2Econ201 Final

12) (Chapter 6 Material) The price elasticity of demand for furniture is estimated at -1.3. This value means a one percent increase in the A) price of furniture will decrease the quantity of furniture demanded by 1.3 percent. B) quantity of furniture demanded will decrease the price of furniture by 1.3 percent. C) quantity of furniture demanded will increase the price of furniture by 1.3 percent. D) price of furniture will increase the quantity of furniture demanded by 1.3 percent.

A

21) Figure 9.1 $22: MC=650 AVC=900 shows the cost structure of a firm in a perfectly competitive market. If the market price is $22, the firmʹs short-run profit maximizing output level is: A) 650. B) 500. C) 1,200. D) 900

A

20) The key assumption that implies zero economic profit in the long run for a perfectly competitive firm is A) free entry and exit B) homogeneous product C) large number of small buyers and sellers D) differentiated product E) strategic interaction

A

23) Which of the following statements involving efficiency and perfect competition is FALSE? A) In the short run, productive efficiency is guaranteed. B) In the long run, allocative efficiency is guaranteed. C) In the long run, productive efficiency is guaranteed. D) In the short run, allocative efficiency is guaranteed

A

31) Refer to Table 13-1. Q, $, TR 4 6.00 24.00 5 5.50 27.50 6 5.00 30.00 What portion of the marginal revenue of the 5th unit is due to the output effect and what portion is due to the price effect? A) output effect = $5.50; price effect = -$2.00 B) output effect = $4.00; price effect = -$0.50 C) output effect = $1.50; price effect = $2.00 D) output effect = $3.00; price effect = $0.50

A

33) Refer to Figure 12-6. ATC and MC above Demand and MR The firm represented in the diagram A) makes zero economic profit. B) makes zero accounting profit. C) should expand its output to take advantage of economies of scale. D) should exit the industry

A

37) Refer to Table 13-1. Increase: Higher profit no matter what A does Leave: Lower profit no matter what A does Does Baine have a dominant strategy and if so, what is it? A) Yes, Baine should increase its advertising budget. B) Yes, Baine should keep its advertising budget as is. C) There are two dominant strategies: if Alistair increases its advertising budget, then Baineʹs best bet is to keep its budget the same but if Alistair does not increase its spending then Baine should raise its advertising budget D) No, there is no dominant strategy

A

38) In class we used game theory to examine the effects of a pledge by competing firms that they ʺwill not be undersoldʺ by the competition. What was the ultimate effect of this kind of pledge? A) It allowed the firms to overcome the prisonerʹs dilemma problem and charge high prices. B) It forced the firms to charge low prices in order to not be undercut by the competition. C) It reduced the profits of the firms by forcing them to charge a lower price than they would otherwise. D) Both B and C are correct

A

4) (Chapter 3 Material) The cost of raising beef cattle has risen at the same time as consumer preference for beef has fallen (i.e. decrease in beef demand). In the market for beef, these events result in the equilibrium price ________ and the equilibrium quantity ________. A) increasing, decreasing, or not changing; decreasing B) decreasing ; increasing, decreasing, or not changing C) increasing, decreasing, or not changing; increasing D) increasing; increasing, decreasing, or not changing

A

40) Suppose that an industry that had been perfectly competitive is transformed into a monopoly. Which is the following would occur? A) economic surplus decreases B) the price decreases C) consumer surplus increases D) level of output increases E) More than one of the above

A

41) Dynamic analysis suggests that certain monopolies should be viewed more favorably than they would be under the static view because A) their monopoly power may be the result of creating a uniquely useful product. B) their monopoly power may be the result of barriers to entry. C) they limit the price that can be charged for a product. D) they increase producer surplus (relative to perfect competition).

A

46) Rank market structures in terms of ʺmarket powerʺ of firms, from lowest market power to highest market power. The correct ranking is A) perfect competition, monopolistic competition, oligopoly, monopoly B) monopoly, monopolistic competition, oligopoly, perfect competition C) monopolistic competition, perfect competition, monopoly, oligopoly D) perfect competition, monopolistic competition, monopoly, oligopoly E) perfect competition, oligopoly, monopolistic competition, monopoly

A

47) Which of the following is a reason discussed in class that firms might voluntarily keep the price of their product below the equilibrium price? A) If customers feel that they are ʺtreated fairlyʺ they are more likely to remain loyal customers in the future. Thus, a company may maximize profits over time by charging a lower price today. B) Firms are often unaware that the price is below equilibrium and continue selling at the low price over time. C) Firms are generally good-hearted and want consumers to be able to pay the lowest price possible. D) None of the above - firms will never voluntarily sell at prices below equilibrium as it doesnʹt result in the maximum amount of profit

