econ-208-practice-exam-4

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StuDocu is not sponsored or endorsed by any college or university Econ 208 practice exam 4 Microeconomic Analysis and Applications (McGill University) StuDocu is not sponsored or endorsed by any college or university Econ 208 practice exam 4 Microeconomic Analysis and Applications (McGill University) Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208 Practice questions randonly selected from test bank - approx. 6 per chapter for Chapters 1 through 12, plus 16,33,34. Answer key provided - neither questions nor answers have been reviewed by prof. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Katie and Hugh are producing pies and jars of pickles. Katie can produce either 200 jars of pickles or 100 pies per month. Hugh can produce either 800 jars of pickles or 200 pies per month. Each divide their time equally between production of the two goods per month: Katie 100 jars of pickles and 50 pies ; Hugh 400 jars of pickles and 100 pies. In order to gain from specialization, which of the following changes should take place? A) Hugh should produce more pies and fewer jars of pickles. B) Katie and Hugh should both produce more jars of pickles and fewer pies. C) Katie should produce more pies and fewer jars of pickles. D) Katie and Hugh should both produce more pies and fewer jars of pickles. E) Katie should produce more jars of pickles and fewer pies. 2) The opportunity cost of going to college for four years is A) the least valued alternative one forfeits to go to university. B) the cost of tuition and books and four years of lost wages from employment. C) the cost of tuition, residence fees and books. D) equal to the wage rate a person will earn after graduation. E) zero. 3) In free - market economies behaviour is A) determined by a central authority. B) directed by self interest. C) based primarily on custom and habit. D) random and unpredictable. E) affected by elements of tradition, government command, and market incentives. 4) The famous economist who developed the idea of the division of labour was A) Adam Smith. B) Karl Marx. C) David Ricardo. D) John Maynard Keynes. E) Milton Friedman. 1 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 5) Consider Figure 1 - 2. If Country X were producing the outputs indicated by point C, A) the opportunity cost of moving to point B is to give up some consumption goods. B) the opportunity cost of moving to point A is zero. C) the opportunity cost of moving to point A is to give up some capital goods. D) it is not possible to move to any point on PPB 1 or PPB 2 without technological progress. E) this is the maximum output possible from given resources. 2 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 6) In Figure 1 - 3, which production possibilities boundary(ies) is/are consistent with increasing opportunity cost? A) curves A and B B) curve C only C) curves B and C D) curves A, B, and C E) curve A only 7) The decision makers best equipped to prevent major fluctuations in economic activity are A) business firms. B) economists. C) households. D) governments. E) the banking industry. 8) A scatter diagram A) shows the dependence of one variable on another. B) relates cross - sectional data only. C) shows a series of observations of the relationship between two variables. D) relates time series data only. E) is a graph of a theoretical relationship between two variables. 9) A testable statement is A) a normative statement which could be proven wrong. B) a positive statement which could be proven right. C) a positive statement which could be proven wrong. D) one which always can be empirically verified. E) an independent statement. 3 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 10) An economic theory requires all of the following EXCEPT: A) assumptions about motives of the people involved. B) a set of definitions of the variables to be considered. C) a set of assumptions about the conditions under which the theory applies. D) a set of hypotheses about the relationships between the variables. E) a set of value judgments to interpret the empirical evidence. 11) Economists build models that abstract from the complexities of reality because A) they believe they gain a greater understanding of reality. B) economists are not interested in reality. C) the complexities of reality are unimportant. D) it is easier to do so. E) economists do not understand the real world. 12) In Figure 2 - 2 the slope of curve A is A) negative and variable. B) positive and constant. C) undefined. D) negative and constant. E) positive and variable. 4 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 13) Variables A) explain the relationship among hypotheses. B) are magnitudes that can take on different possible values. C) outline the conditions under which the theory applies. D) are deduced from the assumptions. E) provide an explanation of the variability of economic data. 14) The statement that a country ʹ s rate of production growth is determined by its firms ʹ investment behaviour is an example of a(n) A) economic law. B) prediction. C) hypothesis. D) theory. E) normative statement. 