SECTION A: Multiple choice questions (50 Marks)
1. Which of the following statements best represents the principle represented by the
adage, "There is no such thing as a free lunch"?
a. Melissa can attend the concert only if she takes her sister with her.
b. Greg is hungry and homeless.
c. Brian must repair the tire on his bike before he can ride it to class.
d. Kendra must decide between going to Colorado or Cancun for spring break.
2. Teresa eats three oranges during a particular day. The marginal benefit she enjoys from
eating the third orange:
a. can be thought of as the total benefit Teresa enjoys by eating three oranges minus the total
benefit she would have enjoyed by eating just the first two oranges.
b. determines Teresa’s willingness to pay for the first, second, and third oranges.
c. does not depend on how many oranges Teresa has already eaten.
d. All of the above are correct.
3. Which of the following transactions does not take place in the markets for factors of
production in the circular-flow diagram?
a. a landowner leases land to a farmer
b. a farmer hires a teenager to help with harvest
c. a retired farmer sells his combine to a new farmer
d. a woman buys corn for dinner
4. Which of the following is not an example of a positive, as opposed to normative,
statement?
a. Higher gasoline prices will reduce gasoline consumption.
b. Equality is more important than efficiency.
c. Trade restrictions lower our standard of living.
d. If a nation wants to avoid inflation, it will restrict the growth rate of the quantity of money.
5. Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If
the federal government increases the minimum wage by $1.00 per hour, then it is likely
that the
a. demand for bicycle assembly workers will increase.
b. supply of bicycles will shift to the right.
c. supply of bicycles will shift to the left.
d. firm must increase output to maintain profit levels.
6. Pens are normal goods. What will happen to the equilibrium price of pens if the price of
pencils rises, consumers experience an increase in income, writing in ink becomes
fashionable, people expect the price of pens to rise in the near future, the population
increases, fewer firms manufacture pens, and the wages of pen-makers increase?
a. Price will rise.
b. Price will fall.
c. Price will stay exactly the same.
d. The price change will be ambiguous.
7. 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.
8. Suppose a producer is able to separate customers into two groups, one having an
inelastic demand and the other having an elastic demand. If the producer's objective is to
increase total revenue, she should
a. increase the price charged to customers with the elastic demand and decrease the price charged
to customers with the inelastic demand.
b. decrease the price charged to customers with the elastic demand and increase the price charged
to customers with the inelastic demand.
c. decrease the price to both groups of customers.
d. increase the price for both groups of customers.
9. Suppose the government has imposed a price ceiling on televisions. Which of the
following events could transform the price ceiling from one that is not binding into one that
is binding?
a. Firms expect the price of televisions to fall in the future.
b. The number of firms selling televisions decreases.
c. Consumers' income decreases, and televisions are a normal good.
d. The number of consumers buying televisions decreases.
10. A binding price floor will reduce a firm's total revenue
a. always.
b. when demand is elastic.
c. when demand is inelastic.
d. never.
11. A drought in California destroys many red grapes. As a result of the drought, the
consumer surplus in the market for red grapes
a. increases, and the consumer surplus in the market for red wine increases.
b. increases, and the consumer surplus in the market for red wine decreases.
c. decreases, and the consumer surplus in the market for red wine increases.
d. decreases, and the consumer surplus in the market for red wine decreases.
12. Raisin bran and milk are complementary goods. A decrease in the price of raisins will
a. increase consumer surplus in the market for raisin bran and decrease producer surplus in the
market for milk.
b. increase consumer surplus in the market for raisin bran and increase producer surplus in the
market for milk.
c. decrease consumer surplus in the market for raisin bran and increase producer surplus in the
market for milk.
d. decrease consumer surplus in the market for raisin bran and decrease producer surplus in the
market for milk.
13. A tax placed on buyers of tires shifts the
a. demand curve for tires downward, decreasing the price received by sellers of tires and causing
the quantity of tires to increase.
b. demand curve for tires downward, decreasing the price received by sellers of tires and causing
the quantity of tires to decrease.
c. supply curve for tires upward, decreasing the effective price paid by buyers of tires and
causing the quantity of tires to increase.
d. supply curve for tires upward, increasing the effective price paid by buyers of tires and
causing the quantity of tires to decrease.
