Economics Final Exam: Multiple Choice Questions Guide

SECTION I (Worth 15 marks) Answer the following 30 multiple choice questions. Each question is worth 0.5 marks 1) Which of the following BEST defines economics? A) Economics teaches how to limit our wants. B) Economics studies how to choose the best alternative when coping with scarcity. C) Economics helps you earn as much money as possible. D) Economics analyzes all aspects of human behavior in general. E) Economics is concerned with prices and quantities of goods and services, both at the individual level and at the industry level 2) If Jessie studies economics for two hours instead of going to the movies with her friends, then A) the benefit of studying is the missed movie. B) the opportunity cost of studying is the missed movie. C) Jesse definitely is making a rational choice. D) Jessie is ignoring the real cost. E) Jessie is not responding to any incentives 3) Consider a demand curve for apples. "A change in the price of apples leads to a ________ the demand curve for apples because ________. A) movement along; all other factors influencing buying plans are held constant B) shift in; all other factors influencing demand are held constant C) movement along; all other factors influencing demand are allowed to change D) shift in; changes in the prices of other fruit affect demand E) movement along; changes in the prices of other fruit affect demand 4) Suppose the current price of a pound of steak is $6 per pound and the equilibrium price is $9 per pound. What takes place? A) There is a shortage, so the price falls and quantity demanded increases. B) There is a surplus, so the price falls and quantity demanded increases. C) There is a shortage, so the price rises and quantity demanded decreases. D) There is a shortage, so the price rises and quantity demanded increases. E) There is a shortage, so the price falls and quantity demanded decreases 5) If a 2 percent change in price leads to a ________ percent change in the quantity demanded, then demand is ________. A) 2; elastic B) 1; unit elastic C) 3; inelastic D) 1; inelastic E) 0; perfectly elastic 1

6) The buyers pay all of a tax when the demand is A) perfectly elastic. B) more elastic than the supply. C) more inelastic than the supply. D) unit elastic. E) perfectly inelastic. 7) If the total utility of 2 bags of chips is 25, the total utility of 3 bags is 33, and the total utility of 4 bags is 40 units, then the marginal utility of the 3rd and 4th bags are A) 8 and 7, respectively. B) 12.5 and 11, respectively. C) 11 and 10, respectively. D) 58 and 73, respectively. E) 33 and 40, respectively 8) Suppose that Jen receives 400 units of utility from her last soda and 200 units of utility from her last slice of pizza. What can we conclude about Jen's choices if the price of a soda is $1 and the price of a slice of pizza is $2? A) Jen is maximizing utility because she buys more of the good providing the most utility. B) Jen should buy more soda to maximize her utility. C) Jen should buy more pizza to maximize her utility. D) Jen needs to buy less soda and less pizza to maximize her utility. E) None of the above answers is correct 9) Which of the following is an implicit cost of production? A) interest paid on a loan to a bank B) wages paid to labour C) the utility bill paid to water, electricity, and natural gas companies D) rent that could have been earned on a building owned and used by the firm 10) Upon graduating with an accounting degree, you open your own accounting firm, you and your assistant are the only employees. To start the firm, you passed on a job offer with a large accounting firm that offered you a salary of $50,000 annually. Last year you earned a total revenue of $120,000. Rent and supplies last year were $50,000. Your assistant's salary is $30,000 annually. .Your economic profit is A) -$10,000. B) $20,000. C) $40,000. D) $70,000. 2

