Econ 201 Final Exam
1. In a competitive market, no single producer can influence the market price because
a. many other sellers are offering a product that is essentially identical.
b. consumers have more influence over the market price than producers do.
c. government intervention prevents firms from influencing price.
d. producers agree not to change the price.
Figure 14-2
2. Refer to Figure 14-2. When price falls from P3 to P1, the perfectly competitive firm finds that
a. fixed cost is higher at a production level of Q1 than it is at Q3.
b. it should produce Q1 units of output.
c. it should produce Q3 units of output.
d. it is unwilling to produce any output.
3. The short-run supply curve for a firm in a perfectly competitive market is
a. likely to be horizontal.
b. likely to slope downward.
c. determined by forces external to the firm.
d. its marginal cost curve (above average variable cost).
4. A price-taking firm produces rubber balls. When the price of rubber balls is below the firm’s minimum
average total cost, but above the firm’s minimum average variable cost, the firm
a. will experience losses but it will continue to produce rubber balls in the short run.
b. will shut down in the short run.
c. will be earning both economic and accounting profits.
d. should raise the price of its product.
Figure 14-5: A typical firm in a competitive market.
5. Refer to Figure 14-5. When market price is P5, the firm's maximum profit is the area
a. P5 Q3.
b. (P5 - P3) Q2.
c. (P5 - P4) Q3.
d. When market price is P5 there are no profits.
6. Refer to Figure 14-5. Firms would want to enter this market whenever price exceeds
a. P1.
b. P2.
c. P3.
d. None of the above are correct.
7. The irrelevance of sunk costs is best described by which of the following business decisions?
a. New airlines enter the market and earn accounting profits.
b. Airlines continue to sell tickets even though they are reporting large losses.
c. Airlines exit the market when they report losses.
d. All of the above are correct.
8. One of the most important determinants of the success of free-market capitalism is
a. enlightened governments selecting firms that should not be allowed to exit a market.
b. free entry and exit in markets.
c. government regulation of market participants.
d. having a few large firms rather than thousands of small ones.
9. A firm in a competitive market has the following cost structure:
Output
Total Cost
0
$5
1
$10
2
$12
3
$15
4
$24
5
$40
If the market price is $5, this firm will
a. produce five units in the short run and exit in the long run.
b. produce three units in the short run and exit in the long run.
c. produce three units in the short run and remain in the market in the long run.
d. shut down in the short run and exit in the long run.
10. When new firms have an incentive to enter a competitive market, their entry will
a. increase the price of the product.
b. drive down profits of existing firms in the market.
c. shift the market supply curve to the left.
d. All of the above are correct.
11. Which of the following is an implicit cost of owning a business?
(i)
interest expense on existing business loans
(ii)
forgone savings account interest when personal money is invested in the business
(iii)
damaged or lost inventory
a.
b.
c.
d.
(i) only
(ii) only
(i) and (ii)
All of the above are correct.
12. Economists normally assume that the goal of a firm is to
a. maximize its total revenue.
b.
c.
d.
maximize its profit.
minimize its explicit costs.
minimize its total cost.
13. The marginal product of labor can be defined as
a. change in profit/change in labor.
b. change in output/change in labor.
c. change in labor/change in output.
d. change in labor/change in total cost.
14. Which of these assumptions is often realistic for a firm in the short run?
a. The firm can vary both the size of its factory and the number of workers it employs.
b. The firm can vary the size of its factory, but not the number of workers it employs.
c. The firm can vary the number of workers it employs, but not the size of its factory.
d. The firm can vary neither the size of its factory nor the number of workers it employs.
15. Average total cost tells us the
a. total cost of the first unit of output, not including fixed cost.
b. cost of a typical unit of output.
c. cost of the last unit of output, including fixed cost.
d. variable cost of a firm that is producing at least one unit of output.
