Intermediate Micro Econ Test 3 Study Guide
What is the change in the producer surplus (PS) when the price increases from $1 to $2? (willing to supply at .5 p) (Q =500 at 1 and 1500 at 2) a. 1000 b. 125 c. 1125 d. 525
a. 1000
Suppose the total cost of producing t-shirts can be represented as TC=50+2q. The marginal cost of the 5th t-shirt is a. 2 b. 10 c. 12 d. 60
a. 2
Labor Output 1 10 2 18 3 24 4 28 5 30 The above figure shows the short run production function for Albert's Pretzels. The average productivity of labor when the firm employs 5 workers is a. 6 b. 8 c. 24 d. not known from the information provided
a. 6
Which of the following characterizes long run equilibrium in perfect competition? a. P=MC=ATC b. P=MC<ATC c. P>MC=ATC d. P+MC>ATC
a. P=MC=ATC
Your new neighbor does not mow his lawn or prune his trees in his front yard. Your neighbor generated a. a negative externality b. a positive externality c. no externality d. a non-rival good
a. a negative externality
An individual's ____ surplus is the area ____ the ____ curve and above the ____ up to the quantity ____. a. consumer; under; demand; market price, the consumer buys b. producer; under; supply; market price; the producer sells c. consumer; above; supply; choke price; the consumer buys d. producer; supply; under; choke price; the producer sells
a. consumer; under; demand; market price; the consumer buys
An interior solution to a consumer's utility maximization problem implies a. consuming a positive amount of all goods b. consuming negative amounts of all goods c. consuming less than optimal amounts of all goods d. consuming more than optimal amount of at least one good
a. consuming a positive amount of all goods
Students who talk loudly with each other in class a. create an externality because other students cannot follow the lecture well b. disturb nobody c. benefit the other students in class because they engage in conversation d. only create an externality if they talk about something unrelated to class
a. create an externality because other students cannot follow the lecture well
In the long run, monopolistically competitive firm a. earns zero economic profit b. produces at minimum average cost c. operates at full capacity d. all of the above
a. earns zero economic profit
The total cost of producing one unit is $50. The total cost of producing 2 units is $75. As a production level of two units, the cost function exhibits a. economies of scale b. rising average costs c. increasing marginal costs d. constant returns to scale
a. economies of scale
In a perfectly competitive market, a. firms can freely enter and exit b. firms sell a differentiated product c. transaction costs are high d. all of the above
a. firms can freely enter and exit
In the Cournot Model, a firm maximizes profit by selecting a. its output, assuming that other firms keep their output constant b. its price, assuming that other firms keep their price constant c. its output, assuming that other firms will retaliate d. its price, assuming that other firms will retaliate
a. its output, assuming that other firms keep their output constant
The situation in which one firm can produce the total output of the market at a lower cost than several firms is called a a. natural monopoly b. pure monopoly c. ruling monopoly d. cost monopoly
a. natural monopoly
In the case of a good that has no exclusion and no rivalry, private markets fail because a. of free ridership b. this is a natural monopoly c. profit is driven down to zero d. the quantity produced will exceed the social optimal
a. of free ridership
If a competitive firm finds that it maximizes short run profits by shutting down, which of the following must be TRUE? a. p<AVC for all levels of output b. p<AVC only for the level of output at which p=MC c. p<AVC only if the firm has no fixed costs d. the firm will earn zero profit
a. p<AVC for all levels of output
A student that asks interesting questions during the lecture generates a. positive externalities b. no externalities c. negative externalities d. an excludable good
a. positive externalities
If a firm is a price taker, then its marginal revenue will always equal a. price b. total cost c. 0 d. 1
a. price
A minimum wage is an example of a a. price floor b. price ceiling c. quantity quota d. free market equilibrium
a. price floor
If a production process generates pollution, then a competitive market will a. produce more of the good than is socially optimal b. produce less of the good than is socially optimal c. produce the socially optimal quantity of that good d. produce zero output
a. produce more of the good than is socially optimal
For a linear production function, q=f(L,K) = 4L+2K, what is the short run production function given that capital is fixed at K=50? a. q=4L +100 b. q=4L +50 c. q=4L d. q=104
a. q=4L+100
Suppose two neighbors share a park. One neighbor leaves trash in the park. This bothers the other neighbor. According to Coase's Theorem, the optimal level of trash in the park can be achieved if a. someone is assigned property rights to the park b. government limits the use of the park c. nobody catches him leaving trash in the park d. the other neighbor moves
a. someone is assigned property rights to the park
