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Econ 208 practice exam 2
Microeconomic Analysis and Applications (McGill University)
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Econ 208 practice exam 2
Microeconomic Analysis and Applications (McGill University)
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Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Price
Quantity
Demanded
$8
5
$7
6
$6
7
$5
8
$4
9
$3
10
$2
11
TABLE 10
-
1
1) Refer to Table 10
-
1, which displays the demand schedule for a single
-
price monopolist. Which of
the following statements about price elasticity of demand is true?
A)
demand is elastic at a price of $5
B) demand is elastic at a price of $8
C)
demand is elastic at a price of $3
D)
demand is inelastic at a price of $8
E) demand is unit
-
elastic at a price of $4
1)
2) Refer to Table 10
-
1. For a single
-
price monopolist, the marginal revenue associated with
increasing sales from 6 to 7 units is
A)
-
4.
B)
-
2.
C) 0.
D) 2.
E) 4.
2)
A-2
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The diagram below shows total revenue for a single
-
price monopolist.
FIGURE 10
-
3
3) Refer to Figure 10
-
3. The profit
-
maximizing output for this single
-
price monopolist is
A)
Q
1
B)
Q
2
.
C)
Q
3
.
D)
Q
4
.
E) not determinable from the diagram.
3)
A-3
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Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10
-
4
4) Refer to Figure 10
-
4. If the single
-
price monopolist is producing at the profit
-
maximizing level of
output, the total cost is represented by the area
A) 0
P
2
b
Q
0
.
B) 0
P
0
g
Q
5
.
C) 0
P
3
c
Q
3
.
D) 0
P
1
d
Q
1
.
E) 0
P
4
a
Q
0
.
4)
5) Suppose the technology of an industry is such that the typical firm's minimum efficient scale is
8000 units per month at an average long
-
run cost of $5 per unit. If the total quantity demanded at
a price of $5 per unit is 8500 units per month, the likely result would be
A)
a concentrated oligopoly.
B) a natural monopoly.
C)
a cartel.
D)
price discrimination.
E) perfectly competitive firms.
5)
6) The main argument of Joseph Schumpeter's idea of "creative destruction" is that
A)
monopoly profits lead to innovation in an effort to sustain those profits.
B) the existence of monopolies leads to destruction of the environment.
C) short
-
run profits created by the existence of monopolies will lead to antitrust legislation,
which will force the fragmentation of monopolies into competitive industries.
D)
perfectly competitive industries are characterized by more productive innovation and
productivity growth than monopolistic industries, which Schumpeter regarded as
destructive.
E) monopolies create profits for themselves at the expense of the destruction of consumer
surplus.
6)
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7) The two characteristic problems for cartels are
A)
policing members' prices and restricting output.
B) policing members' output restrictions and preventing new entrants.
C)
coordinating marketing policies and policing members' quotas.
D)
agreeing on the price to be set and coordinating marketing policies.
E) agreeing on the price to be set and preventing new entrants.
7)
8) It is common for a cartel to collapse when one or more firms in the cartel
A)
exit the industry.
B) is much larger than other cartel members.
C)
increase its price above the monopoly price.
D)
produce more efficiently than other member firms.
E) exceed its output quota.
8)
9) Which of the following is probably NOT an example of price discrimination?
A)
A theatre charging children under 12 less for a movie ticket than it charges an adult.
B) A supermarket charging more for strawberries in December than in June.
C)
Train fares that are less expensive for weekend travel than weekday travel.
D)
A doctor charging for his services according to the income of his patients.
E) Universities charging out
-
of
-
province students higher tuition fees.
9)
10) Suppose you go to a retailer's website and print a coupon that gives you a discount on your next
purchase at their store. But your friend, who also plans to purchase there, can't be bothered. You
are revealing to the store that
A)
you have a higher elasticity of demand than your friend.
B) elasticity of demand changes according to the size of the discount offered.
C)
you have a lower income than your friend.
D)
you understand price discrimination and your friend does not.
E) you have a lower elasticity of demand than your friend.
10)
11) A Canadian industry composed of many small firms is
A)
steel manufacturing.
B) restaurants.
C)
gasoline retailing.
D)
natural gas transmission.
E) automobile production.
11)
12) One difference between a perfectly competitive market and a monopolistically competitive market
is that
A)
there are no barriers to exit in monopolistic competition.
B) there is no product differentiation in perfect competition.
C)
there is strategic interaction among firms in monopolistic competition.
D)
there is no product differentiation in monopolistic competition.
E) there are no barriers to entry in monopolistic competition.
12)
13) A monopolistically competitive firm and a monopoly are similar because
A)
each firm can raise its price without losing all of its sales.
B) both firms must behave strategically toward other firms in the industry.
C)
both firms always operate at their point of minimum average total cost.
D)
both firms will earn zero profits in the long run.
E) each firm has a large number of small competitors.
13)
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14) The presence of significant scale economies in an industry implies that
A)
the minimum efficient scale of operation occurs at fairly low output levels.
B) the firms in the industry will behave as perfect competitors.
C)
a large share of the market is required by each firm to achieve the lowest possible cost per
unit.
D)
barriers to entry in the industry are non
-
existent.
E) this industry is more efficient than others.
14)
15) If there are economic profits in a monopolistically competitive industry, they will generally be
competed away through the
A)
entry of new firms.
B) increasing advertising budgets of existing firms.
C)
exit of existing firms.
D)
manipulation of the demand curve.
E) introduction of brand name products by existing firms.
15)
The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11
-
3
16) Refer to Figure 11
-
3. A monopolistically competitive firm is said to be inefficient because in the
long
-
run equilibrium
A)
MC
is greater than LRAC
.
