings are always effective, whereas price floors are rarely effective. C) Binding price ceilings are always set below the equilibrium price, whereas binding price floors are always set above the equilibrium price. D) Price ceilings represent minimum prices, while price floors represent maximum prices. E) Price ceilings and price floors have the same effects. 9

10 Demand and Supply Schedules for Chocolate Bars Price Quantity Demanded Quantity Supplied ($) (thousands per week) thousands per week) TABLE ) Refer to Table 5-1. Suppose the government imposed a price of $1.80 per chocolate bar. A likely result from this policy is A) the allocation of chocolate bars on a first-come, first-serve basis. B) the allocation of chocolate bars by sellers preference. C) the rationing of chocolate bars. D) the stockpiling of unsold inventories of chocolate bars. E) the development of a black market in chocolate bars. Consider the following demand and supply schedules for some agricultural commodity. TABLE 5-2 Quantity Quantity Price Supplied Demanded $ $ $ $ $ $ ) Refer to Table 5-2. Consider the market-clearing equilibrium. If the government then imposes a production quota of 500 units, the deadweight loss that is created is equal to A) $ B) $ C) $ D) $ E) $ ) A legal price floor is a A) maximum price above which sales cannot legally be made. B) minimum price below which sales cannot legally be made. C) price above which there would be no demand. D) price set by the government at which all goods or services must be legally sold. E) price below which there would be no supply. 10

11 31) If the government fixes the price of good X above its free-market equilibrium level, we should expect A) a surplus of good X to occur. B) an excess demand for good X. C) a shortage of good X to occur. D) a new free-market equilibrium price to be established. E) a black market to arise for good X. 32) Suppose the demand for eggs is inelastic and that the market-clearing price is $1.50 per dozen. Now suppose the government imposes a minimum price of $2.00 per dozen. Why might the government implement such a policy? A) to decrease tax revenues from egg farmers. B) to make consumers better off. C) to increase excess demand in the egg market. D) to reduce excess supply in the egg market. E) to increase the incomes of egg farmers. 33) Consider the pizza market, with a downward-sloping demand curve and an upward-sloping supply curve. Suppose 100 pizzas are purchased at the free-market equilibrium price. The consumer surplus on the 100th pizza is A) positive. B) negative. C) non-negative. D) zero. E) unknown. 34) Consumer surplus A) is the total value that a consumer receives from the purchase of a particular good. B) is a measure of the gains that a consumer forgoes by buying this product rather than another. C) is the difference between what the consumer is willing to pay for all the units consumed and what he or she actually paid. D) is the consumption of a commodity above and beyond the amount required by the consumer. E) is the sum of the marginal values to the consumer. 35) If consumption of a good generates a marginal utility of zero, then consumption of an additional unit would mean that total utility would A) be decreasing. B) be negative. C) not change. D) be increasing. E) also be zero. 36) If total utility is increasing as more units are consumed, then marginal utility must be A) positive. B) negative. C) increasing at an increasing rate. D) increasing. E) decreasing at an increasing rate. 11

12 37) Given a typical downward-sloping demand curve in a market that has reached its equilibrium, the consumer surplus A) is measured by the area below the market price and under the demand curve. B) is measured by the area above the market price and under the demand curve. C) is calculated as the product of market price and quantity consumed. D) is measured by the area immediately above the demand curve. E) cannot be measured given the information. 38) Assume an individual with a downward-sloping demand curve is paying a single price for each unit of some commodity. He will get consumer surplus on A) none of the units. B) all units that were not bought at that particular price. C) all of the units bought. D) all units bought with the possible exception of the last unit. E) the first unit only. 39) Any consumption point that is on the budget line A) implies the household is paying above-market prices for the goods in question. B) implies the household is paying below-market prices for the goods in question. C) indicates consumption spending beyond current income. D) implies that the household is spending all of its income on the goods in question. E) implies that the household is not spending all of its income on the goods in question. 40) A single proprietorship is a form of business organization which A) has unlimited access to money capital. B) has one owner-manager who is personally responsible for the firm's actions and debts. C) allows easy transferability of ownership by the trading of shares. D) has a single owner but has directors who are responsible for the firm's debts. E) has limited liability. 41) If a firm uses factor inputs that are personally owned by the firm's owner, then economists refer to the opportunity cost of these inputs as A) accounting costs. B) sunk costs. C) direct production costs. D) implicit costs. E) inverted costs. 42) Which of the following statements about the organization of firms is true? A) Crown corporations are never interested in increasing profits because they have other goals. B) Owners of a corporation have unlimited liability. C) Partnerships are the most common form of business organization in Canada. D) Owners of a corporation are not personally liable for the firm's actions, though its directors may be. E) Corporations have limited access to money markets. 43) All of the following statements describe possible advantages to the owner of a single proprietorship EXCEPT: A) The capital invested is under the control of the proprietor. B) He or she has limited liability. C) The owner is the boss. D) The owner can readily maintain full and complete control over every aspect of the firm's operation. E) There are possible tax advantages. 12

