VILLANOVA UNIVERSITY
Villanova School of Business
Department of Economics
Economics 1002
Intro. to Microeconomics
PRACTICE EXAM 2
Dr. Alan J. Donziger
November 2007
Essays and graphs. In your answers define all significant terms. Use
diagrams (fully labeled) wherever appropriate.
NOTE: You will not have this many essay questions to answer and
there will be some choice of the essay questions to answer.
1. It is said that “a (perfectly) competitive industry can achieve an efficient use of resources”.
Explain what is meant by the market structure perfect competition. Explain and illustrate how a firm
in perfect competition maximizes profit in the short-run. How does a perfectly competitive industry
(market) reach long-run equilibrium? Explain how the process of the perfectly competitive firm
achieving short-run equilibrium and the perfectly competitive industry reaching long-run equilibrium
achieves an efficient allocation or resources for society.
2. Define the terms substitution effect and income effect. Use these concepts to explain (prove)
the law of demand for a normal good and an inferior good. Also explain why a Giffin good is an
exception to the law of demand.
3. Assume a monopoly and a perfectly competitive industry have the same cost structure.
Illustrate and compare the price and output results for each industry. What are the implications of
these results for society with respect to allocative and productive efficiency?
4. Explain what is meant by the market structure Monopoly. Explain and illustrate short-run profit
maximization for a single-price monopoly. List and discuss three causes of monopoly.
5. Define the law of diminishing returns. Use an example to illustrate this law. Explain and
illustrate short-run cost curves. Why can it be said that the law of diminishing returns is the
basis of short-run cost curves.
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6. Certain industries are characterized as natural monopolies and regulated as public utilities.
Explain why firms in such an industry are not permitted to follow the practice of maximizing profits
and thus require regulation. Compare pricing models based
a. marginal cost pricing
b. fair rate of return (average cost) pricing
Explain the implication for the firm and for society of each model.
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Multiple Choice Questions:
1) With rent controls, which of the following is most likely to occur?
A) a building boom
B) a housing surplus
C) black market activity
D) decreased search activity
2) An effective minimum wage is a price
A) floor that results in a surplus of low-skilled labor.
B) ceiling that results in a shortage of low-skilled labor.
C) floor that results in a shortage of low-skilled labor.
D) ceiling that results in a surplus of low-skilled labor.
3) In general, how a sales tax is divided between buyers and sellers is
determined by
A) the elasticity of supply only.
B) neither the elasticity of demand nor the elasticity of supply.
C) both the elasticity of demand and the elasticity of supply.
D) the elasticity of demand only.
4) Outlawing the sale of a good shifts the supply curve
A) leftward and raises the price.
B) leftward and lowers the price.
C) rightward and raises the price.
D) rightward and lowers the price.
5) Measured wealth is a less accurate indicator of economic inequality than is
measured income because measured wealth excludes
A) financial assets.
B) owner-occupied housing.
C) depreciation.
D) human capital.
6) Which of the following is NOT a potential reason for wage differences by race
or sex?
A) discrimination
B) differences in the degree of specialization
C) differences in human capital
D) All of the above are potential reasons for wage differences by race or sex.
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7) The U.S. tax system
A) increases inequality and shifts the Lorenz curve toward the line of equality.
B) reduces inequality and shifts the Lorenz curve toward the line of equality.
C) increases inequality and shifts the Lorenz curve away from the line of
equality.
D) reduces inequality and shifts the Lorenz curve away from the line of equality.
Consumption
possibility
A
B
C
D
E
F
Video
games
(quantity)
10
8
6
4
2
0
Baseball
cards
(quantity)
0
1
2
3
4
5
8) Jordan has two goods that he consumes this week. He can choose to go to the
arcade and play video games or he can purchase baseball cards. The price of
each video game is $.50 and each pack of baseball cards is $1. Jordan will spend
all his allowance this week on these two goods. Jordanʹs consumption
possibilities are listed in the table above. What is the amount of Jordanʹs
allowance?
A) $15
B) $50
C) $5
D) $10
9) As consumption of a good decreases, its marginal utility ________ and its total
utility _________.
A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases
10) According to marginal utility theory, consumers
A) maximize total utility and minimize marginal utility.
B) must save part of their income for future consumption.
C) equalize marginal utility per dollar spent on different goods.