14. A tax of $0.25 is imposed on each bag of potato chips that is sold. The tax decreases
producer surplus by $600 per day, generates tax revenue of $1,220 per day, and decreases
the equilibrium quantity of potato chips by 120 bags per day. The tax
a. decreases consumer surplus by $645 per day.
b. decreases the equilibrium quantity from 6,000 bags per day to 5,880 bags per day.
c. decreases total surplus from $3,000 to $1,800 per day.
d. creates a deadweight loss of $15 per day.
15. When negative externalities are present in a market
a. private costs will be greater than social costs.
b. social costs will be greater than private costs.
c. only government regulation will solve the problem.
d. the market will not be able to reach any equilibrium.
16. Suppose that electricity producers create a negative externality equal to $5 per unit.
Further suppose that the government gives a $5 per-unit subsidy to producers. What is the
relationship between the equilibrium quantity and the socially optimal quantity of
electricity to be produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
17. 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 opportunity cost of the financial capital that has been
invested in the business?
a. $30
b. $140
c. $170
d. $300
18. Which of the following statements is correct?
a. If marginal cost is rising, then average total cost is rising.
b. If marginal cost is rising, then average variable cost is rising.
c. If average variable cost is rising, then marginal cost is minimized.
d. d. long-run marginal cost is minimized.
19. Charlene sells cotton candy. The cotton candy industry is competitive. Charlene hires a
business consultant to analyze her company's financial records. The consultant
recommends that Charlene increase her production. The consultant must have concluded
that Charlene's
a. total revenues exceed her total accounting costs.
b. marginal revenue exceeds her total cost.
c. marginal revenue exceeds her marginal cost.
d. marginal cost exceeds her marginal revenue.
20. A competitive market is in long-run equilibrium. If demand decreases, we can be
certain that price will
a. fall in the short run. All firms will shut down, and some of them will exit the industry. Price
will then rise to reach the new long-run equilibrium.
b. fall in the short run. No firms will shut down, but some of them will exit the industry. Price
will then rise to reach the new long-run equilibrium.
c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the
industry. Price will then rise to reach the new long-run equilibrium.
d. not fall in the short run because firms will exit to maintain the price.
21. Which of the following statements is correct for a monopolist? i) The firm maximizes
profits by equating marginal revenue with marginal cost. ii) The firm maximizes profits by
equating price with marginal cost. iii) Demand equals marginal revenue. iv) Average revenue
equals price.
a. i), iii), and iv) only
b. i) and iv) only
c. i), ii), and iv) only
d. i), ii), iii), and iv)
22. Price discrimination
a. forces monopolies to charge a lower price as a result of government regulation.
b. is an attempt by a monopoly to prevent some customers from purchasing its product by
charging a high price.
c. is an attempt by a monopoly to increases its profit by selling the same good to different
customers at different prices.
d. increases the consumer surplus associated with a monopolistic market.
23. If we observe a great deal of advertising of dog food, we can infer that
a. consumers spend very little of their disposable income on dog food.
b. dog food is cheap to produce.
c. dog food is a highly-differentiated product.
d. firms who do not advertise earn higher profits than those who do.
24. Laurel and Janet are competitors in a local market and each is trying to decide if it is
worthwhile to advertise. If both of them advertise, each will earn a profit of $5,000. If
neither of them advertise, each will earn a profit of $10,000. If one advertises and the other
doesn't, then the one who advertises will earn a profit of $12,000 and the other will earn
$2,000. In this version of the prisoners' dilemma, if the game is played only once, Laurel
should
a. advertise, but if the game is to be repeated many times she should probably not advertise.
b. advertise, and if the game is to be repeated many times she should still probably advertise.
25. If nations such as Germany, Japan, and the United States prohibited international trade in
automobiles, a likely effect would be that
a. the price effect would become a more significant consideration for each firm that makes
automobile
b. the excess of price over marginal cost would become less pronounced in the automobile
market.
c. all countries would become better off.
d. automobile producers in the U.S. would collude to produce a large number of cars.
Section B – Calculating exercises (20 Marks)
A firm in perfect competition market has $TC (USD) = 2Q^2 + 8Q + 200, where Q is in units.
a. What is the firm's profit when the market price is 58 USD/unit?
b. What are the break-even price and quantity of the firm?
c. What is the firm's decision when the market price is 38 USD?
d. Present all the above results on a graph.
Section C – True/False and explanation. You are recommended to apply graphs
where applicable. (30 marks)
1. Equilibrium quantity will be ambiguous when market demand decreases and supply
increases.
2. Firm in monopoly will set higher price and produce lower level of output and so make
society lose benefit.
3. A market-based policy in dealing with externalities generates a higher cost for our society
than a command-and-control policy.