Microeconomics Final Review (Test 1 A/B + Test 2 A/B) Bruce McClung 2314

5. For entry into a particular perfectly competitive industry to occur, which of the following must be true?

C. Economic profits are greater than zero

Gertie saw a pair of jeans that she was willing to buy for $35. The price tag, though, said they were $29.99. Therefore:

C. Gertie should buy the jeans because the price is less than her reservation price.

Which of the following is NOT true of a perfectly competitive firm? .

C. It seeks to maximize revenue.

22. A firm that emerges as the only seller in an industry with economies of scale is termed a(n):

C. Natural Monopoly

19. Patents and copyrights, which confer market power, exist to:

C. Protect research, Development and creative expression

23. Satellite TV is a close substitute for cable TV. In the 1990's, small satellite TV units were developed that made it more practical for individual consumers to subscribe to satellite TV service. This caused the price elasticity of demand for cable TV service to:

C. become more elastic.

Refer to the figure above. The profit-maximizing level of output for the monopolist is:

C. A.

13. The profit maximizing rule P = MC applies to:

D. perfect competitors only

25. A monopolist calculates its marginal revenue to be $15 and marginal cost to be $16. The firm:

D. Should decrease output

If the quantity demanded of a good is Q when the price for the good is P, the price elasticity of demand for that good at that point is:

A. (P/Q)*(1/slope)

If the slope of the demand curve is -1.4, price is $5 and quantity demanded is 13 units, the price elasticity of demand is:

A. 0.27.

What might cause a demand function to shift to the right?

A. An increase in the price of a substitute.

6. Which of the following factors of production is likely to be fixed in the short run?

A. The location of the firm.

7. Which of the following is most likely to be a variable factor of production at a university?

A. The number of teaching assistants.

Average total cost is defined as

A. Total cost divided by output

A movement along a demand curve from one price-quantity combination to another is called:

A. a change in quantity demanded.

Suppose that the technology used to manufacture laptops has improved. The likely result would be:

A. an increase in supply of laptops.

If the price of computers increases and the demand for monitors decreases as a result, then:

A. computers and monitors are complements.

TEST 2B 1. Generally, ______ motivate firms to enter an industry while ______ motivate firms to exit an industry.

A. economic profits, economic losses

If the percentage change in the price of a good is less than the percentage change in the quantity demanded of that good then the demand for that good, with respect to price, is:

A. elastic.

Application of the Principle of Comparative Advantage leads to:

A. greater specialization of labor and other factors of production.

18. De Beers accounts for approximately 80% of diamond sales worldwide. The source of their market power is:

A. its exclusive ownership of south african diamond mines

Dent 'n' Scratch Used Cars and Trucks employs 3 salesmen. Data for their sales last month are shown in this table: Cars Sold Trucks Sold Larry 10 5 __________________________ Joe 9 9 __________________________ Ralph 3 12 __________________________ Joe's opportunity cost of selling a car is ______ than Ralph's, and Joe's opportunity cost of selling a car is ______ than Larry's.

A. less; greater

Joe's opportunity cost of selling a car is ______ than Ralph's, and Joe's opportunity cost of selling a car is ______ than Larry's.

A. less; greater

9. In many towns in the United States, a single firm provides electricity. Those firms are:

A. monopolist

2. Suppose all firms in a perfectly competitive industry are experiencing economic profits. One would expect that, over time, the number of firms will _______ and the market price will _____.

A. rise, fall

If all the world's resources were to magically increase a hundredfold, then:

A. the scarcity principle would still govern behavior.

Refer to the figure above. The profit maximizing price for the monopolist is:

A.C.

Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. Refer to the information given above. Pat's accounting profit is _______, and Pat's economic profit is _______.

B. $34,000; -$1,000

Refer to the figure above. When the demand is P1 = $30, how much profit is this producer earning?