15) In Figure 3 - 1, if demand were to decrease, this would lead to A) no change in P or Q . B) a decrease in P and a decrease in Q . C) an increase in P and an increase in Q . D) an increase in P and a decrease in Q . E) a decrease in P and an increase in Q . 5 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 16) Higher profit potential for a particular good will typically entice producers to produce more of that good. This will have the effect of A) shifting rightward the supply curve of that good. B) shifting rightward the demand curve for that good. C) shifting leftward the supply curve of that good. D) shifting leftward the demand curve for that good. E) simultaneously shifting the demand and supply curves rightward. 17) The time period to which quantity demanded refers when constructing demand curves is A) a specific time period depending on the good under question. B) a long period of time. C) a moment in time. D) not relevant. E) one year. 18) An equilibrium price is the A) price in the middle fo supply and demand. B) price at which quantity demanded of the commodity is equal to the quantity supplied. C) one that firms want to charge. D) price that always prevails. E) one consumers are willing to pay. 19) If two goods are complements and the price of one falls, all other things being equal, the demand for the other A) remains constant. B) is unrelated. C) falls. D) rises. E) can not be determined. 20) The quantity supplied does NOT change with the A) prices of factors of production. B) number of suppliers in the industry. C) level of technology. D) goals of the firm. E) motivation of consumers. 21) A ʺ decrease in supply ʺ A) refers to a downward movement along a supply curve. B) refers to a leftward shift in the supply curve. C) has the same meaning as ʺ a decrease in quantity supplied. ʺ D) refers to a drop in the quantity actually exchanged. E) is likely to result from the decrease in the price of a factor of production. 6 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 22) Normal goods A) have negative elasticity of supply. B) have negative income elasticity of demand. C) are sometimes also inferior goods. D) have positive income elasticity of demand. E) do not have elasticity of demand. 23) The formula for income elasticity of demand may be written as which of the following? A) percentage change in income percentage change in quantity demanded B) change in quantity demanded change in income C) percentage change in quantity demanded percentage change in income D) percentage change in quantity demanded percentage change in price E) change in income change in quantity demanded 24) Suppose the current level of output of some good is X. If market demand is inelastic at that quantity, total revenues would be higher if output was A) maximized. B) greater than X. C) minimized. D) less than X. E) kept constant. 7 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 25) Refer to Figure 4 - 1. The price elasticity of demand is continuously decreasing as the price falls in diagram(s) A) 1. B) 2. C) 1, 2, and 3. D) 2, 3, and 4. E) none of the above 26) If total expenditure on a product rises and falls directly with a product ʹ s price, then demand for this product has an elasticity of A) greater than one. B) zero. C) direct proportions. D) less than one. E) one. 27) If costs rise rapidly as output increases the A) supply curve will tend to be flat. B) price elasticity of supply will tend to be high. C) price elasticity of supply will tend to be low. D) demand curve will tend to be steep. E) elasticity of demand will tend to be low. 8 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 28) If the price elasticity of demand is 2.7, a 10 percent increase in the price of the good results in A) a 2.7 percent decrease in the quantity demanded. B) a 2.7 percent increase in the quantity demanded. C) a 27 percent increase in the quantity demanded. D) There is not enough information to answer this question. E) a 27 percent decrease in the quantity demanded. 29) the Canadian ʺ farm problem ʺ is largely due to A) production quotas. B) declining prices. C) demand increasing beyond supply. D) falling farm productivity. E) income maintenance through a negative income tax. 30) To be effective, a price ceiling must be set A) below the equilibrium price. B) so that neither excess supply nor excess demand is created. C) very high. D) above the equilibrium price. E) at the equilibrium price. 31) Partial - equilibrium analysis considers A) the existence of a specific market equilibrium as if no other markets exist. B) a specific market while ignoring the existence of other markets. C) the linkages between markets specifically. D) how all markets function together. E) how government planning can improve upon the results of a free market. 