Table 13-1
Measures of Cost for ABC Inc. Widget Factory
Quantity
Variable
Total
Fixed
of Widgets
Costs
Costs
Costs
0
1
2
3
4
5
6
$10
$2
$6
$9
$14
$16
$24
$26
16. Refer to Table 13-1. The average variable cost of producing two widgets is
a. $2.00
b. $7.00
c. $4.00
d. $5.00
17. Refer to Table 13-1. The marginal cost of producing the sixth widget is
a. $26.00.
b. $36.00.
c. $16.00.
d. $12.00.
Figure 13-7
18. Refer to Figure 13-7. Which of the curves is the short-run ATC curve of the smallest factory?
a. ATCA
b. ATCB
c. ATCC
d. ATCD
B
19. Refer to Figure 13-7. In long run competitive equilibrium, a firm can operate on which of the following
curves?
a. ATCA
b. ATCB
c. ATCC
d. All of the above are correct.
20. Refer to Figure 13-7. This firm experiences diseconomies of scale at what output levels?
a. output levels above N
b. output levels between M and N
c. output levels below M
d. All of the above are correct, if the firm is operating in the long run.
21. When a monopolist increases the amount of output that it produces and sells, the price of its output
a. stays the same.
b. increases.
c. decreases.
d. may increase or decrease depending on the price elasticity of demand.
B
Figure 15-3 Cost and revenue structure for a monopoly firm.
22. Refer to Figure 15-3. A profit-maximizing monopoly's profit is equal to
a. P3 Q2.
b. P2 Q4.
c. (P3 - P0) Q2.
d. (P3 - P0) Q4.
23. The monopolist's profit-maximizing quantity of output is determined by the intersection of
a. marginal cost and demand
b. marginal cost and marginal revenue
c. average total cost and marginal revenue
d. average variable cost and average revenue
24. A monopolist will choose to increase output when
a. market price increases.
b. at all levels of output, marginal cost increases.
c. at the present level of output, marginal revenue exceeds marginal cost.
d. All of the above are correct.
25. A monopolist faces the following demand curve:
Price
Quantity
$51
1
$47
2
$42
3
$36
4
$29
5
The monopolist has total fixed costs of $60 and each unit it produces has a marginal cost of $15. What is the
profit-maximizing level of production?
a. 2 units
b. 3 units
c. 4 units
d. 5 units
26. The social problem caused by monopoly is
a. an inefficiently low quantity of output.
b. an inefficiently high value of marginal cost.
c. excessive monopoly profits.
d. excessive producer surplus.
27. One problem with regulating a monopolist by setting price equal to its average total cost is that
a. regulators are unable to effectively control prices and/or production.
b. it does not provide an incentive for the monopolist to reduce its cost.
c. a monopolist's costs, by definition, are higher than costs of perfectly competitive firms.
d. a monopolist is still able to generate excessive economic profits.
28. The concern that "political failure" or “government failure” may be worse than “market failure” supports
which of the following public policies toward monopolies?
a. public ownership of monopolies
b. government regulation of monopolies
c. government incentives to promote competition in monopolized industries
d. doing nothing at all
29. If a previously non-discriminating monopolist begins to price-discriminate,
a. discrimination will increase consumer surplus.
b. discrimination will reduce total surplus.
c. discrimination will convert consumer surplus and deadweight loss into producer surplus.
d. the price effect will come to dominate the output effect in determining its revenue.
Table 16-1 The table below shows the weekly demand curve for basic cable TV subscriptions in a small
market. For simplicity, assume the total cost of providing the service is zero.
Market Quantity
Price
Total Profit
2
4
6
7
8
9
10
$10
$8
$6
$5
$4
$3
$2
$20
$32
$36
$35
$32
$27
$20
30. Refer to Table 16-1. If a monopoly firm controls this market, it would charge what price?
a. $4
b. $6
c. $8
d. $10
31. Refer to Table 16-1. If there are two profit-maximizing firms operating in this market, what will be the price
in Nash equilibrium?
a. $4
b. $6
c. $8
d. $10
32. Cartels are difficult to maintain because
a. antitrust laws are difficult to enforce.
b. cartel agreements are conducive to monopoly outcomes.
c. there is always tension between cooperation and self-interest in a cartel.
d. All of the above are correct.