11) Which of the following is correct about marginal and average products? A) When the marginal product is increasing, the average product must be increasing. B) When the marginal product exceeds the average product, the average product must be increasing. C) When the average product is increasing, the marginal product must be decreasing. D) When the marginal product is decreasing, the average product must be decreasing. E) When the marginal product is increasing, the average product must be decreasing 12) Consider the long-run average cost curve for a firm. Any point representing a cost and output combination that is below the LRAC curve A) is attainable only when all factors are variable. B) represents unattainable cost levels, given current technologies. C) is attainable if the firm minimizes its costs according to the "principle of substitution." D) represents less efficient cost levels than points on the long-run average cost curve. E) may represent actual cost and production levels in the short run. 13) Assume a firm is using 10 units of labour and 10 units of capital and is producing 10 units of output per hour. Now both inputs are doubled, resulting in output rising to 18 units per hour. The firm is experiencing A) decreasing costs. B) decreasing returns to scale. C) constant returns to scale. D) increasing returns to scale. E) economies of scale. 14) Perfect competition is characterized by all of the following EXCEPT A) a large number of buyers and sellers. B) no restrictions on entry into or exit from the industry. C) considerable advertising by individual firms. D) buyers and sellers are well informed about prices. E) firms produce an identical product. 3

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15) The above figure shows a perfectly competitive firm. If the market price is $20 per unit, the firm A) will definitely shut down to minimize its losses. B) will stay open to produce and will make zero economic profit. C) will stay open to produce and will incur an economic loss. D) will stay open to produce and will make an economic profit. E) might shut down but more information is needed about the fixed cost 16) A natural monopoly arises when B) a firm has many small firms that it can control. C) there are firms which act together as a monopoly. D) the long-run average cost curve slopes downward as it crosses the demand curve. E) one firm naturally convinces the government to limit competition in the market. 17) Which of the following is correct for a single-price monopoly? i. The firm can determine the quantity it produces and the price it charges. ii. It would never profitably produce output in the inelastic range of its demand. iii. Its marginal revenue is less than price. A) i only B) i and iii C) ii only D) ii and iii E) i, ii, and iii 4

18) Which of the following must a firm be able to do to successfully price discriminate? i. divide buyers into different groups according to their willingness to pay ii. prevent resale of the good or service iii. identify into which group (high willingness to pay or low willingness to pay) a buyer falls A) ii only B) i and ii C) i and iii D) iii only E) i, ii, and iii 19) Metro Transit offers senior citizens discounted fares for bus rides. This suggests that Metro Transit authorities believe that senior citizens have a ________ demand for bus rides. A) more income elastic B) less income elastic C) more price elastic D) less price elastic 20) Refer to Figure 16-1 . What is the price charged under perfect price discrimination? A) P 3 B) P 4 C) a range of prices corresponding to the demand curve from P 3 and above D) a range of prices corresponding to the demand curve from P 4 and above Answer: C 5

21) Which of the following four-firm concentration ratios would be the best indicator of a monopoly? A) 0.25 percent B) 31 percent C) 78 percent D) 100 percent E) 89 percent 22) Even though monopolistic competition results in inefficiency, it does have which of the following benefits for society? A) Firms make zero economic profit in the long run. B) Firms can make an economic profit in the short run. C) Product variety benefits consumers. D) Marginal cost equals price in the long run. E) The premise of the question is incorrect because nothing in monopolistic competition justifies any economic inefficiency. 23) Which of the following statements is true about monopolistically competitive firms? A) Unlike perfectly competitive firms, monopolistically competitive firms are able to raise their prices without losing all of their customers. B) Like perfectly competitive firms, monopolistically competitive firms are not able to raise prices without losing all of their customers because they face competition from firms selling similar products. C) Like perfectly competitive firms, monopolistically competitive firms maximize their profits by setting price equal to marginal cost. D) Unlike perfectly competitive firms, monopolistically competitive face perfectly inelastic demand curves. 24) Setting a price so low that competitors are driven out of a market and then boosting the price is called A) predatory pricing. C) resale price maintenance. D) price fixing. E) price discrimination. 25) A Nash equilibrium i. is named after the Nobel prize winning professor, John Nash. ii. occurs when each player chooses the best strategy given the strategy of the other player. iii. must give the best possible outcome for both players. A) i only B) ii only C) iii only D) i and ii E) ii and iii 6

