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1 Name Framingham State College Department of Economics and Business Principles of Microeconomics Section D Practice Final Exam Spring VERSION 2 WITH ANSWERS This exam provides questions that are representative of those contained on your exam. This test should in no way be considered a facsimile of your exam. All topics, problems, key words, and class discussion are fair game for the exam whether or not they are contained on this practice exam Directions: Provide the best answer to the following: 25 Multiple Choice Questions each worth 8 points for a total of 200 points. You will be given 110 minutes to complete the exam. If you finish early, you may quietly turn in your exam and leave. The exam is closed book and closed note, please place everything other than your calculator and writing tools at the front of the class. You may not share a calculator Multiple Choice: Identify the letter of the choice that best completes the statement or answers the question. 1a. Both households and societies face many decisions because a. resources are scarce. b. populations may increase or decrease over time. c. wages for households and therefore society fluctuate with business cycles. d. people, by nature, tend to disagree. ANS: A resources are scarce. The Principles of Microeconomics 1 of 10 Practice Final Exam - VERSION 2

2 1b. The term "invisible hand" was coined by a. Adam Smith. b. David Ricardo. c. John Maynard Keynes. d. Thomas Jefferson. ANS: A Adam Smith. 2. An example of an explicit cost of production would be a. the cost of forgone labor earnings for an entrepreneur. b. the lost opportunity to invest in other capital markets when the money is invested in one's business. c. the cost of flour for a baker. d. None of the above are correct. ANS: C the cost of flour for a baker. 3. When adding another unit of labor leads to an increase in output that is smaller than increases in output that resulted from adding previous units of labor, we have the property of a. diminishing labor. b. diminishing output. c. diminishing marginal product. d. negative marginal product. ANS: C diminishing marginal product. The Principles of Microeconomics 2 of 10 Practice Final Exam - VERSION 2

3 Figure 1 4. Refer to Figure 1. Which of the curves is most likely to represent marginal cost? a. A b. B c. C d. D ANS: A 5. Economies of scale occur when a. long-run average total costs rise as output increases. b. long-run average total costs fall as output increases. c. average fixed costs are falling. d. average fixed costs are constant. ANS: B long-run average total costs fall as output increases. The Principles of Microeconomics 3 of 10 Practice Final Exam - VERSION 2

4 6. As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per year. At the end of the first year of operating her new business, Mary's accountant reported an accounting profit of $150,000. What was Mary's economic profit? a. $25,000 loss b. $50,000 loss c. $25,000 profit d. $150,000 profit ANS: A $25,000 loss 7. A firm's marginal cost has a minimum value of $2; its average variable cost has a minimum value of $4; and its average total cost has a minimum value of $5. Then the firm will shut down if the price of its product falls below a. $2. b. $4. c. $5. d. There is not enough information given to answer the question. ANS: B $4. 8. Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, which of the following statements is true? a. Meatball prices will be less than marginal cost. b. Meatball prices will equal marginal cost. c. Meatball prices will exceed marginal cost. d. Meatball prices will be a function of supply and demand and will therefore oscillate around marginal costs. ANS: C Meatball prices will exceed marginal cost. The Principles of Microeconomics 4 of 10 Practice Final Exam - VERSION 2

5 9. What is the monopolist's profit under the following conditions? The profit-maximizing price charged for goods produced is $16. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $8. Average total cost for 10 units of output is $6. a. $20 b. $80 c. $100 d. $160 ANS: C $100 Figure Refer to Figure 2. The monopolist's maximum profit a. is $800. b. is $1,000. c. is $1,250. d. cannot be determined from the diagram. ANS: D cannot be determined from the diagram. 11. A rational pricing strategy for a profit-maximizing monopolist is a. price discrimination. b. price segregation. c. synergy pricing. d. average cost pricing. The Principles of Microeconomics 5 of 10 Practice Final Exam - VERSION 2

6 ANS: A price discrimination. 12. Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you fly back. What is the reason for this price discrepancy? a. Airlines are practicing imperfect price discrimination to raise their profits. b. Airlines charge a different rate based on the different nature of peoples' travel needs. c. Airlines are attempting to charge people based on their willingness to pay. d. All of the above are correct. ANS: D All of the above are correct. 13. Oligopolies can end up looking like competitive markets if the number of firms is a. large and they all cooperate. b. large and they do not cooperate. c. small and they all cooperate. d. small and they do not cooperate. ANS: B large and they do not cooperate. 14. Consider two countries, Eudora and the Inhabii, that are engaged in an arms race. The question each country must face is whether to build new weapons or to disarm existing weapons. Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs. But each country also prefers to live in a world safe from the other country's weapons. If both countries get together and agree on a certain level of arms, what will happen to social welfare assuming that both countries keep their end of the bargain? a. Social welfare will remain unchanged due to the lack of dominant strategies. b. Social welfare will remain unchanged due to the presence of dominant strategies. c. Social welfare will decrease. d. Social welfare will increase. ANS: D Social welfare will increase. The Principles of Microeconomics 6 of 10 Practice Final Exam - VERSION 2

