Directions: There is one best answer to each question, after reading all answers; remember that a multiple choice question is just a series of T-F questions in which one of the responses is true.

1) A rise in the price of eggs, due to a virus that kills many hens, is likely to have what effect on the price of bacon:
a. The price of bacon will rise.
b. The price of bacon will fall.
c. The effect on the price is ambiguous, but the quantity demanded of bacon will fall.
d. The effect on price is ambiguous, but the supply of bacon will decrease.

2) Which of the following will not increase the demand for airline service:
a. Newly published results that airplane travel is a relatively safe form of travel.
b. A continuous transition from local toward global business interactions.
c. Tax breaks for frequent fliers.
d. Innovative new ways to make airplanes more fuel efficient.
e. An increase in the price of travelling by train.

3) A policy that sets minimum wage below the equilibrium wage will:
a. Not cause the actual labor market wage to be different from the equilibrium wage.
b. Create excess demand for labor, or a shortage, at the minimum wage.
c. Create unemployment at the minimum wage.
d. Reduce the potential for discriminatory job-hiring practices.
e. Make workers who keep their jobs better off.

4) Suppose an attorney is employed at Texaco at an annual salary of $75,000. She also has financial assets worth $40,000 that earn $2,000 per year in interest. She also owns a commercial building which she rents out for $10,000 per year. Now suppose she quits the job at Texaco to open her own firm, invests all of her financial assets in the new business, and uses her building for the firm instead of renting it out. In the first year of business, she takes in revenue of $120,000 and makes payments of $10,000 to cover her explicit costs. Her economic profit for the first year is:
a. $110,000.
b. $35,000.
c. $23,000.
d. -$15,000.
e. -$97,000.

5) The supply of corn in the U.S. would be most likely to increase if
a. Severe droughts hit corn growing regions
b. The population increases
c. Corn growers are forced to pay an excize tax
d. Wheat prices substantially fall
d. b and d are both correct

6) Jerry gets his satisfaction only from two activities: gossiping and spitting, both of which are illegal. His marginal utility for gossiping is 200 units of utility, and for spitting is 1,000 units of utility. However, each time he gossips he is fined $100, and each time he spits he is fined $500, and his budget is exhausted from his fines. To maximize his total utility, Jerry should:
a. Not change his mix of gossiping and spitting.
b. Gossip on people more and reduce the amount of spitting.
c. Spit more frequently than usual, but gossip less about others.
d. Reduce both his gossiping and spitting activities because they are wrong, and buy more broccoli.

7) An effective price floor will involve:
a. A shortage and a slight increase in welfare
b. A surplus and welfare loss
c. A shortage and welfare loss
d. A surplus and a slight increase in welfare
e. Neither a shortage nor a surplus, but there will be welfare loss

8) Which of the following might be the original cause of a decrease in the quantity demanded of aluminum?
a. A tax on aluminum
b. A price increase of aluminum, due to energy price increases
c. A labor strike in the aluminum industry, resulting in higher wages
d. A price floor on aluminum, imposed by government
e. All of the above could cause the quantity demanded of aluminum to decrease

9) The Zimbabwean government believes (for whatever reason) that their nation's consumption of Nike shoes is too high. The local legislature thinks that a 40% decrease in Nike consumption would be appropriate, and, with a little research, concludes that the Zimbabwean demand elasticity for Nike shoes is roughly .8. What should their tariff (i.e. import tax) policy be?
a. Set the tariff such that the local price of Nike shoes increases by 50%.
b. Set the tariff such that the local price rises by 5%
c. Set the tariff such that the local price increases by 200%
d. Set the tariff such that the local price decreases by 200%
e. Set the tariff such that the local price increases by 40%

10) "A tax that doubles the price of cigarettes (100% increase) will decrease the quantity demanded a 50%." This statement
a. is a normative statement.
b. assumes that the demand for cigarettes is price inelastic.
c. assumes that the demand for cigarettes is price elastic.
d. all of the above.
e. none of the above.

11) Assume that the market demand for burritos in Boulder is perfectly inelastic and equal to 1000 units. If a tax, nominally paid by suppliers, increases the price of burritos from $4.50 to $5.00, then
a. the consumer surplus lost is $500.
b. there is a deadweight loss of $0, in this case.
c. the deadweight loss is $250.
d. the producer surplus lost is $250.
e. a. and b. are correct.

12) The difference between "shortage" and "scarcity" is that
a. shortage is eliminated by raising price, but there is always scarcity.
b. shortages result from price floors, but scarcity results from an inefficient production system.
c. shortage means that we cannot have all we want at a zero price; scarcity means that we cannot have all we want at any price. d. none of the above: scarcity and shortage are the same.

13) If an increase in the supply of good A increases the demand for good B
a. good A is a substitute for B, but B is a complement to A.
b. the elasticity of supply for good A is greater than 1.
c. goods A and B must be complements.
d. goods A and B must be substitutes.

