DEPARTMENTAL PRACTICE EXAM
Topic 1: Production possibility (1 question)
1) Which of the following would not shift out a nation's production possibility curve?
a) an increase in the capital stock.
b) the discovery of new oil deposits.
c) a reduction in the number of workers who are unemployed. *
d) a rise in the percentage of individuals graduating from college.
e) discovery of a new faster process to manufacture computer chips.
All other choices indicate that the nation’s economic resources have increases which will expand the PPF.
Topic 2: opportunity costs (1 question)
2) The opportunity cost of attending college is
a) The sum of the cost of tuition and books
b) The sum of the cost of tuition, books and the income given up from not working when going to college*
c) The sum of the cost of tuition, books, the income given up from not working when going to college, and
the cost of living
d) Just the income lost from not working while going to college
e) Just the cost of living while going to college
In c the cost of living must be incurred regardless if one goes to college or not. So it is not an opportunity cost.
Topic 3: supply and demand - shifts versus movements (4 questions)
3) We know that DVD players have seen a significant fall in price over recent years. We also know that this fall in
price have been caused by significant decreases in the cost of producing DVD players. In terms of the supply
and demand analysis this is explained by
a) A shift to the right of the demand curve
b) A shift to the left of the supply curve
c) A movement along the supply curve to the right
d) A shift to the right of the supply curve*
e) A movement along the supply curve to the left
The reduction in the cost of production leads to an increase (shift to the right) in the supply curve. Equilibrium
price will fall and the equilibrium quantity will increase.
Price of
DVD
players
S0
P₀
A
P₁
B
D0
Q₀
Q₁
Quantity of DVD players
S1
4) The Colombian ministry of Agriculture announced that an unexpected frost has destroyed one third of this
year's Colombian coffee crop. In the United States, which is a large importer of Colombian coffee, the effect
of the frost would
a) Decrease the demand for Colombian coffee
b) Lower the equilibrium price of tea, a coffee substitute
c) Increase the supply of Colombian coffee
d) Lower the equilibrium price of coffee pots, a coffee complement*
e) Increase the equilibrium price of coffee pots, a coffee complement.
Price of
coffee
S₁
P₁
S₀
B
Price of
coffee pots
S
P₀
P₀
A
P₁
A
B
D0
Q₁
Q₀
D₁
Q₁
Quantity of coffee
D₀
Q₀
Quantity of coffee pots
5) Which of the following is most likely to increase the price of personal computers in the short-run?
a) An improvement in technology which reduces production costs of personal computers. This would shift
the supply to right (increase supply) and will lead to lower price of computers.
b) A reduction in personal income. This would shift the demand to the left and will lead to a lower price of
computers.
c) The development of personal computer software that makes it easier to use personal computers* This
increase the demand for personal computers causing an increase in the price of computers.
d) The expectation that the price of personal computers will decline during the next six months. This will
cause the demand for computers to fall now. People will postpone the purchase of computers when
expecting the price to fall in the future. The price will therefore fall more rapidly.
e) An increase in the price of computer software, a complement of personal computers. An increase in the
price of complement to computers will lead to a decrease in the demand for computers.
6) Decaffeinated instant coffee sold for $4.25 a pound in December 1992 and for $6.87 a pound in December
1993. The amount purchased was about 30% higher in December 1993 than in December 1992. Which of the
following possibilities is consistent with these figures?
a) The supply increased and there was movement downward along the demand curve.
b) The demand increased and there was movement upward along the supply curve.*
c) The demand decreased and there was movement downward along the supply curve.
d) The supply decreased and there was movement upward along the demand curve.
e) Supply decreased at the same time that demand increased.
Price of
decaf
coffee
S
P₁
B
P₀
A
D₀
Q₀
D₁
Q₁
Quantity of decaf coffee
Topic 4: price floors & ceilings (2 questions)
7) Suppose the government sets a legal minimum price in the market for wheat which is HIGHER than the
(uncontrolled) equilibrium price. This would cause
a) An increase in the quantity supplied of wheat and a surplus in the market for wheat*
b) An increase in consumer surplus
c) A decrease in the demand for wheat and a surplus in the market for wheat
d) No effect on the market for wheat
e) Unpredictable changes that would be hard to analyze
Price of
wheat
S
Surplus
PMNIMUM
D
QD
QS
Quantity of wheet
8) In the movie Deep Impact, the President (Morgan Freeman) set a legal maximum price for food that was lower
than the (uncontrolled) equilibrium price. That would cause:
a) The quantity demanded of food to increase and the quantity supplied to fall, leading to a shortage of
food.*
b) Demand to increase and supply to decrease.
c) Demand to increase and thus increase the quantity supplied.
d) Supply to decrease and thus cause the price to fall to the legal maximum.
e) A surplus of food.