7 15. Which of the following statements is true? a. The proper scope of antitrust laws is well defined and definite. b. Antitrust laws focus on granting certain firms the option to form a cartel. c. Policymakers have the difficult task of determining whether some firms' decisions have legitimate purposes even though they appear anti-competitive. d. There is always a need for policymakers to try to limit a firm's pricing power, regardless of whether the firm's market is competitive, a monopoly, or an oligopoly. Figure 3 ANS: C Policymakers have the difficult task of determining whether some firms' decisions have legitimate purposes even though they appear anti-competitive. 16. Refer to Figure 3. The firm depicted in panel b faces a horizontal demand curve. If panel b depicts a profit-maximizing firm, a. it could be operating in either a perfectly competitive market or in a monopolistically competitive market. b. it would not have excess capacity in its production as long as it is earning zero economic profit. c. it is able to choose the price at which it sells its product. d. All of the above are correct. ANS: B it would not have excess capacity in its production as long as it is earning zero economic profit. The Principles of Microeconomics 7 of 10 Practice Final Exam - VERSION 2

8 17. For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost a. in the short run but not in the long run. b. in the long run but not in the short run. c. in both the short run and the long run. d. in neither the short run nor the long run. ANS: C in both the short run and the long run. 18a. If advertising reduces a consumer's price sensitivity between identical goods, it is likely to a. increase the elasticity of demand for differentiated products. b. enhance competition, and encourage more product diversity. c. impede competition and reduce social well-being. d. encourage the consumption of all homogenous goods. ANS: C impede competition and reduce social well-being. 18b. On a vacation to Cancun, Mexico, you find yourself eating every meal at the local McDonald's rather than having a hamburger from one of the street vendors. Your traveling companion claims that you are irrational, since you never eat McDonald's hamburgers when you are home and McDonald's hamburgers cost more than those prepared and sold by Cancun's street vendors. An economist would most likely explain your behavior by suggesting that a. your behavior is rational, but your friend's behavior is clearly irrational. b. you are clearly irrational. c. the McDonald's brand name guarantees consistent quality. d. the advertising by McDonalds in Cancun is more persuasive than the advertising by McDonalds in your home town. ANS: C the McDonald's brand name guarantees consistent quality. 19. Typically, as a firm hires additional workers, the marginal product of labor a. and the value of the marginal product of labor both decrease. b. stays constant and the value of the marginal product of labor decreases. c. decreases and the value of the marginal product of labor stays constant. d. decreases and the value of the marginal product of labor increases. ANS: A and the value of the marginal product of labor both decrease. The Principles of Microeconomics 8 of 10 Practice Final Exam - VERSION 2

9 20. The opportunity cost of an hour of leisure is a. 60 minutes. b. an hour of sleep. c. an hour's worth of wear and tear on your TV, exercise equipment, etc. d. your hourly wage. ANS: D your hourly wage. Figure Refer to Figure 4. Assume W1 = $20 and W2 = $18 and the market is always in equilibrium. Then the shift of the labor supply curve from S1 to S2 a. increases the value of the marginal product of labor by $2. b. decreases the value of the marginal product of labor by $2. c. decreases the value of the marginal product of labor by more than $2. d. does not change the value of the marginal product of labor. ANS: B decreases the value of the marginal product of labor by $ Because of diminishing returns, a factor in abundant supply has a. a high marginal product and a high rental price. b. a high marginal product and a low rental price. c. a low marginal product and a high rental price. d. a low marginal product and a low rental price. ANS: D a low marginal product and a low rental price. The Principles of Microeconomics 9 of 10 Practice Final Exam - VERSION 2

10 23. If empirical tests of the human-capital theory find conclusive evidence that education enhances productivity, then optimal public policy would suggest that a. the benefits of increased productivity need to be weighed against the opportunity cost of education. b. compulsory schooling laws always increase social well-being. c. everyone should be required to finish high school. d. a college education should be required of all members of society. ANS: A the benefits of increased productivity need to be weighed against the opportunity cost of education. 24. Certain factors that are probably important in determining wages are nevertheless difficult to measure. Consequently, labor economists find those factors difficult to incorporate into their studies of labor markets and wages. Those factors include a. effort and natural ability. b. natural ability and years of experience. c. years of experience and job characteristics. d. All of the above are correct. ANS: A effort and natural ability. 25. In discussing discrimination and the wage differences that exist between men and women and between blacks and whites, it has been said that "the disease is political even if the symptom is economic." What does this mean? a. Wage differences persist because the political system has failed to enact laws to equalize wages among all groups. b. Wage differences exist because of past discrimination on the part of political bodies such as city councils and school boards. c. Wage differences exist because of the differences in the political views of the different groups. d. Wage differences exist because the political system is biased against paying compensating differentials. ANS: B Wage differences exist because of past discrimination on the part of political bodies such as city councils and school boards. The Principles of Microeconomics 10 of 10 Practice Final Exam - VERSION 2