Mock exam 1 52508

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Mock exam 1

True/False

Indicate whether the statement is true or false.

____ 1. When a production possibilities frontier is bowed outward, the opportunity cost of the first good in terms of the second good increases as more of the second good is produced.

____ ____ ____ ____ ____ ____ 2. Positive statements can be evaluated using data alone, but normative statements cannot.

3. The gains from specialization and trade are based on absolute advantage.

4. Measures of elasticity enhance our ability to study the magnitudes of changes.

5. A binding price floor may not help all sellers, but it does not hurt any sellers.

6. A tax on buyers shifts the demand curve and the supply curve.

7. Firms operating in perfectly competitive markets try to maximize profits.

____ ____ 8. A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the farm receives for the typical gallon of milk.

9. As the number of firms in an oligopoly becomes very large, the price effect disappears.

____ 10. The labor-supply curve is affected by the trade-off between labor and leisure.

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 11. If the price of visiting a doctor were fixed below the current price, then we would expect a. an increase in the number of visits people want to make and an increase in the number of visits health care providers want to provide. b. an increase in the number of visits people want to make and a decrease in the number of visits health care providers want to provide. c. a decrease in the number of visits people want to make and an increase in the number of visits health care providers want to provide. d. a decrease in the number of visits people want to make and a decrease in the number of visits health care providers want to provide. ____ 12. Which of the following firms is likely to have the greatest market power? a. An electric company b. A farmer c. A grocery store d. A local electronics retailer

Figure 2-2

____ 13.

Refer to Figure 2-2

. Alisha regularly buys fruits and vegetables at a grocery store. Santo regularly pays a lawn-care company to mow his lawn. If the flow of fruits and vegetables from the grocery store to Alisha is represented by an arrow from Box C to Box B of this circular-flow diagram, then the money paid by Santo to the lawn-care company is represented by an arrow a. from Box A to Box D. b. from Box B to Box C. c. from Box C to Box B. d. from Box D to Box A. ____ 14. Which of the following statements best captures the relationship between microeconomics and macroeconomics? a. For the most part, microeconomists are unconcerned with macroeconomics, and macroeconomists are unconcerned with microeconomics. b. Microeconomists study markets for small products, whereas macroeconomists study markets for large products. c. Microeconomics and macroeconomics are distinct from one another, yet they are closely related. d. Microeconomics is oriented toward policy studies, whereas macroeconomics is oriented toward theoretical studies. ____ 15. A demand curve shows the relationship a. between income and quantity demanded. b. between price and income. c. between price and quantity demanded. d. among income, price, and quantity demanded. ____ 16. Suppose Susan can wash three windows per hour or she can iron six shirts per hour. Paul can wash two windows per hour or he can iron five shirts per hour. a. Susan has an absolute advantage over Paul in washing windows. b. Susan has a comparative advantage over Paul in washing windows. c. Paul has a comparative advantage over Susan in ironing shirts. d. All of the above are correct.

Table 3-2

Assume that Aruba and Iceland can switch between producing coolers and producing radios at a constant rate.

Aruba Iceland Labor Hours Needed to Make 1 Cooler 2 1 Radio 5 4 ____ 17.

Refer to Table 3-2.

Aruba’s opportunity cost of one cooler is a. 0.4 radio and Iceland’s opportunity cost of one cooler is 0.25 radio. b. 0.4 radio and Iceland’s opportunity cost of one cooler is 4 radios. c. 2.5 radios and Iceland’s opportunity cost of one cooler is 0.25 radio. d. 2.5 radios and Iceland’s opportunity cost of one cooler is 4 radios. ____ 18. Which of the following might cause the demand curve for an inferior good to shift to the left? a. a decrease in income b. an increase in the price of a substitute c. an increase in the price of a complement d. None of the above is correct.

