Microeconomics Final Exam Questions

The economic inefficiencies of monopolistic competition may be offset by the fact that: a. advertising expenditures shift the average cost curve upward. b. available capacity is fully utilized. c. resources are optimally allocated to the production of the product. d. consumers have increased product variety.

d. consumers have increased product variety.

There is an expectation among demanders that lumber prices will be higher in the coming months. What effects can be predicted for the lumber market in the short run? a. P down, Q down b. P up, Q up c. P down, Q up d. P up, Q indeterminate e. P indeterminate, Q down

b. P up, Q up

In the capitalist or free enterprise system, which of the following most directly determines "what" will be produced? a. economists and planners b. government c. engineers & scientists d. firm's profit from production e. human wants and needs

d. firm's profit from production

Because the monopolist's demand curve is down-sloping: a. MR will equal price. b. price must be lowered to sell more output. c. the elasticity coefficient will increase as price is lowered. d. its supply curve will also be down-sloping.

b. price must be lowered to sell more output.

What is expected to happen to the price in the long run if firms in a competitive industry earn economic profit in the short run? a. price will increase in the long run as new firms enter the industry. b. price will decrease in the long run as new firms enter the industry. c. price will stay the same in the long run as what it is in the short run. d. there is no way to tell what will happen in a competitive industry in the long run.

b. price will decrease in the long run as new firms enter the industry.

Which of the following is most likely to be a fixed cost? a. shipping charges b. property insurance premiums c. wages for unskilled labor d. expenditures for raw materials

b. property insurance premiums

Under which of the following scenarios would successful ticket scalping be most likely? a. an economic surplus with price > Peq b. an economic surplus with price < Peq c. an economic shortage of Qd > Qs d. an economic shortage of Qd < Qs

c. an economic shortage of Qd > Qs

If firms produce a larger quantity of goods than they did previously at all price levels, we can say that there has occurred: a. a decrease in supply b. a decrease in demand c. an increase in supply d. an increase in demand e. a change in quantity supplied

c. an increase in supply

Which of the following normal goods is likely to have the least income elasticity of demand? a. dinner at a nice restaurant b. in-ground swimming pools c. toilet paper d. plasma screen and LCD TVs e. the income elasticities of all of the above would be equal

c. toilet paper

If an economic shortage exists, then: a. the price will fall due to the large market. b. the quantity supplied will equal the quantity demanded. c. producers are guaranteed economic profits. d. the quantity supplied exceeds the quantity demanded. e. the quantity supplied is less than the quantity demanded.

e. the quantity supplied is less than the quantity demanded.

Monica and Rachel live down the hall from each other in the same dorm. Monica likes to play her music loudly, but Rachel finds the music annoying. A Coase theorem solution for this problem would be: a. Monica and Rachel to negotiate a mutually agreeable level of volume and/or selection of music. b. the Director of Housing to impose a fine on Monica whenever she plays her music too loud. c. the dorm government to set a payment schedule by which Rachel would compensate Monica for making her play her music at a lower volume. d. the college to ban the playing of music in dorms. e. none of these answer represents a Coasian solution to the externality defined.

a. Monica and Rachel to negotiate a mutually agreeable level of volume and/or selection of music.

"Natural Monopoly" occurs primarily because of: a. large economies of scale b. single ownership of a unique resource c. government d. the firm's demand curve is downward-sloping e. none of the above

a. large economies of scale

The value of the best alternative to any action you take is referred to as: a. marginal cost b. opportunity cost c. marginal benefit d. comparative advantage e. elasticity

b. opportunity cost

Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $140. Amanda experiences: a. a consumer surplus of $10 and Tony experiences a producer surplus of $190. b. a producer surplus of $200 and Tony experiences a consumer surplus of $10. c. a consumer surplus of $670 and Tony experiences a producer surplus of $200. d. a producer surplus of $10 and Tony experiences a consumer surplus of $190. e. none of these

a. a consumer surplus of $10 and Tony experiences a producer surplus of $190.