14) Shannon's income has just risen from $900 per week to $1,000 per week. As a result, she decides to increase the number of movies she attends each week by 5 percent. Her demand for movies is
a. represented by a horizontal line.
b. represented by a vertical line.
c. income elastic.
d. income inelastic.

15) The short-run result of an earthquake on the housing market is
a. to reduce the short-run supply, raise rents and reduce the equilibrium quantity.
b. to reduce the short-run supply, reduce rents and increase the equilibrium quantity.
c. to reduce housing demand, reduce rents, and reduce the equilibrium quantity.
d. to reduce housing demand, raise rents, and increase the equilibrium quantity.

16) If coffee is substitute for tea, sugar is a complement to tea, and sugar is an inferior good, which of the following will decrease the demand for sugar?
a. An increase in the price of sugar.
b. A decrease in the price of tea.
c. An increase in income.
d. Both a. and c.

17) A variation in the price of compact discs from $15 to $9 changes the demand for compact discs players from 1500 units to 2500 units. Then, the cross-price elasticity is ____ and the goods are ______.
a. 1; complements.
b. -2; substitutes.
c. -1; complements.
d. 0; not related.

18) Which of the following will not shift the supply curve for video cameras?
a. A new technology allows video cameras to be produced in half the time.
b. "America's funniest home-videos" gives out more prizes and people want to make more video films.
c. The government subsidizes video camera production so that US firms can compete with the Japanese producers (thus reducing US producer's cost).
d. The price of video camera lenses decreases.

19) The FDA reports that eating pizza triples the risk of a heart attack. At the same time, the price of flour (a main ingredient in pizza) falls. What happens in the pizza market?
a. Both changes offset each other and nothing happens.
b. Both curves shift, price increases and quantity decreases.
c. There are movements along the demand and supply curve and the effect on the equilibrium is uncertain.
d. Both curves shift, price decreases and the effect on quantity is uncertain without more information.
e. Both curves shift, quantity decreases and the effect on price is uncertain without more information.

20) A public good is not provided efficiently by the market because
a. private companies do not have the technology to produce public goods.
b. demand for public goods is too low.
c. there is a free-rider problem due to non-excludability.
d. public goods are rival in consumption.

21) If the price elasticity of demand for Moe's bagels is 2.5, then
a. demand is perfectly elastic.
b. demand is inelastic.
c. an increase in Moe's bagel prices will leave Moe's total revenue unchanged.
d. a decrease in Moe's bagel prices will result in a higher revenue for Moe.
e. an increase in Moe's bagel prices will result in a higher revenue for Moe.

22) If Moe's Bagels were be only bagel shop in town instead of one among many, the price elasticity of demand for Moe's bagels would be:
a. infinite.
b. zero.
c. lower than in a situation with many competitors.
d. higher than in a situation with many competitors.
e. We can't compare the elasticities in these two situations.

23) If the production of a good generates a negative externality, then in the absence of government intervention the good will be:
a. underproduced .
b. produced in the efficient amount.
c. overproduced.
d. not produced at all.

24) The Water-Diamonds Paradox is resolved when we note that
a. diamonds have a large total value and a small marginal value, while water has a large total value and a small marginal value.
b. diamonds have a small total value and a large marginal value, while water has a large total value and a small marginal value.
c. diamonds have a large total value and a small marginal value, while water has a small total value and a large marginal value.
d. diamonds have a small total value and a large marginal value, while water has a small total value and a large marginal value.
e. none of the above.

25) Tradable emissions rights were argued in class (and in the Course Guide) to:
a. allow high cost-of-clean-up companies to buy rights to pollute and continue operating as before.
b. allow for economic growth--new firms must buy rights from existing firms.
c. be efficient, since firms that are best at clean-up are the ones doing it.
d. result in far less cost for a given environmental quality.
e. all of the above were argued in class or in the handout.

ANSWERS:
1) b
2) d
3) a
4) c
5) d
6) a
7) b
8) e
9) a
10) b
11) e
12) a
13) c
14) d
15) a
16) c
17) c
18) b
19) d
20) c
21) d
22) c
23) c
24) b
25) e

Spring, 1998,Principles of Microeconomics
Phil Graves
U. of Colorado,EC2010
Second Midterm, V1

Directions: There is one best answer to each question, after reading all answers; remember that a multiple choice question is just a series of T-F questions in which one of the responses is true.

1) A firm is deciding whether to produce or shut down in the short run. Its total costs are $15,000 of which $5,000 are the total fixed costs of production. The firm should produce in the short run as long as its total revenues are at least
a. $0
b. $15,000.
c. $10,000.
d. $5,000.

2) If a firm is making zero economic profits, then the firm
a. will exit the market in the long run.
b. is making a loss.
c. will increase output.
d. is making revenue equal to the opportunity cost of the inputs it uses.

3) The inefficiency from monopoly results because
a. monopolists restrict output below the level at which Marginal Revenue is equal to Marginal Cost for the firm.
b. there is no competition to force down cost.
c. high monopoly prices are not equitable.
d. monopolists underproduce relative to the ideal, at which society's Marginal Cost is equal to Marginal Benefit.

