Commerce College Joint Economics Exam 102-1

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1 Class: Date: Commerce College Joint Economics Exam Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. The accountants hired by Davis Golf Course have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $145,000. Because of this information, in the short run, Davis Golf Course should a. shut-down. b. exit the industry. c. stay open because shutting down would be more expensive. d. stay open because the firm is making an economic profit. 2. Constant returns to scale occur when the firm's long-run a. total costs are constant as output increases. b. average total costs are constant as output increases. c. average cost curve is falling as output increases. d. average cost curve is rising as output increases. 3. As new monopolistically competitive firms enter the market, the demand facing each firm, causing the price charged by each firm to. In the long run, each firm will earn a profit. a. falls; rise; positive b. rises; fall; positive c. falls; fall; normal d. rises; fall; normal 4. In game theory, if two rivals in an oligopoly can avoid a large loss by cutting price from $40 to $35, a. neither will cut price b. their actions will depend on their respective strategies c. one will charge $40 and the other will charge $35 d. each will cut price but not all the way to $35 5. Which of the following is an advantage of tradable pollution permits? a. Each firm is allowed to pollute exactly the same amount. b. Revenue from the sale of permits is greater than revenue from a corrective tax. c. The initial allocation of permits to firms does not affect the efficiency of the market. d. Firms will engage in joint research efforts to reduce pollution. 6. Which one of the following industries in Taiwan is not an oligopoly industry? a. newspapers. b. TV stations. c. restaurants. d. automobiles. 1

2 7. Table 1 Number of Output Workers , , , , , ,600 Refer to Table 1. Assume that fixed costs are $500, and variable costs are $100 per worker. For this firm, what are the shapes of the production function and the total-cost curve? a. Both the production function and total-cost curve are increasing at an increasing rate. b. Both the production function and total-cost curve are increasing at a decreasing rate. c. The production function is increasing at a decreasing rate, whereas the total-cost function is increasing at an increasing rate. d. The production function is increasing at an increasing rate, whereas the total-cost function is increasing at a decreasing rate. 8..Scenario 2 Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500. Refer to Scenario 2. Ellie's annual implicit costs will equal a. $55,200. b. $75,200. c. $80,500. d. $165, Fiona's Fish Emporium increased its total monthly revenue from $1,500 to $1,800 when it raised the price of tropical fish from $5 to $9. The price elasticity of demand for Fiona's Fish Emporium is a b c d Which of the following is not an advantage of corrective taxes? a. They raise revenues for the government. b. They enhance economic efficiency. c. They subsidize the production of goods with positive externalities. d. They move the allocation of resources closer to the social optimum. 11. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days. Ice cream costs $5 per gallon, and paperback novels cost $8 each. Karen has a budget of $80, Tara has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels. Which of the following statements is correct? a. Each woman faces the same budget constraint. b. The slope of the budget constraint is the same for each woman. c. The area underneath the budget constraint is larger for Chelsea than for Karen. d. All of the above are correct. 2

