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Econ 2106 Principles of Microeconomics
Sample Exam 2
____
1. A decrease in a consumer's income
a. increases the slope of the consumer's budget constraint.
b. has no effect on the consumer's budget constraint.
c. decreases the slope of the consumer's budget constraint.
d. has no effect on the slope of the consumer's budget constraint.
____
2. The rate at which a consumer is willing to exchange one good for another, and maintain a constant level of
satisfaction, is called the
a. relative expenditure ratio.
b. value of marginal product.
c. marginal rate of substitution.
d. relative price ratio.
____
3. When two goods are perfect substitutes, the marginal rate of substitution
a. is constant along the indifference curve.
b. decreases as the scarcity of one good increases.
c. increases as the scarcity of one good increases.
d. changes to reflect the consumer’s changing preferences for the goods.
____
4. Suppose Rich always uses two packets of sugar with his coffee. Rich's indifference curves for sugar and coffee
are
a. bowed inward.
b. bowed outward.
c. straight lines.
d. L shaped.
____
5. A fall in the price of DVD players leads consumers to buy more DVD players. From this information we can
conclude that DVD players
a. are normal goods.
b. are inferior goods.
c. are Giffen goods.
d. None of the above is correct.
____
6. Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the substitution
effect by itself will
a. cause the consumer to buy more of good Y and less of good X.
b. cause the consumer to buy more of good X and less of good Y.
c. not affect the amount of goods X and Y that the consumer buys.
d. result in an upward-sloping demand for good Y if the substitution effect is positive.
____
7. An outward shift of the budget constraint will cause a consumer to buy
a. fewer normal goods and more inferior goods.
b. more normal goods and fewer inferior goods.
c. more normal goods and more inferior goods.
d. fewer normal goods and fewer inferior goods.
1 Figuree 21-7
____
8. Referr to Figure 21--7. Assume th
hat the consum
mer depicted in the figure faces prices and
a income su
uch that she
optim
mizes at point B. According
g to the graph
h, what chang
ge forces the consumer to move
m
to point A?
a. a decrease in th
he price of Sk
kittles
b. a decrease in th
he price of M&M's
M
c. an
n increase in the
t price of Sk
kittles
d. an
n increase in the
t price of M&M's
M
____
9. Assum
me that a college student purchases
p
onlly coffee and Snickers.
S
Thee substitution effect associaated with a
decrease in the pricce of a Snickeers will result in
n increase in the
t consumpttion of coffee only.
a. an
b. a decrease in th
he consumptiion of coffee only.
o
c. an
n increase in the
t consumpttion of Snickeers and a decrrease in the co
onsumption of
o coffee.
d. a decrease in th
he consumptiion of Snickerrs and an incrrease in the co
onsumption of
o coffee.
Figuree 21-9
____
10. Referr to Figure 21--9. Assume th
hat the consum
mer depicted in the figure has an incom
me of $40. Wh
hich of the
follow
wing price-qu
uantity combin
nations would be on her demand
d
curvee for marshmaallows if the price
p
of
choco
olate chips is $4?
$
a. $22.00, 3
b. $22.00, 9
c. $44.00, 3
d. $44.00, 9
2 ____
11. An ex
xample of an explicit
e
cost of
o production
n would be
a. th
he cost of forg
gone labor earrnings for an entrepreneurr.
b. th
he lost opporttunity to inveest in capital markets
m
when
n the money is invested in one's
bu
usiness.
c. leease payments for the land
d on which a firm’s
f
factory stands.
d. Both a and c arre correct.
____
12. Which
h of the follow
wing expressiions is correctt?
a. acccounting pro
ofit = total rev
venue - expliccit costs
b. ecconomic profit = total reveenue - impliciit costs
c. ecconomic profit = total reveenue - explicitt costs
d. Both a and b arre correct.
