4001.01

As a firm in a perfectly competitive market increases its output by moving along its short-run supply curve, which of the following always decreases? a) Average fixed cost. b) Short-run average variable cost. c) Short-run average total cost. d) Profit. e) None of the above.

a)

In the short-run, the ABC Widget Company combines a variable amount of labor (L) with a fixed amount of capital to produce output (q) according to the production function q=L. Given this short-run production function, we know that: a) ABC's marginal cost and average variable cost are identical. b) ABC's marginal cost curve is U-shaped. c) ABC's average variable cost curve is U-shaped. d) ABC's fixed costs are zero. e) all of the above are true.

a)

Judith's preferences for X and Y (the only commodities available in her two-good world) are described by U=X^(1/2) -Y. Given this information, we know that Judith a) spends her entire income on X. b) spends her entire income on Y. c) spends her income on a combination of X and Y that equates her marginal rate of substitution with the price ratio. d) experiences positive marginal utility of X and positive marginal utility of Y. e) experiences increasing marginal utility of X and increasing marginal utility of Y.

a)

Reiko has $50/day in nonlabor income, pays $1 for each unit of X (market goods), and receives $2 for each hour worked in the labor market. Her preferences for X and L (leisure) are such that her marginal rate of substitution (L for X) equals 2 when she consumes 24 hours of L and 50 units of X each day. From this information, we know that: a) Reiko's reservation wage is $2. b) Reiko is failing to maximize utility if she consumes 24 hours of L each day. c) the 50th unit of X and the 24th hour of L both give Reiko the same marginal utility. d) Reiko will choose to work in the labor market if her wage exceeds $1/hour. e) Reiko has a backward-bending labor supply curve.

a)

Suppose a firm in a perfectly competitive market faces increasing returns to scale. Which of the following statements must be true? a) The firm can double each of its inputs, and its output will more than double. b) The firm's long-run average cost curve is increasing. c) The firm is making zero profit. d) The firm will make plans to shut down. e) All of the above are true statements.

a)

Suppose a technological innovation in the smartphone production process occurs at the same time that consumers' preferences for smartphones increase. Assuming "standard looking" supply and demand curves, which statement is always a correct comparison of the old and new equilibrium in the smartphone market? a) The number of phones sold increases. b) The number of phones sold decreases. c) The price of phones increases. d) The price of phones decreases. e) The price of phones remains unchanged.

a)

Suppose an inward shift in the market supply curve for Good X causes the price of X to increase by 15% and quantity demanded to fall by 20%. Which of the following must be true? a) Total consumer expenditure falls. b) Total producer revenue increases. c) The demand curve is perfectly inelastic in this region. d) Inputs used to produce X became less expensive. e) None of the above.

a)

The Acme Widget Company combines variable amounts of labor (L) with a fixed amount of capital to produce output (q). Its total product of labor function (showing q as a function of L) is S-shaped, with the inflection point at 9 units of L. Given this information, which of the following must be true? a) Acme realizes gains to specialization of labor until 9 units of L are hired. b) Acme's marginal product of labor is minimized at 9 units of L. c) Acme has no fixed costs. d) Output falls to zero if 10 units of L are hired. e) All of the above are true statements.

a)

Which of the following is not a characteristic of monopolistic competition? a) Barriers to entry b) Product differentiation c) Multiple firms in the industry. d) Inefficient levels of social welfare. e) Each firm is a price-setter rather than a price-taker.

a)

Darnell spends his entire income on two goods, X and Y. The following diagram shows a shift in Darnell's budget line from the solid line A to the dotted line B. Which of the following changes can explain this shift in Darnell's budget line? a) Darnell's income and the price of X both increased. b) Darnell's income and the price of X both decreased. c) Darnell's income and the price of Y both decreased. d) Darnell's income increased and the price of X decreased. e) Darnell's preferences changed away from Y towards X.

b)

Jalissa regards both X and Y as "good" goods, and experiences diminishing marginal utility of both X and Y. Which utility function is consistent with these features of Jalissa's preferences? a) U(X,Y) = XY b) U(X,Y) = X^(1/2)Y^(1/2) c) U(X,Y) = X + 2Y d) U(X,Y) = (X^3)(Y^3) e) U(X,Y) = X-Y

b)

Seong spends her entire income on X and Y, which she views as perfect complements. Choose the statement that does not characterize Seong's response to an increase in the price of X. Assume the price of Y and Seong's income remain unchanged. a) Seong's utility level falls. b) Seong decreases consumption of X on the substitution effect. c) Seong decreases consumption of X on the income effect. d) Seong ends up consuming less X and less Y. e) Seong's expenditure on X and Y remains unchanged.