Figure 4-3

price

D' D

quantity

____ 19.

Refer to Figure 4-3

. If the demand curve shifts from D to D ’ , then a. firms would be willing to supply less of the good than before at each possible price. b. people are willing to buy less of the good than before at each possible price. c. people’s incomes evidently have decreased. d. the price of the product has increased, causing consumers to buy less of the product. ____ 20. The difference between a supply schedule and a supply curve is that a. a supply schedule incorporates demand and a supply curve does not. b. a supply schedule incorporates profit and a supply curve does not. c. a supply schedule can shift, but a supply curve cannot shift. d. a supply schedule is a table and a supply curve is drawn on a graph. ____ 21. Which of the following might cause the supply curve for an inferior good to shift to the right? a. An increase in input prices. b. A decrease in consumer income.

c. An improvement in production technology that makes production of the good more profitable. d. A decrease in the number of sellers in the market. ____ 22. Which of the following events would cause the price of oranges to fall? a. There is a shortage of oranges. b. An article is published in which it is claimed that tangerines cause a serious disease, and oranges and tangerines are substitutes. c. The price of land throughout Florida decreases, and Florida produces a significant proportion of the nation’s oranges. d. All of the above are correct. ____ 23. For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. The relevant time horizon is short. b. The good is a necessity. c. The market for the good is broadly defined. d. There are many close substitutes for this good. ____ 24. A perfectly elastic demand implies that a. buyers will not respond to any change in price. b. any rise in price above that represented by the demand curve will result in a quantity demanded of zero. c. quantity demanded and price change by the same percent as we move along the demand curve. d. price will rise by an infinite amount when there is a change in quantity demanded.

Table 5-5

Income

$30,000

Quantity of Good X Purchased

2

Quantity of Good Y Purchased

20 $40,000 6 10 ____ 25.

Refer to Table 5-5

. Using the midpoint method, the income elasticity of demand for good Y is a. 2.33, and good Y is a normal good. b. -2.33, and good Y is an inferior good. c. -0.43, and good Y is a normal good. d. -0.43, and good Y is an inferior good. ____ 26. Which of the following is the most likely explanation for the imposition of a price ceiling on the market for milk? a. Policymakers have studied the effects of the price ceiling carefully, and they recognize that the price ceiling is advantageous for society as a whole. b. Buyers of milk, recognizing that the price ceiling is good for them, have pressured policymakers into imposing the price ceiling. c. Sellers of milk, recognizing that the price ceiling is good for them, have pressured policymakers into imposing the price ceiling. d. Buyers and sellers of milk have agreed that the price ceiling is good for both of them and have therefore pressured policymakers into imposing the price ceiling. ____ 27. A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes

a. increases, and the consumer surplus in the market for red wine increases. b. increases, and the consumer surplus in the market for red wine decreases. c. decreases, and the consumer surplus in the market for red wine increases. d. decreases, and the consumer surplus in the market for red wine decreases.

Table 7-7

The only four producers in a market have the following cost:

Seller

Charlie Quinn Wrex Maxine

Cost

$50 $100 $150 $200 ____ 28.

Refer to Table 7-7.

If the sellers bid against each other for the right to sell the good to a consumer, then the producer surplus will be a. $0 or slightly more. b. $50 or slightly less. c. $150 or slightly less. d. $200 or slightly more. ____ 29. If the supply of land is fixed, the burden of a tax on land falls a. partly on landowners and partly on users of land. b. entirely on the renters or users of land. c. entirely on workers. d. entirely on landowners.

Figure 10-5

____ 30.

Refer to Figure 10-5.

Which price and quantity combination represents the social optimum? a. b.

P P

0 2 and and

Q Q

1 1 . . c. d.

P

1 and

Q

0 .

P

2 and

Q

0 .

Figure 10-9

Price

Panel (a)

Supply P1 P3a P2 P3b Q1

Price

Panel (b)

Demand

Quantity

Social cost Supply P4a P5 P4b

Price

Panel (c)

Supply Q2 Q3 Demand

Quantity

Q4 Q5 ____ 31.

Refer to Figure 10-9.

Which graph represents a market with a positive externality? a. Panel (a) b. Panel (b) c. Panel (c) d. Both (b) and (c) are correct.

Figure 13-3

Social value Demand

Quantity

100 90 80 70 60 50 40 30 20 10

Cost

2 4 6 8 10 12 14 16

Quantity

____ 32. 0 1 2 3

Refer to Figure 13-3

. Which of the following statements best captures the nature of the underlying production function? a. Output increases at a decreasing rate with additional units of input. b. Output increases at an increasing rate with additional units of input. c. Output decreases at a decreasing rate with additional units of input. d. Output decreases at an increasing rate with additional units of input.