B. $800

14. Which of the following statements is always true?

B. Comparative advantage does not require absolute advantage.

21. A firm is most likely to experience economies of scale if it has _____ start up costs and ______ variable costs.

B. High;Low

You have noticed that your next-door neighbor, Mary, always works in the garden and her husband, Joe, always walks the dog. Based on this observation, you conclude that:

B. Joe has a comparative advantage in walking the dog.

Dent 'n' Scratch Used Cars and Trucks employs 3 salesmen. Data for their sales last month are shown in this table: Cars Sold Trucks Sold Larry 10 5 __________________________ Joe 9 9 __________________________ Ralph 3 12 __________________________ ________ has an absolute advantage in selling cars and __________ has an absolute advantage in selling trucks.

B. Larry; Ralph

________ has an absolute advantage in selling cars and __________ has an absolute advantage in selling trucks.

B. Larry; Ralph

Refer to the figure above. When the demand is P1 = $30, what is the profit maximizing output?

D. 80

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry maximizes his surplus by attending:

B. State College, because the difference between the benefit and cost is greatest there.

8. Pure monopoly exists when:

B. a single firm produces a good with no close subs

16. A perfectly competitive firm's output price is $8 and the firm is producing 77 units with a marginal cost of $11. The firm should:

B. decrease production

The seventh glass of soda that Tim consumes will produce an extra benefit of 10 cents and has an extra cost of zero (Tim is eating at the cafeteria). The cost-benefit principle predicts that Tim will:

B. drink the seventh glass and continue until the marginal benefit of drinking another glass of soda is zero.

The supply curve illustrates that firms:

B. increase the quantity supplied of a good when its price rises.

A fixed factor of production:

B. is fixed only in the short run.

Jeans in general have fewer close substitutes than any specific brand of jeans. Therefore, the demand for jeans in general would be _______ than the demand for a specific brand of jeans.

B. more inelastic

10. A downward sloping demand function:

B. necessarily implies that the firms marginal revenue will be less than price

If the demand for a good decreases as income decreases, it is a(n):

B. normal good.

The percentage change in quantity demanded that results from the percentage change in price is known as the:

B. price elasticity of demand.

Suppose a perfectly competitive firm knows that it is not going to shut down, but it is going to earn a loss. It should pick the output level where:

B. price equals marginal cost

If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is:

B. price inelastic.

The central concern of economics is:

B. scarcity

At the very least, Joe Average and Bill Gates are both identically limited by:

B. the 24 hours that comprise a day.

TEST 2A A rational seller will sell another unit if:

B. the cost of making the next unit is less than the revenue gained by selling the next unit.

The opportunity cost of an activity is the value of:

B. the next-best alternative forgone.

23. Which of the following would not be included in the calculation of accounting profits?

B.The salary the owner could have earned working elsewhere

If a perfectly competitive firm produces an output level where price is less than marginal costs, then the firm should:

B.leave its output decision unchanged.

21. Accounting profits are:

B.the difference between total revenues and explicit costs

22. If you were to start your own business, your implicit costs would include:

B.the opportunity cost of your time

Which of the following statements is true for both General Motors and a locally owned restaurant?

D. Both seek to maximize profits.

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. No Name U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. The opportunity cost of attending Elite U is:

C. $20,000

If the price elasticity of demand for tickets to a football game is 2 then, when the price increases by 1%, quantity demanded decreases by:

C. 2%.

When the market price of mushrooms is $40 per bushel, if Moe chooses the profit maximizing quantity he will This graph shows the cost functions of Moe's mushroom gathering business, which is perfectly competitive.

C. earn positive profits

14. If a monopolist finds that its marginal revenue exceeds its marginal costs at the current level of output, it should:

C. expand output until marginal revenue equals marginal cost

Price elasticity of demand is often expressed as a positive number because:

C. it's convenient to use absolute values even though the formula yields non-positive numbers.

8. Congestion of the work space and fixed factors of production at the firm:

C. lead to diminishing marginal returns.

When price is $15 in this industry,

C. new firms will be expected to enter.

Refer to the figure above. This firm can earn a positive profit at ______ units of output.

C. no possible

Assume that a firm uses 13 employee-hours and an office to produce 100 units of output. The price of output is $5, the wage rate is $10, and rent is $200. The firm will earn a _____ of _____.

