Page 1. AP Economics Mid-Term January 2006 NAME: Date:

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1 AP Economics Mid-Term January 2006 NAME: Date: 1. Rationality, in the case of firms, is taken to mean that they strive to A. maximize profits. B. charge the highest possible price. C. maximize revenues. D. sell the highest quantity possible. E. minimize costs. 2. The key characteristic of competitive markets is that they are A. small numbers of buyers and sellers. B. large numbers of buyers and small numbers of sellers. C. firms that are not price takers. D. small numbers of buyers and large numbers of sellers. E. large numbers of buyers and sellers. 3. In competitive markets A. consumers are price takers but firms are not. B. neither consumers nor firms are price takers. C. consumers and firms are price takers. D. consumers and firms behave irrationally. E. firms are price takers but consumers are not. 4. Competitive markets are efficient. This means that A. scarcity is eliminated. B. it is possible to produce more of all goods with existing resources. C. the only way to produce more is to put currently idle resources to work. D. it is not possible to produce more of one good without producing less of some other good. E. it is possible to produce more of some goods with existing resources. 5. The constraints imposed by money are referred to as A. money constraints. B. opportunity constraints. C. demand constraints. D. budget constraints. E. choice constraints. 6. The principal reason that an individual's opportunity set is a straight line is that A. an individual is willing to pay an equal monetary price for the different goods he buys. B. an individual places the same value on the different goods he buys. C. an individual divides resources equally among the different goods he buys. D. an individual faces fixed trade-offs between the goods he buys. E. different goods the individual buys sell at the same market price. 7. A country's production possibilities curve is curved outward because A. resources are scarce, but some are more scarce than others. B. different goods require different combinations of labor and capital in their production. C. some resources are better equipped for the production of one good rather than another. D. the more a country's inhabitants have of anything, the lower is the value they place on having more of it. E. resources are equally well equipped for the production of any good. Page 1

2 8. Trade between two countries is called A. comparative advantage. B. multilateral trade. C. the principle of diminishing returns. D. bilateral trade. E. absolute advantage. 9. A country has the absolute advantage in the production of a good X when it A. can produce more X with a given amount of resources than another country. B. can produce X at a lower relative cost than another country. C. also has a comparative advantage in the production of X. D. is richer and has more resources than another country. E. can charge a higher price for X. 10. The ability of a country to produce a good relatively more efficiently than another country is called A. absolute advantage. B. diminishing returns. C. specialization. D. comparative advantage. E. increasing returns. 11. If the United States can produce either 200 bushels of corn or 400 bushels of wheat from a given quantity of resources, and Canada, using the same amount of resources, can produce either 40 bushels of corn or 100 bushels of wheat, which of the following statements are true? A. The United States has a comparative advantage in the production of both corn and wheat. B. Canada has a comparative advantage in the production of both corn and wheat. C. The United States has a comparative advantage in the production of corn. D. The United States has a comparative advantage in the production of wheat. E. Canada has a comparative advantage in the production of corn. 12. When two countries specialize and trade, A. both countries gain, but some individuals in each country may lose. B. one country gains, and one country loses. C. both countries gain, and all individuals in both countries gain. D. individual gains and losses balance exactly. E. both countries lose, though some individuals in both countries may gain. 13. Along an individual demand curve, an increase in quantity demanded occurs when A. price has increased. B. price has declined. C. the consumer's income has fallen. D. the consumer's income has increased. E. the individual is induced to reduce consumption by an increase in price. 14. The market demand curve is A. derived by vertically summing the individual demand curves at each quantity. B. derived by horizontally summing the individual demand curves at each price. C. derived by vertically summing the individual demand curves at each price. D. derived by horizontally summing the individual demand curves at each quantity. E. independent of individual demand curves. Page 2

3 15. A decline in consumers' income will normally cause A. the demand curve to shift to the left. B. a movement along the demand curve such that quantity demanded declines. C. an individual to increase consumption of any goods she purchases. D. a movement along the demand curve such that quantity demanded increases. E. the demand curve to shift to the right. 16. An increase in the price of coffee is likely to result in A. a rightward shift in the demand curve for coffee. B. an increase in the demand for products that are complements to coffee, such as cream. C. a decline in the demand for products that are substitutes for coffee, such as tea. D. an increase in the demand for products that are substitutes for coffee, such as tea. E. a leftward shift in the demand curve for coffee. 17. A reduction in the price of an input will normally cause A. a movement along the supply curve such that quantity supplied declines. B. the supply curve to shift to the left. C. the supply curve to shift to the right. D. a firm to decrease the amount it offers for sale. E. a movement along the supply curve such that quantity supplied increases. 18. At the equilibrium price A. the quantity demanded exceeds the quantity supplied. B. both consumers and firms thinks the price is fair. C. the quantity supplied exceeds the quantity demanded. D. the quantity supplied equals the quantity demanded. E. the quantity actually traded is less than the equilibrium quantity. 19. At any price below the equilibrium price, A. the quantity supplied is less than the quantity demanded. B. sellers cannot sell all they offer for sale. C. the price will fall. D. consumers can buy all they wish for. E. the quantity supplied is greater than the quantity demanded. Page 3