3 12. Get Smart University is contemplating an increase in tuition to enhance revenue. If GSU feels that raising tuition would enhance revenue, they are a. ignoring the law of demand. b. assuming that the demand for university education is elastic c. assuming that the demand for university education is inelastic. d. assuming the supply of university education is elastic. 13. Table 2 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity Total Revenue Total Cost 0 $0 $10 1 $9 $14 2 $18 $19 3 $27 $25 4 $36 $32 5 $45 $40 6 $54 $49 7 $63 $59 8 $72 $70 9 $81 $82 Refer to Table 2. If the firm's marginal cost is $11, it should a. increase production to maximize profit. b. increase the price of the product to maximize profit. c. advertise to attract additional buyers to maximize profit. d. reduce production to increase profit. 14. For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost in a. the short run but not in the long run. b. the long run but not in the short run. c. both the short run and the long run. d. neither the short run nor the long run. 15. Suppose an increase in the price of rubber coincides with an advance in the technology of tire production. As a result of these two events, the demand for tires a. decreases, and the supply of tires increases. b. is unaffected, and the supply of tires decreases. c. is unaffected, and the supply of tires increases. d. None of the above is necessarily correct. 16. Suppose that when the price of ginger ale is $2 per bottle, firms can sell 4 million bottles. When the price of ginger ale is $3 per bottle, firms can sell 2 million bottles. Which of the following statements is true? a. The demand for ginger ale is income inelastic, so an increase in the price of ginger ale will increase the total revenue of ginger ale producers. b. The demand for ginger ale is income elastic, so an increase in the price of ginger ale will increase the total revenue of ginger ale producers. c. The demand for ginger ale is price inelastic, so an increase in the price of ginger ale will increase the total revenue of ginger ale producers. d. The demand for ginger ale is price elastic, so an increase in the price of ginger ale will decrease the total revenue of ginger ale producers. 3

4 17. A consumer has preferences over two goods: books and movies. Two bundles, which lie on the same indifference curve for this consumer, are shown in the table below. Bundle Books Movies A 2 3 B 3 2 Which of the following bundles could not lie on the same indifference curve with A and B and satisfy the four properties of indifference curves? a. One movie and five books b. Three movies and three books c. Five movies and one book d. One movie and seven books 18. Assume that a profit-maximizing monopolist can sell 10 units of output for $15 each or 11 units of output for $14 each. The marginal revenue of the eleventh unit sold is a. $14 b. $15 c. $4 d. $ A firm in a competitive market has the following cost structure: Output Total Cost 0 $5 1 $10 2 $12 3 $15 4 $24 5 $40 If the market price is $16, this firm will a. produce 4 units of output in the short run and exit in the long run. b. produce 5 units of output in the short run and exit in the long run. c. produce 5 units of output in the short run and face competition from new market entrants in the long run. d. shut down in the short run and exit in the long run. 20. Collusion among firms to raise price is rare in monopolistically competitive markets because a. there are too many firms b. there are too few firms c. there is only one firm d. products are homogeneous 21. Average total cost is increasing whenever a. total cost is increasing. b. marginal cost is increasing. c. marginal cost is less than average total cost. d. marginal cost is greater than average total cost. 22. Which of the following quotations illustrates the Tragedy of the Commons? a. "A bird in the hand is worth two in the bush." b. "The only difference between the rich and other people is that the rich have more money." c. "What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others." d. "Anyone who is not a socialist before he is 30 has no heart; anyone who is still a socialist after he is 30 has no head." 4

5 23. Which of the following is a disadvantage of government provision of a public good such as national defense? (i) The government does not know the exact willingness of consumers to pay for the public good. (ii) The free-rider problem is more likely to occur when the government provides a public good than when the private sector provides a public good. (iii) Taxpayers do not agree on the optimal quantity of the public good that the government should provide. a. (i) only b. (i) and (ii) only c. (i) and (iii) only d. (i), (ii), and (iii) 24. Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem? a. Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke. b. Mary pays Cathy $16 so that Mary can smoke. c. Mary pays Cathy $14 so that Mary can smoke. d. Cathy offers Mary $15 not to smoke. Mary accepts and does not smoke. 25. National defense is a classic example of a public good because a. there is no market for private security services. b. it is difficult to exclude people from receiving the benefits from national defense once it is provided. c. everyone agrees that some level of national defense is important, but only the government knows the optimal amount. d. there are no private firms willing to supply defense goods such as tanks and weapons. 26. Monopolistic competition is similar to a. perfect competition because the firms face downward-sloping demand curves and can only earn normal profit in the long run b. pure monopoly because the firms face downward-sloping demand curves and can only earn normal profit in the long run c. perfect competition because the firms face downward-sloping demand curves and similar to pure monopoly in that the firms can only earn normal profit in the long run d. pure monopoly because the firms face downward-sloping demand curves and similar to perfect competition in that the firms can only earn normal profit in the long run 27. When Sam has an income of $1,000, he consumes 30 units of good A and 50 units of good B. After Sam's income increases to $1,500, he consumes 60 units of good A and 45 units of good B. Which of the following statements is correct? a. Both goods A and B are normal goods. b. Both goods A and B are inferior goods. c. Good A is a normal good, and good B is an inferior good. d. Good A is an inferior good, and good B is a normal good. 28. A monopolistically competitive firm faces the following demand curve for its product: Price ($) Quantity The firm has total fixed costs of $40 and a constant marginal cost of $2 per unit. We can conclude that a. firms will exit this market. b. firms will enter this market. c. this market is in long-run equilibrium. d. this firm is operating at its efficient scale. 5