The efficiency loss associated with a positive externality comes from the idea that: a. a production segment whose marginal costs are less than consumers' valuation of that segment is not produced. b. a production segment whose marginal costs are greater than consumers' valuation of that segment is not produced. c. taxes diminish any incentives to work. d. government spends dollars less efficiently than do households and businesses. e. there are more efficient ways to deal with externalities than through taxation.

a. a production segment whose marginal costs are less than consumers' valuation of that segment is not produced.

Given typical production and cost curves, which of the following is true at the quantity where marginal costs equals average total cost? a. average total cost has reached its minimum level b. average variable cost = average fixed cost c. marginal cost = economic profit d. marginal output declines as output increases e. average total cost declines if output is increased

a. average total cost has reached its minimum level

For a firm in pure competition, Qc is 100 where MC = MR. The product price is $10, the average variable cost is $8, but in this case average total cost is $11. This firm should __________. a. continue to produce because it's loss is less than it would be if it ceased production (shut down) b. continue to produce because it is earning an economic profit c. shut down in the short-run because it is earning an economic loss d. shut down in the short-run because the price exceeds average variable cost

a. continue to produce because it's loss is less than it would be if it ceased production (shut down)

A local transit authority charges $2 for a bus ride. An economic study suggests that in the price range from $1.50 to $2.50, the elasticity of demand for bus trips is 1.5. To increase its revenue, the transit authority should: a. decrease the fare. b. increase the fare. c. leave the fare as it is. d. not enough information to tell

a. decrease the fare.

If perfectly competitive firms earn economic profit, which of the following is expected to occur? a. easy entry will result in additional firms entering the competitive industry increasing competition. b. the product will automatically become differentiated and we will end up with monopolistic competition. c. a large number of small firms will become a small number of large firms. d. weak firms will be forced to exit this industry. e. none of the above

a. easy entry will result in additional firms entering the competitive industry increasing competition.

If regulators chose the most economically efficient price & output (where P = MC) for a natural monopoly such as an electric utility, the result would be: a. economic loss for the firm b. economic profit for the firm c. a "breakeven" result for the firm (profit = zero) d. economies of scale for the firm e. constant returns to scale for the firm

a. economic loss for the firm

Excise taxes are usually NOT placed on goods with elastic demand primarily because: a. efficiency losses (deadweight loss) on products with elastic demand is too large b. efficiency losses (deadweight loss) on products with elastic demand is too small c. the application of the tax to elastic products will make them become price-inelastic d. the revenue effects to sellers of the elastic good will not be affected by the application of the tax

a. efficiency losses (deadweight loss) on products with elastic demand is too large

The typical method of regulating natural monopolies is to enforce: a. fair-return pricing; though inefficient, it yields the firm a fair return but zero economic profit. b. fair-return pricing; it is most efficient and results in economic profits for the firm. c. socially-optimal pricing since it results in economic profits for the firm. d. socially-optimal pricing since it is based on the MR = MC principle.

a. fair-return pricing; though inefficient, it yields the firm a fair return but zero economic profit.

Which of the following is most likely an implicit cost for Newark Manufacturing Company? a. forgone rent from the building owned and used by this firm b. rental payments on IBM equipment c. payments for raw materials purchased from a supplier company d. transportation costs paid to a nearby trucking firm

a. forgone rent from the building owned and used by this firm

Which of the following statements is true? a. if the production of commodities can be broken down into a series of specific steps (division of labor), the gain in productivity will result in greater total output. b. in economics, an "inferior good" is defined as one whose price and quantity demanded vary directly. c. according to economic theory, an increase in the price of Coke will lead to decrease the price of Pepsi. d. a reduction in the supply of an item will increase the demand for it.

a. if the production of commodities can be broken down into a series of specific steps (division of labor), the gain in productivity will result in greater total output.

One would expect to observe diminishing marginal product of labor when: a. limited capital reduces the productivity of additional workers. b. workers are discouraged about the lack of help from other workers. c. a reduction in work effort due to higher wages. d. only new workers are trained in using the most productive capital.

a. limited capital reduces the productivity of additional workers.