4 20. Table 4.1 shows the quantities demanded and supplied at different prices. The equilibrium price is A. $2.10. B. $1.80. C. $1.60. D. $1.40. E. $1.20. Figure Figure 4.5 shows the demand and supply curves for candy bars. At a price of $12, A. there is an excess demand of 3,000 units. B. there is an excess supply of 11,000 units. C. the market is in equilibrium. D. there is an excess supply of 3,000 units. E. there is an excess demand of 8,000 units. Page 4

5 22. The formula for the price elasticity of demand is the A. percentage change in quantity demanded divided by the percentage change in price. B. change in quantity demanded divided by the change in price. C. percentage change in price divided by the percentage change in quantity demanded. D. change in price divided by the change in quantity demanded. E. percentage change in the quantity demanded divided by the change in price. 23. If the price elasticity of demand for a product is 2, a price increase from $1.00 to $1.02 will cause quantity demanded to A. rise by 4 percent. B. rise by 2 percent. C. fall by 4 percent. D. fall by 2 percent. E. fall by $ If the demand for a product is price-elastic, total revenue will A. be unchanged regardless of the direction of the price change. B. fall if price is reduced. C. increase if price is increased. D. increase if price is reduced. E. increase regardless of the direction of the price change. 25. The demand for a product is said to be price-inelastic if the A. change in demand exceeds the change in price. B. percentage change in price exceeds the percentage change in the quantity demanded. C. percentage change in the quantity demanded exceeds the percentage change in the price. D. percentage change in the price equals the percentage change in the quantity demanded. E. change in price exceeds the change in demand. 26. The price elasticity of demand for a product is normally A. higher in the long run than in the short run. B. lower in the long run than in the short run. C. zero in the short run. D. higher in the short run than in the long run. E. the same in the short run as in the long run. 27. The formula for the price elasticity of supply is the A. percentage change in quantity supplied divided by the percentage change in price. B. change in quantity supplied divided by the change in price. C. percentage change in price divided by the percentage change in quantity supplied. D. change in price divided by the change in quantity supplied. E. percentage change in quantity supplied divided by the change in price. 28. A tax has been levied on a product. The more price-elastic the demand for that product is, A. the more likely it is that the tax is borne equally by consumers and sellers. B. the greater is the proportion of the tax borne by producers. C. the greater is the revenue that is raised by the tax. D. the greater is the proportion of the tax borne by consumers. E. the more likely it is that the tax will be reflected in a change in price rather than a change in quantity. Page 5

6 29. A surplus occurs in a market when the going price is the equilibrium price, and as a result there is excess. A. below; supply B. above; demand C. equal to; supply D. above; supply E. below; demand 30. Price ceilings, which are legally established prices the equilibrium price, result in. A. below; shortages B. above; shortages C. below surpluses D. above surpluses E. equal to; market clearing Figure Figure 6.1 shows Arthur's budget constraint. If Arthur's income is $90, the price of pizza is A. $30. B. $15. C. $6. D. $3. E. $ Liz buys only clothes and food. When the price of clothes increases, it is as if Liz has less money to spend on both clothes and food. The impact of this loss of purchasing power on her purchases of clothes is termed the A. substitution effect. B. law of demand. C. income effect. D. price effect. E. elasticity of demand. Page 6