9 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 32) Refer to Figure 5 - 1. With a price ceiling of P 3 , a shortage equaling which of the following will arise? A) FD B) AC C) BC D) AF E) FC 33) If the equilibrium price is $25, then a price ceiling of $15 will bring about A) the same general effects as a price ceiling of $25. B) a surplus of the good. C) no change in the market. D) the same general effects as an equilibrium price of $15. E) a shortage of the good. 34) A price ceiling set above the equilibrium price will result in A) a continuation of the market - determined equilibrium price and quantity. B) the quantity supplied exceeding quantity demanded and thus a surplus in the market. C) a new market - determined equilibrium at a higher price and lower output level. D) the quantity demanded exceeding quantity supplied and thus a shortage in the market. E) increased profits to the firms in the industry. 35) If government establishes a ceiling on the price of rental accommodation lower than the equilibrium price, then A) construction of new rental units will be encouraged. B) a surplus of current rental units will develop. C) the current stock of rental housing will be better maintained as there is a shortage of housing. D) the housing market will be unaffected. E) those people who obtain rental units at the ceiling price will benefit. 10 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 36) The idea that the utility a consumer derives from successive units of a good diminishes as total consumption of the good increases is known as A) the utility theory of demand. B) diminishing marginal utility. C) diminishing total utility. D) the paradox of value. E) utility maximization. 37) Refer to Figure 6 - 1. Marginal utility is zero when total utility is A) equal to zero. B) equal to marginal utility. C) at the maximum. D) is increasing. E) is decreasing. 38) Suppose that the Canadian government provides a service to everyone free of charge. Everyone consumes this service to a point of zero marginal value. Is this necessarily a good program? A) No, because scarce resources used in production of this good could be used to produce other goods that bring more value to consumers. B) No, because government services are notoriously inefficient. C) Yes, because the service has a marginal value is zero. D) Yes because canadians will consume this service to satiation. E) Yes, because it makes all Canadians happy. 11 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 39) In Figure 6 - 3, total consumer surplus is given by the area A) under the demand curve to the left of Q 0 , but above P 0 . B) under the entire demand curve. C) under the demand curve to the left of Q 0 . D) below P 0 and to the left of Q 0 . E) none of the above 40) When a plant is operating at the level of output where its short - run average total cost is at a minimum, A) average variable cost is at a minimum. B) average fixed cost is at a minimum. C) more of the variable factor of production should be employed. D) the plant is operating at its capacity. E) marginal cost is at a minimum. 41) Retained earnings are A) earnings that are used to pay dividends to shareholders. B) earnings that are used to cover interest expenses of the firm. C) profits that are paid out to owners of the firm. D) earnings that are used to cover the costs of production. E) profits that are reinvested in the firm ʹ s operations. 12 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 42) The firm ʹ s short - run marginal cost curve is decreasing when A) total fixed cost is decreasing. B) marginal product is decreasing. C) capacity is reached. D) marginal product is increasing. E) average fixed cost is decreasing. 43) It is assumed in standard economic theory that a firm makes decisions in such a way that it will A) become as large as possible. B) maximize its profits. C) be favoured politically. D) maximize its revenue. E) have a highly diversified product. The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time Total Output 0 0 1 25 2 75 3 175 4 250 5 305 TABLE 7 - 1 44) Refer to Table 7 - 1. The average total cost for 250 units of output is approximately A) 33 cents. B) 40 cents. C) 63 cents. D) 80 cents. E) $1.00. 45) The opportunity cost of using an asset is zero if A) no money was spent to acquire the asset. B) the asset is already owned by the firm. C) the asset was given to the firm for free. D) the asset has no alternative uses. E) the asset has zero sunk costs associated with it. 46) When marginal cost is rising, we know that A) average total cost must be rising. B) marginal product must be zero. C) marginal product must be falling. D) average variable cost must be rising. E) average fixed cost must be rising. 13 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 47) If at the present use of labour and capital, the MP of labour is four times the MP of capital, and the price of labour is twice the price of capital, the firm should A) increase both labour and capital. B) decrease capital and increase labour. C) stay at its present factor mix. D) decrease capital and labour. E) substitute capital for labour until their marginal products are equal. 48) When there is no other way of producing a given output with a smaller total value of inputs, then the firm is operating at A) maximum profit. B) an irrelevant output. C) minimum cost. D) maximum output. E) optimal output. 49) Refer to Figure 8 - 1. Constant returns to scale for a firm are shown only in A) panel (a). B) panel (b). C) panel (c). D) panel (d). E) panels (a) and (d). 