Microeconomics Exam 2019

MICROECONOMICS SECTION I Time - 70 minutes 60 Questions Directions: Each of the questionsor incomplete statementsbelow is followed by five suggestedanswersor completions.Select the one that is best in each case and then fill in the correspondingoval on the answer sheet. 1. The allocation of resourcesin a market economy is describedby which of the following statements? I. The governmentdecideswhich goods will be producedand which consumerswill receive them. II. Buyers and sellers exchangegoods and serviceson a voluntary basis. III. Prices and costshelp producersdecide whether they are producingtoo little or too much of a good. (A) (B) (C) (D) (E) I only II only III only I and III only II and III only (A) There will be a movement to the right along the supply curve. (B) There will be a movement to the right along the demand curve. (C) The supply curve will shift to the right. (D) The supply curve will shift to the left. (E) The demand curve will shift to the right. 3. Which of the following is true of a price floor? (A) The intention of the governmentin creating the price floor is to assistthe producersof the good. (B) To have an impact in the market for the good, the price floor should be set below the existing market price of the good. (C) An effective price floor will increasethe quantity demandedof the good. (D) The price floor would tend to create a shortage of the good in the market. (E) The creation of the price floor would not changethe quantity suppliedof the good if the supply curve were upward-slopingto the right. / x Questions6-7 are basedon the table below, which gives cost information for a perfectly competitive firm. Average Average Marginal Variable Fixed costs costs Quantity costs SUPPlY \ QUANTITY Demand 0 OF TOMATOES 4. On the basisof the graph above, which of the following statementsconcerningchangesin the demandfor and supply of tomatoesis correct? (A) If both the demandand supply increase,the price of tomatoeswill definitely increase. 1 2 3 4 5 6 $100.00 50.00 33.33 25.00 20.00 16.67 $55.00 45 .oo 50.00 55.00 60.00 65.OO $55.00 35.00 60.00 70.00 80.00 90.00 W If both the demandand supply decrease,the quantity of tomatoessold will definitely increase. (0 If the demand decreaseswhile the supply increases,the price of tomatoeswill definitely increase. 03 If the demand decreaseswhile the supply increases,the quantity of tomatoes sold will definitely decrease. (El If the demand increaseswhile the supply decreases,the price of tomatoeswill definitely increase. 6. The averagetotal cost to the firm of producing2 units of output is (A) (B) (C) (D) (E) $ 35.00 $ 85.00 $ 95.00 $100.00 $130.00 7. If the product price is $85; how many units of output must the firm producein order to maximize profits? 5. Which of the following best illustratesthe concept of consumersurplus? (A) A thirsty athlete pays $0.85 for a cold drink when she would have gladly paid $1SO for the drink. (B) An individual who is willing to accept a job at $7.50 per hour is offered $7.00 per hour. (C) An individual pays the sale price of $15.00 for the same shirt that the individual refused to purchaseearlier at $18.00. (D) An individual finds that the price of artichokes,a food she dislikes, has been reducedby 50 percent. (E) A wood-carver has a marginal cost of $5.00 for a unit of output, but sells that unit at $6.00. n 11 n (A) (B) (C) (D) (E) 0 3 4 5 6 8. Which of the following factors can causea firm’s cost curves to shift upward? (A) (B) (C) (D) (E) An increasein wages An increasein the firm’s output An increasein the output price A decreasein the firm’s output A decreasein the price of energy ,Marginal Cost 10. Which of the following statementsis true about a firm that sells its output in a perfectly competitive market? (A) The demandfor its product is a downwardsloping function. The firm will earn zero economic profits in long-run equilibrium. w Advertising is an important tool of the firm. (W The firm will increaseits total economic profits if it chargesa price that is lower than the market price. 03 The marginal revenue the firm receives from selling an additional unit of output will be different from the price at which it sells that unit. w 11. One justification for governmentregulation of a monopoly is that the unregulatedmonopoly (A) earns a normal profit I I 0 10 1 * 151’8 20 QUANTITY 9. The diagram above showsa perfectly competitive firm’s short-runcost curves. If the price of the output increasesfrom $8 to $10, the profitmaximizing firm will (A) continue producing 15 units becauseaverage total cost is at a minimum (B) continue producing 15 units becauseaverage total cost is equal to marginal cost (C) increaseoutput to 20 units becausethis is the output at which price equals average total cost (D) increaseoutput to 