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26) In the figure above, the nation with the LEAST equal distribution of income is nation A) A . B) B . C) C . D) The distribution of income is the same in all three nations because their Lorenz curves can be plotted on the same diagram. E) It is impossible to determine with the information given. Group Percent of income Poorest 20% 5 Second poorest 20% 10 Middle 20% 15 Second richest 20% 25 Richest 20% 45 The table gives the distribution of income in Miseria. 27) What percent of income is earned by the richest forty percent? A) 5 percent B) 20 percent C) 70 percent D) 55 percent E) More information is needed to answer the question. 7

28) Larry and Mike are equally skilled construction workers employed by the Brown and Root Company. Larry's job is riskier because he typically works on a scaffold 300 meters above ground. Larry's higher wage rate is the result of A) acquired differences B) a compensating differential. C) intrinsic differences D) a higher marginal revenue product. 29) The fundamental dilemma facing labour unions is A) job security versus worker safety. B) wage increases versus publicly provided pensions. C) "featherbedding" versus the union-wage premium. D) wage increases versus employment growth E) members' roles as workers versus their roles as consumers. 30) The average union wage premium in Canada is A) between 15 and 30%. B) more than 50%. C) less than 10%. D) between 30 and 50%. E) between 10 and 15%. : 8

SECTION II (Worth 25 marks) Answer the following Five questions. Each question is worth 5 marks Q1. The diagram figure represents Nick's Delicious Pizza House, a firm in monopolistic competition market in Halifax. a. To maximize profit, what quantity will Nick produced? [0.5 marks] 40 pizzas b. What price will Nick charged per pizza? [0.5 marks] $12 c. What is Nick's total cost per hour? [0.5 marks] TC= ATC x Q TC = 8 x 40 TC = $320 Nick’s total costs are $320 per hour. d. What is Nick's total revenue per hour? [0.5 marks] R=QxP R= 40 x 12 R = 480 $480 per hour e. What is Nick's economic profit or loss? [0.5 marks] R-TC = P 480- 320= 160 His profit is $160 per hour. f. Is Nicks’s firm in Long-run equilibrium? Why or why not? [0.5 marks] Briefly explain. No, if his firm was in long run equilibrium his profits would be zero, because firms will keep entering 9

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the market and the selling price will decrease until they’re just breaking even. g. In what way do firms operating in monopolistic competition similar to monopoly [1 mark] Simply bold your answer They are price takers They can earn economic profit in the short run There is mutual interdependence They face barriers to entry h. If firms enter the pizza market, what will happened to Nick’s demand curve? [1 mark] Simply bold your answer Shifts to the right and becomes more inelastic Shifts to the right and becomes less elastic It does not change Shifts to the left and becomes more elastic Shifts to the left and becomes more inelastic 10

Q2. Refer to the diagram below to answer the following questions. a. What quantity will this monopoly produce and what price will it charge if it is unregulated? [1 mark] They will produce 835 units and charge $59 per unit. b. Given your answers to part (a), what is the numerical value of consumer surplus? [1 mark] [(95-59)(835)] / 2 = 15,030 c. Suppose the monopoly is regulated. If the regulatory agency wants the firm to achieve an allocative efficient outcome ( hint : the socially optimal outcome), what price should it require the monopoly to charge? [0.5 marks] The agency would most likely require the firm to charge Marginal Cost Pricing. In that case they would produce 2204 units at $20 per unit. d. Given your answer to part (c), what is the major problem the firm faces if it charges to price required by the regulatory agency? [0.5 marks] Briefly explain. The firm would only be covering the marginal costs, not their total costs, so they’d be losing money on each unit sold. e. Suppose the government decides to regulate the monopoly by imposing average-cost pricing. What quantity will the monopoly produce and what price will the monopoly charge? [1 mark] They would produce 1740 units at $35 per unit. 11

f. Given the outcome in part (e), what profit will the regulated monopoly earn? [0.5 marks] They would not be making a profit, they would just be breaking even. g. What is a major benefit coming from government regulating natural monopolies? [0.5 marks] Simply bold your answer Firms earn greater profits Consumers pay higher prices Deadweight loss decreases Deadweight loss increases 12