33. When each firm chooses its own best strategy, given the strategy the other one actually chooses, the market
has reached
a. a competitive equilibrium.
b. an open market solution.
c. a socially optimal solution.
d. a Nash equilibrium.
Table 16-5. Wal-Mart and K-Mart are both considering building new store in Morgantown, and are trying to
decide whether to build small or big stores. The profits (in millions) for each retailer, given the different
strategies chosen, are shown in this payoff matrix:
Wal-Mart
Build Big Store
Build Small Store
Wal-Mart Profit = $75
Wal-Mart Profit = $25
Build Big Store
K-Mart Profit = $65
K-Mart Profit = $100
K-Mart
Build Small Store
Wal-Mart Profit = $150
Wal-Mart Profit = $85
K-Mart Profit = $75
K-Mart Profit = $135
34. Refer to Table 16-5. If each store follow its own dominant strategy, K-mart’s profits will be
a. $75.
b. $65.
c. $100.
d. $135.
35. The oligopoly game is paradoxical because overall oligopoly profit would be higher if each firm produces the
amount agreed to in the cartel, but
a. each has a good reason to cheat and produce less, which reduces its profit in the end.
b. each has a good reason to cheat and produce more, which reduces its profit in the end.
c. both firms behave irrationally, which reduces their profits in the end.
d. profit for each firm at the Nash equilibrium is greater than its profit under the cartel.
Figure 2-3
36. Refer to Figure 2-3. Which point or points are efficient?
a. B, E
b. A, B, E
c. D
d. C
Table 3-3
Montana
Missouri
Labor Hours Needed to Make
One Unit of:
Baskets
Birdhouses
6
9
3
4
37. Refer to Table 3-3. Montana has a comparative advantage in
a. baskets and Missouri has a comparative advantage in birdhouses.
b.
c.
d.
38.
39.
40.
41.
42.
43.
44.
45.
birdhouses and Missouri has a comparative advantage in baskets.
neither good and Missouri has a comparative advantage in both goods.
both goods and Missouri has a comparative advantage in neither good.
Comparative advantage reflects
a. productivity.
b. relative opportunity cost.
c. efficiency.
d. terms of trade advantage.
Which of the following would definitely result in a higher price in the market for Snickers?
a. demand increases and supply decreases
b. demand and supply both decrease
c. demand decreases and supply increases
d. demand and supply both increase
When supply and demand both increase, equilibrium
a. price will increase.
b. price will decrease.
c. quantity may increase, decrease, or remain unchanged.
d. price may increase, decrease, or remain unchanged.
New oak tables are normal goods. What would happen to the equilibrium price and quantity in the market for
oak tables if the price of oak wood rises, and consumer income rises?
a. Price will fall and the effect on quantity is ambiguous.
b. Price will rise and the effect on quantity is ambiguous.
c. Quantity will fall and the effect on price is ambiguous.
d. Quantity will rise and the effect on price is ambiguous.
What will happen to the market for textbooks if more students attend college, and paper becomes cheaper?
a. Price will rise, but quantity may either rise or fall.
b. Price will fall, but quantity may either rise or fall.
c. Price may either rise or fall, but quantity will fall.
d. Price may either rise or fall, but quantity will rise..
What will happen to the market for pens if the price of pencils falls, and the wages of pen-makers decrease?
a. Price will rise and quantity may rise or fall.
b. Price will fall and quantity may rise or fall.
c. Quantity will rise and price may rise or fall.
d. Quantity will fall and price may rise or fall.
If two supply curves pass through the same point and one is steep and the other is closer to horizontal, which
of the following would be correct?
a. The flatter supply curve is more inelastic.
b. The steeper supply curve is more inelastic.
c. The elasticity of supply will be the same for both curves.
d. Nothing can be said about their relative elasiticities.
