AP Econ Midterm

A profit-maximizing monopolist selects its output level in the

elastic region of its demand curve

A monopolistically competitive profit-maximizing firm is currently producing and selling 2,000 units of output. At this output level, marginal revenue is $9, average revenue is $10, and the average variable cost is $8. The product price is

$10

Which of the following is a source of monopoly power?

Barriers to Entry

Which of the following enables a seller to capture theentireconsumersurplusinamarket?

Perfect Price Descrimination

If the monopolist chooses to maximize total revenue rather than total profit, it will choose which combination of price and output?

Price = p3 Quantity = q3

The graph above shows the market demand for good X. A movement from point A to point B would most likely be caused by

a decrease in production costs for good X

Karen works part-time at a local convenience store and earns $10 per hour. She wants to spend next Saturday afternoon attending a music concert. The full price of a concert ticket is $75, but Karen was able to get a discounted price of $50 from a friend who purchased the ticket but has become unable to attend. If Karen took 4 hours off from her job to attend the concert, what was her opportunity cost of attending the concert?

$90

If the firm can sell as many potatoes as it wants for $2 per pound and has to pay each worker $5 per hour, how many workers should the firm employ to maximize profits?

3

Assume that demand for bottled water is relatively price elastic. An increase in supply of bottled water will result in which of the following?

A decrease in price, leading to an increase in total revenue

Assume that the market for tomatoes is in equilibrium at a price of $35 per bushel. If the demand for tomatoes decreases, which of the following will occur?

A surplus at $35, leading to a decrease in price and in quantity supplied

Which of the following is most likely to reduce inequality in a country's distribution of income?

An increase in the population growth rate

The diagram above shows the production possi- bilities curves for two countries, Country X and Country Y. Assume that both countries use equal amounts of resources in production. If the two countries engage in trade, both would be better off underwhichofthefollowingconditions?

Country Y specialized in the production of cars, because it has a comparative advantage in the production of cars.

Assume that the price of good X decreases from $10 to $9 per unit and that the quantity demanded of good X increases from 25 to 30 units. In this price range, the demand for good X is

Elastic

Suppose that the market for low-wage labor is perfectly competitive and initially in equilibrium. If the government establishes an effective minimum wage, which of the following will occur?

Employment of low-wage workers will decrease and unemployment will increase.

Suppose that the two biggest producers of gold, Bmine and Gmine, form a cartel to set price. However, each has the option to cheat or to not cheat on the agreement. The table below shows the payoffs from these strategies, with the first entry in each cell representing the payoff to Bmine and the second representing the payoff to Gmine.

Gmine'sdominantstrategyistonotcheat; Bmine's dominant strategy is to cheat.

The diagram above shows the production possibilities curve for Country Y. Which of the following statements is true?

If Country Y is producing at point C, it is using all its resources efficiently.

Which of the following statements about a monopolistically competitive firm in long-run equilibrium is true?

It has excess capacity and its output price exceeds its marginal cost, even though its long-run profit is zero.

Which of the following is true about the marginal revenue of a firm in a perfectly competitive industry?

It is constant.

In the short run, which of the following is true of a firm's average total cost of production?

It is equal to average fixed cost plus average variable cost.

The table above shows the short-run production function for picking apples. Based on the production data, which of the following statements about the marginal product of the fifth worker is true?

It is less than the marginal product of the third worker due to diminishing returns.

Which of the following is true of the substitution effect of an increase in the price of a normal good?

It works to reinforce the income effect.

JC pizzeria has a year remaining on an unbreakable lease on its building, requiring a payment of $20,000 a year. If JC operates over the next year, it estimates that its revenues will be $200,000 and that its expenses, in addition to the lease, will be $190,000. Which of the following statements is true?

JC should operate, since its loss is less than its fixed cost.

A firm produces truffles by using labor and capital. The price of labor is $10 per unit, and the price of capital is $20 per unit. At current output level, the marginal product of labor is 40 truffles and the marginal product of capital is 60 truffles. To reduce the total cost of producing the current quantity of truffles, how should the firm change its spending on labor and capital?

Labor = Increase Capital = Decrease

Let W denotes the nominal wage, P the output price, and MPL the marginal product of labor. Which of the following relationships correctly estimates the marginal cost (MC) of production for a perfectly competitive firm in the short run?

MC = W/MPL

Assumethatthegovernmentincreasestheunit excise tax on gasoline suppliers and also that people commute longer distances to work as more houses are built in city suburbs. As a result, the equilibrium price and quantity of gasoline will most likely change in which of the following ways?

Price = Increase Quantity = Indeterminate

Which of the following is true of both monopolistically competitive and perfectly competitive firms in long-run equilibrium?