4) A single-price monopolist sets price
a. where MR=MC.
b. From the demand curve at the quantity for which MC=MR.
c. Where supply=demand.
d. Where MR=demand.

5) As firms enter a perfect competitive industry that is profitable in the short-run, during the transition from the short run to the long run, the economic profit of each firm in the industry:
a. decreases and the price falls.
b. decreases and the price rises.
c. increases and the price falls.
d. increases and the price rises.

6) In a perfectly competitive industry, a permanent demand increase results in a higher price,
a. economic loss and entry.
b. economic loss and exit.
c. profit and entry.
d. profit and exit.

7) A major advantage of a corporation over other types of firms is:
a. limited liability of the owners.
b. better access to markets for financial capital.
c. a corporation is not dissolved when an owner dies.
d. all of the above are advantages of corporations.

8) Marginal revenue equals the change in total:
a. profit as output expands slightly.
b. output from hiring an additional worker.
c. revenue from selling an additional unit of output.
d. tax rates when tax revenue increases a bit.

9) A firm's average variable cost is $60, its total fixed cost is $3,000, and its output is 600 units. Its average total cost must be:
a. less than $58.
b. between $58 and $62.
c. between $62 and $64.
d. more than $64.

10) Which of the following is the best example of price discrimination:
a. When a landlord can choose tenants on the basis of race or gender because rent control creates a housing shortage.
b. When citizens of a nation boycott the imports of another nation.
c. When citizens of a nation boycott the commodities produced by a specific company.
d. When a producer provides discount coupons in the advertisement section of the local newspaper.
e. When certain goods are rationed during war time because of the reduced availability of resources for domestic production.

11) Suppose that in the short run, a perfectly competitive firm faces diminishing marginal returns. Assume that minimum AVC is $5 and minimum ATC is $10. Now consider an increase in the price from $6 to $7.
a. To maximize profit, the firm should decrease production in the short run to make the price increase further so that ATC is covered.
b. To maximize profit, the firm should increase production in the short run, and firms in this market are considered healthy in the sense that they are making non- negative profit.
c. The firm should shut down in the short run to minimize loss (i.e., avoid negative economic profit).
d. To maximize profit, the firm should not change the initial level of output.
e. To maximize profit, the firm should increase output, but in the long run, some firms are expected to exit this industry.

12) Suppose a single-price non-discriminating monopolist sells 4 units of output at a price of $5, but must lower the price to $4 to sell 5 units. Assume that the monopolist is initially maximizing profit. What is the marginal revenue of increasing quantity from 4 to 5 units, and would a profit-maximizing monopolist do this?
a. Marginal revenue is $1, which is positive, so the monopolist should definitely lower price to sell the larger quantity.
b. Marginal revenue is $1, but without more information about costs, it is not possible to make a decision about this pricing policy.
c. Marginal revenue is $0, so the monopolist would definitely lower price so that consumers are able to pay less, which will increase social efficiency.
d. Marginal revenue is $0, and since marginal costs must always be positive, the monopolist would not increase her output from 4 to 5.

13) Now suppose that the monopolist in the previous question is a price discriminator, and the purchasers of the first 4 units are unaware of the price cut necessary to sell the additional unit. What is the marginal revenue from selling the 5th unit, and would the profit-maximizing monopolist do this?
a. MR = $4, which is positive, so the monopolist would definitely lower price.
b. MR = $4, and the price discriminator should lower the price and sell one more unit only if the MC of producing one more unit is less than $4.
c. MR = $1, so the monopolist would definitely lower price so that consumers are able to pay less, which will increase social efficiency.
d. MR = $0, but without more information about costs, it is not possible to make a decision about this pricing policy.

14) Which of the following is a true statement?
a. Monopolies are greedier than perfectly competitive firms, which is why a monopolist enjoys economic profit that is greater than zero.
b. OPEC, the group of oil-producing nations in the Middle East, is a good example of a group of perfectly competitive firms.
c. To maximize profit, firms want to produce the level of output where MC is minimized.
d. Perfectly competitive firms are different from monopolistically competitive firms because perfectly competitive firms sell differentiated products.
e. None of the above are true.

15) What does the following formula imply: MC = W / MP_L (where MC = marginal cost, W = wages, MP_L = marginal product of labor)
a. only labor inputs to production are allowed to change
b. the Law of Increasing Marginal Costs implies (and is implied by) the Law of Decreasing Marginal Product
c. the firm is producing optimally
d. a and b
e. all of the above are implied by the formula

16) A firm, which produces a patented, high-tech telecommunications product, maximizes profits and produces the socially optimal quantity. What can you say about this firm?
a. It is a price-taker and sole-producer of the product
b. It is a price-maker who perfectly price discriminates
c. It is a monopolist who receives zero profit
d. The firm type is unknown, and it produces inefficiently
e. none of the above

17) A firm is producing where its marginal costs are at the lowest level. What can one most likely infer from this?
a. there is either lost opportunity for further profits by producing more, or the firm should shut-down if it is competitive and price is at that low level.
b. It is a price-taker who is producing too much.
c. It is a monopolist who is producing the socially optimal quantity.
d. The firm is producing rationally.
e. Any of the above are equally likely inferences.