B) price is greater than LRAC
at Q
1
.
C)
price is greater than MC
at Q
1
.
D)
MC
is greater than price.
E)
LRAC
at Q
1 is not at its minimum.
16)
A-6
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17) Assume that the world's largest smart
-
phone producers (Apple, Nokia, Samsung, etc.) operate in
an oligopolistic industry. In the long run, which of the following is the most important form of
competition between these firms?
A)
tacit collusion
B) advertising
C)
brand proliferation
D)
product innovation
E) predatory pricing
17)
18) Which of the following industries in Canada can best be thought of as oligopolies?
1) breweries
2) women's clothing retailers
3) automobile manufacturers
A)
1 only
B) 2 only
C)
3 only
D)
1 and 3 only
E) 1, 2, and 3
18)
19) Which of the following statements is the best description of a Nash equilibrium?
A)
An equilibrium outcome achieved by cooperation between players in the game.
B) An outcome that is achieved when players in the game have jointly maximized profits and
divided those profits according to market share of each player.
C)
An equilibrium outcome that is achieved by collusion, and no party has an incentive to
change their behaviour.
D)
An outcome where each player's best strategy is to maintain its present behaviour given the
present behaviour of the other players.
E) An outcome where each player's strategy depends on the behaviour of its opponents.
19)
20) Suppose there are only two firms in an industry. If they each set a high price, they each earn $5000.
If they each set a low price, they each earn $2500. If one firm sets a low price while the other sets a
high price, the low
-
price firm earns $7000 while the high
-
price firm earns $1000. Does a prisoners'
dilemma exist?
A)
no, the Nash equilibrium does not maximize the joint payoff
B) yes, because there is always a prisoner's dilemma in game theory
C)
no, the Nash equilibrium does not maximize the individual payoff
D)
it cannot be determined from the information provided
E) yes, the Nash equilibrium does not maximize the joint payoff
20)
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FIGURE 13
-
1
21) Refer to Figure 13
-
1. Which point shows that 100% of families earn 100% of the income?
A) A
B) B
C) C
D) D
E) E
21)
22) Suppose all Canadians earned equal incomes. In this case, Canada's Lorenz curve would be
A)
below the diagonal line.
B) non
-
existent.
C)
the diagonal line.
D)
coincident with the horizontal axis.
E) above the diagonal line.
22)
23) Consider labour hired for $1000 per week. If the last week of labour hired produces 0.25 units of
output which sells for $5000 per unit, ________ labour should be hired in this situation since the
wage is ________ MRP.
A)
more; greater than
B) no; equal to
C)
less; less than
D)
more; less than
E) less; greater than
23)
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Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of
production employed by the firm.
Total Number of
Units of the Factor
Total Number of
Units of Output
Price per Unit of Output
Total Cost of Production
2
12
$10
$50
3
20
$9
$55
4
26
$8
$60
5
30
$7
$65
6
32
$6
$70
7
32
$5
$75
TABLE 13
-
3
24) Refer to Table 13
-
3. The rise in total revenue generated by hiring the 4th unit of the factor of
production is
A) $2.00.
B) $28.00.
C) $7.50.
D) $3.67.
E) $
-
11.00.
24)
The diagram below shows the MRP curve for a firm producing copper plumbing pipe. The factor of production being considered here is
hours of labour.
FIGURE 13
-
2
25) Refer to Figure 13
-
2. This firm's MRP curve is the firm's
A)
marginal product of labour curve.
B) derived demand for copper plumbing pipe.
C)
total product curve for labour.
D)
demand curve for labour.
E) market demand curve for copper plumbing pipe.
25)
A-9
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26) Refer to Figure 13
-
2. Assume that the firm is a perfect competitor and the price of the firm's output
is fixed. We know that the firm's MRP curve is
A)
the same shape as the firm's marginal revenue curve.
B) steeper than the firm's marginal product curve for labour.
C)
the same shape as the firm's marginal product curve for labour.
D)
flatter than the firm's marginal product curve for labour.
E) horizontal, if the firm is perfectly competitive.
26)
The three diagrams below each show a supply curve for oil tankers over a relatively short period of time.
FIGURE 13
-
4
27) Refer to Figure 13
-
4. Consider oil tankers as a factor of production (for example, for the production
of gasoline). Which diagram shows the most mobility of this factor of production?
A)
diagram 1
B) diagram 2
C)
diagram 3
D)
none of the diagrams
E) each diagram shows mobility
27)
28) Refer to Figure 13
-
4. Consider the supply of oil tankers to an individual Canadian shipping firm,
the North American shipping industry, and the world shipping industry. Which diagram best
shows the supply of oil tankers that is relevant to the world shipping industry?
A)
diagram 1
B) diagram 2
C)
diagram 3
D)
diagrams 2 or 3
E) diagrams 1 or 2
28)
29) When the wage paid to workers in job A
increases relative to the wage in job B
, then, ceteris
paribus,
the
A)
net advantage of job B
will increase relative to job A
.
B) monetary advantage of job A
will increase, but not its net advantage.
C) non
-
monetary advantages of job B
will decrease.
D)
net advantage of job A
will increase relative to job B
.
E) non
-
monetary advantages of job A
will increase.
29)
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30) Choose the statement that best describes the difference between "economic rent" and other factor
payments.
A)
Economic rent is not a cost to the firm but other payments are.
B) A reduction in economic rent will not reduce the availability of the factor whereas reducing
other payments of factors will reduce their availability.
C)
There is no difference between economic rent and other factor payments.
D)
Economic rent is unearned income of the factor whereas other payments are earned.
E) Economic rent is the sum of all factor payments.