6 29. A competitive firm would benefit from charging a price below the market price because the firm would achieve (i) higher average revenue. (ii) higher profits. (iii) lower total costs. a. (i) only b. (ii) and (iii) only c. (i), (ii), and (iii) d. None of the above is correct. 30. The Tragedy of the Commons can be corrected by a. conducting a cost-benefit analysis. b. assigning property rights to individuals. c. providing government subsidies for the resource. d. making certain everyone in the economy has access to the resource. 31. Each member of a cartel a. faces a temptation to cheat on the agreement because lowering its price slightly below the established price will usually increase the firm's sales and profit b. faces a temptation to cheat on the agreement because raising its price slightly above the established price will usually increase the firm's sales and profit c. has no temptation to cheat on the agreement because lowering its price slightly below the established price will usually have no impact on the firm's sales and profit d. has no temptation to cheat on the agreement because raising its price slightly above the established price will usually decrease the firm's sales and profit 32. Perfect price discrimination a. would result in less output than under single-price monopoly. b. allows the firm to capture the entire consumer surplus. c. requires that each unit be sold at the same price. d. occurs only if buyers can resell the product among themselves. 33. When the price of an inferior good decreases, a. both the income and substitution effects encourage the consumer to purchase more of the good. b. both the income and substitution effects encourage the consumer to purchase less of the good. c. the income effect encourages the consumer to purchase more of the good, and the substitution effect encourages the consumer to purchase less of the good. d. the income effect encourages the consumer to purchase less of the good, and the substitution effect encourages the consumer to purchase more of the good. 6

7 34. A small strip mall contains four retail stores, and crime has recently been on the increase in the neighborhood of the strip mall. The owners of the four stores Stores A, B, C, and D are considering contributing to a pool of money that will be used to hire up to 4 security guards. The table represents their willingness to pay, that is, the maximum amount that each store owner is willing to contribute, per day, to hire each security guard. A B C D First guard $35 $40 $20 $50 Second guard Third guard Fourth guard Suppose the cost to hire each individual guard is $70 per day. How many guards should be hired to maximize the total surplus of the four store owners? a. 1. b. 2. c. 3. d Which of the following statements is not correct? a. Monopolistic competition is similar to monopoly because in each market structure the firm can charge a price above marginal costs. b. Monopolistic competition is similar to perfect competition because both market structures are characterized by free entry c. Monopolistic competition is similar to oligopoly because both market structures are characterized by barriers to entry. d. Monopolistic competition is similar to perfect competition because both market structures are characterized by many sellers. 36. You love peanut butter. You hear on the news that 50 percent of the peanut crop in the South has been wiped out by drought and that this will cause the price of peanuts to double by the end of the year. As a result, your demand for peanut butter a. will increase but not until the end of the year. b. increases today. c. decreases as you look for a substitute good. d. shifts left today. 37. Scenario 1 Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Refer to Scenario 1. Tony's accounting profit equals a. $-80. b. $130. c. $170. d. $ Music compact discs are normal goods. What will happen to the equilibrium price and quantity of music compact discs if musicians accept lower royalties, compact disc players become cheaper, more firms start producing music compact discs, and music lovers experience an increase in income? a. Price will fall and the effect on quantity is ambiguous. b. Price will rise and the effect on quantity is ambiguous. c. Quantity will fall and the effect on price is ambiguous. d. Quantity will rise and the effect on price is ambiguous. 7