b)

Suppose a firm in a perfectly competitive market faces decreasing returns to scale. Which of the following statements must be true? a) The firm can double each of its inputs, and its output will more than double. b) The firm's long-run average cost curve is increasing. c) The firm is making zero profit. d) The firm will make plans to shut down. e) All of the above are true statements.

b)

The diagram below shows the demand (D) curve, supply (S) curve, and marginal social cost (MSC) curve in the market for "good X." The production of X imposes a negative externality in the form of air pollution. Which output level of X is socially optimal? a) X=0 (no output) b) X' c) X* d) X'' e) The socially optimal output level cannot be determined.

b)

The follow diagram shows one production isoquant for a firm that, in the long-run, uses two variable inputs—capital (K) and labor (L)—to produce output (q): Which of the following statements is necessarily true? (Note that MRTS means marginal rate of technical substitution.) a) As the firm moves from A to B, the MRTS of L for K is -1/2. b) As the firm moves from A to B, the MRTS of L for K is 2. c) As the firm moves from A to B to C, the MRTS of L for K increases. d) As the firm moves from A to B to C, the marginal of product of labor increases. e) As the firm moves from A to B to C, output increases.

b)

The following diagram shows the long-run market supply curve for a perfectly competitive industry. Given this diagram, which of the following statements must be true? a) The long-run supply curve depicted in the diagram is obtained by "horizontally summing" the portion of each firm's marginal cost curve that is above the minimum of average variable cost. b) This is a constant cost industry. c) Firms in this industry face constant returns to scale. d) If the price were to increases above $9/unit, the short-run response of all firms in this industry would be to stop producing. e) All of the above statements are true.

b)

The following diagram shows the long-run market supply curve for a perfectly competitive industry. Given this diagram, which of the following statements must be true? a) The long-run supply curve depicted in the diagram is obtained by "horizontally summing" the portion of each firm's marginal cost curve that is above the minimum of average variable cost. b) This is an increasing cost industry. c) Firms in this industry face decreasing returns to scale. d) When price increases from $9/unit to $11/unit, the short-run response of all firms in this industry is to increase output from 700,000 to 900,000 units. e) All of the above statements are true.

b)

When the price of apples increases from $1.50/pound to $2/pound, Milos continues to consume apples, but his expenditure on apples decreases. From this information, we know that his own-price demand elasticity in the relevant region (between $1.50/pound and $2/pound) is: a) perfectly elastic b) elastic c) unitary elastic d) inelastic e) perfectly inelastic

b)

When the soft drink market—which is characterized by monopolistic competition—is in long-run equilibrium, we can expect a) each producer of soft drinks to face a perfectly elastic demand curve. b) each producer of soft drinks to make a zero profit. c) each producer of soft drinks to produce at the lowest possible average cost. d) the market to reach the same efficient outcome it would reach if perfectly competitive. e) All of the above are correct statements.

b)

Which of the following is true of a Nash equilibrium? a) It is used to describe the strategic decisions made by monopolists. b) When reached, no firm in the market can make itself better off by changing its prior decisions. c) When reached, no firm in the market makes a positive profit. d) When reached, consumer surplus is maximized. e) All of the above statements correctly characterize a Nash equilibrium.

b)

Currently, the XYZ Flashlight Company combines 5 units of capital (K) with 30 units of labor (L) to produce 25 flashlights (q*); K is fixed at 5 units in the short-run. The following production isoquant diagram shows XYZ's current position. In that diagram, what does the horizontal line (labelled "Horizontal line") represent? a) XYZ's fixed cost curve. b) XYZ's long-run output expansion path. c) XYZ's short-run output expansion path. d) A consumer's income expansion path. e) None of the above

c)

Pedro spends his entire income on X and Y. Given his current income and market prices for X and Y, his budget line is 900=2x+3y. Based on the information, we know with certainty that a) Pedro will consume 3 units of X for every 2 units of Y. b) Pedro will consume 300 units of X and 100 units of Y. c) Pedro will not consume 300 units of X and 200 units of Y. d) Pedro will consume equal amounts of X and Y. e) none of the above (neither a, b, c, nor d are known with certainty).

c)

Suppose a firm in a perfectly competitive market increases its output by moving along its short-run supply curve. Which of the following necessarily increases? a) Average fixed cost b) Fixed cost c) Marginal cost d) Short-run average total cost e) All of the above.

c)

