Comprehensive Microeconomics Test (c) Dick Brunelle and Steve Reff

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1 Comprehensive Microeconomics Test (c) Dick Brunelle and teve Reff 1. The Reffbru Pork Corporation is the largest provider of pork products in the country. They own pig farms in several states. Currently the problem of waste disposal on the firm s farms is polluting the ground water. The firm has yet to deal with this problem. As a result of this situation: A. The Reffbru Pig Farm Corporation is not maximizing profits. B. Consumers of the firm s products are paying more than the socially optimal price. C. Consumers of the firm s products are paying less than the socially optimal price. D. The firm is not producing the socially optimum amount of pork products E. The firm s private costs exceed the social costs. 2. The addition of which of the following will most likely result in a long-run shortage of a good: A. an increase in demand B. a price floor below the original equilibrium price C. a price floor above the original equilibrium price D. a price ceiling below the original equilibrium price E. a price ceiling above the original equilibrium price 3. Assuming that corn is used to feed livestock on Reffbru Pork Corporation s pig farms, the increase use of ethanol made from corn will have what affect on the price and quantity of pork chops? A. Price will increase and quantity sold will increase. B. Price will increase and quantity sold will decrease. C. Price will decrease and quantity sold will decrease. D. Price will decrease and quantity sold will increase. E. Price will stay the same and quantity sold will decrease. 4. Which of the following type(s) of market can have economic profits only in the short-run? A. Monopoly and oligopoly B. Perfect competition and oligopoly C. Monopolistic competition and oligopoly D. Perfect competition and monopolistic competition E. Only perfect competition 5. If a perfect competitor has a selling price of $8 and an average variable cost of $7, but its average total cost is $9, the best decision it can make is: A. Raise its price to at least $9 B. hut-down production immediately C. Continue producing in the short-run D. Continue producing in the long-run even is price and costs do not change E. Produce fewer goods in the short-run 6. If new technological innovations decrease the demand for unskilled workers, the likely changes to the unskilled labor market, the wage rate of unskilled labor, and the marginal revenue product of skilled workers will change in which of the following ways? A. Decrease the supply of unskilled workers, decrease the wage rate of unskilled workers and increase the marginal revenue product of skilled workers B. Decrease in the quantity supplied of unskilled workers, decrease the wage rate of unskilled workers, and increase the marginal revenue product of skilled workers C. Decrease in the supply of unskilled workers, increase in the wage rate of unskilled workers, and decrease in the marginal revenue product of skilled workers. D. Increase in supply of unskilled workers, decrease in the wage rate of unskilled workers, and increase the marginal revenue product of skilled workers. E. Increase the quantity supplied of unskilled workers, increase in the wage rate of unskilled workers and a decrease in the marginal revenue product of skilled workers. 7. Under which of following conditions will a perfectly competitive market experience deadweight loss? Page 1 of 11