Price of
wheat
S
PMAXIMUM
Shortage
D
QS
QD
Quantity of wheet
9) Suppose Indianapolis decided to follow the lead of some other cities and establish rent control, This policy
would establish a maximum price for any given apartment. Which of the following is not an anticipated result
of this policy:
a) renters are generally able to find apartments they can rent at reasonable prices.*
b) many landlords require a substantial nonrefundable key deposit.
c) apartment vacancy rates in Indianapolis fall substantially.
d) many landlords convert more luxuriant apartments into condominiums, which they sell rather rent.
Topic 5: Elasticity (2 questions)
10) IUPUI increased tuition by 10 percent and the total tuition payments received by IUPUI rose by 7 percent.
What kind of demand curve is IUPUI faced with?
a) Elastic demand
b) Unit-elastic demand
c) Inelastic demand *
d) Perfectly inelastic
e) Infinitely elastic
Don’t be mislead by the comparison of percentage changes here. Price of higher education (tuition) goes up,
total revenue goes up. The percentage increase here is irrelevant. When price goes up and total revenue goes
up, then demand is inelastic.
11) When the price of a can of Coca-Cola increased from 60 cents to 80 cents a can, the quantity dropped from 1
million cans per day to 500,000 cans per day. Using the midpoint formula for computing the elasticity, the
price elasticity of demand for Coca-Cola is:
a) Unit elastic
b) Inelastic
c) –2.33*
d) –0.233
e) –1.5
E = ∆Q% ∕ ∆P%
∆Q% = (500,000 – 1,000,000) ∕ 750,000 = −0.667 (−66.7%)
∆Q% = (60 – 80) ∕ 70 = 0.286 (28.6%)
E = −66.7 ∕ 28.6 = −2.33
12) A rise in the wages of printers causes the price of books to rise by 5 percent as the supply curve of books shifts
to the left. If the price elasticity of demand for books is 0.8, what is the expected effect on the quantity of
books sold?
a) They rise by 5 percent.
b) They fall by 4 percent.*
c) They fall by 5 percent.
d) They rise by 4 percent.
e) We cannot figure it out unless we know the percentage increase in wages.
E = ∆Q% ∕ ∆P%
∆Q% = ∆P% × E = 5 × 0.8 = 4%
Topic 6: Costs of Production (2 questions)
13) Ma Baensch's pickled herring factory has variable costs of $500 for 500 jars and variable costs of $503 for 501
jars. The marginal cost of the 501st jar is:
a) Unknown because we do not know fixed costs.
b) Unknown because we do not know total costs.
c) Both a) and b)
d) $503
e) $3*
MC = ∆TVC ∕ ∆Q = (503 – 500) ∕ (501 – 500) = 3
14) Sam, a cost analyst for Jiffy, observes that when they are producing 800 jars of peanut butter an hour, their
marginal cost is 53 cents ($0.53) and their average total cost is only 50 cents ($0.50). From this, Sam
concludes that average total costs must be _________ and average variable costs must be ______________ as
they increase production from 800 jars per hour.
a) Falling: falling.
b) Rising: rising. *
c) Rising: becoming flat.
d) Rising: falling.
e) Falling: rising.
Cost ($)
MC
ATC
53
AVC
50
800
Q
Topic 7: Profit Maximization, Perfect Competition and SR supply curve (3 questions)
15) Consider a firm that has enough capacity to produce up to 5 balloons. Suppose it costs that firm $1 to make
just one balloon; $2 to make 2 balloons; $4 to make 3 balloons; $7 to make 4 balloons; and $11 to make 5
balloons. How many balloons will the firm make if the market price for balloons is $1.50?
a) 0 balloons
b) 1 balloon
c) 2 balloons *
d) 3 balloons
e)
4 balloons
Q
TC
MC
1
$1
2
$2
3
$4
4
$7
5
$11
P = MR
$1.00
$1.50
$2.00
$1.50
$3.00
$1.50
$4.00
$1.50
16) Teddy’s Bear Shop operates in a purely competitive market in which the market price is $15. The upward
sloping marginal cost curve crosses the U-shaped average variable cost curve at $10 and an output of 100, and
continues to increase after that output. The marginal cost reaches $15 at an output of 250.
a) Teddy’s Bear Shop should produce 250 units because, at that output, price=MC, MC is rising, and it thus
maximizes profits.*
b) Teddy’s Bear Shop should produce an output of 100 because, at that output, the price > AVC.
c) It is not possible to say what it should do from the information that is given.
d) All that can be said is that it should produce in the short run, as Price>AVC, but one can say nothing about
how much it should produce.
e) Teddy’s Bear Shop should look for the output at which the average total cost is a minimum.