30)
31) What is the most fundamental purpose of the "capital market"?
A)
To connect households who wish to borrow with banks who wish to lend.
B) To provide the means by which households and firms can invest financial capital.
C)
To provide the means by which firms can acquire physical capital.
D)
To connect firms and households who wish to borrow with financial institutions.
E) To connect the savings decisions of households with the borrowing decisions of firms.
31)
32) Economists use the concept of present value to determine
A)
the amount someone would be willing to pay today to get a payment or stream of payments
in the future.
B) the amount someone would be willing to pay in the future for a discounted value today.
C)
the value in the future of a given stock of physical capital.
D)
the price of a unit of physical capital in the future.
E) the marginal revenue product of a unit of capital.
32)
33) How much would you have to deposit today in a bank account paying 8% annual interest to allow
you to withdraw $200 one year from now and still have $200 remaining in the bank?
A) $185.19.
B) $216.00.
C) $370.37.
D) $385.19.
E) none of the above.
33)
34) Suppose a dairy farmer is considering the purchase of an additional milking machine at a price of
$4000. She expects the discounted MRP of the machine in Year 1 to be $1700, in Year 2 to be $1500
and in Year 3 to be $1200, after which the machine has no value. The farmer should
A)
be indifferent about the purchase because its present value is approximately equal to its
purchase price.
B) not buy the machine because its present value is $400 less than its purchase price.
C)
buy the machine because its marginal revenue is $400 more than its marginal cost.
D)
buy the machine because its present value is $400 more than its purchase price.
E) not buy the machine because its marginal revenue is $400 less than its marginal cost.
34)
35) We can think about the interest rate as the "price" of capital because
A)
firms use financial capital to purchase physical capital and the interest rate is the "price" of
financial capital.
B) this is the amount the firm earns by purchasing the capital.
C)
the interest rate determines the MRP of the capital, which determines its price.
D)
the interest rate represents the value the firm avoids paying to lenders by purchasing the
capital instead.
E) the interest rate determines the equilibrium level of investment demand.
35)
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36) Choose the best reason for a rightward shift in the economy's investment demand curve.
A)
a decrease in the interest rate
B) an increase in the interest rate
C)
changes in technology that improve the productivity of capital
D)
diminishing marginal returns to capital
E) none of the above would shift the investment demand curve
36)
37) Households' supply of financial capital is derived from
A)
their supply of human capital.
B) their supply of saving.
C)
firms' demand for physical capital.
D)
their supply of physical capital.
E) firms' demand for financial capital
37)
38) Suppose that you lend me $100 for a year, and that I agree to pay you $110 at the end of one year
(principal plus interest). Over the intervening year, however, the average price of goods in the
economy rises by 3%. The real rate of return that you will earn on your loan to me is therefore
equal to
A) 3%.
B) 7%.
C) 13%.
D)
greater than 13%.
E) 10%.
38)
A-12
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FIGURE 15
-
2
39) Refer to Figure 15
-
2. The market for financial capital is initially in equilibrium at point E
1
. If the
government then institutes a policy that encourages individuals to decrease the fraction of their
income that they consume,
A)
the equilibrium interest rate falls but the amount of investment is unchanged.
B) the flow of investment and saving both increase in the new equilibrium, but the interest rate
is unaffected.
C)
the flow of investment and saving both increase, and the equilibrium interest rate increases.
D)
the equilibrium interest rate rises and the amount of saving increases.
E) the equilibrium interest rate falls and the amount of investment increases.
39)
40) Which of the following roles of the government is most fundamental to a society's ability to
function safely and carry on normal economic and social life?
A)
provider of health care
B) regulator of free markets
C)
holder of a monopoly of violence
D)
provider of education
E) provider of a justice system
40)
41) The concept of "institution building"
is becoming more prominent. Which of the following best
describes the aim of institution building?
A)
The rich, developed countries focus on the success of institutions that are global in nature,
such as the United Nations, The World Bank and the International Monetary Fund.
B) Canada's aid to developing countries is being focused on creating the economic institutions,
such as a central bank, that are key to a country's economic growth.
C)
The rich, developed countries focus their assistance to developing countries on creating stable
political infrastructures.
D)
In Canada, for example, the strengthening of existing financial institutions is key to the
country's economic well
-
being.
41)
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42) The "informal defence" of free markets includes the argument that markets
A)
permit a centralization of economic power.
B) achieve the maximum feasible rate of economic growth.
C)
provide automatic coordination of the actions of decentralized decision makers.
D)
lead to productive efficiency.
E) lead to allocative efficiency.
42)
43) Which of the following statements about market economies is true?
A)
Market failure means that a market economy is incapable of satisfying human wants.
B) Most present
-
day economists advocate extensive government intervention in most parts of
market economies.
C)
Pure market economies provide the best social outcome.
D)
Externalities make free
-
market outcomes socially efficient.
E) An important characteristic of the market system is its ability to set in motion forces that tend
to correct disequilibrium.
43)
44) Which of the following phenomena is NOT
an example of market failure?
A)
asymmetric information
B) moral hazard
C)
public goods
D)
a positive externality
E) diminishing marginal returns
44)
45) Consider a product (say, tulip bulbs) that generates positive externalities when it is consumed
(other people enjoy looking at them). In this case,
A)
firms will produce too little of this product unless they internalize the external benefits.
B) the government could tax the production of this good to improve efficiency.
C)
at the market equilibrium, the price is too high to be allocatively efficient.
D)
at market equilibrium, the marginal social benefit is less than the marginal cost of producing
the last unit.
E) at the market equilibrium, the output would be greater than the socially optimal amount.
