Microeconomics Quiz Questions for Final

A consumer chooses an optimal consumption point where the A. slope of the indifference curve equals the slope of the budget constraint. B. marginal rate of substitution exceeds the relative price ratio. C. ratio of the prices equals one. D. All other answers are correct.

A

Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly's annual opportunity cost of the financial capital that has been invested in the business? A. $170 B. $300 C. $140 D. $30

A

Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys its goods in large quantities and, therefore, at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that A. there are economies of scale in retail sales. B. there are diseconomies of scale in retail sales. C. consumers do not react to changing prices. D. there are diminishing returns to producing and selling retail goods.

A

Microsoft faces very little competition from other firms for its Windows software. Why isn't the price of the software $1,000 per copy? A. because the government would not allow such a high price B. because the company would sell so few copies that they would earn higher profits by selling at a lower price C. because stockholders would not allow such a high price D. All given answers are correct.

B

On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product? A. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers. B. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers. C. Any of the above could be correct. D. The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers.

B

Pete owns a shoe-shine business. Which of the following costs would be implicit costs? i. shoe polish ii. rent on the shoe stand iii. wages Pete could earn delivering newspapers iv. interest that Pete's money was earning before he spent his savings to set up the shoeshine business A. (i) and (ii) only B. (iii) and (iv) only C. (iv) only D. (i), (ii), (iii), and (iv)

B

Consider the indifference curve map and budget constraint for two goods, X and Y. Suppose the good on the horizontal axis, X, is normal. When the price of X increases, the substitution effectd income effect both cause an increase in the consumption of X. A. causes a decrease in the consumption of X, and the income effect causes an increase in the consumption of X. However, the substitution effect is greater than the income effect. B. causes an increase in the consumption of X, and the income effect causes a decrease in the consumption of X. However, the substitution effect is greater than the income effect. C. and income effect both cause a decrease in the consumption of X. D. and income effect both cause an increase in the consumption of X.

C

In the long run a company that produces and sells popcorn incurs total costs of $1,050 when output is 90 canisters and $1,200 when output is 120 canisters. The popcorn company exhibits A. economies of scale because total cost is rising as output rises. B. diseconomies of scale because average total cost is rising as output rises. C. economies of scale because average total cost is falling as output rises. D. diseconomies of scale because total cost is rising as output rises.

C

The consumer's optimum is where A. MUx/MUy = Py/Px B. No correct answer given. C. MUx/MUy = Px/Py D. MUx/Py = MUy/Px

C

Which of the following statements is not correct? A. If Fiona gets a higher wage and works more, the substitution effect is greater than the income effect for her. B. If the substitution effect is greater than the income effect, the labor-supply curve is upward sloping. C. If Miguel experiences a wage decrease and works less, the income effect is greater than the substitution effect for him. D. If the income effect is greater than the substitution effect, the labor-supply curve is downward sloping.

C

Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. Together Kate and William can arrange 35 bouquets per day. What is William's marginal product A. 22.5 bouquets B. 35 bouquets C. 55 bouquets D. 15 bouquets

D

A benevolent social planner would prefer that the output of good x be increased from its current level if, at the current level of output of good x, A. social cost = private cost = private value < social value B. social cost > private value = social value > private cost C. social value = private value = private cost < social cost D. social value = private cost = social cost > private value

a

A congested side street in your neighborhood is A. not excludable and rival in consumption. B. not excludable and not rival in consumption. C. excludable and rival in consumption. D. excludable and not rival in consumption.

a

Bob owns 5 acres of land. Bob sells the land to a real estate developer who builds a subdivision with 10 houses. The land is an example of a good that is A. both rival in consumption and excludable. B. neither rival in consumption nor excludable. C. excludable, but not rival in consumption. D. rival in consumption, but not excludable.

a

Consider the market for medical doctors. Suppose the opportunity cost of going to medical school decreases for many individuals. Suppose it generally takes about ten years to become a practicing doctor. Holding all else constant, in ten years the equilibrium quantity of doctors will A. increase. B. not change. C. It is not possible to determine what will happen to the equilibrium quantity. D. decrease.

a

If income were equally distributed among households, A. 50 percent of the households would receive exactly 50 percent of the income. B. each household's relative share of income would increase. C. each household's relative share of income would decrease. D. the top fifth of households would have 50 percent of the income.