D) spend the most on the least expensive good.
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11) Roberta spends all of her income on two items, staplers and paper clips. If the
price of a stapler increases, there will be a __________ Robertaʹs demand curve
for staplers and a _________ Robertaʹs demand curve for paper clips.
A) movement along; leftward shift of
B) rightward shift of; leftward shift of
C) movement along; rightward shift of
D) leftward shift of; movement along
12) Rembrandt paintings are expensive and not as vital for life as milk, which is
cheap. Marginal utility theory explains this paradox of value: The total utility from a
Rembrandt painting is _________ than the total utility from milk, and the marginal
utility from a Rembrandt painting is _________ than the marginal utility from milk.
A) larger; smaller
B) smaller; smaller
C) larger; larger
D) smaller; larger
13) The long run is distinguished from the short run because only in the long run
A) resource prices can vary.
B) the firm no longer maximizes its profit.
C) the quantities of all resources can be varied.
D) output prices can vary.
14) The marginal product of labor is the increase in total product from a
A) one unit increase in the quantity of labor, while holding the quantity of capital
constant.
B) one unit increase in the quantity of labor, while also increasing the quantity of
capital by one unit.
C) one percent increase in the wage rate, while also increasing the price of capital
by one percent.
D) one dollar increase in the wage rate, while holding the price of capital constant.
15) A company could produce 99 units of a good for $316 or produce 100 units of
the same good for $320. The marginal cost of the 100th unit
A) is $4.00
B) is $3.20.
C) is $320.
D) cannot be calculated with this information.
16) The range of output over which a firmʹs average variable cost is decreasing is
the same as the range over which its
A) marginal cost is increasing.
B) average product is decreasing.
C) average product is increasing.
D) average fixed cost is decreasing.
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17) A common source of diseconomies of scale is the
A) diminishing marginal returns to capital.
B) growing complexity of management and organizational structure.
C) diminishing marginal returns to land.
D) diminishing marginal returns to labor.
18) In perfect competition, ________.
A) firms in the industry have advantages over firms that plan to enter the industry
B) there are restrictions on entry into the industry
C) only firms know their competitorsʹ prices
D) there are many firms that sell identical products
19) A perfectly competitive firm shuts down if the price of its product is
A) greater than its maximum variable cost.
B) less than its minimum average variable cost.
C) less than its minimum total cost.
D) greater than its minimum average variable cost.
20) As firms enter a perfectly competitive industry, the price
A) falls and the existing firmsʹ economic profits decrease.
B) rises and the existing firmsʹ economic profits decrease.
C) falls and the existing firmsʹ economic profits do not change.
D) falls and the existing firmsʹ economic losses do not change.
21) In a competitive market, the market demand curve measures the if exist and
the market supply curve measures the if exist.
A) marginal social benefit; no external benefits; marginal social cost; no external
costs
B) consumersʹ marginal benefit; external benefits; firmsʹ marginal benefit; external
benefits
C) marginal social benefit; external benefits; marginal social cost; external costs
D) firmsʹ marginal benefit; external benefits; consumersʹ marginal cost; external
costs
22) Patents create monopolies by
restricting
A) profit.
B) prices.
C) entry.
D) demand.
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23) If the demand for its product is inelastic, a monopolyʹs
A) total revenue increases when the firm lowers its price.
B) marginal revenue is equal to zero.
C) marginal revenue is negative.
D) total revenue is unchanged when the firm lowers its price.
24) Which of the following is true for BOTH monopoly and perfect competition?
A) Profits are maximized by producing at the level of output where marginal
revenue is equal to marginal cost.
B) The marginal revenue curve is horizontal at the industry equilibrium price.
C) Economic profits can be sustained indefinitely over time.
D) The demand for the individual firmʹs product is perfectly elastic.
25) Which of the following statements regarding a marginal-cost pricing rule for a
natural monopoly is WRONG?
A) It allows the firm to earn a normal profit.
B) It maximizes total surplus in a regulated industry.
C) It sets price equal to marginal cost.
D) It is efficient.
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Answers to multiple choice questions
1
C
14 A
2 A
15 A
3 C
16 C
4 A
17 B
5 D
18 D
6 D
19 B
7 B
20 A
8 C
21 A
9 D
22 C
10 C
23 C
11 C
24 A
12 D
25 A
13 C
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