Cost ($)
MC
AVC
15
$15
10
100 250
Q
17) Farmer K produces and sells soybeans in a perfectly competitive market. Farmer K’s short run supply curve for
soybeans is
a) The upward sloping portion of the average cost curve.
b) The upward sloping portion of the marginal cost curve.
c) The upward sloping portion of the marginal cost curve above the average variable cost curve.*
d) The upward sloping portion of the marginal cost curve above the average total cost curve.
e) independent of the farmer’s cost curves since he has to compete with other farmers and has to set the
lowest possible price.
Cost ($)
S = MC
AVC
Q
Topic 8: Monopoly, regulated monopoly & monopoly vs. competition (3 questions)
18) Titan Inc. (the only producer of a special kind of industrial robot), can sell 1 robot when the price is $2000, 2
robots when the price is $1500, 3 robots when the price is $1200 and 4 robots when the price is $1000. It can
produce a maximum of 4 robots in a week. If the marginal cost of producing a robot is $500 then
a) the firm will produce 4 robots in a week since that is the maximum amount it can produce.
b) the firm will produce 4 robots in a week since the price of $1000 at which it can sell 4 robots is greater
than the marginal cost
c) the firm will produce and sell only 3 robots every week as the marginal revenue from the 4th robot is only
$400 that is less than the marginal cost of $500*
d) the firm will produce and sell only 2 robots in a week as that is the profit maximizing output for this firm
e) the firm does not know its profit maximizing output since it does not have any information about total
cost.
P
$2,000
Q
1
TR
$2,000
$1,500
2
$3,000
$1,200
3
$3,600
$1,000
4
$4,000
MR
MC
$1,000
$500
$600
$500
$400
$500
19) Monopoly is considered less efficient than a perfectly competitive industry because:
a) a monopoly earns high profits.
b) a monopoly ordinarily utilizes old-fashioned, inefficient technologies because they don’t need to be
efficient to make profits.
c) at the monopoly output, consumers have a higher valuation for the last unit produced than the marginal
cost of producing it, indicating that not all the surplus from trade has been realized.*
d) at the monopoly output, consumers have a lower valuation for the last unit produced than the marginal
cost of producing it, indicating that not all the surplus from trade has been realized.
e) consumers who don’t have a marginal valuation of the good as high as its price are forced to buy it
anyway.
In the diagram below PM is the price charged by the monopoly for selling 4 units. Price paid by the consumer
reflects that consumer’s valuation of the marginal unit of that product. So at 4 units consumers valuation
exceed the marginal cost (point M). Monopoly generates a deadweight loss (shown as the area of MPMPC.
$
MC
PM
$16
AC
$14
PC
D
M
MR
4
5
Q
Figure
20) Citizen’s gas is a natural monopoly. The figure above shows the market for natural gas in the town of Lebanon.
When an average cost price rule is imposed, the price per household per month is __________
a) $60 and 20, 000 households are served
b) $35 and 30,000 households are served
c) $35 and 40, 000 households are served
d) $40 and 40, 000 households are served*
e)
$40 and 20, 000 households are served
Topic 19: Labor Market (2 questions)
21) A small factory in Saltillo, Mexico produces clay figurines. The schedule below shows how many figurines can
be produced daily using various amounts of labor by a firm operating in competitive product and labor
markets:
Workers/day
Output/day
0
0
1
10
2
25
3
40
4
53
5
64
6
73
7
82
8
88
9
94
10
98
If the figurines sell for $1 and the market wage for the workers is $8 per day, how many workers should the
firm employ in order to maximize its profits?