____
13. Dolorres used to wo
ork as a high school teacheer for $40,000 per year but quit in order to start her own
o
catering
busin
ness. To buy th
he necessary equipment,
e
sh
he withdrew $20,000 from
m her savings, (which paid 3 percent
intereest) and borro
owed $30,000 from her unccle, whom shee pays 3 perceent interest peer year. Last year
y
she paid
$25,0000 for ingrediients and had
d revenue of $60,000. She assked Louis th
he accountant and Greg thee economist to
o
calcullate her profitt for her.
a. Louis says her profit is $34,100 and Greg
g says her pro
ofit is $6,500.
g says she lostt $6,500.
b. Louis says her profit is $34,100 and Greg
g says she lostt $5,000.
c. Louis says her profit is $35,000 and Greg
g says her pro
ofit is 33,500.
d. Louis says her profit is $33,5500 and Greg
Figuree 13-2
d
a totall cost function
n for a firm th
hat produces cookies.
The fiigure below depicts
____
14. Referr to Figure 13--2. The chang
ging slope of the total cost curve reflectss
a. decreasing aveerage variablee cost.
b. decreasing aveerage total cosst.
arginal producct.
c. decreasing ma
ncreasing fixeed cost.
d. in
____
15. Assum
me a certain firm
f
regards the
t number off workers it employs
e
as vaariable, and th
hat it regards the size of itss
factorry as fixed. Th
his assumptio
on is often reaalistic
a. in
n the short run
n, but not in the
t long run.
b. in
n the long run
n, but not in th
he short run.
c. bo
oth in the sho
ort run and in
n the long run
n.
d. neeither in the short
s
run nor in the long ru
un.
3 ____
16. The co
ost of produccing an additional unit of output is the firm's
a. marginal
m
cost.
b. prroductivity offset.
c. vaariable cost.
d. av
verage variab
ble cost.
____
17. Dimin
nishing marginal product suggests
s
that
a. ad
dditional unitts of output become
b
less co
ostly as more output is pro
oduced.
b. marginal
m
cost is
i upward slo
oping.
c. th
he firm is at fu
ull capacity.
d. ad
dding additio
onal workers will lower tottal cost.
Figuree 13-5
____
18. Referr to Figure 13--5. Which of the
t following
g can be inferrred from the figure above?
(i)
Marginal cost
c
is increassing at all leveels of output.
Marginal product
p
is inccreasing at low
w levels of ou
utput.
(ii)
Marginal product
p
is deccreasing at hiigh levels of output.
o
(iii)
a.
b.
c.
d.
(i) and (ii)
(ii) and (iii)
(i) and (iii)
(ii) only
ario 13-5
Scena
duces and sellls staplers. Laast year, it pro
oduced 7,000 staplers and sold each staapler for $6. In
n
A certtain firm prod
produ
ucing the 7,00
00 staplers, it incurred
i
variiable costs of $28,000
$
and a total cost of $45,000.
____
19. Referr to Scenario 13-5.
1
The firm
m's accounting
g profit for th
he year was
a. $--3,000.
b. $--5,000
c. $77,000.
d. $117,000.
____
20. At wh
hat level of ou
utput will aveerage variablee cost equal av
verage total cost?
a. When
W
margina
al cost equals average totall cost
b. Fo
or all levels of
o output in which
w
averagee variable costt is falling
c. When
W
margina
al cost equals average variaable cost
d. Th
here is no lev
vel of output where
w
this occcurs, as long as fixed costss are positive.
4 ____
21. For Firm A, when four units of output are produced, the total cost is $175 and the average variable cost is
$33.75. What would the average fixed cost be if ten units were produced?
a. $4
b. $10
c. $40
d. $135
____
22. When firms are said to be price takers, it implies that if a firm raises its price,
a. buyers will go elsewhere.
b. buyers will pay the higher price in the short run.
c. competitors will also raise their prices.
d. firms in the industry will exercise market power.
____
23. If ABC Company sells its product in a competitive market, then
a. the price of that product depends on the quantity of the product that ABC Company
produces and sells since ABC Company’s demand curve is downward sloping.
b. ABC Company's total revenue must be proportional to its quantity of output.
c. ABC Company's total cost must be proportional to its quantity of output.
d. ABC Company's total revenue must be equal to its average revenue.