18) Consider the following production data for the Tickle-Me-Elmo company. What would you, an economic consultant, conclude about this firm?
Current output = 1000 Elmos, MR[at 1000 Elmos] = $3.50
MC[at 1000 Elmos] = $4.00, MC[at 1001 Elmos] = $4.25

a. It is producing too little, and it is producing where marginal costs are falling.
b. It is producing too much, and it is producing where marginal costs are rising.
c. It is producing rationally.
d. Wages are too high.
e. It is a monopolist.

Answer questions 19-21 with the following information for Mary's Donut Shop, a proprietorship in Denver.
All data were taken from a week when a policemens' convention was in Denver.
Cost of supplies = $15,000
Rent = $3,500
Wages paid to Mary's employees = $3,500
Mary's foregone income elsewhere = $3,000
Total Revenues = $50,000

19) What are Mary's total economic profits during this week?
a. $35,000
b. $50,000
c. $22,000
d. $-25,000
e. $25,000

20) What are Mary's implicit costs and explicit costs during this week?
a. Her implicit costs are $6,500 and her explicit costs are $18,500.
b. Her implicit costs are $50,000 and her explicit costs are $25,000.
c. Her implicit costs are $3,500 and her explicit costs are $21,500.
d. Her implicit costs are $3,000 and her explicit costs are $22,000.
e. Her implicit costs are $22,000 and her explicit costs are $3,000.

21) If Mary forgot about the policemen's convention, closed her donut shop and went on vacation, what is the opportunity cost of her vacation?
a. $3,000
b. $50,000
c. $25,000
d. $15,000
e. $00.00

22) Suppose that the own price demand elasticity for frisbees is 2.3 (remember that we ignore the negative). If the monopolistic firm of frisbees wants to increase its revenues, what should it do?
a. simply increase the price
b. increase the quantity of output, thus forcing the price to decrease a bit
c. decrease output, thus forcing the price to increase substantially
d. do anything: with an elasticity of 2.3, revenue will increase regardless of whether price is raised or lowered
e. none of the above

23) Assume that the Law of Diminishing Marginal Product applies at the current output level of a perfectly competitive firm. The price is $20 and, at the current output level, marginal cost is $16 and average cost (total cost divided by output, or "cost per unit") is $20. To maximize profits the firm should:
a. produce the current output level, since average revenue (price) = average cost.
b. produce more since marginal revenue exceeds marginal cost at current output.
c. produce less since marginal revenue is always below average revenue.
d. any of the above is possible, without further information.

24) A firm operating in a perfectly competitive industry:
a. always operates in the elastic range of the market demand curve.
b. always tries to minimize marginal cost in order to maximize profit.
c. confronts a demand curve where price is larger than marginal revenue.
d. has considerable influence over the market price level.
e. none of the above.

25) A member of a cartel (e.g. OPEC) would be most likely to increase its profits by:
a. undercutting the prices of other cartel members to sell more, as long as it did not get caught.
b. setting the price above that of other cartel members.
c. insisting that the cartel continually raise the price it charges.
d. all of the above are equally likely methods of increasing profits.
 

ANSWERS:
1) c
2) d
3) d
4) b
5) a
6) c (assumes initial LR equilibrium, should have said that)
7) d
8) c
9) d (65, of course, is more than 64)
10) d
11) e
12) d
13) b
14) e
15) b or d  (The wording is poor...other things *are* held constant, but this line of reasoning applies to all variable inputs)
16) b
17) a  (actually this is a bad question...a monopolist *could* have MR = MC at the latter's minimum)
18) b  (although, given the specific name--and probable patent--I'm sympathetic to e; didn't need the data for that, though.
19) e
20) d
21) c or a  (it's what she gave up, but that depends on whether that is the "usual" $3K or the $25K--$3K is better)
22) b
23) b
24) e
25) a

Spring, 1998,Principles of Microeconomics
Phil Graves
U. of Colorado,EC2010
Final Exam, V1

Directions: There is one best answer to each question, after reading all answers; remember that a multiple choice question is just a series of T-F questions in which one of the responses is true.

1) Using historical data, you are able to determine that in 1864 the consumption per capita of potatoes in country A increased a 20% as income per capita decreased a 10%. Therefore, in that country and year, the income elasticity for potatoes was _____, and so potatoes were consider _____ good.
a. -0.5; inferior.
b. -0.5; normal.
c. -2; inferior.
d. -2; substitute.

2) Which of the following will likely happen as a result of terrorist attacks on tourists in Egypt?
a. It will decrease the price of hotel rooms in Spain, Italy, Greece and other vacation places.
b. The quantity supplied of hotel rooms in Egypt will decrease.
c. The equilibrium quantity of hotel rooms in Egypt will increase, because of the price reductions made necessary as a result of the terrorist attacks.
d. The wage of tour guides in Egypt will increase in the short run.
e. All of the above are likely to happen.