7 33. The consumer's basic problem is to A. maximize utility within the budget constraint. B. minimize the budget constraint within the level of utility. C. minimize utility within the budget constraint. D. maximize the budget constraint within the level of utility. E. maximize the difference between utility and the budget constraint. 34. Katy is willing to pay $20 for the first T-shirt she buys, $35 for the first two T-shirts, and $45 for the first three T-shirts. The marginal utility of the third T-shirt is A B. 45. C. 25. D. 20. E Diminishing marginal utility means that A. the cost of utility services becomes cheaper as the level of services increases. B. as an individual's bundle of goods includes more of a particular good, each successive increment yields her less total benefit. C. as an individual's bundle of goods includes more of a particular good, total willingness to pay falls. D. as an individual's bundle of goods includes more of a particular good, each successive increment yields her less additional benefit. E. as the price of a good increases, consumers are willing to buy fewer units of the good. 36. The combinations of goods that yield the same level of utility lie on a consumer's A. production possibilities curve. B. budget constraint. C. indifference curve. D. supply curve. E. demand curve. 37. Total profit equals A. revenue minus cost. B. price minus marginal cost. C. marginal revenue minus marginal cost. D. price minus average cost. E. revenue minus variable cost. 38. The marginal product of a factor of production is the A. change in the output divided by the change in the amount of the factor of production the firm uses. B. output divided by the amount of the factor of production that the firm uses. C. firm's output divided by its total cost of production. D. amount of output attributable to that factor of production. E. change in average output divided by the change in the amount of the factor of production the firm uses. 39. If we observe diminishing returns to a single variable factor in the production process, this means that A. output increases proportionately with increased input of the variable factor. B. output increases less proportionately with increased input of the variable factor. C. input of the variable factor increases less proportionately with increases in output. D. output increases more than proportionately with increased input of the variable factor. E. output can only increase when there is an increase in the fixed factor. Page 7

8 40. Any costs that the firm pays even if it produces no output represent its A. average variable cost. B. marginal cost. C. average cost. D. variable cost. E. fixed cost. 41. Any costs that vary with the output the firm produces represent its A. hidden costs. B. overhead costs. C. sunk costs. D. variable costs. E. fixed costs. 42. Whenever a producer is operating under conditions of diminishing returns, marginal cost will be A. decreasing. B. increasing. C. constant. D. stable. E. horizontal. 43. Total cost divided by output equals A. overhead cost. B. average cost. C. average variable cost. D. average fixed cost. E. marginal cost. 44. The curve that depicts those combinations of inputs that cost the same amount is the A. total cost curve. B. isocost curve. C. marginal cost curve. D. variable cost curve. E. fixed cost curve. 45. When the firm balances the extra revenue from producing one more unit with the extra cost of producing that unit, the firm is practicing A. profit maximization. B. revenue maximization. C. cost maximization. D. value minimization. E. utility minimization. 46. The competitive firm's marginal cost is also its A. average revenue curve. B. supply curve. C. marginal revenue curve. D. demand curve. E. average variable cost curve. Page 8

9 47. A profit-maximizing firm will enter a competitive market if market price exceeds A. minimum average cost. B. marginal revenue. C. minimum average variable cost. D. average revenue. E. minimum marginal cost. 48. Accounting profits overlooks a firm's A. variable costs. B. sunk costs. C. opportunity costs. D. revenues. E. fixed costs. 49. When one firm can produce more efficiently than can other firms in the industry, it will receive A. excess profit. B. efficiency profit. C. normal profit. D. surplus profit. E. economic profit. 50. The profit-maximizing firm operating in a competitive market will hire labor up to the point where the A. wage rate equals the marginal cost of labor. B. wage rate equals marginal revenue. C. value of the marginal product of labor equals the wage rate. D. marginal product of labor equals the wage rate. E. value of the marginal product of labor equals marginal cost of output. 51. When the price of the firm's product increases, the demand curve for labor for a profit-maximizing firm operating in a competitive market will A. shift to the left. B. shift to the right. C. become flatter. D. become steeper. E. be unaffected. Page 9

10 Figure In Figure 10.1, consumer surplus is represented by A. the area of the triangle above Pc. B. the area of the triangle below Pc. C. the area of the rectangle denoted by Pc times Qc. D. the area below the demand curve and to the left of Qc. E. the area below the supply curve and to the left of Qc. 53. Rent controls are legally established prices the equilibrium price which result in. A. below; shortages B. above; shortages C. below surpluses D. above surpluses E. equal to; market clearing 54. In monopolistic competition A. there are many firms in the industry, all selling a homogeneous product. B. there are many firms in the industry, each concerned with the behavior of its rivals. C. there is only one firm in the industry. D. there are many firms in the industry, each selling slightly differentiated products. E. there are several firms in the industry, none of which is big enough to be concerned with the behavior of its rivals. 55. For a perfectly competitive firm, marginal revenue equals price because A. it produces a very large percentage of total output. B. it has a relatively large degree of control over price. C. it has been able to differentiate its product from others in the industry. D. at that price it can sell as much as it wants. E. there are a small number of firms in the industry. Page 10