45)
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FIGURE 16
-
1
46) Refer to Figure 16
-
1. Suppose that the perfectly competitive market with no government
intervention achieves equilibrium at point A. If the social marginal costs and social marginal
benefits are represented by MC
0
and MB
1
, respectively, then there exists
A)
a social cost that exceeds the private cost.
B) an external cost.
C)
no external benefits or costs.
D)
an external benefit.
E) an external benefit and an external cost.
46)
47) A common
-
property resource is one that is
A) non
-
rivalrous and excludable.
B) non
-
rivalrous and non
-
excludable.
C)
rivalrous and non
-
excludable.
D)
rivalrous and excludable.
47)
48) One reason that national defence is a classic example of a public good is that
A)
the benefits that accrue to one person do not diminish the benefits available to others.
B) military technology is too expensive for private firms to provide.
C)
society deems it to be too important to be provided by the private sector.
D)
it would be immoral for private firms to provide this essential commodity.
E) all citizens want national defence.
48)
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The diagram below shows the marginal benefit and marginal cost of a public good. This economy has 3 individuals, A, B and C. The
diagram shows the MB for each individual and a summation of their marginal benefits.
FIGURE 16
-
4
49) Refer to Figure 16
-
4. Suppose the government provides Q
4
units of the public good. If the
government was able to require consumers to pay a price of P
4
, then
A)
consumers would not use the public good at all, and this would be socially optimal.
B) the appropriate price would be achieved, although not enough would be consumed.
C)
the market would clear, although not enough would be produced.
D)
the inefficient quantity would be being produced.
E) consumers would not use the public good at all, and this would not be an efficient outcome
for society.
49)
50) Moral hazard is said to exist when one party to a transaction
A)
is subject to a hostile corporate takeover.
B) has no morals.
C)
has the incentive to, and is able to, shift costs to another party in the transaction.
D)
purchases insurance because they know they are involved in risky activities.
E) is not able to take advantage of the other party.
50)
51) Which of the following proposals could be an example of an effort to correct for an adverse
selection problem?
A)
The government subsidizes the consumption of fitness activities.
B) The government imposes a tax on factory
-
emissions of a toxic substance.
C)
An employer requires all employees to submit to drug testing.
D)
The government subsidizes the development of eco
-
friendly production methods.
E) An employer that requires all employees to purchase the employer
-
sponsored dental
insurance program.
51)
A-16
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52) The government has seatbelt and airbag requirements in cars, and laws requiring individual
drivers to use them. What broader social goal is being met in this case?
A)
preference for public provision
B) income distribution
C)
policies for economic growth
D)
social responsibility
E) protecting individuals from others or themselves
52)
53) Governments usually provide a system of unemployment insurance. What broader social goal is
being met in this case?
A)
income distribution
B) preference for public provision
C)
protecting individuals from others or themselves
D)
social responsibility
E) policies for economic growth
53)
54) The total costs of government intervention in the market economy include
A)
compliance costs.
B) the costs of rent seeking.
C)
direct resource costs, such as the salaries of civil servants.
D)
extra costs arising from regulation.
E) all of the above.
54)
55) Provincial laws that mandate a minimum drinking age (for alcohol) are an example of government
intervention through
A)
public provision and price control.
B) communism.
C)
redistribution and reorganization.
D) merit
-
goods control.
E) regulation.
55)
56) Which of the following statements suggests that property taxes might be progressive?
A)
A large part of the property tax is shifted to renters, who typically have lower incomes than
owners.
B) Inner city neighbourhoods often have higher property taxes than do the more affluent
suburbs.
C)
Elderly pensioners often live in their family homes after children have left.
D)
The proportion of income spent on housing tends to decline as income rises.
E) Higher
-
income people live in more expensive houses than do low
-
income people.
56)
57) Which of the following is required to achieve progressivity for a particular tax?
A)
A constant tax rate for all incomes
B) A marginal tax rate equal to the average tax rate (implying that the average tax rate is rising
with income)
C)
An average tax rate above the marginal tax rate (implying that the average tax rate is falling
with income)
D)
A marginal tax rate above the average tax rate (implying that the average tax rate is rising
with income)
E) A marginal tax rate equal to the average tax rate (implying that the average tax rate is falling
with income)
57)
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The figure below show a simplified version of the current (2012) Canadian federal income
-
tax system. The marginal income
-
tax rates
for the four ranges of income are 15.5%, 22%, 26%, and 29%, respectively.
FIGURE 18
-
2
58) Refer to Figure 18
-
2. This income
-
tax system can be characterized as
A) fair.
B) cumbersome.
C) progressive.
D) regressive.
E) proportional.
58)
59) Which of the following is an example of a tax that is designed according to the "benefit principle"?
A)
federal income tax
B) school tax (based on property value)
C)
a provincial sales tax
D) value
-
added tax
E) a metered water tax
59)
60) Suppose an additional "special" tax of $0.10 per litre is imposed on the sale of gasoline in one
province. Prior to the tax the price was $1.30 per litre and 10 million litres of gasoline are sold per
day. After imposition of the tax, the new equilibrium price and quantity are $1.38 per litre and 9.6
million litres per day. What is the direct burden of this "special" tax?
A)
$40 000 per day
B) $ 960 000 per day
C)
$192 000 per day
D)
$768 000 per day
E) There is not enough information to know.
60)
A-18
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FIGURE 18
-
3
61) Refer to Figure 18
-
3. Suppose that supply is perfectly elastic and the price of this good is initially
P
3
. If an excise tax raises the price from P
3
to P
4
, the direct burden of the tax is
A)
the area P
1
CP4.
B) the area P
2
B
P
3
.
C)
the area P
3
A
P
4
.