3) The demand for labor by a firm would decrease if
a. The wage rate increases.
b. The wage rate decreases.
c. The price of the firm's output falls.
d. The productivity of labor falls.
e. Both c. and d. would cause a decrease in the firm demand for labor.

4) The more perfectly a monopoly can price discriminate,
a. The lower its output, and the lower its profits.
b. The higher its output and higher its profits.
c. There is no change in output or profits.
d. None of the above.

5) Farmland can be used to produce either wheat or rye. If the market demand for wheat increases, then the
a. Demand for rye will decrease.
b. Supply of rye will decrease.
c. Demand for rye will increase.
d. Supply of rye will increase.

6) In the short run, a monopolist with a loss of $100, Fixed Costs of $110, Marginal Revenue of $20 and Marginal Cost of $15, should:
a. Shut down.
b. Expand output and cut price.
c. Expand output and increase price.
d. Cut output and price.
e. None of the above.

7) Suppose you are the owner of a firm that uses hazardous inputs (like toxic chemicals) and dumps waste into a river harming a distant city. If you behave as a rational profit-maximizer, then (HINT: this is a more difficult problem than most; reflect on it):
a. You will consider society's marginal cost of dumping waste into the river when deciding your level of production.
b. You will offer higher wages to hire workers.
c. You will lower the price of your product to compensate society for dumping waste.
d. You will generate the socially optimal amount of the product if you are a perfectly- price-discriminating monopolist.
e. None of the above.

8) Suppose you are the manager of a company in a perfect competitive market and your accountant informs you that the accounting profits are negative. Then (again, this is a difficult question--reflect on it a bit):
a. You should not shut down since accounting costs are always bigger than true economic costs.
b. Your true economic profits may still be positive so you may wish to continue producing.
c. You should always shut down in this case, regardless of whether you are a corporation or a sole proprietorship.
d. You should produce an output greater than that at which the price is equal to Marginal Cost, in this case, to maximize profits.

9) Which of the following would happen in the market for cable TV (a monopoly) if many people were so disgusted with "South Park" that they quit watching TV? (HINT: assume for simplicity a constant--or "flat"--Marginal Cost to the cable company)
a. In equilibrium, the price of cable TV falls and the quantity of viewers decreases too.
b. The average cost for the monopolist decreases.
c. In equilibrium, the price of cable TV goes up and the quantity of viewers increases.
d. New cable TV companies enter the market.
e. The price of movies decreases.

10) Consider a firm that produces a patented product for which a few, fairly poor, substitutes exist. Suppose that the federal government levies an excise tax on the product (a tax per unit sold) which the producer must legally pay. Which of the following is a likely short-run response?
a. The quantity sold will increase, resulting in a lower price.
b. The producer will raise price to consumers by the entire amount of the tax.
c. Consumers will end up paying much of the tax through a higher resulting price.
d. Further inefficiency will result, leading to even greater monopoly dead-weight-loss.
e. c and d are both correct.

11) Consider a homeowner named Mary. Mary is planning on using a floor in her home for a small "Aerobics" business. In order to fund the setup costs (stair steps, exercycles, etc.), she will use her entire savings (which generates 10% interest). Her reasoning on this venture is as follows: "Because I own the house, and already have the necessary funds for the investment, I will be able to create this business at a lower cost than other entrepreneurs: hence, I will have an advantage." What can we say about Mary's logic?
a. She is absolutely right, and will reap positive profits because we always ignore sunk costs.
b. Her logic is flawed because she has ignored the opportunity costs of not using her home for other revenue generating purposes (e.g. rental units), and of the lost interest from savings.
c. Her logic may be sound, but we need more information about the "aerobics" market (competitiveness, etc.)
d. Her logic is flawed because it ignores the fact that other entrepreneurs will always enter the market
e. none of the above.

12) In Boston, the equilibrium price of insulin is $10.00/cc ("cc" = cubic centimeter). The Massachusetts state legislature, most of whose members have diabetes, passed a law creating a price ceiling of $14.50. The result will be:
a. no change in the market because the dead-weight-loss will be off set by the increase in social welfare
b. welfare loss will result because the price distortion changes consumers' optimal behavior
c. the equilibrium price and quantity will remain unchanged because the legal maximum price is not economically binding
d. demand will shift down, hence the price will adjust to the old equilibrium level
e. any of the above are possible.

13) Suppose that there is a strike at Nike shoes. Which of the following effects on the sporting-goods market will likely result in the short-run, and why?
a. the prices and quantities of sporting goods will decline because the reduction in the number of laborers working at Nike will shift the shoe supply back, which raises the shoe price, which lowers the demand for all sports shoe complements
b. the sporting goods equilibrium will remain unchanged because the supply of Nike shoes will remain unchanged; only the labor market changes
c. prices of sporting goods will rise and quantities will remain unchanged because the demand for sports shoes and shoe complements typically have zero elasticity
d. quantities will decrease, but prices will remain fixed because the short-run supplies of Nike shoes and shoe compliments are perfectly flat.
e. each of the above is equally likely to occur.