2 A. When too many suppliers enter the market. B. When too many suppliers exit the market. C. When the government imposes an effective price ceiling. D. When the government removes an existing per unit tax E. When demand for the product decreases 8. A sales tax is considered to be a regressive tax because: A. the wealthy buy more goods so they are proportionally more affected. B. a sales tax discourages the consumption of a good C. the low income workers spend a larger percentage of their incomes on consumption D. a sales tax creates deadweight loss E. a sales tax raises less revenue for the government 9. A firm will always maximize total revenue when: A. total consumers spending on the good is much greater than the total cost of producing the good B. the marginal revenue of the good is zero C. the marginal revenue of the good is equal to the marginal cost of the good D. the marginal revenue of the good exceeds the marginal cost of the good E. the price of the good exceeds the marginal cost of the good. 10. The Reffbru Rollerblade Company makes custom rollerblades. It currently employs 5 skilled workers. The weekly pay for each worker is $1000 including all benefits. Total weekly production is 300 pairs of rollerblades. Each pair sells for $400. The firm uses expensive equipment to produce the rollerblades and estimates that its total weekly fixed cost is $10,000. The material cost of making each pair of rollerblades is $100. What is the current weekly profit before taxes of the Reffbru Rollerblade Company? A. $7500 B. $75,000 C. $104,900 D. $10,490 E. $71, The Reffbru Rollerblade Company makes custom rollerblades. It currently employs 5 skilled workers. The weekly pay each worker is $1000 including all benefits. Total weekly production is 300 pairs of rollerblades. Each pair sells for $400. The firm uses expensive equipment to produce the rollerblades and estimates that its total weekly fixed cost is $10,000. The material cost of making each pair of rollerblades is $100. The firm is trying to decide whether or not it should hire a 6 th skilled worker. With the sixth worker, the firm will be able to produce 330 rollerblades per week. However, the firm will now have to pay all of the six workers $1200 per week. The average material cost will remain the same. The firm cannot price discriminate and will have to reduce the price of rollerblades to $380 to sell all 340 pairs a week. What should the firm do and for what reason? A. Hire the 6 th worker; total profits will increase B. Hire the 6 th worker; it is always better to increase total units sold C. Do not hire the 6 th worker. The firm is currently producing an average of 60 pairs of rollerblades per worker. The 6 th worker only adds an additional 30 pairs of rollerblades. D. Do not hire the 6 th worker. The additional total cost of the workers is greater than the additional revenue E. Do not hire the 6 th worker. The additional total cost of the worker is greater than the additional profit. 12. If domestic shoes and imported shoes are substitute goods. A tariff on imported shoes will most likely: A. Decrease jobs for domestic shoe workers. B. Decrease the price of imported shoes. C. Decrease the price of domestic shoes. D. Increase the price of just imported shoes. E. Increase the price of both imported and domestic shoes. Page 2 of 11

3 13. This question refers to the following graph for the CD market: This Christmas season 10,000,000 mp players will be purchased. These devices (the ipod for example) allow the owners to download thousands of songs from different sources into the individual memory bank of the mp players. The most likely short-run affect on the CD Market graphed above will be: A. an increase in price B. an increase in demand C. an increase in supply D. a decrease in demand E. a decrease in supply 14. Last year, the Brureff Music Company produced and sold 1000 units of the BM players. The price last year was $200. This year the firm plans to increase the price of their BM s to $240. The firm expects to sell 900 units this year. If the firm is correct in its expectations, which of the following best describes the demand for the firm s product: A. The firm has an elastic demand because the higher price leads to fewer units sold. B. The firm has an elastic demand because the higher price leads to more total revenue. C. The firm has an inelastic demand because the higher price leads to less total revenue D. The firm has an inelastic demand because the higher price leads to more total revenue E. The firm has a unit-elastic demand because the total revenue will remain the same. Refer to the following graph for the following two questions: 15. Given that the above graph accurately depicts Bure Monopoly s business practice. The graph of the Bure Monopoly Company best illustrates: A. the industry s demand curve and the firm s demand curve B. the firm s ability to price discriminate C. the Firm s lack of understanding of how to graph a monopoly D. the loss of demand to a competitor in the same industry E. two demands with identical elasticities Page 3 of 11

4 16. Given the graph above accurately depicts Bure Monopoly s business practice. The graph indicates that: A. the firm does not have monopoly power B. the firm cannot price discriminate C. the firm can clearly define and serve two groups of customers with different elasticities D. the firm can clearly define and serve two groups of customers with the same elasticities E. The firm has to decide which one price it will charge 17. Charlie uses all of his money to buy Bruburgers and Reffsodas. The Bruburgers cost $3 each and the Reffsodas sell for $1 each. An analysis of Charlie s utility and his spending of $30 last week indicates that Charlie s spending resulted in the following: The last Bruburger he purchased resulted in his MU B /P B = 3 and The last Reffsoda he purchased resulted in his MU R /P R = 1 From the above information we can determine that A. Charlie maximized his total utility for Bruburgers and Reffsodas. B. Charlie probably should have purchased more Bruburgers and fewer Reffsodas. C. Charlie probably should have purchased more Reffsodas and fewer Bruburgers. D. Charlie purchased too many of both items. E. Charlie purchased too few of both items. The following table is used in the next 3 questions Acme company table of output and total cost. 18. Acme s average fixed cost when the firm produces only 2 units is: A. Indeterminant B. $ 2 C. $ 8 D. $ 4 E. $ Acme s average variable cost when the firm produces 4 units is: A. $ 12 B. $ 10 C. $ 8 D. $ 4 E. $ Acme s marginal cost for producing the 5 th unit is: A. $7 B. $11 C. $13 D. $17 E. $ 9 Page 4 of 11