Table 13-5 The Flying Elvis Copter Rides

Quantity Total Cost Fixed Cost $50 $150 G M $50 A H N Variable Cost $0 B I O Marginal Cost -- C $120 P Average Fixed Cost -- D J Q Average Variable Cost -- E K $120 Average Total Cost -- F L R ____ 33.

Refer to Table 13-5.

What is the value of L? a. $60 b. $135 c. $240 d. $270 ____ 34. In the long run, when marginal cost is above average total cost, the average total cost curve exhibits a. economies of scale. b. diseconomies of scale. c. constant returns to scale. d. efficient scale.

Figure 13-9

The figure below depicts average total cost functions for a firm that produces automobiles.

____ 35.

Refer to Figure 13-9

. Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory? a. ATC A b. ATC B c. ATC C d. ATC D ____ 36. A firm in a competitive market has the following cost structure:

Output

0 1 2

ATC

-- $10 $8 3 4 $7 $8 5 $10 If the firm's fixed cost of production is $3, and the market price is $10, how many units should the firm produce to maximize profit? a. 1 unit b. 2 units c. 3 units d. 4 units

Figure 15-3

P

Price

M C A B C F G H ATC D O J K

Quantity

L M R ____ 37.

Refer to Figure 15-3.

What price will the monopolist charge? a. A b. B c. C d. F ____ 38. Suppose when a monopolist produces 75 units its average revenue is $10 per unit, its marginal revenue is $5 per unit, its marginal cost is $6 per unit, and its average total cost is $5 per unit. What can we conclude about this monopolist? a. The monopolist is currently maximizing profits, and its total profits are $375. b. The monopolist is currently maximizing profits, and its total profits are $300. c. The monopolist is not currently maximizing profits; it should produce more units and charge a lower price to maximize profits. d. The monopolist is not currently maximizing profits; it should produce fewer units and charge a higher price to maximize profits. ____ 39. Which of the following is

not

a characteristic of monopolistic competition? a. a large number of sellers b. firms are price takers c. free entry into the market d. a differentiated product ____ 40. New firms will likely enter a monopolistically competitive market when price exceeds a. marginal revenue. b. average revenue. c. marginal cost. d. average total cost. ____ 41. A firm is a price taker a. only when the market is perfectly competitive. b. only when the market is perfectly competitive or monopolistic. c. only when the market is perfectly competitive or monopolistically competitive. d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

____ 42. Barb and Sue 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 $5,000. If they both advertise on radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $8,000 and the other will earn $3,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $15,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant strategy, then Barb will a. advertise on TV and earn $5,000. b. advertise on radio and earn $7,000. c. not advertise at all and earn $10,000. d. None of the above is correct. Barb and Sue do not have dominant strategies. ____ 43. A central issue in the Microsoft antitrust lawsuit involved Microsoft's integration of its Internet browser into its Windows operating system, to be sold as one unit. This practice is known as a. tying. b. predation. c. wholesale maintenance. d. retail maintenance. ____ 44. Which of the following would shift a market labor supply curve to the right? a. an increase in the price of output b. an increase in immigration c. a labor-saving technological change d. a decrease in the wage rate ____ 45. A change in the supply of one factor of production a. will not change either the marginal productivities or the prices of other factors. b. will not change the prices of other factors, but it may change their marginal productivities. c. will not change the marginal productivities of other factors, but it may change their prices. d. changes the marginal productivities and the prices of other factors.

Short Answer

46. Place each of the following in the correct location in the table. Rival? Yes Excludable? Yes Private Goods No Natural Monopolies No Common Resources Public Goods a. Congested toll roads b. Knowledge c. Fish in the ocean d. National defense e. Congested nontoll roads f. Cable TV g. The environment h. Fire protection i. Ice-cream cones j. Uncongested toll roads

k. Clothing l. Uncongested nontoll roads 47. Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximizing firm?