D) zero.
E) the area BFC.
61)
62) An example of a government expenditure that is a transfer payment is
A)
education payments.
B) employment
-
insurance (EI) payments.
C)
construction costs of a new government
-
owned airport.
D)
salaries of welfare case workers.
E) payments made to the Canadian International Development Agency (CIDA).
62)
63) Welfare recipients are sometimes faced with a withdrawal of welfare benefits and an increase in
income tax as their earned income rises. This creates a problem because
A)
of the incentives for firms to lay off workers more frequently for short periods.
B) of the powerful disincentives to work for low
-
income individuals.
C)
firms become unwilling to hire people that are currently unemployed.
D)
of the incentives for workers to shirk and/or retire early.
E) it is administratively difficult to track these individuals.
63)
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64) Consider the allocation of a nation's resources between additional public
-
sector spending versus
additional private spending. James Buchanan argued that
A)
compared to private spending, public spending leads to more sustained long
-
run economic
growth.
B) given the current size of government, the value of the marginal dollar spent by government
is less than the value of that dollar left in the hands of households or firms.
C)
compared to public spending, private spending leads to more sustained long
-
run economic
growth.
D)
public sector spending is always subject to corruption and is therefore not as valuable as
private spending.
E) the marginal utility of an additional dollar's worth of spending on public goods is higher than
an additional dollar's worth of spending on private goods.
64)
65) In a market for a good or service, the quantities demanded and supplied are
A)
neither stock nor flow variables.
B) both stock variables.
C)
a flow variable and a stock variable, respectively.
D)
both flow variables.
E) a stock variable and a flow variable, respectively.
65)
66) If goods X and Y are substitutes and the price of X falls, all other things being equal, the demand
curve for Y will
A)
shift to the right.
B) shift to the left.
C)
not shift at all.
D)
be indeterminate.
66)
67) A leftward shift in the supply curve indicates
A)
a decrease in the quantity supplied at each price.
B) that an increase in income results in an increase in the quantity demanded at each price.
C)
that more suppliers have entered the industry.
D)
an increase in the quantity supplied at each price.
E) that more is demanded at each price.
67)
68) The term "quantity supplied" is the amount of a commodity that
A)
firms wish to sell at a given price during a given period of time.
B) is exchanged between firms and consumers during a given period of time at a given price.
C)
firms actually sell during a given period of time at a given price.
D)
households wish firms would sell during a given period of time at a given price.
E) is supplied at a fair market price.
68)
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FIGURE 3
-
3
69) Refer to Figure 3
-
3. At a price of P
3
there is excess ________ in the market for X and pressure for
the price to ________.
A)
demand; rise
B) supply; fall
C)
demand; fall
D) supply; rise
69)
The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.
Quantity
Demanded
(millions)
Quantity
Supplied
(millions)
Price ($)
Year 1
Year 2
Year 1
Year 2
30
80
95
140
125
26
90
105
135
120
22
100
115
130
115
18
110
125
125
110
14
120
135
120
105
10
130
145
115
100
TABLE 3
-
3
70) Refer to Table 3
-
3. The equilibrium price and quantity for overnight parcel delivery in Year 2 is
________ and ________ million parcels.
A)
$22; 115
B) $10; 100
C) $14; 120
D) $18; 125
E) $18; 110
70)
71) The price of one good divided by the price of another good is called a
A)
ceteris paribus
price.
B) absolute price.
C)
money price.
D)
relative price.
E) marginal price.
71)
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72) Suppose an index of average prices of imported goods in Canada indicates an increase in price of
2.3% over a 12
-
month period. Over the same period the Consumer Price Index indicates an
increase in the general price level of 2.3%. What is the change in the price of imports relative to the
change in the overall price level?
A)
an increase of 2.3%
B) an increase of 4.6%
C)
no change
D)
a decrease of 2.3%
E) a decrease of 4.6%
72)
73) Which of the following statements about price elasticity of demand is true?
A)
It usually increases over time.
B) It is greater than one if the percentage increase in the commodity's price is greater than the
percentage decline in quantity demanded.
C)
It is higher for an entire group of related products than it is for a particular product in that
group.
D)
It is a positive number because price and quantity demanded move in the same direction.
E) It is very small when good substitutes are readily available for the commodity.
73)
74) Consider two demand curves and the same price change for both. If the resulting percentage
change in quantity demanded is greater for one (
D
1
) than the other (
D
2
), we can conclude
A) that D
1
is inelastic and D
2
is elastic.
B) that D
2
is more elastic than D
1
.
C) that D
1
is more elastic than D
2
.
D) that D
1
is elastic and D
2
is inelastic.
E) nothing about their relative elasticities.
74)
75) If the total expenditure on perfume increases when the price of perfume falls, the price elasticity of
demand is
A)
greater than one (demand is elastic).
B) exactly zero.
C)
less than one (demand is inelastic).
D)
unity (demand is unit elastic).
E) not determinable from the information given.
75)
76) The elasticity of supply for some product will tend to be larger
A)
the harder it is for firms to shift from the production of this product to another.
B) the less time firms have to adjust to price changes.
C)
the easier it is for firms to shift from the production of this product to another.
D)
the lower is the elasticity of demand for the product.
E) the higher is the elasticity of demand for the product.
76)
77) Consider a firm's price elasticity of supply. If firms' costs rise rapidly as output increases, the
A)
price elasticity of supply will tend to be high.
B) demand curve will tend to be steep.
C)
supply curve will tend to be flat.
D)
price elasticity of supply will tend to be low.
E) elasticity of demand will tend to be low.