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Q3. The diagram below represents demand and supply in the market for gasoline. a. How much is the government tax on each litre of gasoline? [0.5 marks] There is $0.60 of tax on each litre of gasoline. b. What portion ($ amount) of the per-unit tax is paid by consumers? [0.5 marks] Consumers pay $0.40 of the tax per litre of gasoline. c. What portion ($ amount) of the per-unit tax is paid by producers? [0.5 marks] Producers pay $0.20 of the tax per litre of gasoline. d. Given your understanding of the incidence of the tax, and your answers to parts (b & c), what can you determine about the elasticity of demand as compared to the elasticity of supply? [0.5 marks] Simply bold your answer Demand is less elastic than supply There are no differences between the elasticities Demand is more elastic than supply e. What is the quantity sold after the imposition of the tax? [0.5 marks] 13

After tax, 30,000 litres of gasoline is sold. f. What is the after-tax revenue per litre received by producers? [0.5 marks] R= Q x P R= 30,000 x 3.20 R= 96,000 The producers receive $96,000 after tax. g. What is the total tax revenue collected by the government? [1 mark] R = P x Q R= 30,000 x 0.60 R = 18,000 The government receives $18,000 in tax revenue. h. What is the value of the excess burden of the tax (Deadweight loss)? [1 mark] [(35,000-30,000)(3.80-3.20)] /2 = 1,500 The value of the DWL is $1,500. 14

Q4. Borgal & Partners are manufacturers operating in a perfectly competitive industry. Table below shows the firm's cost schedule. Use the table to answer the following questions. Quantity (cases) Variable Cost Total Cost Marginal Cost Average Variable Cost Average Total Cost 0 $0 $76 --- --- --- 1 30 106 $30 $30 106 2 50 126 20 25 63 3 58 134 8 19.33 44.67 4 64 140 6 16 35 5 84 160 20 16.8 32 6 114 190 30 19 31.67 7 150 226 36 21.43 32.29 8 190 266 40 23.75 33.25 9 240 316 50 26.67 35.11 a. Complete by filling in the blank cells. [2 marks] b. Borgal & Partners are selling their products at the market price of $40 per unit. What is the profit- maximizing or loss-minimizing level of output? [0.5 marks] 8 cases. c. Calculate the firm's profit or loss. [1 mark] R= 8 x 40 R=320 TC= 266 R-TC= 54 They are profiting $54 d. What price corresponds to the break-even quantity? [0.5 marks] e. “A perfectly competitive firm is called a price maker because all the firms together must make the market price." Is the statement correct or incorrect? Briefly explain your answer. [1 mark] This statement is incorrect, firms in a perfectly competitive market are price setters and must settle to what people are willing to pay, and if a firm lowers their price they can get a competitive advantage against the other firms in the market. 15

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Q5. Cermela and Maria, two St. Mary’s students who operate beauty parlors in Halifax. Both consider offering their clients free transportation services to and from their parlors. The payoff matrix below contains the expected monthly profits for each beauty parlor. a. Does Cermela have a dominant strategy and, if so, what is it? Briefly explain. [1 mark] Yes, her dominant strategy is Don’t Offer because she will be earning $150,000 or $80,000 rather than $110,000 or $60,000 respectively. b. Does Maria have a dominant strategy and, if so, what is it? Briefly explain. [1 mark] Yes, her dominant strategy is also Don’t offer because she will be earning $50,000 or $20,000 rather than $25,000 or $10,000. c. What is the Nash equilibrium in this game? [1 mark] d. Is there an incentive for Cermela and Maria to collude and form a cartel agreement? Why or why not? Briefly explain. [1 mark] No, because there isn’t a combination that is the best option for both girls. With any combination, one of the girls would be receiving a lower payoff than possible. e. What are the two main reasons cartels to fail? [1 mark] There’s an incentive to cheat on your agreement, and it’s difficult to prevent entries of new firms entering the market. 16

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