Advocates of steel tariffs to protect US steel firms realize that when imposing such tariffs, the gains of firms are outweighed by the losses to consumers. This implies that a. such advocates value producer surplus more than consumer surplus b. such advocates want to help consumers c. such advocates value consumer surplus more than producer surplus d. such advocates value producer surplus and consumer surplus equally
a. such advocates value producer surplus more than consumer surplus
If the average productivity of labor equals the marginal productivity of labor, then a. the average productivity is at a maximum b. the marginal productivity of labor is at a maximum c. both A and B d. neither A nor B
a. the average productivity of labor is at a maximum
The marginal product of labor is a. the change in total product resulting from an extra unit of labor, holding other factors constant b. the ratio of output to the number of workers used to produce that output c. the amount of output that can be produced by a given amount of labor d. equal to the marginal product of labor when the average product is increasing
a. the change in total product resulting from an extra unit of labor, holding other factors constant
If 2 bundles are on the same indifference curve, then a. the consumer derives the same level of utility from each b. the consumer derives the same level or ordinal utility from each but not the same level of cardinal utility c. no comparison can be made between the two bundles since utility cannot really be measured d. B and C
a. the consumer derives the same level of utility from each
Suppose the production of mp3 players can be represented by the following production function: q = L^0.4K^0.4. which of the following statements is TRUE? a. the production function has decreasing returns to scale b. the production function has increasing returns to scale c. the production function has constant returns to scale d. returns to scale vary with the last level of output
a. the production function has decreasing returns to scale
Which of the following conditions can help prolong the life of a cartel? a. there are only a few firms in the market and they all belong to the cartel b. there are many firms in the market that are not members of the cartel c. it is difficult to know what price any cartel member is actually charging d. the cartel has no ability to punish members who cheat on the cartel
a. there are only a few firms in the market and they all belong to the cartel
In the long run, all factors of production are a. variable b. fixed c. materials d. rented
a. variable
An indifference curve represents bundles of goods that a consumer a. views as equally desirable b. ranks from most preferred to least preferred c. refers to any other bundle of goods d. all of the above
a. views as equally desirable
Use the above figure to answer this question (base = 20, willing to pay 3 and P=.10). At the current price of $0.10, consumer surplus equals a. 2 b. 29 c. 58 d. 60
b. 29
The result that, under certain circumstances, no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called a. a Nash Equilibrium b. Coase Theorem c. Bargaining Theorem d. English Bargaining
b. Coase Theorem
What are the functions for MC and AC if TC = 40+10q+5q^2? a. MC= 10q; AC=10+5q b. MC= 10+10q; AC=40/q +10+10q c. MC = 10 + 10q; AC = 40/q + 10q2 d. MC = 20 + 10q; AC = 40/q + 10q
b. MC = 10+10q; AC=40/q +10+10q
Which situation is most likely to exhibit diminishing marginal returns to labor? a. a factory that obtains a new machine for every new worker hired b. a factory that hires more workers and never increases the amount of machinery c. a factory that increases the amount of machinery and holds the number of workers constant d. none of these situations will result in diminishing marginal returns to labor
b. a factory that hires more workers and never increases the amount of machinery
Variable costs are a. a production expense that does not vary with output b. a production expense that changes with the quantity of output produced c. equal to total cost divided by the units of output produced d. the amount by which a firm's cost changes if the firm produces one more unit of output
b. a production expense that changes with the quantity of output produced
Diminishing marginal rate of substitution can be seen when indifference curves a. cross b. are convex to origin c. are downward sloping d. are straight lines
b. are convex to the origin
Minimum efficient scale refers to the lowest level of output at which a. the firm can earn a profit b. the average cost is minimized c. the firm will operate d. the average cost curve is downward sloping
b. average cost is minimized
Max has allocated $100 towards meats for his barbecue. His budget line and an indifference map are shown in the above figure. Which bundle will Max choose? a. a b. b c. c d. d
b. b
Oligopoly differs from monopolistic competition in that an oligopoly includes a. product differentiation b. barriers to entry c. no barriers to entry d. downward sloping demand curves facing the firm
b. barriers to entry
The organization of Petroleum Exporting Countries (OPEC) is an example of a(n) a. oil monopoly b. cartel c. competitive arrangement d. monopolistically competitive arrangement