If a product has many suitable substitutions, the price elasticity of demand is likely to be a. more elastic b. infinitely inelastic c. more inelastic d. 1

a. more elastic

You manage a firm called Daycare Inc. in an industry that has many small firms, east entry and exit (low capital costs), and a homogenous product. What market structure best describes the industry that you are in? a. perfect competition b. monopolistic competition c. monopoly d. oligopoly e. a price-elastic industry

a. perfect competition

If the supply of liquor is upward-sloping and demand for liquor is downward-sloping, a $1 excise tax (per bottle) placed on the liquor producer will: a. raise price by less than $1 per bottle. b. raise price by more than $1 per bottle. c. not change the price of liquor. d. lower price by $1 per bottle.

a. raise price by less than $1 per bottle.

Suppose that the equilibrium price for real estate has increase, yet we witness an increase in the sales of real estate. The logical conclusion is that: a. the demand for new homes must have increased. b. the law of demand has been violated in the case. c. new firms have entered the construction industry. d. the cost of constructing new homes must have increased.

a. the demand for new homes must have increased.

"Lower prices increase the purchasing power of consumers allowing them to buy more." This statement describes: a. the income effect. b. consumer behavior regarding an inferior behavior. c. the substitution effect. d. the allocation mechanism of markets. e. none of the above

a. the income effect.

If there exists an economic surplus of flour, which of the following must be true? a. the price of flour is above its free market equilibrium price b. the price of flour is below its free market equilibrium price c. the demand for flour must be decreasing d. the supply of flour must be increasing. e. none of the above can be inferred from the information provided.

a. the price of flour is above its free market equilibrium price

A $3.00 per unit tax levied on packs of cigarettes will shift the supply curve of cigarettes: a. upward by exactly $3.00. b. upward by less than $3.00. c. downward by less than $3.00. d. downward by exactly $3.00. e. none of these

a. upward by exactly $3.00.

Suppose that a business incurred implicit costs of $150,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profit is __________ and the economic profit is __________. a. $50,000; $200,000 loss b. $200,000; $50,000 c. $150,000; $50,000 d. $200,000; zero e. $150,000; $200,000

b. $200,000; $50,000

If a person pulls into a gas station and doesn't even bother to check the price and just puts $25 worth in the tank, that person's implied price elasticity is: a. zero b. 1 c. -1 d. infinite e. impossible to determine

b. 1

A 10% increase in income results in an 8% increase in purchases of eggs. a. since Ei > 1, eggs are a normal good. b. since Ei > 0, eggs are a normal good. c. since Ei < 1, eggs are an inferior good. d. since Ei < 0, eggs are an inferior good. e. eggs are price inelastic

b. Since Ei > 0, eggs are a normal good.

If the cross price elasticity of demand for good X with respect to the price of good Y is negative (Exy < 0), then goods X and Y are: a. normal goods. b. complement goods. c. substitute goods. d. inferior goods.

b. complement goods.

The price elasticity of demand coefficient (Ed) indicates the extent to which: a. the supply curve is upward-sloping. b. consumption (Qd) responds to price changes. c. the demand curve shifts as income changes. d. two goods are substitutable.

b. consumption (Qd) responds to price changes.

The likelihood of collusive agreements being successful is greater when: a. firms are producing differentiated products each with a unique demand curve. b. cost and demand curves of the rival firms are very similar. c. the number of firms involved is relatively large. d. the economy is in the recession phase of the business cycle and profit is questionable. e. none of the above

b. cost and demand curves of the rival firms are very similar.

Economics assumes that as a consumption of ice cream increases (per unit of time), the marginal utility of ice cream __________ per unit of time. a. increases b. decreases c. does not change d. impossible to determine

b. decreases

The conditions of the market structure known as Monopolistic Competition is best represented by: a. difficult entry, high capital costs, & differentiated products b. easy entry, many relatively small firms, differentiated products c. few firms, high capital costs, homogenous products d. many firms, difficult entry, homogenous products e. many small firms, easy entry, homogenous products

b. easy entry, many relatively small firms, differentiated products

An important similarity between a monopolistically competitive firm and a purely competitive firm is that: a. both face perfectly elastic demand schedules. b. economic profit tends toward zero in the long run for both industries. c. both realize productive efficiency. d. both realize allocative efficiency. e. none of the above

b. economic profit tends toward zero in the long run for both industries.