5 21. California produces more tomatoes than any other U.. state. The California tomatoes are sold for both tomato sauce and whole tomatoes. Recently trade restrictions have been eliminated and California expects to export a lot more of the more profitable tomato sauce. The most likely affect on the domestic consumer of California whole tomatoes will be that she/he will: A. Buy more tomatoes at a lower price B. Buy fewer tomatoes at a lower price C. Buy more tomatoes at a higher price D. Buy fewer tomatoes at a higher price E. Buy fewer tomatoes but the price is indeterminant 22. If the government wants to put a tax on an item for the purpose of raising tax revenue, it would better meet this purpose if it put a tax on an item that A. Had an inelastic demand B. Had an elastic demand C. Had many substitutes D. Was not a necessity E. Had a relatively flat demand curve 23. If a firm s average variable cost is increasing, its A. marginal cost could be increasing or decreasing B. average fixed cost is increasing C. marginal cost is increasing D. marginal cost is decreasing E. average fixed cost is constant 24. Which of the following is most likely to be true if the United tates government put an import tax on steel? A. Domestic steelworkers would lose jobs. B. Domestic steel producers would make less profit. C. It would cost more to purchase products made of steel D. It would cost less to purchase products made of steel E. Domestic steel producers would produce less steel 25. Brureff Bottling Company s current production and sales level result in a marginal revenue of 15 cents. Currently, the cost of producing the last bottle adds 11 cents to total cost. The company has the opportunity to increase the quantity sold, and it has the capacity to do so. The company enjoys market power because of the patented technology of its stay-cold bottles. The company is concerned that if it lowers its price to accommodate the additional production, the last bottle sold will add 12 cents to its total revenue and the cost of the last bottle will increase to 11.5 cents. The company does not want to lower its current profitability. What should the company do? A. Reject the opportunity to sell more bottles. It would decrease profits. B. The firm has market power; therefore, it should increase price and sell more bottles. C. The Firm should produce and sell the additional bottles because the additional sales revenues are more important than the decrease in profit. D. The firm should produce more bottles. The required decrease in price necessary to sell the increased output will still lead to a greater profit. E. The firm should decrease price to 11 cents a bottle to maximize profit. 26. Assuming that olive oil is a perfect substitute good, if the olive oil producing country of Masrizona were to remove all barriers to olive oil imports and exports, and if the world price of olive oil was higher than the domestic price of olive oil. Which of the following would most likely occur? A. Consumers in Masrizona would buy more olive oil at a higher price B. Producers in Masrizona would produce the same amount of olive oil but sell it at a higher price. C. Producers in Masrizona would produce a greater quantity of olive oil and sell it at a higher price. Page 5 of 11

6 D. Consumers in Masrizona would buy the same amount of olive oil but pay a higher price. E. Exports of olive oil from Masrizona would decrease The next two questions refer to the following graph that depicts the output of guns and butter. 27. Referring to the graph labeled PPC #4, which of the following statements is true? A. The country of Nerc has the absolute advantage in the production of guns and butter B. The country of Nerc has the comparative advantage in the production of guns and butter C. The country of Oodles has the comparative advantage in the production of guns and butter D. The country of Oodles has the absolute advantage in the production of guns and butter E. Neither country has a comparative advantage in the production of guns 28. Referring to the graph labeled PPC #4, which of the following statements is true? A. Nerc has the comparative advantage in the production of guns and Oodles has the comparative advantage in the production of butter B. Oodles has the comparative advantage in the production of both guns and butter C. Nerc has the comparative advantage in the production of both guns and butter D. Oodles has the comparative advantage in the production of guns and Nerc does not have a comparative advantage in either product. E. Oodles has the comparative advantage in the production of guns and Nerc has the comparative advantage in the production of butter. Refer to the following graph for the next two questions Apples Oranges Page 6 of 11