A

50) Consider the ʺrequired linksʺ for the final exam. Which of the following is TRUE? A) Robert Frank argues that Charles Darwin is the true founder of economics because he shows that competition is both beneficial and detrimental to society. B) Dan Arielly (the behavioral economist) argues that individuals make rational, informed decisions more often than economists have traditionally expected. C) All of the above

A

7) equilibrium: (30hrs, $4) D= (10hrs, $5) S= (40hrs, $5) (Chapter 4 Material) The market for low-skilled labor is illustrated in the figure above. The market is initially in equilibrium, and then a minimum wage of $5 per hour is imposed. Employment will fall by ________ million hours per year, and unemployment will rise by _______ million hours per year. A) 20 ; 30 B) 10 ; 30 C) 30 ; 10 D) 20 ; 20

A

???????? 22) Figure 9.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $10, in the short run, this firm will produce a quantity of output ________ zero, and suffer losses equal to _______. A) equal to ; $7,200. B) equal to ; AVC C) equal to ; total variable costs D) greater than ; total fixed costs E) greater than ; $2,800

A

$10: MR=MC $12: MR=ATC MC=ATC $14: D=MC $16: D, fewest haircuts (20) 29) Refer to Figure 15.1. If Domʹs Barber Shop is maximizing profit, it is earning a profit of A) $0. B) $80. C) $120. D) $320

B

15) What is the relationship among the following variables for a perfectly competitive firm: the market price, average revenue and marginal revenue? A) Average revenue is equal to the market price; average revenue is greater than marginal revenue. B) The market price is equal to both average revenue and marginal revenue. C) As a firm lowers the market price to sell more output, marginal revenue and average revenue will be less than the market price. D) Average revenue is equal to marginal revenue; average revenue is greater than the market price

B

17) Refer to Figure 12-2. Total revenue above, linear toalt cost below, exponential Suppose the firm is currently producing Q1 units. What happens if it expands output to Q2 units? A) Its profit increases by the size of the vertical distance cg. B) Its total revenues rise more than its total costs rise. C) It makes less profit. D) Its profits rise more than its total revenues rise. E) It is moving toward its profit maximizing output which is Q4.

B

2) (Chapter 2 Material) Refer to Figure 2-4. Consider the following events: a. a general advance in production technology b. an increase in the size of the economyʹs labor force c. some resources which had been idle are now used in production Which of the events listed above could cause a movement from X to Y? (a shift and movement along the line) A) a only B) a and b only C) c only D) a and c only E) a, b, and c

B

27) The demand facing a monopolistically competitive firm is ________ a monopolistic firm and ________ a perfectly competitive firm. A) more elastic than; as elastic as B) more elastic than; less elastic than C) less elastic than; more elastic than D) as elastic as; less elastic than

B

35) Economies of scale can lead to an oligopolistic market structure because A) a few firms can force rivals to produce at low levels of output. B) if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms. C) a few firms can use high profits to keep out new entrants. D) if economies of scale are insignificant, only a few firms are able to produce at the low costs achieved by the big established firms.

B

44) Refer to Figure 15-10. G: no intersection E: MC=D H: MC=MR F: D in line with MR The deadweight loss due to a monopoly is represented by the area A) GEH. B) FHE. C) FGE. D) FQ1Q2E

B

45) Monopoly power is a matter of degree. The _________________ the elasticity of demand, the less the monopoly power of the firm. A) less B) greate

B

48) Grace Makutsi finally bought a pair of blue shoes that she had been coveting for a long time. In less than a week she discovered that the shoes were uncomfortable. Grace went back to wearing her old pair and stashed away the new pair. When asked by her friend why does she not simply give away the new pair, she said: ʺBut I paid so much for them.ʺ Graceʹs behavior A) is rational because the more you pay for an item the more valuable it is. B) ignores the fact that the purchase price is now a sunk cost and has no bearing on whether she should give them away or not. C) is rational: she should not discard a valuable item

B

49) According to the findings of Behavioral Economics, people tend to do which of the following when they face uncertain outcomes? A) rationally consider the expected values of all possible outcomes B) overemphasize recent outcomes C) gather all of the relevant information concerning all of the possible outcomes. D) overestimate the possibility of mundane, undramatic outcomes (such as the increased likelihood of heart disease from being overweight)