Which of the following statements is false? a. a distinguishing feature of economics is that it views "costs" as broadly dealing with foregone alternatives as opposed to dollars out of pocket. b. economics focuses on "how" goods are produced. the distribution of the goods and services produced by the economy is primarily the concern of other social sciences. c. the ceteris paribus assumption simplifies economic analysis and allows the true relationships between variable to be more clearly understood. d. "taxes are excessive in the United States." this is a normative economic statement.

b. economics focuses on "how" goods are produced. the distribution of the goods and services produced by the economy is primarily the concern of other social sciences.

What is the economic rationale for the law of increasing opportunity costs? a. full resource utilization and optimal allocation of goods and services have not been achieved. b. economic resources are not fully adaptable to alternative uses. c. economic growth is limited by technological advances. d. technology and resources are fixed.

b. economics resources are not fully adaptable to alternative uses.

Which of the following statements concerning a monopolistically competitive industry is correct? a. if there are short-run losses, firms will enter the industry and the market shares of the remaining firms will increase. b. if there are short-run economic profits, firms will enter the industry and eliminate the profit in the long run. c. if there are short-run losses, firms will leave the industry, and the market shares of the remaining firms will then fall. d. if there are short-run economic profits, firms will leave the industry and increase the short-run profit of the remaining firms in the long run.

b. if there are short-run economic profits, firms will enter the industry and eliminate the profit in the long run.

Which of the following is a short-run adjustment? a. the number of orchards in the United States increases by 8 percent. b. local grocery store hires two additional clerks. c. six new firms enter the generic drug industry. d. BMW constructs a new assembly plant in South Carolina.

b. local grocery store hires two additional clerks.

Because the demand for illicit drugs is considered to be inelastic, supporters of drug de-criminalization suggest that one of the significant gains for society from drug "legalization" is: a. the benefits that increased drug consumption will yield to new drug users. b. the reduced profit to selling drugs. c. the reduction in taxation revenue that the legalized drug trade will result in. d. an increase in the number of drugs offenders sent to prison. e. the increase in the prices of drugs to drug users.

b. the reduced profit to selling drugs.

Suppose that as the price of batteries falls from $4 to $3. As a result, the quantity of batteries demanded increases from 45 to 55. The implied price elasticity of demand is: a. 5.00 b. 1.43 c. 0.70 d. 0.20 e. none of these

c. 0.70

The cost of reducing pollution to Tide is $600 per ton. For Clorox, this cost is $1,000 per ton. A pollution credit costs $700 per ton. On the basis of this information, which of the following is most likely in a system of tradable emission credits? a. both firms would rather eliminate pollution than buy pollution credits. b. both firms would rather buy pollution credits than reduce their pollution. c. Clorox would seek a pollution credit and may get one from Tide who is willing to sell a credit. d. Tide would seek a pollution credit and may get one from Clorox who is willing to sell a credit. e. none of the above

c. Clorox would seek a pollution credit and may get one from Tide who is willing to sell a credit.

An unregulated pure monopolist will maximize profits by producing that output at which: a. P = MC. b. P = ATC. c. MR = MC. d. MC = AC. e. none of these

c. MR = MC.

The efficiency loss of a tax is the idea that: a. government spends dollars less efficiently than do households and businesses. b. there are more efficient ways to deal with externalities than through taxation. c. a production segment whose marginal costs are less than consumers' validation of that segment is not produced. d. a production segment whose marginal costs are greater than consumers' validation of that segment is not produced. e. taxes diminish any incentives to work.

c. a production segment whose marginal costs are less than consumers' validation of that segment is not produced.

Traditional analysis of the minimum wage treats it as a typical price floor leading to excess supply. Some studies of the minimum wage suggest that the price elasticity of demand for teenage workers is relatively inelastic. From this we can conclude that: a. the cross price elasticity of demand between teenage and adult workers is positive and very large. b. an increase in the Wmin would increase unemployment significantly for unskilled workers as group. c. an increase in the Wmin would increase unemployment very little for unskilled workers as a group. d. the earnings effect of an increase in the minimum wage would be relatively small.

c. an increase in the Wmin would increase unemployment very little for unskilled workers as a group.