b. cartel
As other firms enter a monopoly's market, the monopoly's market power a. is unaffected b. declines c. increases d. increases according to the Lerner Index but decreases according to the price/marginal cost ratio
b. decline
A special license is required to operate a taxi in many cities. The number of licenses is restricted. More drivers want licenses than are issued. This describes a non-perfectly competitive market because a. taxi services are very different b. firms cannot freely enter and exit the market c. transaction costs are high d. the government generates revenue from the liscenses
b. firms cannot freely enter and exit the market
The above figure shows Larry's indifference map and budget line for ham and pork. Which of the following statements is TRUE? a. pork is an inferior good b. ham is an inferior good c. both ham and pork are normal goods d. both ham and pork are inferior goods
b. ham is an inferior good
Sally is shopping for textbooks at the beginning of the semester. What is one reason she might decide to not purchase a textbook? a. her expected producer surplus is positive b. her expected consumer surplus is negative c. her expected consumer surplus is positive d. her expected profits are positive
b. her expected consumer surplus is negative
A profit maximizing monopolist a. is guaranteed to lose money because of a lack of competition b. is not guaranteed to make a positive profit c. is guaranteed to make a positive profit, hence the desire to be a monopolist d. is guaranteed to make a non negative profit, otherwise government would step in to assist
b. is not guaranteed to make a positive profit
A monopoly might produce less than socially optimal amount of pollution because a. it likes to be a good citizen b. it sets price above marginal cost c. it earns economic profit d. it internalizes the external cost
b. it sets price above marginal cost
The monopolist's marginal revenue curve a. doesn't exist b. lies below the demand curve c. is identical to the demand curve d. lies above the demand curve
b. lies below the demand curve
Regardless of market structure, all firms a. consider the actions of rivals b. maximize profit by setting marginal revenue equal to marginal cost c. produce a differentiated product d. have the ability to set prices
b. maximize profit by setting marginal revenue equal to marginal cost
Consider a housing development built near an existing airport. After the houses are occupied, homeowners complain that the airport imposes a negative externality on them and it should be moved or otherwise limited. Is the airport a negative externality? a. no, the airport was there first b. no, if the original property values reflect the costs imposed by the airport c. no, airports are government entities and therefore don't impose costs on individuals d. yes, the airport's noise should be curtailed for the well being of the homeowners
b. no, if the original property values reflect the costs imposed by the airports
A competitive market maximizes social welfare because in a competitive market, a. profits are 0 b. price equals marginal cost of the last unit produced c. price equals average cost of the last unit produced d. there is free entry and exit
b. price equals marginal cost of the last unit produced
As the price of a Giffen good falls, the consumer will a. purchase more units b. purchase fewer units c. not change the amount purchased d. there is not enough information to answer this question
b. purchase fewer units
If a production process creates pollution, a competitive market produces excessive pollution because a. private marginal cost of pollution exceeds its social marginal cost b. social marginal cost of pollution exceeds its private marginal cost c. the marginal benefit of pollution to the firm is zero d. zero pollution is optimal
b. social marginal cost of pollution exceeds its private marginal cost
Indifference curves that are thick violate a. the assumption of transitivity b. the assumption that more is better c. the assumption of completeness d. none of the assumptions
b. the assumption that more is better
For a monopoly, marginal revenue is less than price because a. the firm is a price taker b. the firm must lower price if it wishes to sell more output c. the firm can sell all of its output at any price d. the demand for the firm's output is perfectly elastic
b. the firm must lower price if it wishes to sell more output
Deadwight loss occurs when a. producer surplus is greater than consumer surplus b. the maximum level of total welfare is not acheived c. consumer surplus is reduced d. an inferior good is consumer
b. the maximum level of total welfare is not achieved
Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work full time in her own business. She will invest her savings of $50,000 (which currently has an annual interest rate of 10% rate of return) into the business. Her annual opportunity cost of this new business is a. $0 b. $40,000 c. $45,000 d. $90,000
c. $45,000
A profit maximizing monopolist will never operate in the portion of the demand curve with price elasticity equal to a. -3 b. -1 c. -1/3 d. any of the above, the price elasticity does not matter
c. -1/3