Mock exam1 Answer Section

TRUE/FALSE

1. ANS: F NAT: Analytic PTS: 1 DIF: 2 REF: 2-1 LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Interpretive 2. ANS: T NAT: Analytic PTS: 1 DIF: 2 LOC: The study of economics and definitions in economics TOP: Positive statements | Normative statements REF: 2-2 MSC: Interpretive 3. ANS: F NAT: Analytic PTS: 1 LOC: Gains from trade, specialization and trade TOP: Gains from trade DIF: 1 MSC: Definitional REF: 3-2 4. ANS: T NAT: Analytic MSC: Definitional PTS: 1 LOC: Elasticity DIF: 1 REF: 5-0 TOP: Price elasticity of demand 5. ANS: F NAT: Analytic MSC: Interpretive PTS: 1 DIF: 2 LOC: Supply and demand REF: 6-1 TOP: Price floors PTS: 1 DIF: 2 LOC: Supply and demand REF: 6-2 TOP: Taxes 6. ANS: F NAT: Analytic MSC: Interpretive 7. ANS: T NAT: Analytic MSC: Applicative 8. ANS: F NAT: Analytic MSC: Interpretive PTS: 1 DIF: 2 LOC: Perfect competition PTS: 1 DIF: 1 LOC: Perfect competition REF: 14-1 TOP: Profit maximization REF: 14-2 TOP: Sunk costs 9. ANS: T NAT: Analytic 10. ANS: T NAT: Analytic MSC: Interpretive PTS: 1 LOC: Oligopoly DIF: 2 TOP: Oligopoly PTS: 1 LOC: Labor markets DIF: 2 REF: 17-1 MSC: Interpretive REF: 18-2 TOP: Labor supply

MULTIPLE CHOICE

11. ANS: B NAT: Analytic TOP: Markets PTS: 1 DIF: 2 REF: 1-2 LOC: Markets, market failure, and externalities MSC: Applicative 12. ANS: A NAT: Analytic TOP: Market power PTS: 1 DIF: 2 REF: 1-2 LOC: Markets, market failure, and externalities MSC: Applicative 13. ANS: B NAT: Analytic PTS: 1 TOP: Circular-flow diagram DIF: 3 LOC: Understanding and applying economic models MSC: Analytical REF: 2-1 14. ANS: C PTS: 1 DIF: 2 REF: 2-1

NAT: Analytic LOC: The study of economics and definitions in economics TOP: Microeconomics | Macroeconomics MSC: Interpretive 15. ANS: C NAT: Analytic MSC: Interpretive PTS: 1 DIF: 2 LOC: Supply and demand REF: 2-5 TOP: Demand 16. ANS: D NAT: Analytic PTS: 1 DIF: 2 LOC: Gains from trade, specialization and trade TOP: Absolute advantage | Comparative advantage REF: 3-2 MSC: Applicative 17. ANS: A NAT: Analytic PTS: 1 LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost DIF: 2 MSC: Applicative REF: 3-2 18. ANS: C NAT: Analytic MSC: Analytical PTS: 1 DIF: 3 LOC: Supply and demand REF: 4-2 TOP: Complements 19. ANS: B NAT: Analytic MSC: Interpretive PTS: 1 DIF: 2 LOC: Supply and demand REF: 4-2 TOP: Demand curve PTS: 1 DIF: 2 LOC: Supply and demand REF: 4-3 TOP: Supply schedule | Supply curve 20. ANS: D NAT: Analytic MSC: Interpretive 21. ANS: C NAT: Analytic MSC: Analytical 22. ANS: C NAT: Analytic 23. ANS: D NAT: Analytic MSC: Analytical PTS: 1 DIF: 3 LOC: Supply and demand PTS: 1 LOC: Equilibrium PTS: 1 LOC: Elasticity DIF: 2 TOP: Equilibrium DIF: 3 REF: 4-3 TOP: Technology REF: 4-4 MSC: Applicative REF: 5-1 TOP: Price elasticity of demand 24. ANS: B NAT: Analytic MSC: Interpretive 25. ANS: B NAT: Analytic MSC: Applicative 26. ANS: B NAT: Analytic MSC: Interpretive 27. ANS: D NAT: Analytic MSC: Applicative PTS: 1 LOC: Elasticity PTS: 1 LOC: Elasticity PTS: 1 PTS: 1 DIF: 2 TOP: Perfectly elastic demand DIF: 2 TOP: Income elasticity of demand DIF: 2 LOC: Supply and demand DIF: 3 LOC: Supply and demand REF: 5-1 REF: 5-1 REF: 6-1 TOP: Price ceilings REF: 7-1 TOP: Consumer surplus 28. ANS: B NAT: Analytic MSC: Analytical 29. ANS: D NAT: Analytic PTS: 1 PTS: 1 LOC: Elasticity DIF: 3 LOC: Supply and demand DIF: 2 TOP: Land tax REF: 7-2 TOP: Price | Cost | Producer surplus REF: 8-3 MSC: Interpretive 30. ANS: B NAT: Analytic PTS: 1 TOP: Negative externalities DIF: 2 LOC: Markets, market failure, and externalities MSC: Interpretive REF: 10-1 31. ANS: C PTS: 1 DIF: 2 REF: 10-1

