# Practice Test for Midterm 2 Econ Fall 2009 Instructor: Soojae Moon

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1 Practice Test for Midterm 2 Econ Fall 2009 Instructor: Soojae Moon Please read carefully and choose the choice that best completes the statement or answers the question. Table 7-2 This table refers to five possible buyers' willingness to pay for a case of Vanilla Coke. Buyer Willingness To Pay David \$8.50 Laura \$7.00 Megan \$5.50 Mallory \$4.00 Audrey \$ Refer to Table 7-2. If the price of Vanilla Coke is \$6.90, who will purchase the good? a. all five individuals b. Megan, Mallory and Audrey c. David, Laura and Megan d. David and Laura 2. Refer to Table 7-2. If the market price is \$5.50, the consumer surplus in the market will be a. \$3.00. b. \$4.50. c. \$ d. \$ Donald produces nails at a cost of \$200 per ton. If he sells the nails for \$350 per ton, his producer surplus per ton is a. \$150. b. \$200. c. \$350. d. \$550. Table 7-6 The following table represents the costs of five possible sellers. Seller Abby \$1,500 Bobby \$1,200 Carlos \$1,000 Dianne \$750 Evalina \$ Refer to Table 7-6. If the market price is \$1,000, the producer surplus in the market is a. \$700. b. \$750. c. \$2,250.

2 d. \$3, Which of the following equations is valid? a. Consumer surplus = Total surplus - to sellers b. Producer surplus = Total surplus - Consumer surplus c. Total surplus = Value to buyers - Amount paid by buyers d. Total surplus = Amount received by sellers - to sellers Figure Refer to Figure At the equilibrium price, consumer surplus is a. \$150. b. \$200. c. \$300. d. \$ Refer to Figure At the equilibrium price, producer surplus is a. \$150. b. \$200. c. \$300. d. \$ A tax on a good a. raises the price that buyers effectively pay and raises the price that sellers effectively receive. b. raises the price that buyers effectively pay and lowers the price that sellers effectively receive. c. lowers the price that buyers effectively pay and raises the price that sellers effectively

3 receive. d. lowers the price that buyers effectively pay and lowers the price that sellers effectively receive. Figure 8-3 The vertical distance between points A and C represents a tax in the market. 9. Refer to Figure 8-3. The price that buyers effectively pay after the tax is imposed is a. P1. b. P2. c. P3. d. P Refer to Figure 8-3. The price that sellers effectively receive after the tax is imposed is a. P1. b. P2. c. P3. d. P Refer to Figure 8-3. The amount of tax revenue received by the government is equal to the area a. P3ACP1. b. ABC. c. P2DAP3. d. P1CDP Refer to Figure 8-3. The amount of deadweight loss associated with the tax is equal to a. P3ACP1. b. ABC. c. P2ADP3. d. P1DCP Refer to Figure 8-3. Which of the following equations is valid for the tax revenue that the tax provides to the government? a. Tax revenue = (P2 - P1)xQ1 b. Tax revenue = (P3 - P1)xQ1 c. Tax revenue = (P3 - P2)xQ1 d. Tax revenue = (P3 - P1)x(Q2 - Q1)

4 14. When a tax is imposed on a good for which both demand and supply are very elastic, a. sellers effectively pay the majority of the tax. b. buyers effectively pay the majority of the tax. c. the tax burden is equally divided between buyers and sellers. d. None of the above is correct; further information would be required to determine how the burden of the tax is distributed between buyers and sellers. 15. The amount of deadweight loss from a tax depends upon the a. price elasticity of demand. b. price elasticity of supply. c. amount of the tax per unit. d. All of the above are correct. 16. If a country allows trade and, for a certain good, the domestic price without trade is higher than the world price, a. the country will be an exporter of the good. b. the country will be an importer of the good. c. the country will be neither an exporter nor an importer of the good. d. Additional information is needed about demand to determine whether the country will be an exporter of the good, an importer of the good, or neither. Figure 9-3. The domestic country is China. 17. Refer to Figure 9-3. With no international trade, a. the equilibrium price is \$12 and the equilibrium quantity is 300. b. the equilibrium price is \$16 and the equilibrium quantity is 200. c. the equilibrium price is \$16 and the equilibrium quantity is 300. d. the equilibrium price is \$16 and the equilibrium quantity is Refer to Figure 9-3. With trade, China will a. import 100 pencil sharpeners. b. import 250 pencil sharpeners. c. export 150 pencil sharpeners. d. export 250 pencil sharpeners.