18 units becausethis is the output at which price equals marginal cost (E) decreaseoutput to 10 units becausethis is the output at which average variable cost is at a minimum w pays its workers a lower wage than if the market were competitive ((3 has a very elastic demandcurve CD) chargesa price higher than a competitive market price sells too much of the product (E) 12. Which of the following is most likely to shift the demand for aircraft mechanicsto the right? (A) An increasein the demand for air travel @I An increasein the price of a license necessaryfor aircraft mechanics 0 A decreasein the price of a license necessary for aircraft mechanics (D) A decreasein the demandfor air travel (E) A decreasein the marginal productivity of aircraft mechanics 15. All of the following are sourcesof inequality in the distributionof personalincome EXCEPT SUPPlY Marginal Revenue Product NUMBER OF WORKERS 13 The graph above showsthe marginal revenue product curve and supply curve of labor for a firm. The introductionof new managementtechniques dramatically increasesworker productivity. Which of the following changesis most likely to occur? (A) (B) (C) (D) (E) progressiveincome taxes discriminationin employment differences in personalmotivation differences in educationallevel attained differences in abilities 16. An outward shift in the production possibilities curve of an economy can be causedby an increasein (A) (B) (C) (D) (E) unemployment the labor force inflation output demand (A) The supply curve will shift to the left, increasingthe wage rate. (B) The supply curve will shift to the right, increasingemployment. (C) The marginal revenue product curve will shift to the right, increasingthe wage rate. (D) The marginal revenue product curve will shift to the left, reducing employment. (E) Neither the marginal revenue product curve nor the supply curve will shift, but the wage will increaseand employment will fall. 14. If the productionof a good resultsin a positive externality, the governmentmight be able to improve economic efficiency in this market by E 0 FD UNITS OF GOOD X (A) (B) (C) (D) (E) eliminating private production of the good imposing a tax on private producers promoting the export of the surplusoutput initiating antitrust action granting a subsidyto private producers 17 The graph above showsan economy’s production possibilitiesfrontier for the production of two goods, X and Y. Assumethat the economy is currently at point B. The opportunity cost of moving from point B to point C is (A) (B) (C) (D) (E) AH units of good Y HG units of good Y OG units of good Y EF units of good X OF units of good X 18. If the demand for potatoesincreaseswhenever a person’s income increases,then potatoesare an example of (A) (B) (C) (D) (E) an inferior good a free good a Giffen good a normal good a public good 19 The American Heart Associationhasjust issued a report warning consumersabout the negative health effects of eating beef. Which of the following changesin the beef market is most likely to occur as a result? (A) The supply curve will shift to the left, increasingthe price of beef. The demand curve will shift to the left, (W decreasingthe price of beef. (0 The demandcurve will shift to the right, increasingthe price of beef. CD) Neither the supply nor demandcurve will shift; only quantity will increaseas price decreases. W Neither the supply nor demandcurve will shift; only quantity will decreaseas price increases. 20. Which of the following is most likely to increase the supply of soldiersfor an all-volunteer army? (A) A decreasein the salariespaid to soldiers (B) A decreasein the average wage rate in civilian employment (C) A reduction in college tuition benefits provided to soldiers (D) The imposition of new restrictionson women in the military (E) An increasein the required length of service 21. If the increasein the price of one good decreases the demand for another,then the two goods are (A) (B) (C) (D) (E) inferior goods luxury goods normal goods substitutegoods complementarygoods 22 Which of the following is true about a firm’s average variable cost? (A) It will rise if marginal cost is less than average variable cost. (B) It will never equal the firm’s marginal cost. (C) It will decline,when the firm’s marginal product declines. (D) It will be negative if marginal revenue declines. (E) It will equal average total cost when fixed costsare zero. Questions23-24 refer to the graph below showing cost curves for a perfectly competitive firm. MarginalCost $16 verageTotal cost t i i i i i i i i i i i i 0 I ! 2 I! 3 4 \ 5 1 ! 6 7 ! 8 ! ! ! ! 