11 56. For a monopoly, marginal revenue is less than price because A. to sell extra units, it must lower its price on all units. B. it has no control over price. C. it can sell as much as it wants at the market price. D. it produces a very small percentage of total output. E. there are a large number of firms in the industry. 57. A monopolist can sell 10 units at $15 per unit and 9 units at $16 per unit. The marginal revenue associated with the tenth unit is A. $150. B. $144. C. $15. D. $6. E. $ Both a perfectly competitive firm and a monopolist choose output to maximize profits where A. marginal cost equals price. B. total revenue equals total cost. C. marginal cost equals marginal revenue. D. average cost equals price. E. marginal revenue equals price. 59. Monopolies reduce economic efficiency because A. total revenue exceeds total cost when profit is maximized. B. price exceeds marginal cost when profit is maximized. C. marginal revenue exceeds marginal cost when profit is maximized. D. marginal cost exceeds marginal revenue when profit is maximized. E. marginal revenue equals marginal cost when profit is maximized. Page 11

12 Figure Figure 12.1 shows a monopolist's demand, marginal revenue, and marginal cost curve. The profitmaximizing price is at point, and the profit-maximizing output is at point. A. A; E B. B; D C. C; D D. B; E E. A; D ESSAY QUESTIONS: Be sure to draw and explain graphs to support and explain your answers. 1. Assume that in a perfectly competitive market, a firm s costs and revenues are as follows. Marginal cost = average variable cost at $20 Marginal cost = average total cost at $30 Marginal cost = average revenue at $25 Use and label graphs to answer the following questions. A. How will this firm determine the profit-maximizing level of output? B. What price will this firm charge? Explain how the firm determined this price. C. Should this firm produce in the short run? Why or why not? D. Will this firm earn a profit or loss? Why? E. Assume the following change to the above. Marginal cost = average revenue at $19 What will this firm do in the short run and why? Page 12

13 S $20.00 D 22, The new baseball stadium in DC will hold a maximum of 22,000 people, as indicated in the graph above. Assume that the team played well all season and that every game sold out at a price of $20.00 a ticket. The y-axis represents price and the x-axis quantity (tickets or seats). A. Assume (why not?) that the Nationals won their pennant race and made it to the World Series. Assume that everyone wants to see World Series games even more than regular-season games and that the graph above will be used to analyze the interaction of supply and demand for tickets to the first World Series game at this stadium. Analyze (explain) the effect on each of the following of the changes to the graph for the first World Series game. o The price of tickets o The quantity of tickets B. The mayor and council of Washington, DC, face elections in just a couple of months and are concerned about public reaction to the changes you identified in your answer to part A. Consequently, the mayor and council legislate a price ceiling on all tickets. (None took an AP economics course in high school!) Explain at what price they will set the price ceiling. What will happen to each of the following after the imposition of the price ceiling? o The quantity of tickets demanded o The quantity of tickets supplied C. Now imagine that you can conduct a survey of the people who attended this World Series game. Will everyone who attended have paid the price ceiling imposed by the city? (Assume that Jack Abramoff and others like him are NOT involved in providing any tickets.) Why or why not? D. Identify at least one other alternative that the mayor and council could have considered to allocate these tickets in a fair way. Would this have been an economically efficient solution? Why or why not? Page 13

14 3. Hugo Chavez in Venezuela just announced that he will nationalize the sugar cane industry in Venezuela. Previously, sugar cane operated in a perfectly competitive industry. A. Draw a graph that shows the output and price the monopolist would choose to maximize profits. Explain why the monopolist chose the output that you identified and how you determined the price paid by consumers. Assume that the United States stages an invasion, overthrows the dictator (found hiding in a small, underground bunker), and restores a perfectly competitive market to the sugar industry in this country. B. Describe how one of the new sellers might determine the profit-maximizing output level of sugar if the sugar industry were perfectly competitive. C. Compare the post-invasion market efficiency to the conditions prevailing under the dictator s rule. D. Now assume that another nearby island also produces sugar, although in very much smaller quantities and that this other island sells its product into the same international market as does No-hay-apuro. It has been alleged that a highly-placed US administration figure owns a controlling share in this non-monopolistic sugar plantation in another nearby country and that she (this administration figure) supported this invasion for her own monetary gain. Do you believe this? Explain by analyzing the effect of the invasion on the price that sugar producers received during and after the dictatorship. Page 14