____
24. If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual
farmer's elasticity of demand
a. will also be -0.3.
b. depends on how large a crop the farmer produces.
c. will range between -0.3 and -1.0.
d. will be infinite.
____
25. The short-run supply curve for a firm in a perfectly competitive market is
a. horizontal.
b. likely to slope downward.
c. determined by forces external to the firm.
d. the portion of its marginal cost curve that lies above its average variable cost.
____
26. When price is below average variable cost, a firm in a competitive market will
a. shut down and incur fixed costs.
b. shut down and incur both variable and fixed costs.
c. continue to operate as long as average revenue exceeds marginal cost.
d. continue to operate as long as average revenue exceeds average fixed cost.
____
27. When a profit-maximizing competitive firm finds itself minimizing losses because it is unable to earn a
positive profit, this task is accomplished by producing the quantity at which price is equal to
a. sunk cost.
b. average fixed cost.
c. average variable cost.
d. marginal cost.
5 ____
28. A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is
positive. Then, the price rises to $25 and the firm makes whatever adjustments are necessary to maximize its
profit at the now-higher price. Once the firm has adjusted, which of the following statements is correct?
a. The firm's quantity of output is higher than it was previously.
b. The firm's average total cost is higher than it was previously.
c. The firm's marginal revenue is higher than it was previously.
d. All of the above are correct.
____
29. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will
a. fall in the short run. All firms will shut down and some of them will exit the industry. Price
will then rise to reach the new long-run equilibrium.
b. fall in the short run. No firms will shut down, but some of them will exit the industry. Price
will then rise to reach the new long-run equilibrium.
c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the
industry. Price will then rise to reach the new long-run equilibrium.
d. not fall in the short run because firms will exit to maintain the price.
____
30. Raiman's Shoe Repair also produces custom-made shoes. When Mr. Raiman produces 12 pairs a week, the
marginal cost of the twelfth pair is $84, and the MR of that unit is $70. What would you advise Mr. Raiman to
do?
a. Shut down the business.
b. Produce more custom-made shoes.
c. Decrease the price.
d. Produce fewer custom-made shoes.
____
31. Which of the following is an example of a barrier to entry?
(i)
A key resource is owned by a single firm.
(ii)
The costs of production make a single producer more efficient than a large number of
producers.
(iii)
The government has given the existing monopoly the exclusive right to produce the
good.
a.
b.
c.
d.
____
(i) and (ii)
(ii) and (iii)
(i) only
All of the above are examples of barriers to entry.
32. If the distribution of water is a natural monopoly, then
(i)
multiple firms will each have to pay large fixed costs to develop their own network
of pipes.
(ii)
allowing for competition among different firms in the water-distribution industry is
efficient.
(iii)
a single firm can serve the market at the lowest possible average total cost.
a.
b.
c.
d.
(i) and (ii)
(ii) and (iii)
(i) and (iii)
(iii) only
6 ____
33. A monopolist's average revenue is always
a. equal to marginal revenue.
b. greater than the price of its product.
c. equal to the price of its product.
d. less than the price of its product.
____
34. Marginal revenue can become negative for
a. both competitive and monopoly firms.
b. competitive firms, but not for monopoly firms.
c. monopoly firms, but not for competitive firms.
d. neither competitive nor monopoly firms.
____
35. Which of the following statements is true of a monopoly firm?
a. A monopoly firm is a price taker and has no supply curve.
b. A monopoly firm is a price maker and has no supply curve
c. A monopoly firm is a price maker and has a downward-sloping supply curve.
d. A monopoly firm is a price maker and has an upward-sloping supply curve.
Scenario 15-2
A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its
marginal revenue is $30, its average revenue is $60, and its average total cost is $34.
____
36. Refer to Scenario 15-2. The firm's profit-maximizing price is
a. $30.
b. between $30 and $34.
c. between $34 and $60.
d. $60.
____
37. The following table shows quantity, price, and marginal cost information for a monopoly. What price should
the firm charge to maximize its profit?
Q
0
1
2
3
4
5
6
a.
b.
c.
d.
