SAMPLE FINAL. Part I - Multiple Choice Questions:

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1 Part I - Multiple Choice Questions: SAMPLE FINAL 1. Which of the following is not a characteristic of a perfectly competitive market? a. Firms are price takers. b. Firms have difficulty entering the market. c. There are many sellers in the market. d. Goods offered for sale are the same. 2. When a competitive firm doubles the quantity of output it sells, its a. total revenue doubles. b. average revenue doubles. c. marginal revenue doubles. d. profits must increase. 3. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost of $11. It follows that the a. production of the 100th unit of output increases the firm's profit by $1. b. production of the 100th unit of output increases the firm's average total cost by $1. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 110th unit of output must increase the firm s profit but by less than $1. 4. A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has average revenue of $9 and average total cost of $7. It follows that the firm's a. average total cost curve intersects the marginal cost curve at an output level of less than 200 units. b. average variable cost curve intersects the marginal cost curve at an output level of less than 200 units. c. profit is $400. d. All of the above are correct. 5. Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the short run the firm will a. experience losses but will continue to produce rubber bands. b. shut down. c. earn both economic and accounting profits. d. raise the price of its product.

2 6. Suppose a firm operating in a competitive market has the following cost curves: Refer to Figure Above. When market price is P7, a profit-maximizing firm's short-run profits can be represented by the area a. P7 Q5. b. P7 Q3. c. (P7 - P5) Q3. d. We are unable to determine the firm s profits because the quantity that the firm would produce is not labeled on the graph. 7. In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms. If there are 200 identical firms in this market, what level of output will be supplied to the market when price is $2.00? a. 2,000 b. 10,000 c. 20,000 d. 40,000

3 8. In the short-run, a firm's supply curve is equal to the a. marginal cost curve above its average variable cost curve. b. marginal cost curve above its average total cost curve. c. average variable cost curve above its marginal cost curve. d. average total cost curve above its marginal cost curve. 9. Consider a competitive market with a large number of identical firms. In long-run equilibrium, market price is determined by a. the minimum point on the firms' average variable cost curve. b. the minimum point on the firms' average total cost curve. c. the portion of the marginal cost curve below average variable cost. d. a firm s level of sunk costs. 10. Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. Also assume that Germany has an absolute advantage in both fish and cars. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, then a. the two countries combined output of both goods will be higher than it would be in the absence of trade. b. Greece will produce more fish than it would produce in the absence of trade. c. Germany will produce more cars than it would produce in the absence of trade. d. All of the above are correct. 11. Which of the following events would cause a movement upward and to the left along the demand curve for olives? a. The number of people who purchase olives decreases. b. Consumer income decreases, and olives are a normal good. c. The price of pickles decreases, and pickles are a substitute for olives. d. The price of olives rises. 12. Suppose roses are currently selling for $20 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a a. shortage to exist and the market price of roses to increase. b. shortage to exist and the market price of roses to decrease. c. surplus to exist and the market price of roses to increase. d. surplus to exist and the market price of roses to decrease.

4 13. Suppose the government is deciding to tax a particular market. How is the burden of a tax divided? (i) When the tax is levied on the sellers, the sellers bear a higher proportion of the tax burden. (ii) When the tax is levied on the buyers, the buyers bear a higher proportion of the tax burden. (iii) Regardless of whether the tax is levied on the buyers or the sellers, the buyers and sellers bear an equal proportion of the tax burden. (iv) Regardless of whether the tax is levied on the buyers or the sellers, the buyers and sellers bear some proportion of the tax burden. a. (i) and (ii) only b. (iv) only c. (i), (ii), and (iii) only d. (i), (ii), and (iv) only 14. Suppose that a worker in Radioland can produce either 4 radios or 1 television per year, and a worker in Teeveeland can produce either 2 radios or 4 televisions per year. Each nation has 100 workers. Also suppose that each country completely specializes in producing the good in which it has a comparative advantage. If Radioland trades 100 radios to Teeveeland in exchange for 100 televisions each year, then each country's maximum consumption of new radios and televisions per year will be a. 100 radios, 300 televisions in Radioland and 300 radios, 100 televisions in Teeveeland. b. 300 radios, 100 televisions in Radioland and 100 radios, 300 televisions in Teeveeland. c. 200 radios, 100 televisions in Radioland and 100 radios, 200 televisions in Teeveeland. d. 300 radios, 100 televisions in Radioland and 100 radios, 400 televisions in Teeveeland. 15. Which of the following would shift the demand curve for gasoline to the right? a. a decrease in the price of gasoline b. an increase in consumer income, assuming gasoline is a normal good c. an increase in the price of cars, a complement for gasoline d. a decrease in the expected future price of gasoline

5 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. 17. Suppose goods A and B are substitutes for each other. We would expect the cross-price elasticity between these two goods to be a. positive. b. negative. c. either positive or negative. It depends whether A and B are normal goods or inferior goods. d. either positive or negative. It depends whether the current price level is on the elastic or inelastic portion of the demand curve. 18. Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor, the a. demand curve for toothpaste shifts to the left. b. supply curve for toothpaste shifts to the right. c. quantity demanded of toothpaste decreases, and the quantity of toothpaste that firms want to supply increases. d. quantity supplied of toothpaste stays the same. 19. A minimum wage that is set above a market's equilibrium wage will result in an excess a. demand for labor, that is, unemployment. b. demand for labor, that is, a shortage of workers. c. supply of labor, that is, unemployment. d. supply of labor, that is, a shortage of workers.