The following diagram shows the market demand curve (D) for LED lightbulbs and the horizontal marginal cost curve (MC) for the monopolist operating on the supply side of the market. Given this information, we know that a) price equals marginal revenue for the last bulb produced. b) price equals marginal cost for the last bulb produced. c) fewer than 50 bulbs are sold in this market. d) consumer surplus is zero. e) the firm's profit exceeds its producer surplus.

c)

The perfectly competitive market for cigarettes has a downward-sloping, linear market demand curve and an upward-sloping, linear market supply curve. If unregulated, the per-unit equilibrium price of cigarettes is P*. If a per-unit tax of T is imposed (via the seller) on this market, a) The price paid by consumers is P*+T. b) The net price kept by sellers is P*-T. c) Fewer cigarettes are purchased than without the tax. d) The loss in social welfare is equal to the tax revenue. e) All of the above are correct statements.

c)

A public good and a nonpublic good are distinguishable for all reasons except the following: a) A public good is nonexclusive, while a nonpublic good is exclusive. b) A public good is nonrival, while a nonpublic good is rival. c) Individual consumers can free ride on a public good, but not on a nonpublic good. d) The marginal social benefit exceeds demand for a public good, but not for a nonpublic good. e) Markets can correctly price a nonpublic good, but not a public good.

d)

Consider a firm that uses labor (L) and capital (K) to produce output, where only L is variable in the short-run. When this firm increases output by moving along its short-run output expansion path, it is necessarily a) minimizing the long-run cost of production. b) at a point of tangency between a production isoquant and an isocost line. c) equating the ratio of marginal products (MPL/MPK) with the ratio of input prices (w/r). d) increasing its usage of L. e) increasing its usage of K.

d)

Mia spends her entire income on two goods, X and Y. When her income doubles but prices (PsubX and PsubY) stay unchanged, she consumes more X and more Y. Given this information, which of the following statements must be true? a) Her utility doubles. b) The income effect dominates the substitution effect for X. c) The substitution effect dominates the income effect for Y. d) Her income-consumption curve is upward sloping in this range of incomes. e) All of the above statements are true.

d)

The market for corn has a downward-sloping, linear market demand curve and an upward-sloping, linear market supply curve if the market is perfectly competitive. If the market is monopsonized, that same upward sloping curve represents average expenditure (AE). Under these conditions, which of the following outcomes is greater if the market is monopsonized than if the market is perfectly competitive? a) Quantity of corn exchanged. b) Price of corn. c) Producer surplus. d) Deadweight loss. e) Both b) and d).

d)

The perfectly competitive market for college education is depicted below, with an equilibrium price of P* dollars per years of college and an equilibrium quantity of Q* years of college. If the demand curve in the market for college education were to account for the (positive) marginal external benefit of college education, how would the market outcome change relative to what is shown in the diagram? a) Price would exceed P* and quantity exchanged would be less than Q*. b) Price would be less than P* and quantity exchanged would be less than Q*. c) Price would be less than P* and quantity exchanged would exceed Q*. d) Price would exceed P* and quantity exchanged would exceed Q*. e) The change in price and/or quantity exchanged is indeterminate.

d)

When a market is characterized by monopsony, a) the buyer pays a higher price than it would if the market were perfectly competitive. b) a greater quantity of goods is exchanged than if the market were perfectly competitive. c) producer surplus is greater than it would be if the market were perfectly competitive. d) the monopsonist sets a price below marginal expenditure. e) one seller controls the supply side of the market.

d)

XYZ Boxes, Inc. produces boxes (q) by combining two inputs: labor (L) and capital (K). Each unit of L costs w, and each unit of K costs r. In the long-run, XYZ will satisfy each of the following conditions except: a) The marginal rate of technical substitution of L for K equals w/r. b) The chosen combination of L and K is on XYZ's long-run output expansion path. c) The total cost of producing q is on XYZ's long-run total cost curve. d) XYZ does not maximize profit. e) XYZ produces q at the lowest possible average cost, given technology, w and r.

d)

Yoshi chose not to work (H=0) when the wage offered to him was $10/hour. When the offered wage increased to $15/hour (with no change in preferences, income, or the price of market goods), he chose to work six hours per day (H=6). From this information, we can conclude that: a) Yoshi increased his consumption of leisure in response to the wage increase. b) Yoshi receives no utility from consuming leisure. c) Yoshi's labor supply curve must be backward bending. d) Yoshi's reservation wage is less than $15/hour. e) A decrease in Yoshi's reservation wage is what caused him to start working.

d)

A firm's total cost function is given by the equation TC = 8000 + 10q + 20q2. Which of the following statements must be true? a) The firm's fixed cost function is FC = 8000. b) The firm's average fixed cost function is AFC = 8000/q. c) The firm's variable cost function is VC = 10q + 20q^2. d) The firm's average variable cost function is AVC = 10 + 20q. e) All of the above are true statements.