14 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 50) In the long run, decreasing returns can be caused by A) management diseconomies. B) decreasing costs. C) diminishing returns to the variable factor. D) specialization. E) a decrease in factor prices. 51) The fact that isocost lines are downward sloping straight lines indicates A) that each factor price has a negative value. B) constant factor prices. C) increasing factor prices. D) a change in relative factor prices. E) decreasing factor prices. 52) Which of the following conditions indicate cost minimization, assuming two inputs, labour ( L ) and capital ( K )? A) MP K /P L = MP L /P K B) MP K /P K = MP L /P L C) P K · MP K = P L · MP L D) MP L = MP K E) P K = P L 53) An essential aspect about technological change and economic efficiency is that A) if a firm is economically efficient it will also be using the best technology. B) economic efficiency is unimportant while technological change is important. C) neither is of consequence to the management of a firm. D) technological change is unimportant while economic efficiency is important. E) if a firm is using the best technology it will also be economically efficient. 54) If the output level required to achieve the minimum long - run average cost is so great that it will take up an appreciable share of the market, then A) the market demand curve will be horizontal. B) the firm is guaranteed to earn economic profits. C) its supply curve will slope upward to the right because of increasing returns to scale. D) the firm will no longer be a price taker. E) the firm will remain competitive because it will still be a quantity adjuster. 15 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 55) Refer to Figure 9 - 1. If the price a perfectly competitive firm is facing in the market is P 5 , then the profit - maximizing firm in the short run should produce output A) D. B) E. C) F. D) G. E) H. 16 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 56) Refer to Figure 9 - 3. At output Q 1 and price P 1 , A) there are profits to induce increases in output by firm X, using existing plant. B) there is no lower - cost scale of plant which could be built by X. C) firm X is at its long - run profit - maximizing position. D) new firms have a profit incentive to enter the industry, building larger plants. E) firm X is producing at its minimum efficient scale. 57) If a competitive firm is producing to the left of the minimum point of its long - run average cost curve, then A) it can reduce its costs per unit by building a larger plant. B) it can still be in long - run equilibrium as long as P = SRATC . C) its profits will decrease if it builds a larger plant. D) it should shut down. E) it cannot be producing its present output efficiently. 58) The firms that produce a well - defined product or closely related set of products constitute A) an industry. B) a market. C) a business. D) a monopoly. E) an economy. 59) Smaller - than - efficient sized firms in a perfectly competitive market can exist in A) the short run, but they will make only normal economic profits. B) the short run. C) both the short and long run. D) the long run. E) the long run, but they will make only normal economic profits. 17 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice Assume the following total cost schedule for a perfectly competitive firm. Output TVC TFC 0 0 100 1 40 100 2 70 100 3 120 100 4 180 100 5 250 100 6 330 100 TABLE 9 - 1 60) The firm depicted in Table 9 - 1 will continue to produce in the short run even though the market price is less than its ATC as long as the price is greater than or equal to A) TVC . B) MC . C) AFC . D) AVC . E) TC 61) A monopolist effectively practicing price discrimination probably would produce A) a higher output with average revenue higher than the best single price. B) a higher output with average revenue lower than the best single price. C) a lower output with a higher average revenue than the best single price. D) the same output as a single - price monopolist. E) a lower output with total revenue higher than the single best price. Market Demand Schedule Price $8 $7 $6 $5 $4 $3 $2 Quantity 5 6 7 8 9 10 11 TABLE 10 - 12 62) Referring to Table 10 - 1, the marginal revenue associated with increasing sales from 8 to 9 units is A) 0. B) 4. C) 2. D) - 2. E) - 4. 63) Suppose the technology of an industry is such that the typical firm ʹ s minimum efficient scale is 8000 units per month at an average long - run cost of $5 per unit. If the total quantity demanded is 8500 per month at that price, the likely result would be A) price discrimination. B) perfectly competitive firms. C) a government - approved monopoly. D) a cartel. E) a natural monopoly. 18 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 64) If the industry ʹ s demand conditions allow at most one firm to cover its costs while producing at its MES, this situation is known as A) discriminating monopoly. B) competition. C) natural monopoly. D) marginal revenue. E) natural economies. 65) Suppose a monopolist is operating where price is $10 and marginal revenue is $8. The one thing we do not know is whether A) the firm is not perfectly competitive. B) price elasticity is greater than one. C) price exceeds marginal revenue. D) total revenue is increasing (as output increases). E) the firm is making a profit. 66) Compared to perfect competition, a constant cost monopoly is predicted to result in A) a smaller output with the same price. B) a greater output and a higher price. C) the same output and the same price. D) the same output but a higher price. E) a smaller output and a higher price. 67) Characteristics of a monopolistic competitive market include A) a small number of firms in the industry. B) ease of entry and exit. C) difficult in exiting the industry. D) economic profits in the long run. E) a horizontal demand curve facing each individual firm. 19 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