C. profit, 170

4. In an industry with free entry and exit, economic profits:

C. provide incentives for a reallocation of recourses out of other industries and into the one with economic profits

A shortage occurs when:

C. quantity demanded exceeds quantity supplied.

PART B 1. The demand curve illustrates the fact that consumers:

C. tend to purchase more of a good as its price falls.

In general, when the demand curve shifts to the right and supply remains constant then:

C. the equilibrium quantity will rise.

The production possibilities curve shows:

C. the maximum production of one good for every possible production level of the other good.

Having a comparative advantage in a particular task means that:

C. you give up less to accomplish that task than do others.

Quantity Total Revenues Explicit Costs Implicit Costs 10 50 36 5 16 75 63 6 20 100 93 7 25 125 125 8 30 150 169 9 _______________________________________ Refer to the figure above. At what output level or levels are the business owners doing as well as or better than their next best alternative?

C.10, 15, and 20 units

If Scout has an absolute advantage over Dill:

D. Scout can accomplish more in a given period of time than can Dill

Dent 'n' Scratch Used Cars and Trucks employs 3 salesmen. Data for their sales last month are shown in this table: Cars Sold Trucks Sold Larry 10 5 __________________________ Joe 9 9 __________________________ Ralph 3 12 __________________________ For Ralph, the opportunity cost of selling a truck is:

D. 1/4 car not sold.

For Ralph, the opportunity cost of selling a truck is:

D. 1/4 car not sold.

Dent 'n' Scratch Used Cars and Trucks employs 3 salesmen. Data for their sales last month are shown in this table: Cars Sold Trucks Sold Larry 10 5 __________________________ Joe 9 9 __________________________ Ralph 3 12 __________________________ For Larry, the opportunity cost of selling a truck is:

D. 2 fewer cars sold

For Larry, the opportunity cost of selling a truck is:

D. 2 fewer cars sold.

According to the principle of increasing opportunity cost, expanding production requires using resources in which order?

D. Starting with the resource with the lowest opportunity cost and proceeding to the higher opportunity cost resources.

When mushrooms sell for $10 per bushel, if Moe chooses the profit maximizing quantity Moe will gather This graph shows the cost functions of Moe's mushroom gathering business, which is perfectly competitive.

D. Zero Bushels

11. Suppose a firm collects $90 in revenues when it sells 4 units, $100 in revenues when it sells 5 units, and $105 when it sells 6 units. You could infer the firm is likely to be:

D. a monopolist

Chris has a one-hour break between classes every Wednesday. Chris can either stay at the library and study or go to the gym and work out. The decision Chris must make is:

D. an economic problem because Chris has only one hour during which he can study or work out.

A market comprised of a downward-sloping demand curve that intersects an upward-sloping supply curve is said to be stable because:

D. at any price other than equilibrium, forces in the market move price towards the equilibrium

Economic questions always deal with:

D. choice in the face of limited resources

6. In a perfectly competitive industry over the long run:

D. economic profits and losses are driven towards zero by entry and exit

20. According to the textbook, the most important and enduring source of market power is:

D. economics of scale

A market in disequilibrium would feature:

D. either excess supply or excess demand.

3. If all firms in a perfectly competitive industry are experiencing economic losses, then firms will:

D. exit the industry, until economic profits equal zero

When the demand for a good is inelastic, that good is likely to have:

D. few close substitutes.

4. A price-taker confronts a demand curve that is:

D. horizontal at the market price.

The cost-benefit principle indicates that an action should be taken:

D. if the extra benefit is greater than or equal to the extra costs.

12. Because the monopolist charges a price in excess of marginal costs, it must be the case that the monopolist:

D. produces less than the socially efficient level of output

If supply were to shift to the left, and demand were to also shift to the left, in the new equilibrium:

D. quantity would be lower, but the direction of the price change cannot be determined.

15. A decrease in the price the firm receives for its output will cause the firm to:

D. reduce output and earn smaller profits or larger losses

Sally earned $25,000 per year before she became a mother. After she became a mother, she told her employer that her opportunity cost of working is now $50,000, and so she is not willing to work for anything less. Her decision is based on:

D. the value she places on spending time with her child.

In the short run, if a firm chooses to operate and produce output, it must be the case that:

D. total revenues are greater than or equal to the cost of variable factors of production.

23. The primary objective of a monopolist is to:

D.Maximize Profits