Price Theory and Applications. Practice Questions

Econ 310 Practice Questions: Chaps. 1-4, 7-14 Computers Figure 1-1 50 40 30 25 0 0 •A •B • •C D •E 75 80 85 100 Apples 1. In the production possibilities frontier in Figure 1-1, the opportunity cost of producing 5 more apples and moving from point B to point C is A) 25 computers. B) 15 computers. C) 5 computers. D) Unable to determine without knowing input costs. 2. In the production possibilities frontier in Figure 1-1, the opportunity cost of producing 10 more computers and moving from point B to point A is A) 15 apples. B) 10 apples. C) 5 apples. D) The economy cannot move to point A. 3. "If, at the initial price, there is excess demand, the price will rise. The increase in price has two consequences: It shifts the demand curve down since people buy less at a higher price, and it shifts the supply curve up because producers find it profitable to produce more output at a higher price. Price will continue to adjust until there is no excess demand." Which of the following is true about this statement? A) The quotation is correct. B) The quotation confuses excess supply with excess demand. C) The quotation confuses movements along curves with shifts of curves. D) The quotation confuses short-run adjustments with long-run adjustments. 4. An elasticity of -0.2 indicates that a 1 percent increase in price leads to a A) 2 percent decrease in quantity demanded. B) 20 percent decrease in quantity demanded. C) 0.2 percent decrease in quantity demanded. D) 0.2 percent increase in quantity demanded. 5. If price changes from $4.75 to $5.25 and quantity demanded changes from 1025 to 975 units, then the price elasticity of demand, using the arc elasticity formula, is A) -4.0. B) -0.5. C) -0.25 D) -2.2. 6. At every point on an individual's demand curve, the height of the demand curve measures A) the quantity demanded of the good. B) the marginal benefit of the good to the consumer. C) the real income of the consumer. D) All of the above. 7. A) B) C) D) If a consumer's marginal utility were 10 utils per unit of meat and 5 utils per unit of potatoes, the consumer should purchase more potatoes and less meat. the consumer would be in equilibrium if the per-unit price of meat were twice the price of potatoes. the consumer would be in equilibrium if the price per unit of meat were 1/2 the price of potatoes. the consumer's total utility could be increased by consuming more meat and less potatoes until the marginal utilities of the two goods were equal. 8. Consider a budget line drawn with apples on the vertical axis and oranges on the horizontal axis. The consumer's income is $100, the price of apples is $5, and the price of oranges is $10. Suppose the consumer's income falls to $75.00, but the prices of apples and oranges remain unchanged. The change in income produces a A) parallel shift inward of the indifference curves. B) new budget line which is steeper than the original one. C) parallel shift inward of the budget line. D) new budget line which is flatter than the original one. 9. A) B) C) D) The substitution effect is the change in consumption due to a change in relative prices. a change in income. a change in utility. a change in preferences. 10. If the price-consumption curve is horizontal, then demand elasticity A) may be between 0 and -0.5. B) must be between 0 and -0.5. C) is greater than -1. D) equals -1. 11. Assume that as the price of good X rises, the demand for good Z shifts outward. On the basis of this information we can conclude that A) good Z is inferior. B) goods X and Z are complements. C) goods X and Z are substitutes. D) the substitution effect for good X is larger than the substitution effect for good Z. 12. The slope of the total product curve measures A) the marginal rate of technical substitution. B) marginal product. C) average product. D) the maximum output. Figure 7-1 Output Total Product curve O A B C D E Quantity of Labor 13. Between points C and D in Figure 7-1, A) marginal product reaches a maximum. B) average product is rising and reaches a maximum at D. C) total product declines. D) marginal product is falling. 14. A carpenter hammers nails each day at work. The average number of nails hammered over the first three hours is 50, and the marginal product of the fourth and fifth hours of work are 40 and 20 nails, respectively. The total output after five hours work is A) 150 nails. B) 110 nails. C) 210 nails. D) 60 nails. 15. If a firm doubles its usage of labor, and output doubles, the product function is said to exhibit A) increasing returns to scale. B) decreasing returns to scale. C) constant returns to scale. D) None of the above. 16. If fixed costs are $10,000 and variable costs are constant at $1.00 per unit over the relevant range of output, what will the average total cost be when 10,000 units are produced? A) $0.20 B) $2.00 C) $5.00 D) $1.00 Figure 8-1 Costs F C S R A B G T Output 17. Point R in Figure 8-1 identifies the point A) of inflection. B) where AVC reaches a minimum. C) where MC reaches a minimum. D) where diminishing marginal returns set in. 18. If the marginal product of the variable input rises and then falls, the MC curve will A) rise and then fall. B) fall and then rise. C) fall, and continue falling. D) not depend upon the path of the marginal product of the variable input. 19. A firm is employing 100 units of labor and 50 units of capital to produce 200 widgets. Labor costs $10 per unit and capital $5 per unit. For the quantities of inputs employed, MPL = 2 widgets and MPK = 5 widgets. In this situation, the firm A) is producing the maximum output possible given the prices and relative productivities of the inputs. B) could increase its output at no extra cost by using more labor and less capital. C) could increase its output at no extra cost by using more capital and less labor. D) should use more of both inputs in equal proportions. Figure 9.2 $/unit MC $10 R E F G W H T D O A B AVC Demand Z S AC V C K 20. A) B) C) D) At the profit-maximizing level of output in Figure 9-2, when price is $10 the firm is earning economic profit equal to area RFHS. the firm is earning economic profit equal to area RGZW. the firm is earning economic profit equal to area RGCO. the firm is earning negative economic profit (area not marked). 