77)
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78) Given that elasticity of supply changes over time, in the short run an increase in demand will
generally cause
A)
the price to rise to a level below its long
-
run equilibrium value.
B) both price and quantity exchanged to rise above their long
-
run equilibrium values.
C)
the quantity exchanged to rise above its long
-
run equilibrium value.
D)
the price to rise above its long
-
run equilibrium value.
E) supply to change.
78)
79) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before
the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked. (P =
$15, Q =
100). The city government imposes a tax of $3 per car parked per day. Market equilibrium adjusts
to P =
$16 and Q =
95. What is the total after
-
tax revenue received per day by the seller after
imposition of the tax?
A) $1500
B) $1520
C) $1600
D) $1425
E) $1235
79)
80) Suppose the supply curve for breakfast cereals is upward sloping. Suppose also that as average
household income increases we observe a fall in the price of breakfast cereal. We can conclude that
breakfast cereal is a(n)
A)
normal good.
B) luxury good.
C)
inferior good.
D)
necessity good.
E) substitute good.
80)
81) If two goods, X and Y, have a negative cross elasticity of demand, then we know that they
A)
each have a price elasticity greater than one.
B) are both inferior goods.
C)
are complements.
D)
are substitutes.
E) are both normal goods.
81)
82) Partial
-
equilibrium analysis considers
A)
a specific market while ignoring any feedback effects that may come from induced changes
in other markets.
B) the induced changes in other markets that result from a partial change in the primary
market.
C)
how government planning can improve upon the results of a free market.
D)
only the existence of a market equilibrium, as if no other markets exist.
E) all markets simultaneously, recognizing the interactions among the various markets.
82)
83) The price of a good or a service can be determined by free interaction of demand and supply or by
a government price regulation. One important difference between these two price
-
determining
methods is
A)
one is capitalist and the other is communist.
B) there are no shortages or surpluses at the free
-
market equilibrium price.
C)
regulated prices are fairer since more people can then afford the goods or services.
D)
the government is in the best position to know the needs of the people.
E) that a regulated price above the equilibrium price will always result in shortages.
83)
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84) If a binding price floor is in place and if the demand curve for the product shifts rightward, one
consequence would be
A)
a decrease in the amount of excess supply.
B) a decrease in the amount of excess demand.
C)
a decrease in the quantity exchanged.
D)
an increase in the amount of excess demand.
E) an increase in the amount of excess supply.
84)
85) Suppose the government decides to eliminate a binding price floor that it had previously imposed
on a particular good. It can be expected that
A)
the price would increase, the quantity demanded would increase and the quantity supplied
would decrease.
B) the price would decrease, the quantity demanded would decrease and the quantity supplied
would increase.
C)
the price would decrease, the quantity demanded would increase and the quantity supplied
would decrease.
D)
the price would increase, the quantity demanded would decrease and the quantity supplied
would increase.
E) no changes would take place.
85)
FIGURE 5
-
1
86) Refer to Figure 5
-
1. If the diagram applies to the market for rental housing and P
3
represents the
maximum rent that can be charged, then
A)
units supplied will be reduced relative to the competitive equilibrium by AF rental units.
B) windfall profits will be earned by landlords.
C)
there will be an excess supply of rental units equal to BD.
D)
there will be excess demand for rental units equal to AF.
E) there will be excess demand for rental units equal to FC.
86)
A-24
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87) Suppose a downward
-
sloping demand curve intersects the horizontal axis at a point where
quantity demanded equals 1250 units. What is the "value" that consumers place on the 1250th unit
of this good?
A)
a positive value
B) it depends on the position of the supply curve
C) $0
D)
a negative value
E) $1250
87)
Demand and Supply Schedules for Chocolate Bars
Price
($)
Quantity Demanded
(thousands per week)
Quantity Supplied
(thousands per week)
2.00
1500
2100
1.80
1600
2050
1.60
1700
2000
1.40
1800
1950
1.20
1900
1900
1.00
2000
1850
0.80
2100
1800
0.60
2200
1750
0.40
2300
1700
TABLE 5
-
1
88) Refer to Table 5
-
1. Suppose that as a public health measure the government wants to reduce the
number of chocolate bars consumed by children. If the government imposes a price of $1.60 per
chocolate bar, how many fewer chocolate bars will be consumed each week, relative to the
competitive equilibrium?
A) 200
B) 300
C) 1800
D) 2000
E) 1700
88)
89) Consider the market for any agricultural commodity for which there exists a binding output quota
and demand is inelastic. Any individual producer has a clear financial incentive to
A)
give away their quota.
B) stop producing.
C)
leave the market.
D)
limit production of the commodity.
E) produce a small amount beyond their individual quota amount.
89)
90) Economists usually assume that consumers
A)
are motivated to maximize their utility.
B) are poor judges of what is best for them.
C)
are motivated to maximize their profit.
D)
spend all of their current income.
E) usually save as much as possible of their income.
90)
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91) In economics, the term "utility" is defined as the
A)
usefulness of a good.
B) system of basing the price of a good on its usefulness to society.
C)
total consumer satisfaction received from consumption of a good.
D)
a service such as sewer and water or electricity.
E) usefulness of a theory to explain price determination.
91)
The table below shows the quantities of toffee bars and bags of cashews that a consumer could consume over a 1
-
week period.
Toffee (bars)
Cashews (bags)
Units
Marginal
Utility
Total Utility
Marginal
Utility
Total Utility
1
10
10
12
12
2
8
18
10
22
3
5
23
7
29
4
3
26
5
34
5
1
27
2
36
6
0
27
1
37
7
0
27
0
27
TABLE 6
-
1
92) Refer to Table 6
-
1. If the prices of toffee bars and bags of cashews are both $1 and this consumer
has $7 per week to spend on these two snacks, how many of each will he/she purchase to
maximize utility?