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 NUMBER OF WIDGETS (in thousands) 23. At a market price of $6, the profit-maximizing rate of output will result in (A) (B) (C) (D) (E) economic profits economic losses normal profits profits that are less than normal profits that are greater than normal 24. If the market price is $10, how many widgets shouldthis profit-maximizing firm produce? (A) 3,000 (B) 6,000 (C) 12,000 (D) 16,000 (E) 21,000 25. A competitive firm producesa product using labor and plastic. The firm is initially in equilibrium. If the cost of plastic suddenlyincreases, which of the following will occur? (A) The demand curve for the product will shift to the left. (B) The firm’s demand curve for plastic will shift to the left. (C) The firm will increasethe number of units offered for sale. (D) The firm will definitely go out of business, since competitive firms earn zero economic profits in equilibrium. (E) The firm’s marginal costswill increaseat each level of output. 27. Which of the following are characteristicsof a perfectly competitive industry? I. New firms can enter the industry easily. II. There is no product differentiation. III. The industry’s demand curve is perfectly elastic. IV. The supply curve of an individual firm in the industry is perfectly elastic. (4 I and II only 09 I and III only (0 II and IV only (D) I, II, and IV only (El I, III, and IV only 28. The profit-maximizing output level producedby an unregulatedmonopoly is (A) the socially optimal output level, since the I 91 92 OUTPUT 26. Given the cost and demand schedulesdepicted above, if the firm increasedoutput from qi to q2, it would 6% earn a normal profit m experience an increasein profits cc>experience a decline in profits CD) increaserevenuesbut not costs (E) increasecostsbut not revenues firm’s marginal revenue equalsits marginal cost greater than the socially optimal level, since the firm’s marginal cost exceedsits marginal revenue (C) greater than the socially optimal level, since the firm makes economic profits 03 less than the socially optimal level, since the price paid by consumersexceedsthe firm’s marginal cost less than the socially optimal level, since the 03 price of the product is less than the firm’s marginal revenue 29. The wage rate is $10 per hour and the last worker hired by the fimr increasedoutput by 100 units. Computersrent for $100 per hour and the last computer rented by the firm increasedoutput by 2,000 units. To minimize coststhe firm should (A) hire more workers and rent more computers becausethe marginal revenue productsof both workers and computersare greater than their respectiveprices (B) hire more workers and reduce the number of computersrented becauseworkers are cheaper than computers (C) lay off workers and rent more computers becausecomputersproduce more output per dollar of additional expenditure (D) lay off workers and rent more computers becausecomputersproduce more output (E) keep the same number of workers and computersbecausethe marginal revenue productsof both workers and computers are positive 31. The opportunity cost of owning a businessis equal to which of the following? I. The economic profits earned in the business II. The accountingprofits earned in the business III. The profits that could be earned in another businessusing the same amount of resources (A) (B) (C) (D) (E) I only II only III only I and III only I, II, and III SUPPlY 30. Imposing taxes that increaseas a firm’s pollution increasesis often recommendedby economists as a means to reduce pollution. The reasonfor this recommendationis that suchtaxes would likely (A) eliminate pollution completely (B) encouragefirms to use the most efficient method to reduce pollution cc>increasethe government’s revenues m encouragefirms to increaseproduction 03 be paid out of firms’ profits and not paid for by higher consumerprices Demand QUANTITY OF COMPUTERS 32. The graph above showsthe supply and demand curves for a particular brand of computers.In 1988, 10,000 computerswere sold for $1,000 each, but in 1989, 9,000 computerswere sold for $1,000 each. Which of the following changesin the supply and demand curves could most likely have causedthis change? (A) (B) (C) (D) (E) Demand Curve Supply Curve Shift right Shift right No change Shift left Shift left Shift right Shift left Shift left Shift left No change 33. If the minimum wage for teen-agersincreasedto a rate higher than their market equilibrium wage, what would be the effect on their wage and employment? (A) (B) (C) (D) (E) Wage Employment Increase Increase Increase Decrease Decrease No effect Increase Decrease Increase Decrease 37. Which of the following is true if a perfectly competitive market is in long-run equilibrium? (4 Market price will eventually decrease. (W New firms will enter the industry. (Cl Marginal revenue is equal to average total cost. Price is not equal to marginal revenue. CD) Average variable costsare decreasing. m UNITS OF OUTPUT 34. If a store raisesits prices by 