B

1) Hours Open Total Revenue (dollars) 1 $25 2 45 3 70 4 90 5 105 6 110 Thuy Anh runs a small flower shop in the town of Florabunda. She is debating whether she should extend her hours of operation from 4 hours to 5 hours. Thuy Anh figures that her sales revenue will depend on the number of hours the flower shop is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of $16 per hour. 1) (Chapter 1 Material) Refer to Table 1-2. Thuy Anhʹs marginal benefit of staying open for five hours instead of four hours is _______, and her marginal cost of doing so is ________. A) $25 ; $16 B) $105 ; $80 C) $15 ; $16 D) $15 ; $15 E) $80 ; $105

C

13) Pizza Hut Labor (workers), Total output (pizzas produced per hour) 0 0 1 2 2 6 3 11 4 14 5 15 (Chapter 11 Material) Using the data in the above table, when do diminishing marginal returns to labor set in? A) after the 1st worker B) after the 2nd worker C) after the 3rd worker D) after the 4th worker E) None of the above - In the example diminishing marginal returns never set in

C

14) 20-25= up turn in U shape graph LRAC (price x quantity) (Chapter 11 Material) In the above figure, between 20 and 25 units per hour, the firm experiences A) economies of scale. B) increasing total fixed costs. C) diseconomies of scale. D) constant returns to scale

C

16) In perfect competition A) the market demand curve is perfectly inelastic while demand for an individual sellerʹs product is perfectly elastic. B) the market demand curve and the demand for an individual sellerʹs product are identical. C) the market demand curve is downward sloping while demand for an individual sellerʹs product is perfectly elastic. D) the market demand curve is perfectly elastic while demand for an individual sellerʹs product is perfectly inelastic.

C

25) Refer to Figure 11-6. P4: MC/=ATC P3:MC=ATC Suppose that initially the price is P4. In the long run - after entry and exit occurs - the price in this market will be: A) P1 B) P2 C) P3 D) P4

C

26) The owner of Tie-Dyed T-shirts, a perfectly competitive firm, has hired you to give him some economic advice. He has told you that the market price for his shirts is $20 and that he is currently producing 200 shirts. His AVC is $15 and his ATC is $25. Based on what you learned in this class, what should you recommend to him? A) To shut down in the short run, as he is incurring a loss and to leave the industry in the long run, if there are no changes in economic conditions. B) To continue to produce in the short run, even though he is earning a loss, and to expand in the future with the hope of increasing market share and total revenue. C) To continue producing in the short run, as his losses are less than his fixed costs, but to exit the industry in the long run if there are no changes in economic conditions. D) You tell him you cannot make any recommendations until you know what his fixed costs are.

C

34) A characteristic found only in oligopolies is A) independence of firms. B) products that are slightly different. C) interdependence of firms. D) break even level of profits.

C

43) When smaller companies merge and form a larger company, is it possible for consumers to benefit? A) No - the increase in market power results in higher consumer prices. B) Yes, if the increase in market power of the firm is more powerful than the increase in the firmʹs production costs. C) Yes, if the cost efficiencies through economies of scale are more powerful than the increase in market power of the firm. D) Yes, if the cost efficiencies through economies of scale are more powerful than the increase in marginal cost of the firm.

C

5) (Chapter 3 Material) Which of the following would cause increases in both the equilibrium price and quantity of white bread? A) An increase in the price of flour, an input to white bread production. B) An increase in the price of butter, a consumption complement for white bread. C) An increase in the price of rye bread, a consumption substitute for white bread. D) A decrease in the price of flour, an input to white bread production

C

9) MSC on MSB= (2, $150) MC on MSB= (4, $100) MC with MSC= (2, $50) (Chapter 5 Material) The above figure shows the marginal social benefit, marginal private cost and marginal social cost of producing steel. There is a marginal external ________ of ________ per ton. A) cost; $50 B) benefit; $50 C) cost; $100 D) benefit; $100 E) benefit; $200

C

Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 13-1 shows the payoff matrix for this advertising game. 36) Refer to Table 13-1. How are the firms in this advertising game caught in a prisonerʹs dilemma? A) Only the first mover is caught in a prisonerʹs dilemma because the second has a chance to observe and respond. B) Since each firm is uncertain about the otherʹs behavior, each will adopt a wait-and-see attitude which results in no increase in market share and no new customers. C) They would be more profitable if they refrained from advertising but each fears that if it does not advertise, it will lose customers. D) They are not in a prisonerʹs dilemma because there is one clear strategy for each.