14) Frank is in the following situation at his current monthly consumption bundle: MU_s x P_r > MU_r x P_s ("s" = spaghetti; "r" = red wine). What should Frank do? (HINT: rearrange the formula to get it in a familiar--and useful--form)
a. work longer hours at his job to raise his marginal utility of both goods.
b. consume more spaghetti and less red wine
c. consume more red wine and less spaghetti
d. consume more of both
e. consume less of both

15) Assume that beans and rice are demand complements. Now, imagine that a severe drought damages 90% of the world rice supply. What will likely occur in the Boulder burrito market?
a. nothing, because the small producer faces a fixed price
b. the price of rice and bean burritos will decline, but the new equilibrium quantity will be unknown
c. the quantity sold of rice and bean burritos will increase, but the new equilibrium price is unknown
d. the price of rice and bean burritos will increase
e. none of the above

16) 19 frisbee firms form a group in order to dominate the market (assume that there are only 19 frisbee firms in existence). What can we say about the likely outcome in the short-run?
a. they will be a cartel which will necessarily produce the socially optimal quantity
b. they will be competitive, and face a perfectly elastic market demand
c. they will be a cartel which produces less than the socially optimal quantity, as long as they are not perfectly price discriminating and each member remains loyal to the group
d. they will be a monopoly which competes with other monopoly producers of the same product
e. none of the above

17) Firms A and Firm B produce different products and are both profit-maximizers. Firm A produces less than the socially optimal quantity, yet faces a perfectly flat demand. Firm B produces more than the socially optimal amount, yet faces a downward sloping market demand. What can you say about these firms?
a. Firm A is a monopolist and firm B is a price-taker
b. Firm A is a price-taker and firm B is a typical monopolist
c. Firm A and firm B both produce too little
d. Firm A is likely to have positive externalities in production, while Firm B is likely to be generating negative externalities
e. Firm B is a monopolist and firm A produces too much

18) A positive education externality will, before any intervention, likely imply what?
a. people have too much education: the government will step in order to force the education supply down
b. people have too little education: nothing will be done according to the economics of welfare
c. people have too little education: the government will step in by subsidizing education (e.g. public education)
d. people have exactly the amount of education which maximizes social welfare
e. none of the above

19) Consider two firms, A and B, which produce different products. Suppose that firm A is producing where demand is fairly elastic, and firm B faces a very steep, but not vertical, demand curve. Suppose equal excise (taxes on output) taxes are levied on both goods, which each respective firm legally pays. Holding everything else constant, who will actually pay these taxes?
a. the consumers of product A will pay most of A's tax, while B will pay most of B's tax
b. firm A will pay most of his tax, while consumers of firm B will pay most of B's tax
c. the consumers of product A will pay most A's tax, and firm B will pay all of B's tax
d. the consumers of product A will pay most A's tax, and the consumers of product B will pay most of B's tax.
e. none of the above accurately reflects the incidence of these taxes.

20) Which of the following is the competitive firm's marginal value of labor? ("x" denotes "times" and MC=marginal cost, MR=marginal revenue, P=output price, AVC=average variable cost, and MP_L=marginal product of labor):
a. [MC] x [MR]
b. P x MP_L
c. [MP_L] x [AVC]
d. [AVC] x P
e. all of the above are equivalent

21) Suppose that a firm produces until its marginal costs are equal to its marginal revenues. What can we infer?
a. the firm is either a price-taker or price-maker, and is maximizing profit
b. the firm is either a price-taker or price-maker, and is minimizing costs
c. the firm can only be a price-taker who is maximizing profit
d. the firm can only be a price-maker who is perfectly price discriminating
e. we do not have enough information to make any claims about this firm

22) Suppose and economy has only two sectors (say, computer-related goods and other manufactured goods) and that there are sudden technological advances in the computer sector that greatly increase worker productivity, while productivity is stagnant (unchanged) in the other sector. What happens to wages in the two sectors in the short-run?
a. wages rise in the productive sector and fall in the unproductive sector.
b. wages rise in the productive sector and stay the same in the stagnant sector.
c. wages remain the same in both sectors, since capital will flow between them until profit rates are the same.
d. wages rise in both sectors, as labor moves from the stagnant sector to the productive sector.
e. none of the above.

23) Bernette's Bagels of Laramie Wyoming is contemplating hiring another worker. Bernette knows that the wage is $5.00/hour, expects that the worker will produce 100 bagels in a 10 hour shift, and that the price of a bagel remains at $.60 (i.e. 60 cents). What should Bernette do?
a. hire the worker because the marginal costs of doing so are greater than the marginal benefits
b. do not hire the worker because the marginal costs of doing so will greater than the marginal benefits
c. hire the worker because, for a 10 hour shift, the marginal value of the worker is $50, and the marginal cost of the worker is $60.
d. hire the worker because, for a 10 hour shift, the marginal value of the worker is $60, and the marginal cost of the worker is $50.
e. we do not have enough information do formulate a decision.