20 percent and its total revenue increasesby 10 percent, the demand it faces in this price range must be (A) (B) (C) (D) (E) inelastic elastic unit elastic perfectly elastic perfectly inelastic 35. In which of the following market structuresis it sometimesassumedthat rival firms will match price decreasesbut not match price increases? (A) (B) (C) (D) (E) Unitsof Capital 1 2 3 Perfect competition Oligopoly Natural monopoly Monopolistic competition Monopoly 36. A farmer producespeppersin a perfectly competitive market. If the price falls, in the short run the farmer should (A) increaseproductionuntil the new price equals average revenue (B) increaseproductionto offset the fall in price (C) discontinueproduction if the new price is less than marginal revenue (D) continue to produce only if the new price covers average fixed costs (E) continue to produce only if the new price covers average variable costs 38. The table above showsthe various units of output that can be producedwith different combinations of capital and labor. Which of the following statements is correct accordingto the information in the table? (A) In the long run, there are constantreturnsto scale. (Bj In the long run, there are increasingreturns to scale. (Cj In the short run, the marginal product of capital is constant. (D) In the short run, the marginal product of labor is constant. (E) In the short run, the law of diminishingmarginal returnsdoes not hold. Number of Workers 1 2 3 4 5 6 7 QUANTITY 39. The graph above showsa firm’s cost and revenue curves. This profit-maximizing firm will (A) produce where demand is inelastic 0% charge a higher price than that necessaryto maximize revenues 0 have many profit-maximizing price and quantity combinations be unable to increase salesand total CD) revenuesby lowering its price 0% never have a region of falling average total cost 40. Which of the following is necessarilytrue of the profit-maximizing equilibrium of a monopolist who setsa single price? (A) Price equalsaverage total cost. w Price is greater than marginal cost. cc>Average total cost is at its minimum level. W Marginal revenue is greater than marginal cost. Marginal cost is minimized. 0% Number of Sandwiches Producedper Day 80 150 200 240 250 230 200 Given the production information in the table above, how many workers would be employed if the wage rate were $20.00 per day and if sandwiches sold for $OSO? (A) 1 @I 2 0 4 CD) 5 0% 7 L)L. Which of the following is true when the production of a good resultsin negative externalities? (A) The governmentmust produce the good. 0% The private market will producetoo little of the good. The private market price will be too low. (G) The governmentmust prevent the production CD) of the good. 0% Private firms will not be able to maximize profits. 43. In the long run, a monopolistically competitive firm is allocatively inefficient becausethe firm will 47. If a one-of-a-kind Etruscanvase is offered for sale at an auction, which, if any, of the following correctly showsthe supply curve for the vase? (A) produce only when marginal cost is greater than marginal revenue (B) produce only when marginal revenue is greater than marginal cost (C) charge a price greater than the marginal cost (D) earn positive economic profits (E) experience economic losses 44. A changein which of the following will NOT cause a shift in the demand curve for a factor of production? PlY QUANTITY (B) (A) Demand for the goods producedby the factor (B) Prices of the goods producedby the factor (C) Prices of substitutefactors (D) Supply of the factor (E) Supply of substitutefactors SUPPlY z 2 / QUANTITY 45. There are negative externalities associatedwith the use of a freeway in a major city at rush hour becauseduring this time (A) drivers slow down other drivers becauseof the high traffic volume (B) drivers value their time more (C) governmentrevenuesfrom toll roads increase (D) revenuesof bus companiesincrease (E) gasolinecostsmore SUPPlY / QUANTITY (D) 46. Economic growth can be depicted using a productionpossibilitiescurve by which of the following? (A) A rightward shift of the curve (B) A movement upward on an existing curve (C) A movement downward on an existing curve (D) A movement from a point outsidethe curve to a point on the curve (E) A movement from a point on the curve to a point inside the curve QUANTITY (E) It is impossibleto determine the shapeof the supply curve from the given information. 48. Which of the following will causean unregulated monopolistto produce a more allocatively efficient level of output? (A) A tax basedon the amount of profits (B) A tax that does not change as output increases (C) A tax that increasesas output increases (D) A subsidythat increasesas output increases (E) A subsidythat does not change as output increases 50. Which of the following is true in the market for a certain product if producersconsistentlyare willing to sell more at the going price than consumers are willing to buy? (A) (B) (C) (D) (E) Demand is highly inelastic. Supply is highly elastic. The product is inferior. There is a price ceiling on the product. There is a price floor on the product. 