Holding all other factors constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially more over a 10 year period, compared to a 6 month period because: a. buyers will have substantially more real income over a ten-year period. b. the quantity supplied of gasoline increases very little in response to an increase in the price of gasoline. c. buyers tend to be much more sensitive to a change in price when given more time to react. d. buyers tend to be much less sensitive to a change in price when given more time to react.

c. buyers tend to be much more sensitive to a change in price when given more time to react.

Which of the following is the best example of the concept of "price discrimination"? a. different sized coffees are sold at different prices at Dunkin Donuts. b. the golf balls used by serious players, which often require more steps in the production process, are more expensive than other balls. c. catalog companies like Victoria's Secret often send catalogs with higher prices to zip codes that are known to be in more affluent areas. d. the price of premium gasoline is higher than the price of regular.

c. catalog companies like Victoria's Secret often send catalogs with higher prices to zip codes that are known to be in more affluent areas.

Which of the following is not a characteristic of pure competition? a. a standardized product b. no barriers to entry c. different price strategies by the firms in the industry d. a larger number of sellers e. all of these are fundamental characteristics of perfect competition

c. different price strategies by the firms in the industry

A monopolistically competitive industry combines elements of both competition and monopoly. The most important characteristic about monopolistic competition that is different than perfect competition is: a. the likelihood of collusion. b. high entry barriers. c. product differentiation. d. mutual interdependence in decision making.

c. product differentiation.

Which of the following specifically represents the "Law of Demand": a. demand increases as income increases b. demand increases as the price of the product decreases c. quantity demanded increases as the price of the product decreases d. quantity demanded increases as income increases e. none of these

c. quantity demanded increases as the price of the product decreases

Economic profits are typically: a. greater than accounting profits because economic costs do not take explicit costs into account. b. equal to accounting profits because economic costs include all opportunity costs. c. smaller than accounting profits because economic costs take all costs, explicit and implicit, into account. d. greater than accounting profits because economic costs do not take implicit costs into account.

c. smaller than accounting profits because economic costs take all costs, explicit and implicit, into account.

Gayle can study, nap, or shop at the mall. She gets 20 units of satisfaction from shopping, 12 units from napping, and 6 units from studying. She chooses to study, but if she didn't study, she would shop. What is the opportunity cost of her choice to study? a. the 32 units of satisfaction she would have gotten from shopping and napping. b. the 6 units of satisfaction she gets from studying. c. the 20 units of satisfaction she would have gotten from shopping. d. zero because she gets satisfaction from all three activities. d. 2 units of satisfaction, which is the difference between what she gets from shopping less what she gets from napping and studying.

c. the 20 units of satisfaction she would have gotten from shopping.

Economics as a field of study is primarily concerned with: a. business making profits. b. acquiring assets and making money in the stock market. c. the production and allocation of goods and services to satisfy unlimited human wants. d. making our collective social interests consistent with our individual interests. e. creating public policies that will be unanimously supported.

c. the production and allocation of goods and services to satisfy unlimited human wants.

We calculate the price elasticity of demand for good X as the: a. change in quantity demanded of X divided by the change in the price of X. b. % change in price of X divided by the % change in quantity demanded of X. c. quantity of X divided by the price of X. d. % change in quantity demanded of X divided by the % change in the price of X. e. none of these

d. % change in quantity demanded of X divided by the % change in the price of X.

Assume an oligopolistic structure with three firms Alpha, Beta, & Gamma and total sales of $10 million. Alpha has $5 million of those sales, Beta has $3 million, and Gamma has $2 million. What is the industry Herfindahl Index? a. 100% b. 10,000 c. 2,600 d. 3,800 e. 50%

d. 3,800

I. Mary usually buys two dresses per month, but because they are on sale, she now buys four. II. Mary usually buys two dresses per month, but because she is replacing her total wardrobe, she is now buying four per month regardless of their price. a. both statements indicate a "change in the quantity demanded". b. both statements indicate a "change in demand". c. I is a "change in demand" and II is a "change in the quantity demanded". d. I is a "change in the quantity demanded" and II is a "change in demand".

d. I is a "change in the quantity demanded" and II is a "change in demand".