7 29. The graph labeled PPC # 3 indicates that: A. There is a constant cost associated with apples but an increasing cost associated with oranges. B. An increasing cost associated with both apples and oranges C. A constant cost associated with both apples and oranges D. A decreasing cost associated with apples E. A decreasing cost associated with oranges 30. Referring to graph PPC #3, which of the following is true? A. The opportunity cost of producing the 8 th apple is 1 orange B. The opportunity cost of producing the 8 th apple is 2 oranges C. The opportunity cost of producing the 12 th orange is 1 apple D. The opportunity cost of producing the 12 th orange is 2 apples E. The opportunity cost of producing the 4 th apple is less than the opportunity cost of producing the 5 th apple 31. Consider the following data from the Brureff Bottling Corporation: 2006 Accounting Profit = $100,000 alaries of the key managers Bru and Reff = $50,000 each Value of capital assets = $ 1,000,000 Fair market return on investment = 5% Which of the following is true for the year 2006? A. The Brureff Bottling Corporation had an economic loss B. The Brureff Bottling Corporation had an economic profit C. The Brureff Bottling Corporation had less than normal profits D. The Brureff Bottling Corporation had neither economic loss nor economic profit E. The Brureff Bottling Corporation had only normal profits 32. If the government wanted a monopoly to produce a quantity and price that provided only a normal profit, it would want the monopoly to produce where: A. Price was equal to marginal cost B. Marginal revenue was equal to 0 C. Price exceeded average revenue D. Average revenue equaled average cost E. The monopoly allocated fewer resources to production 33. The most likely reason why catfish are less endangered than haddock is A. Consumers do not like catfish as much as they like haddock B. There are more privately owned haddock farms C. There are more privately owned catfish farms D. Catfish are fried more often than haddock E. Fisherman tend to intentionally limit their catch of haddock 34. Assume that pasta is an inferior good. If the average household income increases by 10%, we can expect the price and quantity sold of pasta to: A. price will increase and quantity sold will increase B. price will increase and quantity sold will decrease C. price will decrease and quantity sold will increase D. price will decrease and quantity sold will decrease E. price will decrease and quantity sold is indeterminant 35. When compared to a profit maximizing monopoly, a perfectly competitive industry will always A. make less normal profit B. produce fewer goods and receive a higher price than if the product were produce by the monopolist Page 7 of 11

8 C. produce more goods and receive a lower price than if the product were produced by the monopolist D. produce fewer goods and receive a lower price than if the product were produced by the monopolist E. produce more goods and receive a higher price than if the product were produced by the monopolist 36. If Helen is willing to buy a sweater for $50 but finds it on sale for $40 and purchases it, she has P v u a b c d e f z 0 w A. less utility per dollar spent then she intended B. consumer surplus C. overestimated her utility D. made an irrational decision E. increased her total utility for sweaters g t x l h i s m n o r j MR Monopoly Graph MC ATC D Q The next 3 questions refer to the above graph: 37. A profit maximizing monopolist would produce what output? A. price f quantity m B. price e and quantity m C. price a and quantity m D. price b and quantity n E. price e and quantity n 38. The profit maximizing monopolist illustrated in the graph above, allows for a consumer surplus of A. avg B. cvi C. auw D. flz E. eagx 39. If the government influenced the monopolist to produce at price c and quantity o, the monopolist would A. still not produce the allocatively efficient quantity B. no longer have an economic profit C. have only normal profit D. have economic profit Page 8 of 11