51. According to the theory of consumerbehavior, which of the following decreasesfirst as additional units of a product are consumed? (A) (B) (C) (D) (E) Total utility Average utility Marginal utility Marginal physical product Total physical product 52. Under which of the following circumstancesis a firm experiencing economiesof scale? \ Marginal Revenue \ (A) The firm increasesonly its labor input, and output decreases. (B) The firm doublesits inputs, and output triples. (C) The firm builds a new plant, and the average cost of productionincreases. (D) The firm hires a new plant manager,and profits increase. (E) The product price increases,and the firm increasesits output. Demand QUANTITY 49. The graph above showsthe cost and revenue curves for a natural monopoly. Considerthe following two policies for regulating this natural monopoly. Policy I: Require the monopoly to set quantity and price where demand equals marginal cost. 53. Which of the following statementsabout cost is always true for both monopoliesand perfectly competitive firms? Policy II: Require the monopoly to set quantity and price where demand equals average total cost. Which of the following is true of these policies? Both would result in the same level of output and price. Both would result in an inefficient (B) allocation of resourcesrelative to the unregulatedresult. (C> Policy I would result in a lower level of output than would Policy II. (D) Policy I would result in a higher price than would Policy II. 03 Policy I might require the payment of a subsidyto the firm. (4 n 21 n (A) Average total cost equals marginal cost when averagetotal cost is a minimum. (B) Marginal cost decreasesas production increases. (C) Average fixed cost is equal to marginal cost when average fixed cost is a minimum. (D) Average variable cost is equal to marginal cost when marginal cost is a minimum. (E) Average variable cost decreasesas production increases. K M \ QUANTITY Marginal Revenue 54. The graph above depicts cost and revenue curves for a typical firm in a monopolistically competitive industry. Supposethat the firm is producingOM units of output. To maximize profits, it should do which of the following to output and price? (A) (B) (C) (D) (E) output Price Increase Increase Decrease Not change Not change Decrease Increase Increase Increase Not change n 22 W 55. In most casesthe supply curve for a perfectly competitive industry can be describedas which of the following? (A) More elastic in the short run than in the long run More elastic in the long run than in the (B) short run (0 Downward sloping in the short run CD) Perfectly inelastic in the long run (El Perfectly elastic in the short run 58. Which of the following will happenin the labor market if the price of the good producedby the workers decreases? (A) The marginal product of labor will increase. (B) The marginal product of labor will decrease. (C) The marginal revenue product of labor will increase. (D) The marginal revenue product of labor will decrease. (E) The demand curve for labor will shift to the right. 56. Compared with firms in a perfectly competitive industry,firms in a monopolistically competitive industry are inefficient becausethey (A) make economic profits in the long run @I do not lower the product price if input prices fall restrict their output level to maximize (C) profits m charge the highestprice that consumers will pay (E) waste resourcesby producing an excess amount of output 57. Which of the following is NOT a characteristic of monopolistically competitive markets? Relatively easy market entry Differentiated products CC) Substantialproduct advertising CD) A large number of both buyers and sellers (El Long-run economic profits (4 w 59. Assumethat a firm is hiring labor in a perfectly competitive labor market. If the marginal revenue product of labor is greater than the wage rate, which of the following will be true? (A) (B) (C) (D) (E) The firm must be losing money. The firm should employ more workers. The firm should replace workers with capital. The firm is maximizing its profits. The firm is experiencingdiminishing marginal utility. 60. Which of the following is true of the marginal cost of providing a pure public good to one more consumer? (4 It is positive. w It is equal to zero. (C) It is equal to the original cost of the good. (W It decreasesas the number of consumers increases. It increasesas the number of consumers 03 increases. END OF SECTION I