NAT: Analytic LOC: Markets, market failure, and externalities TOP: Positive externalities MSC: Interpretive 32. ANS: A NAT: Analytic MSC: Interpretive PTS: 1 DIF: 2 LOC: Costs of production REF: 13-2 TOP: Production function 33. ANS: B NAT: Analytic cost MSC: Analytical 34. ANS: B NAT: Analytic MSC: Applicative PTS: 1 DIF: 3 LOC: Costs of production PTS: 1 DIF: 2 LOC: Costs of production REF: 13-3 TOP: Average total cost | Marginal REF: 13-4 TOP: Diseconomies of scale 35. ANS: A NAT: Analytic MSC: Analytical 36. ANS: C NAT: Analytic MSC: Analytical PTS: 1 DIF: 1 LOC: Costs of production PTS: 1 DIF: 3 LOC: Perfect competition REF: 13-4 TOP: Average total cost REF: 14-2 TOP: Profit maximization 37. ANS: B NAT: Analytic 38. ANS: D NAT: Analytic MSC: Analytical 39. ANS: B NAT: Analytic MSC: Definitional PTS: 1 LOC: Monopoly PTS: 1 LOC: Monopoly PTS: 1 DIF: 2 TOP: Monopoly DIF: 3 DIF: 1 LOC: Monopolistic competition REF: 15-2 MSC: Interpretive REF: 15-2 TOP: Profit maximization REF: 16-1 TOP: Monopolistic competition 40. ANS: D NAT: Analytic MSC: Interpretive 41. ANS: A NAT: Analytic TOP: Perfect competition | Monopolistic competition 42. ANS: A NAT: Analytic MSC: Applicative 43. ANS: A NAT: Analytic MSC: Interpretive PTS: 1 LOC: Monopolistic competition PTS: 1 LOC: Monopolistic competition PTS: 1 LOC: Oligopoly PTS: 1 DIF: 2 DIF: 1 DIF: 3 REF: 17-2 TOP: Dominant strategy DIF: 2 LOC: The role of government REF: 16-2 TOP: Long-run equilibrium REF: 16-4 MSC: Interpretive REF: 17-3 TOP: Tying 44. ANS: B NAT: Analytic MSC: Applicative 45. ANS: D NAT: Analytic MSC: Applicative PTS: 1 LOC: Labor markets DIF: 2 PTS: 1 LOC: Labor markets DIF: 2 REF: 18-2 TOP: Labor supply REF: 18-4 TOP: Factor markets

SHORT ANSWER

46. ANS: Rival?

Excludable? Yes No Yes Private Goods  Ice-cream cones  Clothing  Congested toll roads Common Resources  Fish in the ocean  The environment  Congested nontoll roads No Natural Monopolies  Fire protection  Cable TV  Uncongested toll roads Public Goods  National defense  Knowledge  Uncongested nontoll roads PTS: 1 DIF: 1 REF: 11-1 LOC: The study of economics and definitions in economics TOP: Excludability | Rivalry in consumption NAT: Analytic MSC: Applicative 47. ANS: Average revenue is total revenue divided by the quantity of output. Marginal revenue is the change in total revenue from the sale of each additional unit of output. Marginal revenue is used to determine the profit maximizing level of production, and average revenue is used to help determine the level of profits. Note that for all firms, price equals average revenue because AR=(PxQ)/Q=P. But only for a firm operating in a perfectly competitive industry does price also equal marginal revenue.

PTS: 1 DIF: 2 LOC: Perfect competition REF: 14-1 TOP: Price NAT: Analytic MSC: Definitional

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