9 E. no longer be producing on the elastic portion of its demand curve 40. The Holymoly Customized Trucks and Automobiles Company produces specialized vehicles. Given its current resources it can produce either 500 trucks or 1000 automobiles. It can also produce some combination of the two as follows: Trucks Automobiles Based on the information above, A. The opportunity cost of producing 1 more truck increases as more trucks are produced and the opportunity cost of producing 1 more automobile increases as more automobiles are produced. B. The opportunity cost of producing 1 more truck is constant as more trucks are produced but the opportunity cost of producing 1 more automobile increases as more automobiles are produced. C. The opportunity cost of producing 1 more truck increases as more trucks are produced but the opportunity cost of producing 1 more automobile is constant as more automobiles are produced. D. The opportunity cost of producing 1 more truck is constant as more trucks are produced and the opportunity cost of producing 1 more automobile is constant as more automobiles are produced. E. The opportunity cost of producing more trucks or more automobiles cannot be determined. 40. The Futile Bugle Company produces specially crafted bugles. Currently it is producing 1000 bugles a year. It s average cost of producing the 1000 bugles is $300. The average revenue for the 1000 bugles is $500. A famous jazz musician offers the Futile Bugle Company $1,000 if it produces 1 more bugle for her (the company will still charge the other customers their current price). The company determines that if it produces the 1001 bugle that it s total average cost will rise to $302. hould the Futile Bugle Company produce the additional bugle? What is the reason for your decision? A. Yes, the additional bugle will sell for $1,000 and the average cost will be only $302. B. Yes, the firm will experience decreasing cost in the production of one more bugle. C. Yes, the firm will have a marginal revenue that is greater than marginal cost. D. No, the firm will set a precedent of charging a higher price E. No, the marginal cost would be greater than the marginal revenue 41. A regulated natural monopoly will most likely: A. Experience diseconomies of scale B. Produce at a higher average total cost than it would with competition C. Produce at a lower average total cost than it would with competition D. Have no market power E. Overproduce 42. Alpha Corporation and Beta Corporation are two competing firms in a duopoly. Next year the industry expects a slight increase in sales. Both companies would like to get the largest part of the increased sales for next year. They are trying to decide whether or not they should increase their advertising budgets. Alpha calculates that if it increases its advertising budget to match Beta s increase in advertising budget it will increase net profit by $75,000 and Alpha will gain $75,000 more in net profit. If Alpha increases its advertising budget and Beta does not it will increase its profits by $100,000 while Beta will increase its profits by $100,000. If Alpha does not increase its advertising budget while Beta does, Alpha will increase its profits by $80,000 and Beta will increase its profits by $100,000. If neither firm increases their respective budgets then they will both will increase profits by $115,000. Which of the following statements is accurate: A. Beta has a dominant strategy and that is to advertise because it will then gain a greater profit than Alpha. Page 9 of 11

10 B. Alpha has a dominant strategy and that is to not increase its advertising budget. Beta does not have a dominant strategy. C. Neither company has a dominant strategy D. Both have a dominant strategy and that is to not increase their advertising budget. E. Both companies could do better if they colluded and did not pursue a dominant strategy. Refer to the following side by side graphs for the next two questions. P MC P p i j a h g b c d e f ATC P q 1 q 2 q 3 q 4 Q Q D Q 43. The graphs above depict A. A firm with monopoly power B. A perfectly competitive firm and market in long run equilibrium C. A perfectly competitive firm and market in short-run equilibrium D. A monopolistic competitor and its market E. A monopoly and its market. 44. The firm illustrated in the above graph would produce quantity A. q 1 B. q 2 C. q 3 D. q 4 E. Q 45. Referring to the above graph, which of the following statements is most likely to be true? A. Firms will not enter this market because there are barriers to entry. B. Firms will leave this market. C. Firms will enter this market D. Demand in this industry will increase E. upply in this industry will increase 46. If a firm had to power to perfectly price discriminate: A. Its marginal revenue curve would be the same as its demand curve. B. Its marginal revenue curve would be flatter C. Its marginal revenue curve would be more vertical D. Its marginal cost curve would not be used to determine output. E. Its demand curve would be inside its marginal revenue curve. 47. If a perfectly competitive firm increases its output and its total revenue increases more than its total costs, then A. It is profit maximizing and its marginal revenue is equal to its marginal cost B. It is producing too much output C. It should stop increasing its production Page 10 of 11

11 D. It is not producing the profit maximizing quantity E. It should lower its price Use the following graphs to answer the next three questions graph A graph B graph C price 2 1 D D price D 2 1 price D 1 2 quantity quantity quantity price graph D 1 2 D D price graph E D quantity quantity 48. Which of the above graphs could best be used to illustrate the effects of an increase in human capital? A. A B. B C. C D. D E. E 49. Which of the above graphs illustrates the equilibrium for a constant cost industry? A. A B. B C. C D. D E. E 50. Which of the above graphs illustrates the effects of a successful advertising campaign? A. A B. B C. C D. D E. E Page 11 of 11