208RandomPractice 68) Refer to Figure 11 - 1. The firm ʹ s supply curve in diagram D A) is the MC curve above ATC . B) is the MC curve above AVC . C) is the AC curve above ATC . D) is the MR curve. E) cannot be drawn. 69) A Canadian industry composed of many small firms is A) restaurants. B) furniture manufacturing. C) gasoline retailing. D) automobile production. E) steel manufacturing. 20 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 70) Refer to Figure 11 - 1. In diagram D, the profit - maximizing output is one where A) P = AR = MR . B) P = AR = MC . C) P = AR = AC . D) P = AR > MC . E) P > AR > MR 21 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 71) Refer to Figure 11 - 2. In the long run a monopolistically competitive firm will A) lose money by producing at Q L and charging Price P C . B) maximize profit but break even by producing at Q L and charging Price P L . C) maximize profit and make positive profit by producing at Q L and charging Price P L . D) make profit by producing at Q C and charging Price P L . E) produce the output Q C where AC is at its minimum. 72) Oligopolists make decisions after taking into account the expected reaction of their competitors. Oligopolists are exhibiting A) non - strategic behaviour. B) strategic behaviour. C) cooperative behaviour. D) non - cooperative behaviour. E) collusive behaviour. 73) The Competition Act was A) part of the North American Free Trade Agreement . B) legislated to prevent excessive competition. C) enacted in the early 1940s in an attempt to stop price fixing. D) a reform of the Combines Investigation Act . E) enacted in 1914 and made it illegal for one firm to acquire another firm. 22 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 74) Refer to Figure 12 - 1. Comparing the monopoly equilibrium to the perfectly competitive equilibrium, the area P 2 P 3 CB represents A) a redistribution of income from consumers to the monopolist. B) the net loss in the monopolist ʹ s profits. C) the net gain in the monopolist ʹ s profits. D) the dead - weight loss of monopoly. E) a redistribution of income from the monopolist to the consumer. 75) Cross - subsidization refers to A) transfers from rising - cost natural monopolies to falling - cost natural monopolies. B) transfers of profits from transnational corporations to small firms in the same industry. C) taxation of private sector firms to subsidize public sector firms. D) the taxation of growing industries to subsidize declining ones. E) the use of profits from one of a firm ʹ s products to subsidize another of its products at a price below cost. 76) A major difference between equilibrium in a competitive industry and a monopoly is that A) perfect competitors achieve productive efficiency, but monopolies do not. B) the monopoly achieves allocative efficiency but perfect competition does not. C) the monopolist produces where P = MC , but the perfect competitor does not. D) the monopoly produces where MR = MC , but the perfect competitor does not. E) perfect competition achieves allocative efficiency but monopoly does not. 23 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 77) Average - cost pricing in natural monopolies, such as Manitoba Hydro, Ontario Hydro, and New Brunswick Power, leads to A) allocative efficiency. B) productive efficiency. C) distorted investment decisions. D) both allocative efficiency and productive efficiency. E) a reduction in the output by these firms. 78) Under the Competition Act A) firms cannot enter a market if it is dominated by another firm. B) firms must get the government ʹ s permission to acquire competing firms if the result is lower prices and higher output. C) mergers are encouraged. D) a cartel is illegal since it restrains trade. E) it is illegal for one firm to acquire another firm. 79) The primary objective of Canadian Competition legislation is A) to prevent both the monopolization of an industry and the restraint of trade. B) socialize production. C) to reduce the profitability of monopoly. D) an attempt to promote allocative efficiency among competitive firms. E) to prevent firms from merging. 