24) Consider the following production information about a taco firm. Assuming that it's producing 101 tacos, what can we say about this firm? (Note: "C" denotes "cost" and "R" denotes "revenue" )
C[100 tacos]= $10 C[101 tacos]=$10.09 C[102 tacos]=$10.17
R[100 tacos]=$100 R[101 tacos]=$101 R[102 tacos]=$101.75
a. it is producing optimally
b. it is producing too much (MC > MR)
c. it is producing too little (MR > MC), and in the "crowding" range of MC
d. it is producing too little (MR > MC), and in the "scale" (or increasing marginal product) range of MC
e. it is producing the profit maximizing amount because R = C

25) Why does the average fixed cost curve have a downward slope (i.e. it never rises)?
a. because all costs fall indefinitely (ATC = Q / C_Fixed)
b. because variable costs increase (AVC = C_Var / Q)
c. because short-run fixed costs do not change as quantity increases: (AFC = C_Fixed / Q)
d. because they represent the average opportunity to consumers, who have a downward sloping demand curve
e. none of the above

26) If consumers become willing and able to buy more of a good at each possible price, the:
a. Demand curve shifts up and to the right.
b. Quantity demanded rises because the market price falls.
c. Prices of complementary goods fall.
d. Determinants of supply quickly change in favorable ways.
e. Economy slumps into a recession.

27) A perfectly competitive firm would be most likely to enter the industry if the market price were:
a. Less than average variable cost.
b. Greater than average variable cost but less than average total cost.
c. Equal to average total cost.
d. Higher than average total cost.
e. Just higher than average fixed cost.

28) Which of the following conditions would be the least likely to generate excessive economic profits for a firm?
a. The firm produces a good that is unique.
b. The firm operates in a large metropolitan area with a large population.
c. The firm is the only one of its kind in a small town.
d. The firm has high fixed costs (i.e., high capital outlay for startup) relative to other industries.
e. The firm holds many patents for popular goods.

29) You are a college student, and you consume only two commodities to maximize your utility: tuna and cola. Assume that you spend all of your income. Initially, the price of a can of tuna is $1, and your marginal utility from another can of tuna is 100; the price of a can of cola is $0.50, and the marginal utility from another can of cola is 50. Now suppose that environmental laws require the use of more expensive fishing methods. How will your new equilibrium consumption of tuna and cola change from the original levels to maximize utility?
a. It is impossible to determine without more information about total utility from tuna and cola.
b. You will consume less of both commodities.
c. You will consume more of both commodities.
d. You will consume more tuna and less cola.
e. You will consume less tuna and more cola.

30) Suppose U.S. consumers are the primary purchasers of automobiles produced by Japan and that the demand for imported cars in the U.S. market is elastic. If technological advances allow Japanese auto manufacturers to increase production by 25%, these exporters would experience:
a. No change in their total revenue from auto exports.
b. An increase in total revenue even though the price of cars would fall.
c. An decline in total revenue even though they sold a larger quantity.
d. Losses which would cause them to reduce the number of cars sold next year.
e. An increase in total revenue because the price for imported cars would go up.

31) Assume the law of diminishing marginal returns holds. A perfectly competitive firm is currently producing a level of output with a marginal cost of $24, and minimum average total cost is $15. The market price for the the commodity produced by the firm is $20/unit. To maximize profit, the firm should:
a. Decrease production, and economic profit will be positive in the short run.
b. Decrease production, but it's not possible to conclude whether economic profits will be positive, negative, or zero.
c. Decrease production, but economic profit will be negative in the short run, which means some firms in the industry will exit in the long run.
d. Increase production, and economic profit will be positive in the short run.
e. Increase production, but economic profit will be negative in the short run, which means some firms in the industry will exit in the long run.

32) (Use the following table to answer this question)
Q, P, TR, TC
1, $15, $15, $3
2, $14, $28, $4
3, $13, $39, $7
4, $12, $48, $12
5, $11, $55, $18
6, $10, $60, $28

This monopolist maximizes profit by producing an output of __ and charging a price of __:
a. 6 units; $9.
b. 6 units; $10.
c. 5 units; $11.
d. 5 units; $7.
e. 2 units; $14.

33) A country's production possibilities frontier shows
a. the combination of goods that is best for society.
b. output combinations which fully employ society's resources.
c. demands for different resources.
d. monetary prices and quantities.

34) The "Law of Demand" states that if a good's price rises, its quantity demanded will fall
a. no matter what happens to other variables .
b. if all else is assumed constant.
c. because its demand curve shrinks.
d. when substitutes become more costly.

35) The statement "The US government should subsidize farmers to ensure the long run supply of agricultural products." is:
a. a normative statement.
b. a positive statement.
c. a negative statement.
d. obviously true because without subsidies farmers would go bankrupt and there would not be enough supply in the long run.
e. is ambiguous because we don't know how subsidies affect the long run supply.

36) Which of the following will not shift the demand curve for tennis shoes?
a. The price of the leather that the shoes are made of falls.
b. It is discovered that all tennis shoe producers employ child labor and consumers boycott the firms.
c. A major tax cut raises people's income.
d. There is an alien invasion and the aliens all require shoes because they came barefoot.