The discovery of a new type of wheat increases the supply of wheat, which most likely causes
a. consumer surplus to fall and total surplus to increase.
b. consumer surplus to fall and total surplus to fall.
c. consumer surplus to rise and total surplus to fall.
d. consumer surplus to rise and total surplus to rise.
Figure 6-5
46. Refer to Figure 6-5. A binding price floor would exist at a price of
a. $5.00.
b. $4.00.
c. $2.00.
d. It could exist at any price below $4.00.
47. Suppose that the demand for picture frames is price elastic and the supply is inelastic. The burden of a tax of
$1 per frame will fall
a. entirely on consumers.
b. more on consumers than on producers.
c. more on producers than on consumers.
d. on consumers or producers, depending on who gets the tax bill from the government.
48. Chad is willing to pay $4.00 for a latté. If he buys a latté for $3.75, his consumer surplus is
a. $0.25.
b. $0.50.
c. $3.75.
d. $4.00.
Table 7-2
BUYER
DAVID
LAURA
MEGAN
MALLORY
AUDREY
WILLINGNESS TO PAY
$8.50
$7.00
$5.50
$4.00
$3.50
49. Refer to Table 7-2. If the market price is $5.00, the consumer surplus in the market will be
a. $2.50.
b. $4.50.
c. $6.00.
d. $21.00.
Figure 8-4
50. Refer to Figure 8-4. The price buyers pay if the tax is imposed would be
a. P1.
b. P2.
c. P3.
d. impossible to determine.
51. Refer to Figure 8-4. The loss in total welfare due to the tax is represented by area
a. A + B + C.
b. D + E + F.
c. A + B + D + F.
d. C + E.
52. Taxes on luxury goods cause deadweight losses because
a. the government always wastes the money collected.
b. they prevent buyers and sellers from realizing some of the gains from trade.
c. they take more money from the rich than the poor.
d. they treat equally well-off people unequally.
53. The greater the elasticities of demand and supply the
a. smaller the deadweight loss from a tax.
b. less intrusive a tax will be on a market.
c. greater the deadweight loss from a tax.
d. more equitable the distribution of a tax between buyers and sellers.
54. If the labor supply curve is nearly vertical, a tax on labor
a. has a large deadweight loss.
b. will raise small amounts of tax revenue.
c. has little impact on the amount of work workers are willing to do.
d. will be fair.
Figure 10-3
55. Refer to Figure 10-3. The difference between the social cost curve and the supply curve reflects the
a. profit margin of each concert.
b. external costs of the concert (e.g., noise and traffic).
c. value of concerts in general to society as a whole.
d. amount by which the city should subsidize the concert organizers.
56. Which of the following would be considered a common resource good?
a. cable television
b. bottled natural mineral water
c. uncongested toll roads
d. fish in the ocean
57. Private markets usually fail to provide enough lighthouses because
a. lighthouses cost too much to build relative to their benefits.
b. government intervention makes it hard for private lighthouse owners to compete.
c. ship captains have incentives to use lighthouses without paying.
d. lighthouses are valued very little by ship captains these days.
58. Which of the following would NOT shift the demand curve for a good or service?
a. a change in income
b. a change in the price of the good or service
c. a change in expectations about the price of the good or service
d. a change in the price of a related good
59. If the current price of roses is $40.00, but the equilibrium price of roses is $30.00, we expect a
a. shortage to exist and the market price of roses to increase.
b. shortage to exist and the market price of roses to decrease.
c. surplus to exist and the market price of roses to increase.
d. surplus to exist and the market price of roses to decrease.
60. Suppose that the incomes of buyers in a particular market for a normal good decline and there is also a
reduction in input prices paid by sellers. What would occur in this market?
a. Equilibrium price would increase, but quantity may rise or fall.
b. Equilitbrium price would decrease, but quantity may rise or fall.
c. Both equilibrium price and equilibrium quantity would increase.
d. Equilibrium quantity would increase, but equilibrium price may rise or fall.
Econ 201 Final Exam
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