P
10
9
8
7
6
5
4
MC
-3
4
5
6
7
8
$4
$5
$6
$7
7 ____
38. One problem with government operation of monopolies is that
a. a benevolent government is likely to be interested in generating profits for political gain.
b. monopolies typically have rising average costs.
c. the government typically has little incentive to reduce costs.
d. a government-regulated outcome will increase the profitability of the monopoly.
____
39. A perfectly price-discriminating monopolist is able to
a. maximize profit and produce a socially-optimal level of output.
b. maximize profit, but not produce a socially-optimal level of output.
c. produce a socially-optimal level of output, but not maximize profit.
d. exercise illegal preferences regarding the race and/or gender of its employees.
____
40. If a monopolist is able to perfectly price discriminate,
a. consumer surplus is always increased.
b. total surplus is always decreased.
c. consumer surplus and deadweight losses are transformed into monopoly profits.
d. the price effect dominates the output effect on monopoly revenue.
____
41. A firm cannot price discriminate if it
a. has perfect information about consumer demand.
b. operates in a competitive market.
c. faces a downward-sloping demand curve.
d. is regulated by the government.
____
42. If one were to compare a competitive market to a monopoly that engages in perfect price discrimination, one
could say that
a. in both cases, total social welfare is the same.
b. total social welfare is higher in the competitive market than with the perfectly price
discriminating monopoly.
c. in both cases, some potentially mutually beneficial trades do not occur.
d. consumer surplus is the same in both cases.
____
43. Monopolistic competition differs from perfect competition because in monopolistically competitive markets
a. there are barriers to entry.
b. all firms can eventually earn economic profits.
c. each of the sellers offers a somewhat different product.
d. strategic interactions between firms is vitally important.
____
44. In the short run, a firm in a monopolistically competitive market operates much like a
a. firm in a perfectly competitive market.
b. firm in an oligopoly.
c. monopolist.
d. monopsonist.
____
45. As firms exit a monopolistically competitive market, profits of remaining firms
a. decline and product diversity in the market decreases.
b. decline and product diversity in the market increases.
c. rise and product diversity in the market decreases.
d. rise and product diversity in the market increases.
8 ____
46. Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to
a. a change in the technology that the firm utilizes.
b. a shift of its demand curve.
c. a shift of its supply curve.
d. an increase in the firm’s average cost of production.
____
47. An important difference between the situation faced by a profit-maximizing monopolistically competitive firm
in the short run and the situation faced by that same firm in the long run is that in the short run,
a. price may exceed marginal revenue, but in the long run, price equals marginal revenue.
b. price may exceed marginal cost, but in the long run, price equals marginal cost.
c. price may exceed average total cost, but in the long run, price equals average total cost.
d. there are many firms in the market, but in the long run, there are only a few firms in the
market.
____
48. Monopolistically competitive firms have excess capacity. To maximize profits, firms will
a. increase their output to lower their average total cost of production and eliminate the
excess capacity.
b. produce where price equals marginal cost to eliminate the excess capacity.
c. produce where average revenue equals marginal cost to eliminate the excess capacity.
d. maintain the excess capacity.
____
49. Which of the following best describes the idea of excess capacity in monopolistic competition?
a. Firms produce more output than is socially desirable.
b. The output produced by a typical firm is less than what would occur at the minimum point
on its ATC curve.
c. Due to product differentiation, firms choose output levels where P > ATC.
d. Firms keep some surplus output on hand in case there is a shift in the demand for their
product.
____
50. When firms in a monopolistically competitive market engage in price-related advertising, defenders of
advertising argue that
a. the quality of products sold in the market always increases.
b. customers are less likely to be informed about other characteristics of the product.
c. new firms are discouraged from entering the market.
d. each firm has less market power.
9 Answer Key
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D
C
A
D
D
A
B
D
C
B
C
A
B
C
A
A
B
B
A
D
A
A
B
D
D
A
D
D
C
D
D
C
C
C
B
D
D
C
A
C
B
A
C
C
C
B
C
10 48. ANS: D
49. ANS: B
50. ANS: D
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