8 39. Some environmentalists argue that we should protect the environment as much as possible, regardless of cost. Which of the following is not a likely outcome of pursuing such a course of action? a. lower levels of nutrition, health care, and housing b. a lower standard of living c. slowing or reversing technological advancement d. the elimination of all pollution 40. Which of the following is an example of a two-part tariff? a. price discrimination based on the buyers' willingness to pay b. charging a hookup fee plus a monthly charge equal to marginal cost c. higher sales tax on specific products d. different prices based on the cost of production and quantity bought 41. The fundamental reason that marginal cost eventually rises as output increases is because of a. economies of scale b. diseconomies of scale. c. diminishing marginal product. d. rising average fixed cost. 42. Pierre says that he will spend exactly 75 cents a day on candy bars, regardless of the price of candy bars. Pierre's demand for candy bars is a. perfectly elastic. b. unit elastic. c. perfectly inelastic. d. None of the above answers is correct. 43. A natural monopoly's output is less if it is regulated with a. a marginal cost pricing rule than if it is unregulated. b. an average cost pricing rule than if it is unregulated. c. an average cost pricing rule than if it is regulated with a marginal cost pricing rule. d. a marginal cost pricing rule than if it is regulated with an average cost pricing rule. 8

9 44. Figure 1 Suppose a firm operating in a competitive market has the following cost curves: Refer to Figure 1. In the short run, if the market price is P4, individual firms in a competitive industry will earn a. positive profits. b. zero profits. c. losses but will remain in business. d. losses and will shut down. 45. For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are no close substitutes for this good. b. The good is a luxury. c. The market for the good is broadly defined. d. The relevant time horizon is short. 46. The flatter the demand curve through a given point, the a. greater the price elasticity of demand at that point. b. smaller the price elasticity of demand at that point. c. closer the price elasticity of demand will be to the slope of the curve. d. greater the absolute value of the change in total revenue when there is a movement from that point upward and to the left along the demand curve. 47. Suppose that Stacy's hourly wage increases, and she decides to work fewer hours. For her, the substitution effect of the wage change is a. only partially offset by the income effect. b. more than offset by the income effect. c. exactly offset by the income effect. d. We do not have enough information with which to answer the question. 9

10 48. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? a. $3,000; $1,500. b. $4,500; $3,500. c. $4,500; $4,000. d. $4,500; $2, What would happen to the equilibrium price and quantity of lattes if coffee shops began using a machine that reduced the amount of labor necessary to produce steamed milk, which is used to make lattes, and scientists discovered that coffee prevents heart attacks? a. Both the equilibrium price and quantity would increase. b. Both the equilibrium price and quantity would decrease. c. The equilibrium price would increase, and the effect on equilibrium quantity would be ambiguous. d. The equilibrium quantity would increase, and the effect on equilibrium price would be ambiguous. 50. Which of the following is an example of an implicit cost? (i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm (ii) interest paid on the firm's debt (iii) rent paid by the firm to lease office space a. (ii) and (iii) only b. (i) and (iii) only c. (i) only d. (iii) only 10