C

Figure 4-4- S= (10,000, $1) D= (10,000, $3) equilibrium= (20,000, $2) 6) (Chapter 4 Material) Refer to Figure 4-4. The figure above represents the market for iced tea. Assume that this is a competitive market. If there are 10,000 glasses of tea produced in this market, then A) the marginal cost of iced tea is greater than the marginal benefit; therefore, output is inefficiently high. B) the marginal cost of iced tea is greater than the marginal benefit; therefore, output is inefficiently low. C) the marginal benefit of iced tea is greater than the marginal cost; therefore, output is inefficiently low. D) the marginal benefit of iced tea is greater than the marginal cost; therefore, output is inefficiently high.

C

10) (Chapter 6 Material) Which of the following statements is TRUE? A) A narrowly defined good or service generally has a less elastic demand. B) Goods or services for which a greater proportion of income is spent on the item generally have less elastic demand. C) Goods or services that have many close substitutes generally have a less elastic demand. D) The longer the time that has elapsed since a price change, the more elastic the demand.

D

11) (Chapter 6 Material) You are the manager of a store that carries generic soft drinks. Due to a local economic recession, your customersʹ incomes have fallen by five percent. The income elasticity of demand for these soft drinks is estimated to be -2. What is the change in the quantity of soft drinks you should order to satisfy the change in demand without a shortage or surplus of inventory? A) You should order 5% more soft drinks B) You should order 20% less soft drinks C) You should order 20% more soft drinks D) You should order 10% more soft drinks E) You should order 10% less soft drinks

D

18) If a perfectly competitive apple farmʹs marginal revenue is less than the marginal cost of the last bushel of apples sold, what should the farm do to maximize its profit? A) lower its price to sell more B) increase output C) raise its price to make more profit per unit D) decrease output E) produce the same level of output

D

19) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The ownerʹs accounting profit is ________ and the economic profit is ________. A) $25,000, -$5,000 B) $45,000, -$5,000 C) $20,000, $5,000 D) $20,000, -$5,000

D

24) In perfect competition, a firmʹs marginal cost curve above the minimum of the average variable cost curve is also: A) the market supply curve. B) the firmʹs producer surplus curve. C) the firmʹs demand for production curve. D) the firmʹs short-run supply curve

D

28) Refer to Figure 15.1. $10: MR=MC $12: MR=ATC D=ATC $14: D=MC $16: D, fewest haircuts (20) The profit-maximizing price for a haircut is A) $12. B) $14. C) $10. D) $16.

D

32) Refer to Figure 12-6. Q1: MR Q2: ATC=D Q3: MC=D Q4: MC=ATC The productively efficient output for this firm is _____ units, the allocatively efficient output level is ______ units, and the amount of output actually produced by the firm is ________ units. A) Q3 ; Q3 ; Q2 B) Q2 ; Q3 ; Q4 C) Q4 ; Q3 ; Q3 D) Q4 ; Q3 ; Q2 E) Q1 ; Q2 ; Q

D

39) What is a prisonerʹs dilemma game? A) a game that involves no dominant strategies B) a game in which prisoners are stumped because they cannot communicate with each other C) a game in which players collude to outfox authorities D) a game in which players act in rational, self-interested ways that leave everyone worse off

D

Figure 15-15 shows the cost and demand curves for the Erickson Power Company. 42) Refer to Figure 15-15. Erickson Power is a natural monopoly because A) it faces a downward-sloping demand curve. B) of its continually declining marginal revenue curve as output rises. C) it is a power company and all power companies are natural monopolies. D) average total cost is still declining when it intersects demand

D

Table K Blueberries Peaches Blueberries Peaches Devote all time to picking blueberries You: B80 P0 Them: B90 P0 Devote all time to picking peaches You: B0 P40 Them: B0 P30 Table K depicts how many pounds of blueberries and peaches you and your neighbor can pick in one week. 3) (Chapter 2 Material) Refer to Table K. Which of the following statements is true? A) Your neighborʹs opportunity cost of picking one pound of peaches is 1/3 pounds of blueberries. B) You have comparative advantage in blueberries. C) Your neighbor has absolute advantage in peaches. D) You have comparative advantage in peaches. E) More than one of the above is correct.

D

30) In the long run, there is likely to be entry of new firms in this industry. This entry will cause: A) the MC of Domʹs haircuts to fall. B) the MC of Domʹs haircuts to rise. C) the demand for Domʹs haircuts to decrease and become less elastic. D) the demand for Domʹs haircuts to increase and become less elastic. E) the demand for Domʹs haircuts to decrease and become more elastic

E

8) (Chapter 5 Material) Externalities A) do become reflected in market prices, so they can be a source of economic inefficiency. B) are not reflected in market prices, so they do not adversely affect economic efficiency. C) may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event. D) do become reflected in market prices, so they do not adversely affect economic efficiency. E) are not reflected in market prices, so they can be a source of economic inefficiency.

E