Consider a firm in a purely competitive industry that is in a long run equilibrium. Which of the following would be correct? a. P > MC and P > ATC a. P > MC and P = ATC c. P = MC and P > ATC d. P = MC and P = ATC

d. P = MC and P = ATC

If the price elasticity of demand for paper towels 0.4, a 10% decrease in the price of papers towels will result in: a. a 40% increase in the consumption of paper towels. b. a 10% decrease in the seller's profit from the sale of the paper towels. c. a 10% decrease in the consumption of paper towels. d. a 4% increase in consumption of paper towels. e. a 4% increase in the seller's total revenue from the sale of paper towels.

d. a 4% increase in consumption of paper towels.

Which of the following could cause a change in the quantity supplied for eggs? a. discovery of a new production technology for eggs b. a change in the price of milk - an alternative product for dairy farms c. the placement of an excise tax on eggs d. a change in the demand for eggs e. none of the above would cause a change in the quantity supplied for eggs

d. a change in the demand for eggs

A "negative" market externality refers to: a. any unanticipated change in market price or output. b. the impact of legal and institutional forces upon market behavior. c. a cost on the seller that results from implicit opportunity costs as opposed to direct "out-of-pocket" costs. d. a cost imposed on people other than the direct consumers and producers of a good or service. e. none of the above

d. a cost imposed on people other than the direct consumers and producers of a good or service.

Which of the following is a possible reason (cited in class) why Coase bargaining is NOT commonly used in general cases of negative externality? a. large number of parties can make consensus difficult to determine. b. transactions cost such as legal costs to a Coase bargaining agreement may be high. c. the externality to which Coase bargaining may apply can be difficult to quantify which could render a Coase bargaining solution impossible to apply. d. all of the above were cited in class as possible obstacles to Coarse bargaining.

d. all of the above were cited in class as possible obstacles to Coarse bargaining.

Which of the following, when changed, will not shift the demand curve for product X? a. income b. price of related product Y c. income expectations d. price of product X e. tastes and preferences for good X

d. price of product X

Movie theaters often give a discount to senior citizens. For what reason is this done? a. seniors have proven to be an inelastic customer segment. b. theater owners like to give things away to seniors. c. senior citizens lack other recreational activities. d. senior citizens have a more elastic demand than that of general customers. e. none of the above

d. senior citizens have a more elastic demand than that of general customers.

If an excise tax is placed on a product like gasoline, which has inelastic demand and supply, the: a. higher the proportion of the excise tax paid by consumers. b. smaller the proportion of the excise tax paid by producers. c. larger the efficiency loss of an excise tax will be. d. smaller the efficiency loss of an excise tax will be.

d. smaller the efficiency loss of an excise tax will be.

Steel is an input in the production of new cars. What will happen to the equilibrium price and quantity of new cars if the cost of steel rises and there is an increase in consumer income? a. P down; Q ? b. P ?; Q up c. P down; Q down d. P up; Q up e. P up; Q ?

e. P up; Q ?

Economic resources are considered to be: a. consumers, firms & markets b. demand, supply & equilibrium c. scarcity, utility & opportunity cost d. what, how & for whom e. land, labor, physical & human capital, & entrepreneurship

e. land, labor, physical & human capital, & entrepreneurship

We would expect the cross elasticity of demand between chicken and beef to be: a. positive, indicating normal goods. b. positive, indicating complementary goods. c. negative, indicating substitute goods. d. negative, indicating complementary goods. e. none of these

e. none of these

For a firm in pure competition, Qc is 100 where MC = MR. The product price is $10, the average variable cost is $8, but in this case average total cost is $11. This firm is earning __________. a. profit of $1,000 b. losses of $900 c. profit of $800 d. losses of $800 e. profit of $100

e. profit of $100