a

Suppose that Chloe opens a dog grooming business in a local shopping center. Which of the following would be an example of a factor of production used by Chloe? i. her employees' time ii. brushes, combs, scissors, and clippers iii. shampoo, water, and flea prevention treatments iv. Chloe's time spent on bookkeeping and bill paying A. (i), (ii), (iii), and (iv) B. (i) only C. (i), (ii), and (iii) only D. (i) and (ii) only

a

Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the transition from this initial situation to a long-run equilibrium, A. each existing firm experiences a decrease in demand for its product. B. each existing firm experiences a rightward shift of its marginal revenue curve. C. each existing firm experiences an upward shift in its average total cost curve. D. the number of firms in the market decreases.

a

The profit-maximization problem for a monopolist differs from that of a competitive firm in which of the following ways? A. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a monopolist maximizes profit at the point where average revenue exceeds marginal cost. B. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profit-maximizing level of output is smaller than it is for larger levels of output. C. For a profit-maximizing competitive firm, thinking at the margin is much more important than it is for a profit- maximizing monopolist. D. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost.

a

Which of the following statements is correct? An individual worker's labor supply curve A. slopes backward if that person responds to a higher opportunity cost of leisure by working fewer hours per week. B. can never be backward sloping. C. slopes backward if that person responds to a higher wage by taking fewer hours of leisure per week. D. slopes upward if that person works the same number of hours per week, regardless of the opportunity cost of leisure.

a

Which of the following statements is false? A. Most economists agree that predatory pricing is a profitable business strategy that usually preserves market power. B. The Clayton Act allows triple damages in civil lawsuits in order to encourage lawsuits against conspiring oligopolists. C. Many economists defend the practice of resale price maintenance on the grounds that it may help solve a free-rider problem. D. The U.S. Supreme Court's view that the practice of tying usually allows a firm to extend its market power is not generally supported by economic theory.

a

A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will A. fall in the short run. All firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. B. fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. C. not fall in the short run because firms will exit to maintain the price. D. fall in the short run. No firms will shut down, but some of them will exit the industry. Price will then rise to reach the new long-run equilibrium.

b

After the patent runs out on a brand name drug, generic drugs enter the market. What happens next in the market? A. Price increases, and total surplus increases. B. Price decreases, and total surplus increases. C. Price decreases, and total surplus decreases. D. Price increases, and total surplus decreases.

b

Juan Pablo and Zak are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $8,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $12,000 and the other will earn $10,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $22,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Juan Pablo will A. advertise on TV and earn $8,000. B. advertise on radio and earn $14,000. C. not advertise and earn $20,000. D. advertise on TV and earn $22,000.

b

Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the A. private benefit equals the social benefit at the private market solution. B. social value exceeds the private value at the private market solution. C. private cost exceeds the social benefit at the private market solution. D. private cost exceeds the private benefit at the private market solution.

b

Sunshine's Organic Market sells organic produce. Assume that labor is the only input that varies for the firm. The store manager has determined that if she hires 5 workers, the store can sell 150 pounds of produce per day. If she hires 6 workers, the store can sell 170 pounds of produce per day. The store earns $4 for each pound of produce that it sells, and the manager pays each worker $60 per day. Which of the following is not correct? A. Assuming no changes in either the daily wages paid to store workers or the price at which the store sells its produce, the firm would maximize profits by hiring a 7th worker so long as the store can increase its sales to at least 185 pounds per day. B. For the 6th worker, the marginal revenue product is $20 per day. C. The store earns a higher profit by employing 6 workers than by employing 5 workers. D. For the 6th worker, the marginal product is 20 pounds of produce per day.

b

Suppose that a firm produces electricity by burning coal. The production process creates a negative externality of air pollution. If the firm does not internalize the cost of the externality, it will produce where A. the value of electricity to consumers equals the social cost of producing electricity. B. the value of electricity to consumers equals the private cost of producing electricity. C. the transaction costs of private bargaining are minimized. D. the cost of the externality is maximized.

b

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that A. Firm A will buy some of Firm B's pollution permits. Each one will cost less than $100. B. Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200. C. Firm B will buy all of Firm A's pollution permits. Each one will cost between $100 and $200. D. Both firms will use their own pollution permits.

b

When a natural monopoly exists, it is A. always cost effective for two or more private firms to produce the product. B. never cost effective for two or more private firms to produce the product. C. always cost effective for government-owned firms to produce the product. D. never cost effective for one firm to produce the product.