A)
3 toffee bars and 4 bags of cashews
B) 2 toffee bars and 5 bags of cashews
C)
4 toffee bars and 3 bags of cashews
D)
6 toffee bars and 1 bag of cashews
E) 5 toffee bars and 2 bags of cashews
92)
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Diagrams A, B, and C show 3 individual consumers' demand curves for cement. Consumers A, B, and C constitute the entire monthly
cement market in this region.
FIGURE 6
-
3
93) Refer to Figure 6
-
3. On the regional market demand curve for cement (not shown), at which price
level(s) is there a "kink" in the demand curve?
A)
$30 and $70
B) $10
C) $80
D)
$20 and $30
E) $40 and $70
93)
FIGURE 6
-
4
94) Refer to Figure 6
-
4. For both goods, the price falls from P
0
to P
1
. The substitution effect is
illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the
change in quantity demanded from B to C. Good X is certainly a(n) ________ good.
A) inferior
B) luxury
C) Giffen
D) normal
E) necessity
94)
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95) At a garage sale, Ken purchases a used bicycle for $8 when he was willing to pay $25. If the bicycle
costs $75 new, Ken's consumer surplus is
A) $17.
B) $33.
C) $50.
D) $0.
E) $67.
95)
96) Which of the following is the best example of an input to production that is an intermediate
product?
A)
computer circuit boards
B) a sewing machine
C)
a textile factory
D)
the skills and training of a web designer
E) 40 acres of farmland
96)
97) Economists use the notation Q =
f
(L,K) to describe
A)
the financial relationship between the inputs that a firm uses and the outputs that it
produces.
B) the arithmetic relationship between the outputs that a firm uses and the inputs that it
produces.
C)
the level of output (Q) required to fully employ labour (L) and capital (K).
D)
the technological relationship between the inputs that a firm uses and the outputs that it
produces.
E) the flow of labour (L) and capital (K) services that are available when output is (Q).
97)
The table below provides the total revenues and costs for a small landscaping company in a recent year.
Total Revenues ($)
250 000
Total Costs ($)
-
wages and salaries
150 000
-
risk
-
free return of 2% on owner's capital of $20 000
400
-
interest on bank loan
1500
-
cost of supplies
27 000
-
depreciation of capital equipment
8000
-
additional wages the owner could have earned in next
best alternative
30 000
-
risk premium of 4% on owner's capital of $20 000
800
TABLE 7
-
2
98) Refer to Table 7
-
2. The accounting profits for this firm are
A)
$71 500.
B) $32 300.
C) $63 100.
D) $63 500.
E) $32 700.
98)
99) The period of time over which all factors of production and technology are variable is known as
the
A) very
-
long run.
B) short run.
C)
long run.
D) very
-
short run.
99)
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100)
With regard to economic decision making for firms, the short run is
A)
a definite number of months.
B) a period over which the quantities of all factors of production are variable but technology is
fixed.
C)
a period over which the quantities of all factors of production and technology are variable.
D)
less than one year.
E) a period over which the quantity of at least one significant factor of production is fixed.
100)
101)
In the short run, the firm's product curves show
A)
when the MP
curve cuts the AP
curve from above, the AP
curve begins to fall.
B)
AP
is at its minimum when MP
=
AP
.
C)
TP
is at its maximum when MP
is at its maximum.
D)
TP
begins to decrease when AP
begins to decrease.
E) when MP
<
AP
, AP
is increasing.
101)
102)
Consider a firm in the short run. If AP =
MP and both are positive, then total product
A)
may be either increasing or decreasing as extra units of the variable factor are employed.
B) is increasing as extra units of the variable factor are employed.
C)
is decreasing as extra units of the variable factor are employed.
D)
is at its minimum.
E) is at a maximum.
102)
103)
Consider the short
-
run costs of a firm. Suppose the firm's total fixed costs are $100 and average
variable costs are constant regardless of output. Which of the following is then true?
A)
Marginal cost will be less than average variable cost.
B) Average total cost will decrease when output is increased.
C)
Marginal cost will be rising as output rises.
D)
Average total costs will be constant.
E) Marginal cost will equal average total cost.
103)
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
-
4
104)
Refer to Table 7
-
4. The total cost of producing 175 units of output is
A) $350.
B) $100.
C) $175.
D) $75.
E) $150.
104)
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105)
Consider a firm that uses only labour and capital. At the present use of labour and capital, the MP
of labour is two times the MP
of capital, and the price of labour is two times the price of capital. In
order to minimize its costs, the firm should
A)
decrease both capital and labour.
B) decrease capital and increase labour.
C)
increase both labour and capital.
D)
substitute capital for labour until their marginal products are equal.
E) not alter its present factor mix.
105)
The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets
per month.
Technique
A
B
C
D
Labour
25
35
50
30
Capital
50
35
25
60
TABLE 8
-
1
106)
Refer to Table 8
-
1. If the price of labour is $5 and the price of capital is $10, which production
technique minimizes the costs of producing 1000 units of output?
A) A
B) B
C) C
D) D
E) Any of the techniques have the same cost.
106)
FIGURE 8
-
2
107)
Refer to Figure 8
-
2. Increasing returns to scale occur over the output range
A)
0 to Q
1
only.
B)
Q
2
to Q
3
only.
C)
Q
1
to Q
2
only.
D) beyond Q
3 only
.
E) 0 to Q
3 only
.
107)
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108)
A short
-
run average total cost curve and a long
-
run average cost curve are tangent
A)
by coincidence.
B) where the short
-
run cost curve is downward sloping.