37) An increase in the price of Kelloggs cereal will, holding all other things constant,
a. increase the demand for all brands of cereal.
b. increase the quantity demanded of Kelloggs cereal and decrease the demand for General Mills cereal.
c. decrease the quantity demanded for Kelloggs cereal and increase the demand for General Mills cereal.
d. decrease the demand for Kelloggs cereal and leave the market for General Mills cereal unaffected.

38) A new study finds that drinking grapefruit juice instead of orange juice promotes weight loss. At the same time, a hurricane destroys one third of the grapefruit trees in the US.
What happens in the market for grapefruit juice?
a. Both curves shift, price increases and quantity decreases.
b. Both changes offset each other and nothing happens.
c. Both curves shift, price increases and the effect on quantity is uncertain without more information.
d. Both curves shift, quantity increases and the effect on price is uncertain without more information.
e. There are movements along the demand and supply curves and the effect on the
equilibrium is uncertain.

39) An effective price floor
a. will cause a surplus because quantity demanded is lower than quantity supplied.
b. will cause a shortage because quantity demanded exceeds quantity supplied.
c. will cause a surplus because quantity demanded is higher than quantity supplied.
d. will cause a shortage because quantity demanded is lower than quantity supplied.

40) A public good is not provided efficiently by the market because
a. private companies do not have the technology to produce public goods.
b. demand for public goods is too low.
c. there is a free-rider problem due to non-excludability.
d. public goods are rival in consumption.

41) If the demand curve for a good is a vertical line then
a. demand is perfectly elastic and the price elasticity of demand is infinite.
b. demand is perfectly inelastic and the price elasticity of demand is equal to zero.
c. demand is inelastic and the price elasticity of demand is between 1 and infinity.
d. demand is elastic but we cannot say anything about the price elasticity of demand.

42) A deadweight loss
a. is the loss in profits to producers if demand decreases.
b. is the loss in social surplus.
c. tends to get bigger the more efficient markets operate.
d. tends to arise if government imposes a tax in a market that operated efficiently before the tax.
e. b and d.

43) A competitive firm will produce in the short run as long as price is above:
a. average fixed cost
b. average variable cost
c. average total cost
d. marginal cost
e. marginal revenue

44) A monopoly that is unable to price discriminate is:
a. inefficient because it produces where marginal benefit is greater than marginal cost.
b. inefficient because it produces too much in order to increase its profit.
c. efficient because it produces where marginal benefit is equal to marginal cost.
d. efficient because it produces the maximum amount possible at the lowest cost.

45) A firm spends $1500 on R&D to invent a new battery. To install the new production technology costs $4000. Once everything is set up, it costs $1 to produce each battery. What is the marginal cost if 1000 batteries are produced?
a. $1
b. $5.50
c. $4
d. $1.50
e. none of the above.

46) Which of the following is true:
a. Marginal cost always equals average total cost at the minimum of average total cost.
b. When output is zero, total cost equals total fixed cost.
c. The average fixed cost curve is always downward sloping.
d. The marginal cost curve is upward sloping if marginal product is diminishing.
e. All of the above.

47) Which of the following is least likely to increase the demand for autoworkers (shift the labor demand curve to the right)?
a. the invention of a new technology that makes every autoworker more productive.
b. a large increase in peoples' (non-autoworkers) income.
c. a successful campaign encouraging the use public transportation instead of cars.
d. a successful advertising campaign by car manufacturers.
e. all of the above.

48) The demand for a factor of production by a competitive firm is
a. the value of its marginal product.
b. marginal revenue.
c. the total product of the factor.
d. the average product of the factor.
e. price.

49) Diminishing marginal product of labor causes
a. MC to increase.
b. the value of the marginal product of labor to decline.
c. the labor demand curve to slope downward.
d. all of the above.
e. none of the above.

50) Your parents have just finished paying off the mortgage of their home, a home they bought a long time ago for $36,000. Their monthly payments used to be $600. Their home is currently worth $360,000. If they can earn 10 percent on asset investments, their current monthly cost of living in their home is:
a. only $0, since it is paid for.
b. no more than the $600 that they used to pay each month.
c. $300, the foregone interest on their original investment of $36,000.
d. $3,000, the foregone interest on its current value.
e. just $60 (10% of their old monthly payment).
 

ANSWERS:
1) c
2) b
3) e
4) b
5) b
6) b
7) e  (overproduce from society's standpoint since private MC < social MC, and they pay attention to private costs)
8) c  (tax law--write-offs, etc.--complicate things, though)
9) a  (may be some "real-world" contract stipulations working differently, but other answers clearly wrong)
10) e
11) b
12) c
13) a
14) b
15) d
16) c
17) d
18) c
19) b
20) b
21) a
22) d
23) d
24) d
25) c
26) a
27) d
28) b
29) e
30) b
31) a
32) c
33) b
34) b
35) a
36) a
37) c
38) c
39) a
40) c
41) b
42) e
43) b
44) a
45) a
46) e
47) c
48) a
49) d
50) d