If the utility function (U) between food (F) and clothing (C) can be represented as U = (FxC)^1/2 , the marginal utility of food equals a. squareroot of F/c b. squareroot of C/F c. 1/2 x squareroot of C/F d. 1/2 x squareroot of F/C
c. 1/2 x squareroot of C/F
Joe's income is $500, the price of food (F) is $2, and the price of shelter (S) is $100. Which of the following bundles is in Joe's opportunity set? a. 50 units of food, 5 units of shelter b. 200 units of food, 2 units of shelter c. 100 units of food, 1 unit of shelter d. 150 units of food, 3 units of shelter
c. 100 units of food, 1 unit of shelter
A monopoly incurs a marginal cost of $1 for each unit produced. If the price elasticity of demand equals -2.0, the monopoly maximizes profit by charging a price of a. 1 b. 1.50 c. 2 d. 3
c. 2
Labor Output 1 10 2 18 3 24 4 28 5 30 The above figure shows the short run production function for Albert's Pretzels. Suppose the marginal productivity of labor for the 6th worker is 1. What is the total output produced by 6 workers? a. 29 b. 30 c. 31 d. not known from the information provided
c. 31
The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed a. 0 b. AVC=MC c. AC=MC d. MC>AVC
c. AC=MC
One difference between a monopoly and a competitive firm is that a. a monopoly is a price taker b. a monopoly maximizes profit by setting marginal revenue equal to marginal cost c. a monopoly faces a downward sloping demand curve d. none of the above
c. a monopoly faces a downward sloping demand curve
If a consumer prefers Apples to Bananas and prefers Bananas to Citrus Fruit, in order to satisfy transitivity she has to prefer a. bananas to apples b. citrus fruit to bananas c. apples to citrus fruit d. citrus fruit to apples
c. apples to citrus fruit
Economic costs of an input include a. only implicit costs b. only explicit costs c. both implicit and explicit costs d. whatever management wishes to report to the shareholders
c. both implicit and explicit costs
The above figure shows the market for steel ingots. If the market is competitive, then the deadweight loss to society is a. a b. b c. c d. zero
c. c
The above figure shows the demand and marginal cost curves for a monopoly. The deadweight loss of this monopoly equals a. h b. c c. c+f d. c+d+e+f
c. c+f
Even if two products have different characteristics, such as color, the products are only considered heterogeneous if consumers a. consider the two products as perfect complements b. consider the two products as perfect substitutes c. consider the two products as imperfect substitutes d. consider the two products as imperfect complements
c. consider the two products as imperfect substitutes
As the ratio of price to marginal cost decreases, the Lerner index a. stays the same b. increases c. decreases d. can increase or decrease depending upon the shape of the demand curve
c. decreases
If the two goods are perfect substitutions, then the indifference curves for those two goods would be a. upward sloping and concave to the origin b. downward sloping and convex to the origin c. downward sloping and straight d. L-shaped
c. downward sloping and straight
Assume baseball player salaries are fully determined before the season starts. From the point of view of the baseball team owner, player salaries during the course of the season are then a. variable cost b. marginal cost c. fixed cost d. average cost
c. fixed cost
The monopoly maximizes profit by setting a. price = to marginal cost b. price = to marginal revenue c. marginal revenue = marginal cost d. marginal revenue = 0
c. marginal revenue = marginal cost
Economists typically assume that the owners of firms wish to a. maximize consumers' welfare b. maximize sales revenue c. maximize profits d. none of the above
c. maximize profits
Perfect competition and monopolistic competition are similar in that both market structures include a. price taking behavior by firms b. a homogeneous product c. no barriers to entry d. very few firms
c. no barriers to entry
The Stackelberg model is more appropriate than the Cournot model in situations where a. there are more than 2 firms b. all firms enter the market simultaneously c. one firm makes its output decision before the other d. firms will be likely to collude
c. one firm makes its output decision before the other
Keith is indifferent between canned soup and fresh soup. In the figure below, Keith's indifference curves are represented by I1, I2, I3, and I4 curves. What is Keith's utility maximization choice? a. 4 canned soups and 4 fresh soups b. 4 canned and 2 fresh c. only 4 canned d. only 2 fresh
c. only 4 canned
In a market with positive externalities a. the efficient level of production is less than what competition will obtain b. the efficient level of production is equal to what competition will obtain c. the efficient level of production is more than what competition will obtain d. there cannot be an efficient level of production
c. the efficient level of production is more than what competition will obtain
A horizontal demand curve for a firm implies that a. the firm is a monopoly b. the market the firm is operating in is not competitive c. the firm is selling in a competitive market d. the products of that firm are very different from other firms' products