C)
when the plant size is at the optimal level for that level of output.
D)
where the short
-
run cost curve is downward sloping and the plant size is optimal.
E) where the short
-
run cost curve is upward sloping.
108)
109)
The creation of a new product is called
A)
process innovation.
B) a rise in productivity.
C)
creative destruction.
D)
product innovation.
E) investment.
109)
110)
Which of the following producers operate in a market structure closely approximated by perfect
competition?
A)
Air Canada
B) a Safeway grocery store
C)
A B.C. peach grower.
D)
the Bank of Montreal
E) a restaurant in your neighbourhood
110)
111)
The conditions for a perfectly competitive market include which one of the following?
A)
Firms can control prices.
B) Firms must employ the newest technologies as soon as they are developed.
C)
Profits are zero in the short run.
D)
New entrants cannot threaten the position of existing firms.
E) Firms behave as price takers.
111)
112)
Why will a perfectly competitive firm not sell its product below the prevailing market price?
A)
This would lead to a price war among sellers.
B) It can sell all it wishes at the market price.
C)
Its costs would increase dramatically.
D)
The sellers in the market have agreed to not sell below a specified price.
E) It faces inelastic demand.
112)
113)
The market demand curve for a perfectly competitive industry is typically
A)
downward sloping.
B) a rectangular hyperbola.
C)
identical to the competitive firm's demand curve.
D)
infinitely elastic.
E) upward sloping.
113)
114)
For any firm operating in any market structure, marginal revenue (
MR
) equals
A)
△
(
p
×
q
)/
△
q
B)
p
×
q
.
C) (
p
×
q
)/
q
D)
△
p
×
△
q
.
E)
△
q/
△
p
114)
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115)
Farmer Anna is producing tomatoes in a perfectly competitive market. In Year 1 she sells 4000
bushels of tomatoes at a price of $12.00 each. In Year 2 she sells 4800 bushels at $13.00 each. In
Year 2, her average revenue is ________ and her marginal revenue is ________.
A)
$12.50; $12.50
B) $13.00; $13.00
C)
$13.00; $1.00
D)
$12.00; $1.00
E) $12.00; $12.00
115)
Consider the price and quantity data below for a perfectly competitive firm producing mousetraps.
Price ($)
Quantity
5
1000
5
1250
5
1500
5
1750
5
2000
TABLE 9
-
1
116)
Refer to Table 9
-
1. Suppose this firm is producing 1250 mousetraps and its average total cost is $4
per unit. The firm will be
A)
earning profits of $1250.
B) suffering losses of $5000.
C)
suffering losses of $1250.
D)
earning profits of $5000.
E) breaking even.
116)
Assume the following total cost schedule for a perfectly competitive firm.
Output
TVC ($)
TFC ($)
0
0
100
1
40
100
2
70
100
3
120
100
4
180
100
5
250
100
6
330
100
TABLE 9
-
2
117)
Refer to Table 9
-
2. If the market price were $71, this competitive firm wishing to maximize its
profits would
A)
produce 6 units of output.
B) produce 5 units of output.
C)
produce 2 units of output.
D)
not produce because
P
<
minimum of ATC
.
E) not produce because P
<
TFC
.
117)
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118)
The supply curve for a perfectly competitive industry is the horizontal summation of the
individual firms'
A) short
-
run average cost curves.
B)
MC
curves above AVC
.
C)
MC
curves above ATC
.
D)
MC
curves above AFC
.
E)
AVC
curves above MC
.
118)
119)
If firms in a competitive industry are earning positive economic profits, in the long run we expect
A)
the government would intervene and force the firms to lower prices.
B) the supply curve for the product will shift to the right as new firms enter the industry,
causing industry output to increase and price to fall.
C)
the demand curve for the product will shift to the left, so that the price of the product will
fall.
D)
there would be no change in the industry as long as P
=
MC
for the individual firms.
E) the individual firms will lower their price to discourage new firms from entering the
industry.
119)
120)
If a perfectly competitive firm is producing where its MR
=
MC, but is operating to the left of the
minimum point of its LRAC curve,
A)
its profits will decrease if it builds a larger plant.
B) it can reduce its average costs by building a larger plant.
C)
it cannot be optimizing its short
-
run behaviour.
D)
it can still be in long
-
run equilibrium as long as P =
SRATC.
E) it is in a long
-
run profit maximizing position.
120)
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Answer Key
Testname: FINAL EXAMINATION 2014 MICRO
1) B
2) C
3) E
4) A
5) B
6) A
7) B
8) E
9) B
10) A
11) B
12) B
13) A
14) C
15) A
16) E
17) D
18) D
19) D
20) E
21) E
22) C
23) D
24) B
25) D
26) C
27) A
28) B
29) D
30) B
31) E
32) A
33) C
34) D
35) A
36) C
37) B
38) B
39) E
40) C
41) C
42) C
43) E
44) E
45) A
46) D
47) C
48) A
49) E
50) C
51) E
52) E
53) A
54) E
55) E
56) E
57) D
58) C
59) E
60) B
61) D
62) B
63) B
64) B
65) D
66) B
67) A
68) A
69) A
70) A
71) D
72) C
73) A
74) C
75) A
76) C
77) D
78) D
79) E
80) C
81) C
82) A
83) B
84) A
85) C
86) A
87) C
88) A
89) E
90) A
91) C
92) A
93) A
94) A
95) A
96) A
97) D
98) D
99) A
100) E
101) A
102) B
103) B
104) C
105) E
106) C
107) E
108) C
109) D
110) C
111) E
112) B
113) A
114) A
115) B
116) A
117) B
118) B
119) B
120) B
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