80) The free - rider problem means that A) too many people will over consume a public good. B) people need to pay a government user fee to pay for the good ʹ s production. C) it is impossible or impractical to make people pay for a public good. D) the private market will produce the efficient amounts of a public good. E) government will not be able to produce an efficient amount of a public good. 81) Which of the following best describes the reason for over fishing in Canadian offshore fisheries? A) The Canadian government explicitly encourages fishing through subsidies to fishermen. B) Fishing has depleted fish stocks leading to smaller catches. C) The private marginal cost incurred by current fishermen is less than the social marginal cost. D) The private marginal cost incurred by future generations of fishermen is greater than the private marginal cost incurred by current fishermen. E) The Canadian government allows foreign fishing within the Canadian offshore boundary. 24 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 82) Government intervention to correct market failure may face special problems in a democracy because democratic decision making A) allows each person the same opportunity to vote. B) can be relied on to make consistent choices. C) may fail to take into account the intensity of voter ʹ s preferences. D) can tend to underrepresent special interests. E) can reallocate to compensate the economic losers from the winners gains. 83) The government objective best described by the provision of employment insurance is A) income distribution. B) protecting individuals from others or paternalism. C) social responsibility. D) policies for economic growth. E) preference for public provision. 84) Government intervention in a particular industry is unnecessary if each of the industry ʹ s firms is operating where A) price is equal to private marginal cost. B) there are no positive externalities. C) marginal social benefit is equal to marginal social cost. D) there are no negative externalities. E) the demand curve is perfectly elastic. 85) A market prone to the problem of asymmetric information is A) the principal - agent problem. B) the problem of moral hazard. C) the free - rider problem. D) the problem of adverse selection. E) the purchase and sale of used cars. 86) Which of the following statements about market economies is true? A) An important characteristic of the market system is its ability to set in motion forces that tend to correct disequilibrium. B) Pure market economies provide the best social outcome. C) Externalities make free - market results socially efficient. D) Most present - day economists advocate extensive government intervention in markets. E) Market failure means that the market is incapable of satisfying human wants. 25 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice FIGURE 33 - 2 87) If point A in Figure 33 - 2 represents an economy ʹ s autarky (without trade) point, production occurs at point ________ and consumption occurs at point ________. A) A; B B) E; A C) A; A D) A; C E) E; B 88) Given that two countries, A and B, produce two goods, X and Y. In country A it takes Xa units of resources to produce one unit of good X and Ya units of resources to produce one unit of good Y. In country B it takes Xb and Yb respectively. We assume that the amount of resources used to produce the goods in the two countries can be compared unambiguously. Country A has a comparative advantage in producing good X if A) (X a /Y a ) is greater than (X b /Y b ). B) (X a /X b ) is greater than (Y a /Y b ). C) X a = X b . D) (X a /Y a ) is less than (X b /Yb). E) X a is less than Y b . 89) If the index of import prices is 250 and the index of export prices is 200, then the index of the terms of trade is A) 0.80. B) 1.25. C) 12.50. D) 80.00. E) 125.00. 26 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice FIGURE 33 - 4 90) Figure 33 - 4 represents Robinson Crusoe ʹ s annual production possibility boundary. Starting from point A and moving to point B, his opportunity costs of producing each additional bundle of 20 kilograms of coconuts are A) increasing. B) decreasing followed by increasing. C) decreasing. D) increasing followed by decreasing. E) constant. 91) The United States exports automobile components to Canada, and Canada exports automobile components to the United States. This is a(n) A) example of the inefficiency of trade patterns. B) obvious failure to take advantage of specialization. C) likely result of economies of scale and product differentiation. D) general conclusion of the Heckscher - Ohlin theory. E) violation of the law of comparative advantage. 27 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice The following production possibilities schedule shows the quantities of soybeans and oil that can be produced in Canada and Mexico with one unit of equivalent resources. Soybeans Oil (bushels) (barrels) Canada 60 10 Mexico 24 8 TABLE 33 - 2 92) In Table 33 - 2, Mexico would not gain by producing and exporting oil and importing soybeans unless it received A) any quantity of soybeans. B) more than 10 barrel of oil. C) more than 3 bushels of soybeans per barrel of oil. D) more than 6 bushels of soybeans per barrel of oil. E) 2 bushels of soybeans per barrel of oil. 93) Spain is currently producing 90 units of wine and 10 units of cheese, but to produce 10 more units of cheese it must sacrifice 30 units of wine. Portugal produces 45 units of wine and 45 units of cheese, but to produce 10 more units of cheese it must sacrifice 10 units of wine. It can be concluded that A) Portugal has absolute advantage in both wine and cheese production. B) Spain has comparative advantage in wine production and Portugal has a comparative advantage in cheese production. C) Portugal has absolute advantage in wine production and Spain has absolute advantage in cheese production. D) Spain has absolute advantage in both wine and cheese production. E) none of them have absolute advantage in production of both wine and cheese. 