6 20. Seller Cost LeBron $700 Kobe $600 Kevin $450 Steve $400 Refer to Table Above. You and your best friend want to hire a professional photographer to take pictures of your two families. The table shows the costs of the four potential sellers in the local photography market. You and your friend agree to offer $500 for each session. Who accepts the offer, and what is the total producer surplus in the market? a. LeBron and Kobe; $500 b. Kevin and Steve; $500 c. LeBron and Kobe; $300 d. Kevin and Steve; $ When a country allows trade and becomes an importer of a good, a. everyone in the country benefits. b. the gains of the winners exceed the losses of the losers. c. the losses of the losers exceed the gains of the winners. d. everyone in the country loses. 22. Denmark is an importer of computer chips, taking the world price of $12 per chip as given. Suppose Denmark imposes a $5 tariff on chips. Which of the following outcomes is possible? a. More Danish-produced chips are sold in Denmark. b. More foreign-produced chips are sold in Denmark. c. Danish consumers of chips become better off. d. Total surplus in the Danish chip market increases.

7 23. In each case, the budget constraint moves from BC-1 to BC-2. Refer to Figure Above. Which of the graphs in the figure could reflect a simultaneous increase in the price of good X and decrease in the price of good Y? a. graph a b. graph b c. graph c d. graph d 24. Higher indifference curves are preferred to lower ones as long as the a. marginal rate of substitution is diminishing. b. products in the bundle are bads and not goods. c. products in the bundle are goods and not bads. d. budget constraint does not shift. 25. A consumer chooses an optimal consumption point where the a. marginal rate of substitution is maximized. b. rate at which the consumer is willing to trade one good for another equals the price ratio. c. price ratio is minimized. d. All of the above are correct.

8 26. The following graph illustrates a representative consumer s preferences for marshmallows and chocolate chip cookies: Assume that the consumer depicted the figure has an income of $50. Based on the information available in the graph, which of the following price-quantity combinations would be on her demand curve for chocolate chips if the price of marshmallows is $2.50? a. P=$2.50, Q=6 b. P=$2.50, Q=10 c. P=$5.00, Q=3 d. P=$5.00, Q=5 27. John has decided to start his own lawn-mowing business. To purchase the mowers and the trailer to transport the mowers, John withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is John's annual economic cost of the financial capital that has been invested in the business? a. $30 b. $140 c. $170 d. $ Inefficiency exists in an economy when a good is a. not being consumed by buyers who value it most highly. b. not distributed fairly among buyers. c. not produced because buyers do not value it very highly. d. being produced with less than all available resources.

9 Figure 1. The Vertical distance between points A and B represents a tax in the market. 29. Refer to Figure 1. The amount of tax revenue received by the government is equal to a. $350. b. $490. c. $700. d. $ Refer to Figure 1. The tax results in a loss of consumer surplus that amounts to a. $120. b. $340. c. $450. d. $510.

10 Part II - Short Answer Questions 1. True/False. Briefly explain your reasoning. Suppose that the good is ordinary and inferior good. Income effect and substitution effect move in the opposite direction, and income effect dominates substitution effect. 2. Suppose that a perfectly competitive market is initially in long-run equilibrium. Then, demand decreases. Explain how demand changes affect the market in the short-run and long-run by using market demand-supply graph and individual firm s cost curves. 3. Suppose that the wheat market is operating as if it is perfectly competitive market. Market demand (Q d ) and market supply (Q s ) are described as below: Q d =1000 5P Q s = 5P 500 Assume that individual firm s marginal cost is MC = 2q +100 where q is the amount of the output produced by the firm. a. Find short run equilibrium market P and Q b. Find each individual firm s amount of production c. How many firms are operating in the market in the SR? 4. True/False. Briefly explain your reasoning. The more elastic are supply and demand in a market, the greater are the distortions caused by a tax on that market, and the more likely it is that a tax cut in that market will raise tax revenue. 5. True/False. Briefly explain your reasoning. A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes decreases, and the consumer surplus in the market for red wine increases. (Use supply-demand graphs to show the changes in CS in both market) 6. A firm has a fixed cost of $700 in its first year of operation. When the firm produces 99 units of output, its average variable cost is $100. The marginal cost of producing the 100th unit of output is $200. What is the average total cost of producing 100 units?