11 Commerce College Joint Economics Exam Answer Section MULTIPLE CHOICE 1. ANS: C REF: 4-1 TOP: 4. 生產理論與成本分析 2. ANS: B REF: 5-1 TOP: 5. 完全競爭市場 3. ANS: C REF: TOP: 6-3. 獨占性競爭 4. ANS: B REF: TOP: 6-2. 寡占 5. ANS: C REF: 7-1 TOP: 7. 公共財與外部性 6. ANS: C REF: TOP: 6-2. 寡占 7. ANS: C REF: 4-2 TOP: 4. 生產理論與成本分析 8. ANS: C REF: 4-2 TOP: 4. 生產理論與成本分析 9. ANS: B REF: 2-1 TOP: 2. 供需彈性與比較靜態分析 10. ANS: C REF: 7-1 TOP: 7. 公共財與外部性 11. ANS: B REF: 3-2 TOP: 3. 消費者選擇 ( 與需求曲線的導出 ) 12. ANS: C REF: 2-2 TOP: 2. 供需彈性與比較靜態分析 13. ANS: D REF: 5-1 TOP: 5. 完全競爭市場 14. ANS: C REF: TOP: 6-3. 獨占性競爭 15. ANS: D REF: 1-1 TOP: 1. 需求供給與均衡 16. ANS: D REF: 2-1 TOP: 2. 供需彈性與比較靜態分析 17. ANS: B REF: 3-1 TOP: 3. 消費者選擇 ( 與需求曲線的導出 ) 18. ANS: C REF: TOP: 6-1. 獨占 19. ANS: C REF: 5-1 TOP: 5. 完全競爭市場 20. ANS: A REF: TOP: 6-3. 獨占性競爭 21. ANS: D REF: 4-2 TOP: 4. 生產理論與成本分析 22. ANS: C REF: 7-1 TOP: 7. 公共財與外部性 23. ANS: C REF: 7-2 TOP: 7. 公共財與外部性 24. ANS: B REF: 7-1 TOP: 7. 公共財與外部性 25. ANS: B REF: 7-2 TOP: 7. 公共財與外部性 26. ANS: D REF: TOP: 6-3. 獨占性競爭 27. ANS: C REF: 3-2 TOP: 3. 消費者選擇 ( 與需求曲線的導出 ) 28. ANS: C REF: TOP: 6-3. 獨占性競爭 29. ANS: D REF: 5-1 TOP: 5. 完全競爭市場 30. ANS: B REF: 7-1 TOP: 7. 公共財與外部性 31. ANS: A REF: TOP: 6-2. 寡占 32. ANS: B REF: TOP: 6-1. 獨占 33. ANS: D REF: 3-2 TOP: 3. 消費者選擇 ( 與需求曲線的導出 ) 34. ANS: C REF: 7-1 TOP: 7. 公共財與外部性 35. ANS: C REF: TOP: 6-3. 獨占性競爭 36. ANS: B REF: 1-1 TOP: 1. 需求供給與均衡 37. ANS: C REF: 4-2 TOP: 4. 生產理論與成本分析 38. ANS: D REF: 1-2 TOP: 1. 需求供給與均衡 39. ANS: D REF: 7-2 TOP: 7. 公共財與外部性 40. ANS: B REF: TOP: 6-1. 獨占 41. ANS: C REF: 4-1 TOP: 4. 生產理論與成本分析 42. ANS: B REF: 2-1 TOP: 2. 供需彈性與比較靜態分析 43. ANS: C REF: TOP: 6-1. 獨占 44. ANS: B REF: 5-1 TOP: 5. 完全競爭市場 1

12 45. ANS: B REF: 2-1 TOP: 2. 供需彈性與比較靜態分析 46. ANS: A REF: 2-1 TOP: 2. 供需彈性與比較靜態分析 47. ANS: B REF: 3-2 TOP: 3. 消費者選擇 ( 與需求曲線的導出 ) 48. ANS: B REF: 7-1 TOP: 7. 公共財與外部性 49. ANS: D REF: 1-1 TOP: 1. 需求供給與均衡 50. ANS: C REF: 4-2 TOP: 4. 生產理論與成本分析 2

Section I (20 questions; 1 mark each)

Foundation Course in Managerial Economics- Solution Set- 1 Final Examination Marks- 100 Section I (20 questions; 1 mark each) 1. Which of the following statements is not true? a. Societies face an important