5 19. Refer to Figure 9-3. With trade, producer surplus in China is a. \$800. b. \$1,200. c. \$1,800. d. \$2,700. Figure 9-4. The domestic country is Jamaica. 20. Refer to Figure 9-4. With trade, Jamaica a. imports 150 calculators. b. imports 250 calculators. c. exports 100 calculators. d. exports 250 calculators. 21. Which of the following would be an example of an implicit cost? (i) forgone investment opportunities (ii) wages of workers (iii) raw materials costs a. (i) only b. (ii) only c. (ii) and (iii) only d. (i) and (iii) only 22. An example of an explicit cost of production would be the a. cost of forgone labor earnings for an entrepreneur. b. lost opportunity to invest in capital markets when the money is invested in one's business. c. lease payments for the land on which a firm s factory stands. d. Both a and c are correct. Table 13-2 Number of Workers Output Fixed Variable Total 0 0 \$50 \$0 \$50

6 1 90 \$50 \$20 \$ \$50 \$40 \$ \$50 \$60 \$ \$50 \$80 \$ Refer to Table The marginal product of the second worker is a. 90 units. b. 85 units. c. 80 units. d. 20 units. 24. For a construction company that builds houses, which of the following costs would be a fixed cost? a. the \$20 per hour wage paid to a construction foreman b. the \$30,000 per year salary paid to the company's bookkeeper c. the \$2 per worker-hour paid to the state government for workers compensation insurance d. All of the above are correct. Table 13-9 Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled children in public school districts. The owner rents several small rooms in an office building in the suburbs for \$600 a month and has leased computer equipment that costs \$480 a month. Output (Instructional Modules per Month) Fixed s Variable s Total Average Fixed Average Variable Average Total Marginal 0 \$1,080 1 \$1,080 \$ 400 \$1,480 \$400 2 \$965 \$450 3 \$1,350 \$2,430 4 \$1,900 \$475 5 \$2,500 \$216 6 \$4,280 \$700 7 \$4,100 8 \$5,400 \$135 9 \$7, \$10,880 \$ Refer to Table What is the average variable cost for the month if 6 instructional modules are produced? a. \$ b. \$ c. \$ d. \$ Refer to Table What is the average fixed cost for the month if 9 instructional modules are produced? a. \$ b. \$ c. \$ d. \$ Figure 13-4

7 27. Refer to Figure Curve A represents which type of cost curve? a. marginal cost b. average total cost c. average variable cost d. average fixed cost 28. Refer to Figure Which curve is most likely to represent average total cost? a. A b. B c. C d. D 29. Economies of scale occur when a firm s a. marginal costs are constant as output increases. b. long-run average total costs are decreasing as output increases. c. long-run average total costs are increasing as output increases. d. marginal costs are equal to average total costs for all levels of output. Figure 13-10

8 30. Refer to Figure The three average total cost curves on the diagram labeled ATC 1, ATC 2, and ATC 3 most likely correspond to three different a. time horizons. b. products. c. firms. d. factory sizes. 31. Refer to Figure The firm experiences diseconomies of scale if it changes its level of output from a. Q 1 to Q 2. b. Q 2 to Q 3. c. Q 3 to Q 4. d. Q 4 to Q A key characteristic of a competitive market is that a. government antitrust laws regulate competition. b. producers sell nearly identical products. c. firms minimize total costs. d. firms have price setting power. 33. A market is competitive if (i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market. a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii), and (iii) 34. If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater than marginal cost, it should a. shut down. b. reduce its output, but continue operating. c. keep output the same. d. increase its output. 35. When a profit-maximizing firm is earning profits, those profits can be identified by

9 a. P Q. b. (MC - AVC) Q. c. (P - ATC) Q. d. (P - AVC) Q. Figure Refer to Figure If the market price is P3, in the short run, the perfectly competitive firm will earn a. positive economic profits. b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits. 37. Refer to Figure If the market price is P4, in the short run, the perfectly competitive firm will earn a. positive economic profits. b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits. 38. Refer to Figure Which of the four prices corresponds to a perfectly competitive firm earning positive economic profits in the short run? a. P1 b. P2 c. P3 d. P4 39. In a perfectly competitive market, the horizontal sum of all the individual firms' supply curves is a. zero. b. equal to the industry profits. c. the market supply curve. d. a horizontal line. 40. Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly is often a. not in the best interest of society. b. one that fails to maximize total economic well-being.

10 c. inefficient. d. All of the above are correct. 41. Encouraging firms to invest in research and development and individuals to engage in creative endeavors such as writing novels is one justification for a. resource monopolies. b. natural monopolies. c. government-created monopolies. d. breaking up monopolies into smaller firms. 42. When a firm has a natural monopoly, the firm's a. marginal cost always exceeds its average total cost. b. total cost curve is horizontal. c. average total cost curve is downward sloping. d. marginal cost curve must lie above the firm s average total cost curve. Figure Refer to Figure If the monopoly firm is currently producing Q3 units of output, then a decrease in output will necessarily cause profit to a. remain unchanged. b. decrease. c. increase as long as the new level of output is at least Q2. d. increase as long as the new level of output is at least Q Refer to Figure If the monopoly firm wants to maximize its profit, it should operate at a level of output equal to a. Q1. b. Q2. c. Q3. d. Q4. Figure 15-9

11 45. Refer to Figure What area measures the deadweight loss? a. (B-F)*K b. 0.5[(P-O)*(L-O)] c. 0.5[(A-H)*(L-J)] d. 0.5[(B-F)*(L-K)] 46. Which of the following statements is not correct? a. Two examples of early antitrust laws are the Sherman and Clayton Antitrust Acts. b. Antitrust laws automatically prevent mergers between companies that produce similar products. c. Antitrust laws give the government power to increase competition. d. Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through more efficient joint production. Figure Refer to Figure If the monopoly firm is not allowed to price discriminate, then the deadweight loss amounts to a. \$50. b. \$100.