a) 2 workers
b) 3 workers
c) 5 workers
d) 7 workers*
e) 9 workers
Workers/day
Output/day
MP
VMP = P∙ MP
W
0
0
1
10
10
$10
$8
2
25
15
$15
$8
3
40
15
$15
$8
4
53
13
$13
$8
5
64
11
$11
$8
6
73
9
$9
$8
7
82
9
$9
$8
8
88
6
$6
$8
9
94
6
$6
$8
10
98
4
$4
$8
22) A Great Clips franchise has found that the output of haircuts per day is given by the following schedule:
(assume that it hires and sells in a competitive market). The wage rate for a hair dresser is $60 per day. If the
price of haircut increases from $10 to $16
Labor (Workers)
0
1
2
3
4
5
a)
b)
c)
d)
e)
Output (Haircuts per day)
0
24
36
44
48
50
The number of workers hired would remain unchanged at 4
The number of workers hired would increase from 4 to 5
The number of workers hired would increase from 3 to 4*
The number of workers hired would increase from 2 to 3
The number of workers hired would remain unchanged at 3
L
Q
P = $10
VMP
P = $16
VMP
24
$240
$384
$60
12
$120
$192
$60
8
$80
$128
$60
4
$40
$64
$60
2
$20
$32
$60
MP
0
0
1
24
2
36
3
44
4
48
5
50
W
Topic 10: externalities (2 questions)
23) Prestige Paper Company has a paper mill located on the Wisconsin River. It produces paper with a "high gloss"
finish. If the production of this paper causes negative externalities for downstream users of the Wisconsin
River, and if Prestige does not consider these externalities when deciding how much to produce, then Prestige
will produce
a) Less than the efficient output level
b) More than the efficient output level at which price is equal to marginal cost
c) The efficient level of output as long as price equals marginal costs
d) The efficient level of output as long as the firm is in a perfectly competitive industry
e) More than the efficient level of output at which the price is less than marginal cost *
Price and
cost
MSC
S = MC
MSC
P
D0
QEFFICIENT
QINEFFICIENT
Quantity of paper
Topic 11: Trade: Comparative Advantage (1 question)
U.S.
Mexico
Output if only computers
are produced
1,000 computers
100 computers
Output if only toys
are produced
5,000 toys
1,000 toys
24) The table above shows the total output of the two countries if they specialize in one particular output for an
entire day. What can we say about trade between these two countries?
a) Both the U.S. and Mexico can be better off if the U.S. specializes in computers and Mexico in toys, and
then they trade.*
b) Both the U.S. and Mexico can be better off if the U.S. specializes in toys and Mexico in computers, and
then they trade.
c) U.S. would not be willing to trade with Mexico because Mexico is less productive in both outputs.
d) U.S would be willing to trade with Mexico but Mexico (being less productive) would not gain from trading
with the U.S.
e) Since the U.S. has an absolute advantage in producing both goods, U.S. cannot gain by trading with
Mexico
Toys
5000
US
1000
MX
100
1000
Computers
US has comparative advantage in computers because the cost of each additional computer in the US is
5000 ∕ 1000 = 5 toys given up. In Mexico the cost of each additional computer is 1000 ∕ 100 = 10 toys given up. It
costs more for Mexico to produce computers than the US. Conversely each addition toy in the US costs 1 ∕ 5
= 0.2 computer, while in Mexico each additional toy costs 1 ∕ 10 = 0.1 computer.
Topic 12: Tariffs and Quotas (2 question)
25) When Senegal, a country in West Africa, bans imported radios,
a) It raises consumer surplus in Senegal and lowers producer surplus in Senegal
b) It lowers consumer surplus in Senegal and raises producer surplus in Senegal, and there is a deadweight
loss*
c) It raises both consumer and producer surplus in Senegal
d) It lowers both consumer surplus and raises producer surplus in Senegal, and there is NO deadweight loss
e) It raises both consumer surplus and producer surplus in Senegal, and there is NO deadweight loss.
26) Suppose the international "free-trade" price (or world price) of oil is $2.00 per gallon. In order to reduce the
dependency on imported oil the U.S. imposes a tariff of $2.00 per gallon. This would cause
a) The quantity of oil produced in the U.S. to increase and the quantity imported to fall and there would be
NO deadweight losses.
b) The quantity of oil produced in the U.S. to increase and the total quantity imported to fall and the
consumer surplus will increase.
c) The quantity of oil produced in the U.S. to increase and the total quantity imported to fall but consumer
surplus will fall leading to a deadweight loss.*
d) The quantity of oil produced in the U.S. to increase and the quantity imported to fall and even though the
consumer surplus falls there are NO deadweight losses.
e) The quantity of oil produced in the U.S. to increase and the total quantity imported to fall as a result the
total surplus will increase.