b

Which of the following is most likely sold in a monopolistically competitive market? A. a share of McDonald's stock B. sunglasses C. sports drinks D. cable TV programming

b

A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price falls to $18, and the firm makes whatever adjustments are necessary to maximize its profit at the now-lower price. Once the firm has adjusted, its A. average total cost is lower than it was previously. B. marginal cost is higher than it was previously. C. quantity of output is lower than it was previously. D. All other answers are correct.

c

Cost-benefit analysts often encounter the problem that those who would benefit from government provision of a public good tend to A. understate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to understate the costs they would incur from the public good. B. understate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good. C. overstate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good. D. overstate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to understate the costs they would incur from the public good.

c

Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e., on an average night, 80 percent of the hotel rooms are full). This kind of excess capacity is indicative of what kind of market? A. monopoly B. perfect competition C. monopolistic competition D. oligopoly

c

In some parts of the United States, sugar beets are grown and harvested. The process of producing usable sugar from the beets generates foul-smelling smoke. A government policy that limits the emission of smoke by sugar- beet-processing firms is an example of A. tradable pollution permits. B. transaction costs. C. a command-and-control policy. D. a market-based policy.

c

To maximize profit, a competitive firm hires workers up to the point of intersection of the A. value of marginal product curve and the wage line. B. marginal product curve and the wage line. C. value of marginal product curve and the marginal revenue curve. D. total revenue curve and the wage line.

c

Which of the following is not an example of a barrier to entry? A. A taxi cab driver in New York City obtains a license to legally provide transportation in New York City. B. Microsoft obtains a copyright for its Windows operating system. C. A soybean farmer is the first in her county to use a new brand of fertilizer. D. A pharmaceutical company obtains a patent for a new medication to treat migraine headaches

c

A monopolistically competitive firm is currently producing 20 units of output. At this level of output the firm is charging a price equal to $20, has marginal revenue equal to $12, has marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that A. firms are likely to leave this market in the long run. B. All other answers are correct. C. the profits of the firm are negative. D. the firm is currently maximizing its profit.

d

A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market A. sells its product in a highly-concentrated market. B. chooses its profit-maximizing quantity where marginal revenue equals marginal cost. C. can earn profits in the long run. D. faces a downward-sloping demand curve for its product.

d

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and a marginal cost of $10. It follows that the A. production of the 100th unit of output increases the firm's average total cost by $7. B. production of the101st unit of output must increase the firm's profit by more than $3. C. production of the 100th unit of output increases the firm's profit by $3. D. firm's profit-maximizing level of output is less than 100 units.

d

Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes? A. The after-tax equilibrium quantity is less than the socially optimal quantity. B. There is not enough information to answer the question. C. The after-tax equilibrium quantity is greater than the socially optimal quantity. D. They are equal.

d

Suppose the socially-optimal quantity of good x is 2,500 units and the market-equilibrium quantity of good x is 3,000 units. When 2,500 units of good x are produced, the A. external cost of good x equals the private value of good x. B. external cost of good x exceeds the private value of good x. C. social cost of good x exceeds the private value of good x. D. cost of good x equals the private value of good x.

d

The United States has greater income A. disparity than both other economically advanced and all developing countries. B. equality than most other economically advanced countries but greater income disparity than some developing countries. C. equality than both other economically advanced and developing countries. D. disparity than most other economically advanced countries, but a more equal income distribution than some developing countries.

d

Which of the following statements is correct? A. Monopolistic competition is similar to perfect competition because both market structures are characterized by perfectly elastic demand curves for firms. B. Monopolistic competition is similar to oligopoly because both market structures are characterized by strategic interaction between firms in the market. C. Monopolistic competition is similar to perfect competition because both market structures are characterized by differentiated products. D. Monopolistic competition is similar to monopoly because both market structures are characterized by firms being price makers rather than price takers.

d

Which of the following statements is not correct? A. Government policies may improve the market's allocation of resources when positive externalities are present. B. A positive externality is an example of a market failure. C. Government policies may improve the market's allocation of resources when negative externalities are present. D. Without government intervention, the market will tend to undersupply products that produce negative externalities.

d

Granting a pharmaceutical company a patent for a new medicine will lead to i. a product that is priced higher than it would be without the exclusive rights. ii. incentives for pharmaceutical companies to invest in research and development. iii. higher quantities of output than without the patent.

i. and ii.

Which of the following are necessary characteristics of a monopoly? i. The firm is the sole seller of its product. ii. The firm's product does not have close substitutes. iii. The firm generates a large economic profit. iv. The firm is located in a small geographic market.

i. and ii.