94) During the debate about trade liberalization in Canada some politicians argued that multilateral tariff reductions would benefit foreign countries at the expense of Canadian businesses and their workers. This argument is A) correct because reduced tariffs on imports hurt Canadian producers and help foreign exporters. B) wrong because Canadian exporting businesses and their employees benefit from increased exports. C) correct since reduced tariffs on imports hurts Canadian exporters. D) wrong because Canada ʹ s trading partners would not benefit from tariff reductions. E) wrong because no Canadian enterprise would be hurt by tariff reduction. 28 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 95) Valid counter - arguments to the idea that the imposition of tariffs in industry X will increase wages of domestic workers in that industry, (Assuming there is no retaliation), include A) the increase in industry X wages would tend to be more than offset by increases in the cost of living to all other domestic consumers. B) money wages would first rise and then decrease in industry X and workers would experience reductions in savings and consumption. C) the increase in money wages of workers in industry X would reduce profits to business owners by an equal amount. D) the increase in money wages would increase unemployment. E) all of the above 96) Trade creation is A) inefficient trade that follows the establishment of a free - trade area. B) always smaller than trade diversion. C) trade based on comparative advantage that follows the establishment of a free - trade area. D) always larger than trade diversion. E) increased exports and reduced imports as a result of a high tariff policy. 29 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice FIGURE 34 - 2 97) Figure 34 - 2 represents the domestic demand and domestic supply for the competitive jeans market in Canada. Assuming that jeans are traded internationally at a price equal to P W and Canada now imposes a tariff of $ t (per pair of jeans), Canada ʹ s imports will A) increase from (Q 4 - Q 2 ) to (Q 5 - Q 1 ). B) decrease from (Q 5 - Q 1 ) to (Q 4 - Q 2 ). C) increase from (Q 4 - Q 2 ) to (Q 5 - Q 3 ). D) decrease from (Q 5 - Q 3 ) to (Q 4 - Q 2 ). E) decrease from(Q 5 - Q 3 ) to (Q 3 - Q 1 ). 98) If Canada reduces the tariff imposed on a commodity from 10 percent to 5 percent, we would expect to observe A) a reduction in the quantity produced of the commodity in Canada. B) an upward shift in the commodity ʹ s demand curve. C) an increase in quantity produced of the commodity in Canada. D) a downward shift in the commodity ʹ s demand curve. E) a reduction in the quantity consumed of the commodity in Canada. 99) A tariff is A) a tax imposed on imported goods. B) a tax imposed on exported goods. C) an encouragement to worldwide specialization and division of labour. D) a tax imposed on domestically produced manufactured goods. E) a quota imposed on imported goods. 30 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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208RandomPractice 100) If all countries try to expand exports and restrict imports through the use of subsidies and tariffs, the net effect will probably be A) no change in the volume of trade but an increase in the overall unemployment rates. B) an increase in the volume of trade but little change in unemployment levels. C) no change in the volume of trade but less unemployment. D) a fall in the volume of trade but little change in the level of unemployment in any country. E) a fall in the volume of trade and an increase in the standard of living in each country. 31 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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Answer Key Testname: 208RANDOMPRACTICE 1) C 2) B 3) B 4) A 5) B 6) B 7) D 8) C 9) C 10) E 11) A 12) D 13) B 14) D 15) B 16) A 17) A 18) B 19) D 20) E 21) B 22) D 23) C 24) D 25) A 26) D 27) C 28) E 29) B 30) A 31) B 32) B 33) E 34) A 35) E 36) B 37) C 38) A 39) A 40) D 41) E 42) D 43) B 44) D 45) D 46) C 47) B 48) C 49) B 50) A 32 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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Answer Key Testname: 208RANDOMPRACTICE 51) B 52) B 53) A 54) D 55) E 56) D 57) A 58) A 59) B 60) D 61) A 62) E 63) E 64) C 65) E 66) E 67) B 68) E 69) A 70) B 71) B 72) B 73) D 74) A 75) E 76) E 77) C 78) D 79) A 80) C 81) C 82) C 83) A 84) C 85) E 86) A 87) C 88) D 89) D 90) E 91) C 92) C 93) B 94) B 95) A 96) C 97) B 98) A 99) A 100) D 33 Downloaded by Nicholas Sun (sun_nicholas@yahoo.com) lOMoARcPSD|16672699

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econ-208-practice-exam-4

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