13 44) The law of diminishing returns states that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, then A) the AP will eventually decrease, but only if TP is held constant. B) the MP will eventually decrease with constant AP. C) the MP and the AP of the variable factor will eventually decrease. D) the AP will eventually decrease with constant MP. E) TP will eventually begin to fall. 45) In the short run, the firm's product curves show A) when MP > AP, AP is decreasing. B) TP is at its maximum when MP = O. C) AP is at its minimum when MP = AP. D) when the MP curve cuts the AP curve from below, the AP curve begins to fall. E) TP begins to decrease when AP begins to decrease. 46) With regard to economic decision making for firms, the long run is a period in which A) all factors of production are variable but technology is fixed. B) technology is variable. C) technology may be variable, but some factors of production are fixed. D) only capital is variable. E) only some of the factors of production are variable. 47) Suppose a firm is employing labour (L) and capital (K) such that MPK/MPL = PK/PL. If the price of labour rises, the cost-minimizing firm should A) employ more labour and less capital because MPK/MPL < PK/PL B) employ more labour and less capital because MPK/MPL > PK/PL. C) employ more capital and less labour because MPK/MPL > PK/PL D) employ more capital and less labour because MPK/MPL < PK/PL. E) do nothing. 48) When there is no other way of producing a given level of output with a smaller total value of inputs, the firm is operating at A) optimal output. B) maximum output. C) minimum cost. D) maximum profit. E) an irrelevant output. 13

14 FIGURE ) Refer to Figure 8-1. Which of the four firms in the figure is displaying decreasing returns to scale at all output levels? A) Firm A B) Firm B C) Firm C D) Firm D E) all firms are displaying increasing returns to scale. FIGURE ) Refer to Figure 8-2. In the long run, the lowest-cost level of output achievable by this firm is A) Q1. B) Q2. C) Q3. D) not shown in the diagram 14

15 51) If a firm is using labour and capital such that the MP of labour is two times the MP of capital, and the price of labour is four times the price of capital, the firm should in order to minimize its costs of producing its output. A) decrease both capital and labour B) increase both labour and capital C) decrease capital and increase labour D) not alter its present factor mix E) increase capital and decrease labour 52) When economists say that a firm is a price taker they mean that A) at the price prevailing in the market, the firm will be willing to sell an infinite quantity. B) the firm can alter its rate of production and sales without affecting the market price of the product. C) the firm can alter the market price as it changes its rate of production. D) the firm initially takes price as given and tries to influence it through advertising. E) the demand curve that the firm faces is perfectly inelastic. 53) A firm in a perfectly competitive industry will maximize profits by adjusting A) output until average revenue equals short-run average total cost. B) price until marginal revenue equals marginal cost. C) price until average revenue equals average total cost. D) average total cost until it equals price. E) output until marginal cost equals marginal revenue. 54) If a firm in a perfectly competitive market were to raise its price, its A) revenue would decrease if market demand were elastic. B) total costs would increase. C) profits would increase as long as costs remained constant. D) revenue would fall to zero. E) revenue would increase if market demand were inelastic. 55) The demand curve facing a perfectly competitive firm depends on A) market demand and the market supply curve. B) market demand alone. C) the marginal cost of the firm. D) market demand and the firm's supply curve. E) market supply alone. 56) The shut-down point is the price at which a competitive firm can just cover its A) marginal costs. B) unstated costs. C) variable costs. D) non-economic costs. E) fixed costs. 57) Any firm's average revenue is defined as A) total revenue divided by the number of units sold. B) the change in total revenue resulting from the sale of an additional unit of the product. C) the total amount received by the seller from the sale of a product. D) price times quantity of the product sold. E) the change in price resulting from the sale of an additional unit of the product. 15