Price equals average total cost.

If an industry ignores the external costs it generates in its production, which of the following will be true at the competitive market equilibrium output?

Price will be less than the marginal social cost.

Which of the following is the defining characteristic of a capitalistic economy?

Private ownership and protection of property rights

After which worker does diminishing marginal product first occur?

Second worker

Assume that a firm that produces a good in a constant-cost perfectly competitive industry is in long-run equilibrium. If the demand for the good increases, the profit-maximizing output by the firm will change in which of the following ways in the short run and long run?

Short run = Increase Long Run = Return to original level

If positive externalities exist in the market for flu shots, which of the following is true?

Subsidizing flu shots will lead to the socially efficient level of output.

In the current labor market, suppose that the wage rate for accountants is significantly higher than the wage rate for economists. In the long run, if you observed that the wage rate for economists rose while the wage rate for accountants fell, which of the following would best explain your observation?

The supply of economists must have decreased, and the supply of accountants must have increased.

Assume that the price elasticity of demand for good X is constant and equal to −0.5 and the price elasticity of demand for good Y is constant and equal to -2. Assume that goods X and Y have identical upward-sloping elastic supply curves. If a per-unit excise tax of the same amount is levied on good X and on good Y, which of the following would be true?

The tax share paid by consumers of good X would be relatively higher than that paid by consumers of good Y.

The graph above shows the cost curves for a competitive firm that produces 20 units of output. What are the total cost and the total fixed cost of producing 20 units of output?

Total Cost = $120 Total Fixed Cost = $20

If the income elasticity of demand for good X is negative and the cross-price elasticity of demand between good X and good Y is negative, which of the following must be true of good X?

X is an inferior good and is a complement to Y.

In the market shown in the graph above, at a price of $5, there will be

a surplus and the price will eventually fall

The cartel model of oligopoly predicts that

all the firms in the industry act in unison to set a monopoly price

A leftward shift in the supply curve of watches could be caused by

an increase in wages paid to workers who produce watches

Suppose that a firm is producing the profit- maximizing output under conditions of diminishing returns. Its output price is $25, and its marginal cost of production at its current output level is $25. Based on this information, it can be concluded that this firm must

be a perfectly competitive firm

The difference between the price a consumer would be willing to pay for a cone of ice cream and the actual market price that she pays gives a measure of her

consumer surplus

A governmental welfare program that taxes the labor income of the wealthy and redistributes the tax revenue to low-income citizens will

decrease income inequality and efficiency

If a firm's long-run average total cost increases as output increases, the firm is experiencing

diseconomies of scale

When total utility is at its maximum, marginal utility is

equal to zero

Individuals in any society must make choices regarding the types of goods and services to be produced because

free markets only satisfy the demands of paying consumers

If the monopolist produces the allocatively efficient level of output rather than the profit- maximizing level of output, consumer surplus will

increase by the area P5JKP4

When the monopolist produces the socially optimal level of output, it is

incurring economic losses and it requires a subsidy to continue in business

The short-run supply curve for a firm in a perfectly competitive industry is

its marginal cost curve above the minimum point of its average variable cost curve

If a firm's average total cost decreases as the firm increases its output, the firm's marginal cost must be

less than the average total cost

Assume that both the product and labor markets are perfectly competitive. It would be profitable for a firm to hire additional labor if the ratio of the wage to the marginal product of labor is

less than the output price

Pollution abatement policies will improve efficiency if the

marginal cost of abatement is less than the marginal benefit of abatement

A pure public good is a good that is

nonrivalrousandnonexcludablein consumption

If the government wants to regulate this monopoly to produce the socially optimum level of output, it should set a price equal to

p2

The primary purpose of antitrust laws is to

prevent firms from monopolizing trade and to promote competition

To maximize utility, a consumer with a fixed budget will purchase quantities of goods so that the ratios of the marginal utility of each good to its

price are equal

A firm's demand for labor is known as a derived demand because

the amount of labor demanded depends on the demand for the firm's product

If the price of a good produced by a competitive firm increases, then

the marginal revenue product of labor will increase

Which of the following is true for a monopoly but NOT for a perfectly competitive firm?

The firm faces a downward-sloping demand curve.

A perfectly competitive firm is currently producing at the profit-maximizing output level. If the marginal physical product of labor is 10 units per hour and the firm pays a wage rate of $8 per hour, which of the following is true?

The output price is $0.80 per unit.

If growing corn becomes more profitable than growing wheat, which of the following will occur?

The price of corn will decrease.

If resources were perfectly substitutable in all activities, which of the following would be true?

The production possibilities curve would be a straight line.