12 c. \$500. d. \$1, Refer to Figure If the monopoly firm perfectly price discriminates, then the deadweight loss amounts to a. \$0. b. \$100. c. \$200. d. \$ Which of the following statements is not correct? a. Monopolistic competition is different from monopoly because monopolistic competition is characterized by free entry, whereas monopoly is characterized by barriers to entry. b. Both monopolistic competition and oligopoly fall in between the more extreme market structures of competition and monopoly. c. Monopolistic competition is different from oligopoly because each seller in monopolistic competition is small relative to the market, whereas each seller can affect the actions of other sellers in an oligopoly. d. Both monopolistic competition and perfect competition are characterized by product differentiation. 50. Which of the following conditions distinguishes monopolistic competition from perfect competition? a. the number of sellers in the market b. the freedom of entry and exit by firms in the market c. the size of firms in the market d. product differentiation 51. Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms, a. marginal revenue will equal average total cost. b. price will exceed marginal cost. c. marginal cost will exceed average revenue. d. average variable cost will be declining. 52. Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell a. highly-differentiated consumer goods. b. goods produced by natural monopolies. c. agricultural products. d. products with a limited shelf life such as milk and lettuce. 53. A monopolistically competitive market is like both a competitive market and a monopoly in that a. all three market structures feature easy entry by new firms in the long run. b. firms in all three market structures maximize profit by producing an output level where marginal revenue equals marginal cost. c. firms in all three market structures produce the welfare-maximizing level of output. d. All of the above are correct.

13 Practice Test for Midterm 2 Answer Section MULTIPLE CHOICE 1. ANS: D PTS: 1 DIF: 2 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Willingness to pay 2. ANS: B PTS: 1 DIF: 2 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus 3. ANS: A PTS: 1 DIF: 1 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus 4. ANS: B PTS: 1 DIF: 2 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Analytical 5. ANS: B PTS: 1 DIF: 2 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Total surplus MSC: Definitional 6. ANS: C PTS: 1 DIF: 3 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus 7. ANS: B PTS: 1 DIF: 3 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Producer surplus 8. ANS: B PTS: 1 DIF: 2 REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Taxes 9. ANS: C PTS: 1 DIF: 2 REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Taxes 10. ANS: A PTS: 1 DIF: 2 REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Taxes 11. ANS: A PTS: 1 DIF: 2 REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Tax revenue 12. ANS: B PTS: 1 DIF: 2 REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Deadweight loss 13. ANS: B PTS: 1 DIF: 2 REF: 8-1 NAT: Analytic LOC: Supply and demand TOP: Tax revenue 14. ANS: D PTS: 1 DIF: 2 REF: 8-2 NAT: Analytic LOC: Elasticity TOP: Tax incidence Elasticity 15. ANS: D PTS: 1 DIF: 2 REF: 8-2

15 MSC: Analytical 32. ANS: B PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Definitional 33. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets 34. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization 35. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit 36. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve 37. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve 38. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve 39. ANS: C PTS: 1 DIF: 1 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Market supply MSC: Definitional 40. ANS: D PTS: 1 DIF: 2 REF: 15-0 NAT: Analytic LOC: Monopoly TOP: Monopoly 41. ANS: C PTS: 1 DIF: 1 REF: 15-1 NAT: Analytic LOC: Monopoly TOP: Patents Copyrights 42. ANS: C PTS: 1 DIF: 2 REF: 15-1 NAT: Analytic LOC: Monopoly TOP: Natural monopoly 43. ANS: C PTS: 1 DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Profit maximization MSC: Analytical 44. ANS: B PTS: 1 DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Profit maximization MSC: Analytical 45. ANS: D PTS: 1 DIF: 3 REF: 15-3 NAT: Analytic LOC: Monopoly TOP: Deadweight loss 46. ANS: B PTS: 1 DIF: 2 REF: 15-5 NAT: Analytic LOC: Monopoly TOP: Antitrust 47. ANS: D PTS: 1 DIF: 3 REF: 15-4 NAT: Analytic LOC: Monopoly TOP: Deadweight loss 48. ANS: A PTS: 1 DIF: 2 REF: 15-4 NAT: Analytic LOC: Monopoly TOP: Perfect price discrimination

16 MSC: Analytical 49. ANS: D PTS: 1 DIF: 2 REF: 16-0 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Analytical 50. ANS: D PTS: 1 DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition Perfect competition 51. ANS: B PTS: 1 DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition Demand curve 52. ANS: A PTS: 1 DIF: 1 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising 53. ANS: B PTS: 1 DIF: 2 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition Monopoly

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