16 Consider the following cost curves for a perfectly competitive firm. FIGURE ) Refer to Figure 9-2. The short-run supply curve for this perfectly competitive firm is its A) entire marginal cost curve. B) marginal cost curve at and above $1.50. C) SRAVC curve at and above $1.50. D) SRATC curve at and above $3. E) marginal cost curve at and above $3. 16

17 Suppose a monopolist faces the demand curve and cost curves shown below. FIGURE ) Refer to Figure If the monopolist is practicing perfect price discrimination and is maximizing its profits, the consumer surplus is represented by the area A) P5P4a. B) P5P2e. C) P5P0c. D) P5P3c. E) zero -- there is no consumer surplus in this case. 60) Refer to Figure A profit-maximizing single-price monopolist would produce the quantity A) Q0. B) Q1. C) Q4. D) Q2. E) Q3. 61) Which one of the following is a natural barrier to entry? A) Decreasing returns to scale B) A negatively-sloped LRAC curve over the whole range of output C) Threats of punitive price-cutting by existing producers D) A positively-sloped LRAC curve over the whole range of output E) Licensing and patent restrictions 62) For a single-price monopolist, marginal revenue falls faster than price (as output rises) because A) in order to sell additional units, the price must be lowered on all units. B) the cost of producing extra units of output increases as production is increased. C) the firm has no supply curve. D) profits are maximized when marginal cost equals marginal revenue. E) none of the above -- marginal revenue does not fall faster than price. 17

18 63) The demand curve facing a single-price monopolist slopes downward because A) demand is perfectly inelastic. B) it sells typically to only one consumer. C) its average revenue equals its marginal revenue. D) its demand curve is the market demand curve, which is generally downward sloping. E) its supply curve is upward sloping. The diagram below shows demand and cost curves for a monopolistically competitive firm. FIGURE ) Refer to Figure In the long run, a monopolistically competitive firm will A) make profit by producing at QC and charging Price PL. B) maximize profit and make positive profit by producing at QL and charging Price PL. C) maximize profit but only break even by producing at QL and charging Price PL. D) lose money by producing at QL and charging Price PC. E) none of the above. 18

19 FIGURE ) Refer to Figure The position of a typical firm when the industry is in long-run equilibrium with free entry and exit and product differentiation is exhibited in diagram A) A. B) B. C) C. D) D. E) none of the above. 66) Which of the following is generally NOT a characteristic of oligopoly? A) Prices are rarely above marginal costs B) Products of different firms are often differentiated C) The industry usually has a high concentration ratio D) The pricing policies of one firm often impact on pricing policies of other firms E) There are small numbers of significantly sized sellers 19

20 67) are products that differ from each other enough that they can be sold at different prices, but are similar enough that they can be considered the same product. A) Standardized products B) Differentiated products C) Inferior products D) Complementary products E) Necessary products 68) A characteristic common to most imperfectly competitive markets is A) inelastic market demand curves. B) unexploited economies of scale. C) common pricing among firms. D) non-price competition among firms. E) similar cost conditions facing each individual firm. 69) The main point about public choice theory is that A) elected officials never compromise the public interest in order to gain votes. B) the choices of public officials may be governed more by their own self-interest than the public interest. C) most civil servants act solely in the public interest. D) there is adverse selection in the selection of elected officials. E) most politicians are corrupt. 70) In a competitive market economy with no externalities, allocative efficiency would exist if A) prices equal marginal costs in all markets. B) prices equal average variable cost in all markets. C) prices equal total cost in all markets. D) prices equal marginal revenue in all markets. E) stringent government intervention exists. 20