c. the firm is selling in a competitive market
A firm will shut down in the short run if a. total fixed costs are too high b. total revenue from operating would not cover all costs c. total revenue from operating would not cover variable costs d. total revenue from operating would not cover fixed costs
c. total revenue from operating would not cover variable costs
Positive externalities are created when a. other consumer reduce their demand for coffee and price thereby declines b. farmers spray pesticide in their fields and it washes into the local river after the first rain storm c. your neighbor plants beautiful trees and flowers in her yard d. you purchase the "Mona Lisa" and lock it in a vault
c. your neighbor plants beautiful trees and flowers in her yard
Which of the following is NOT a common property a. a city park b. a main street c. a public beach d. a movie screening
d. a movie screening
If a competitive firm maximizes short run profits by producing some quantity of output, which of the following must be TRUE at that level of output? a. p=MC b. MR=MC c. p is greater than or equal to AVC d. all of the above
d. all of the above
In the long run, a monopolistic competitor a. sets MR=MC b. produces where P=AC c. sets P>MC d. all of the above
d. all of the above
The Cournot Model of Oligopoly assumes that a. firms decide what quantity to produce b. firms make their decision simultaneously c. firms do not cooperate d. all of the above
d. all of the above
When the isocost line is tangent to the isoquant, then a. MRTS = -w/r b. the firm is producing that level of output at minimum cost c. the last dollar spent on capital yields as much extra output as the last dollar spent on labor d. all of the above
d. all of the above
Which of the following statements about private and social costs is TRUE? a. social costs include externalities b. private cost do not include externalities c. social costs are never smaller than private costs d. all of the above
d. all of the above
L-shaped isoquants imply that production requires that the inputs a. are perfect substitutes b. are imperfect substitutes c. cannot be used together d. are perfect compliments
d. are perfect compliments
Which of the following market structures is (are) capable of earning positive economic profits in the long run? a. monopoly b. oligopoly c. monopolistic competition d. both A and B
d. both A and B
The above figure shows the market for steel ingots. The optimal quantity of pollution a. 0 b. 50 c. 100 d. cannot be determined from the information provided
d. cannot be determined from the information provided
Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as a perfectly competitive? a. buyers and sellers know the prices b. firms freely enter and exit c. transaction costs are low d. consumers believe all firms sell identical products
d. consumers believe all firms sell identical products
Two firms sell 100% orange juice in 10 ounce bottles. The juice is only good for one week. The two firms have contracts for all the oranges produced in a large geographic area. Each firm decides how many bottles of juice to produce at the same time. This market is best described with a a. Bertrand b. Strackelberg C. monopolistic competition model d. Cournot Model
d. cournot model
In the long run, profits will equal zero in a competitive market because of a. constant returns to scale b. identical products being produced by all firms c. the availability of information d. free entry and exit
d. free entry and exit
With respect to production, the short run is best defined as a time period a. lasting about 6 months b. lasting about 2 years c. in which all inputs are fixed d. in which capital is fixed
d. in which capital is fixed
Joey's Lawncutting Service rents office space from Joey's dad for $300 per month. A similar office space in the same building rents for $545 per month. What is the economic profit earned by Joey's dad? a. profit of $245 b. profit of $100 c. loss of $100 d. loss of $245
d. loss of $245
The above figure shows the demand and marginal cost curves for a monopoly. Under monopoly, a consumers surplus equals A. A+B b. A+B+C c. A+B+C+D+E+F d. None of the above
d. none of the above
If the consumer's income increases while the prices of both goods remain unchanged, what will happen to the budget line? a. the budget line rotates inward from the intercept on the horizontal axis b. the budget line rotates outward from the intercept on the vertical axis c. the budget line shifts inward without a change in slope d. the budget line shifts outward without a change in slope
d. the budget line shifts outward without a change in slope
Both Sally and Sam receive a 10% raise in a single year. Sally increases her demand for ground beef whereas Sam decreases his demand for ground beef. a. this is impossible b. this is only possible if Sally considers ground beef as an inferior good and Sam views it as a normal good c. this is only possible if Sally has lower income than Sam d. this is only possible if Sally considers ground beef a normal good and Sam views it as an inferior good
d. this is only possible if Sally considers ground beef a normal good and Sam views it as an inferior good