e)

Bert spends his entire income on peanuts (P) and Crackerjack (C), both of which he views as "good" goods that are neither perfect substitutes nor perfect complements. Currently, Bert pays $1/unit for both P and C, and consumes a positive amount of each good in maximizing his utility. Which statement necessarily characterizes Bert's current, utility-maximizing consumption decision? a) Bert's marginal rate of substitution (C for P) is 1. b) The indifference curve that Bert attains has the same slope as his budget line. c) The last unit of P and the last unit of C both increased Bert's utility by the same amount (MUsubP = MUsubC). d) Bert is unable to increase his utility level further without an increase in income or decrease in market prices. e) All of the above are correct answers.

e)

Consider a firm that combines a variable input, labor (L), with a fixed amount of capital to produce output. Suppose the firm currently uses an amount of labor (L*) that equates the marginal revenue produce of labor and the market price of labor (MRPsubL =w*). Which of the following is true? a) The firm is maximizing economic profit. b) P*=MC, where P* is the market price of output and MC is marginal cost. c) MPL=w*/P*, where MPsubL is the marginal product of L and P* is the market price of output. d) The firm is on its short-run demand for labor curve. e) All of the above are true.

e)

In a world where peanuts and Crackerjack are the only two products available for consumption, Ernie enjoys peanuts but hates Crackerjack. Given his preferences, which of the following combinations of income and prices will give Ernie the highest utility level? a) Income=$100, price of peanuts is $0.25/package, price of Crackerjack is $0.25/package. b) Income=$200, price of peanuts is $0.50/package, price of Crackerjack is $0.50/package. c) Income=$20, price of peanuts is $0.05/package, price of Crackerjack is $0.05/package. d) Income=$100, price of peanuts is $0.25/package, price of Crackerjack is $0.50/package. e) Each of the preceding income/price combinations leaves Ernie with the same utility level.

e)

Jenna's individual demand curve for hockey tickets is given by the equation P=30-15q, where P is the price of each ticket and q is her quantity demanded. The current market price for hockey tickets is P*=15. Given this information, we know that a) Jenna will purchase 1 ticket b) Jenna's consumer surplus is $7.50 c) Jenna's utility level is higher at P*=15 than it would be at P=20. d) Jenna will never pay more than $30 for a ticket. e) all of the above (statements a, b, c, and d are all correct).

e)

Oligopoly always refers to a situation where a) the supply side of the market has exactly two firms. b) firms sell differentiated products. c) firms sequentially decide how much to produce in order to reach a Cournot equilibrium. d) firms make zero profit in equilibrium. e) in equilibrium, no firm wants to change its decision upon seeing its competitors' decisions

e)

Suppose Jasmine has a certain income equal to $1,000, but faces an income gamble that gives her (in exchange for the $1,000) a 50% chance of receiving $0 and a 50% chance of receiving $2,000. The risk premium that Jasmine will pay to avoid the gamble is a) negative if she is a risk lover. b) zero if she is risk neutral. c) positive if she faces decreasing marginal utility of income. d) equal to the difference between $1,000 and a hypothetical income that yields utility equal to the expected utility of the gamble (0.5·U(0)+0.5·U(2000). e) All of the above are correct answers.

e)

Suppose Jasmine has a certain income equal to $1,000, but faces an income gamble that gives her (in exchange for the $1,000) a 50% chance of receiving $0 and a 50% chance of receiving $2,000. The risk premium that Jasmine will pay to avoid the gamble is a) negative if she is a risk lover. b) zero if she is risk neutral. c) positive if she faces decreasing marginal utility of income. d) equal to the difference between $1,000 and a hypothetical income that yields utility equal to the expected utility of the gamble (0.5·U(0)+0.5·U(2000). e) All of the above are correct answers

e)

The Spacely Sprockets Company combines labor (L) and capital (K) to produce sprockets, but views L and K as perfect substitutes in production. From this information, which of the following statements about Spacely's marginal rate of technical substitution (MRTS) of L for K is correct? a) MRTS = MPL / MPK b) MRTS = -ΔK / ΔL c) MRTS is constant. d) MRTS does not change as Spacely moves along a given production isoquant. e) All of the above

e)

Which of the following pricing strategies will often (or always) result in two consumers paying different prices for the exact same good or service? a) 1st-degree price discrimination b) 2nd-degree price discrimination c) 3rd-degree price discrimination d) Intertemporal price discrimination e) All of the above.

e)