21. A) B) C) D) Zero economic profit occurs when price equals marginal cost. a firm has existed for long enough to make a normal return. price equals average cost. a firm operates at the minimum of its long-run marginal cost curve. Output 22. In a constant-cost competitive industry, if price rises above its long-run equilibrium level, which of the following will not occur as the industry adjusts to a new long-run equilibrium? A) New firms will enter the industry. B) Economic profit will be eliminated. C) Input prices will rise. D) Existing firms will first increase production as price rises and then reduce production as price falls. Figure 10-1 Price of yams S L E P3 P2 K F J I P1 H G D M A B C Quantity of yams 23. In Figure 10-1, the change in producer surplus due to a price ceiling set at P1 is A) -JFHI. B) EFJ – P2JIP1. C) P2FIP1. D) P1IM. 24. A) B) C) D) The marginal revenue curve of a monopolist is unrelated to its demand curve. is always downward-sloping. is horizontal. coincides with the demand curve. 25. A) B) C) D) If the monopolist is operating on the elastic portion of its demand curve, then an increase in price will increase total revenues. an increase in price will decrease total revenues. marginal revenue is negative. an increase in price will leave total revenue unchanged. Figure 11-2 Price I F A G B H AC Demand MR O C E J 26. A) B) C) D) The monopolist in Figure 11-2 will produce output OC. OE. OJ. Not shown. 27. A) B) C) D) With perfect price discrimination, each customer pays the same price but receives a different quantity. each customer pays a different price based on willingness to pay. efficiency loss is maximized. price is everywhere above marginal revenue and above marginal cost. Quantity Figure 12-1 Price P3 A P2 B P1 C MC Demand MR O 28. A) B) C) D) Q1 Q2 Quantity In Figure 12-1, if the monopolist perfectly price discriminates, deadweight loss will be P3AP2. P3CP1. ABC. zero. 29. In a Cournot duopoly, the industry output will equal A) half of the output of perfect competition. B) 1/3 of the output of perfect competition. C) 2/3 of the output of perfect competition. D) twice the output of perfect competition. 30. The key element in the Cournot model is that each firm determines its A) price based on the assumption that the other firms will not change its price. B) price based on the assumption that the other firm will not change its output. C) output based on the assumption that the other firm will not change its output. D) output based on the assumption that the other firm will not change its price. 31. An ideal cartel will A) set the price higher than the monopoly price. B) set price higher than the competitive price but lower than the monopoly price. C) set price above marginal cost but below average revenue. D) set price equal to the monopoly price. 32. If a cartel member violates the cartel agreement and sells at a price below the cartel price, A) the cartel will collapse. B) the violator will lose money. C) the violator faces a very elastic demand curve for the additional output. D) it is in violation of antitrust law. Figure 14-1 Firm B Low Output High Output 120 Low Output Firm A 100 135 75 60 High Output 125 80 80 33. With reference to the payoff matrix in Figure 14-1, Firm A's dominant strategy is A) low output. B) high output. C) high output if Firm B selects high output and low output if Firm B selects low output. D) neither high nor low output, since the firm does not have a dominant strategy. 34. The prisoners' dilemma illustrates a situation in which A) neither player has a dominant strategy. B) the Nash equilibrium is superior to the dominant strategy equilibrium. C) each oligopolist behaves as if it were a perfectly competitive firm. D) each player pursuing its self-interest generates a collective outcome that is inferior for both. Figure 14-3 Firm A Low Output High Output 20 Low Output Firm B 60 40 30 10 High Output 50 30 40 35. Given the information in Figure 14-3, Firm A will produce a ______ output if Firm B produces a ______ output. A) low; low B) low; high C) high; high D) Either (A) or (C) is correct. Figure 14-4 Firm A Low Output High Output 25 Low Output Firm B 25 5 40 X High Output 15 Y 30 36. If x = 10 and y = 15, then the information in Figure 14-4 implies that the game has A) a Nash equilibrium and a dominant-strategy equilibrium. B) a Nash equilibrium but not a dominant-strategy equilibrium. C) no Nash equilibrium but has a dominant-strategy equilibrium. D) neither a Nash equilibrium nor a dominant-strategy equilibrium. 37. A prisoners' dilemma game is one in which A) only one of two prisoners has a dominant strategy. B) altruistic motives by each player leads to an outcome where all players are worse off than if they cooperate. C) self-interest by each player leads to an outcome where all players are worse off than if they cooperate. D) self-interest by each player leads to an outcome where all players are better off than if they cooperate. 38. A tit-for-tat strategy is one in which A) each player mimics the action taken by the other player in the previous period. B) each player does the opposite of the action taken by the other player in the previous period. C) each player randomly chooses an action. D) one player always plays the same strategy. 39. Assume that Hines Corporation and Lamb Limited each produce a homogeneous product and that the two firms are the only two sellers in the market. The two firms have agreed to a collusive price agreement and expect demand and cost conditions will not change over time. If the pricing game is repeated indefinitely and Hines knows that Lamb is playing a tit-for-tat strategy, then Hines' best strategy is to A) cut price in every period. B) cut price in alternate periods. C) comply with the agreement. D) None of the above. Answer key: 1. C 2. D 3. C 4. C 5. B 6. B 7. B 8. C 9. A 10. D 11. C 12. B 13. D 14. C 15. D 16. B 17. B 18. B 19. C 20. B 21. C 22. C 23. C 24. B 25. B 26. A 27. B 28. D 29. C 30. C 31. D 32. C 33. B 34. D 35. C 36. B 37. C 38. A 39. C