VILLANOVA UNIVERSITY
Villanova School of Business
Department of Economics
Economics 1001
Intro. to Microeconomics
PRACTICE FINAL EXAM
Dr.Alan J. Donziger
December 2007
CHAPTER 1 What is Economics?
1) Microeconomics focuses on all of the following EXCEPT
A) the purchasing decisions that an individual consumer makes.
B) the effect of increasing the money supply on inflation.
C) the hiring decisions that a business makes.
D) the effect of an increase in the tax on cigarettes
on cigarette sales.
2) U.S. producers decide to produce more compact cars and fewer SUVs as the
price of gasoline rises. Producers are answering the ____ question.
A) “what”
B) “how”
C) “when”
D) “how many”
3) Human capital is
A) all capital owned by individuals, but not by corporations or governments.
B) all capital owned by individuals or corporations, but not by governments.
C) machinery that meets or exceeds federal safety standards for use by
humans.
D) the skill and knowledge of workers.
4) The term used to emphasize that making choices in the face of scarcity
involves a cost is
A) substitution cost.
B) opportunity cost.
C) utility cost.
D) accounting cost.
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5) The benefit that arises from an increase in an activity is called
A) the marginal benefit.
B) the marginal cost.
C) opportunity cost.
D) an incentive.
6) The Latin term “ceteris paribus” means
A) “false unless proven true”
B) “other things being equal”
C) “after this, therefore because of this”
D) “what is true of the whole is not necessarily true of the parts”
CHAPTER 2 The Economic Problem
7) Which of the following statements regarding the production possibilities frontier
is true?
A) Points outside the frontier are attainable.
B) Points inside the frontier are attainable.
C) Points on the frontier are less efficient than points inside the frontier.
D) None of the above because all of the above statements are false.
8) If Sam is producing at a point on his production possibilities frontier, then he
A) cannot produce any more of either good.
B) can produce more of one good only by producing less of the other.
C) will be unable to gain from trade.
D) is not subject to scarcity.
9) Marginal cost curves generally slope
A) upward because of increasing opportunity cost.
B) upward because of decreasing opportunity cost.
C) downward because of increasing opportunity cost.
D) downward because of decreasing opportunity cost.
10) The production possibilities frontier shifts as
A) tastes and preferences change.
B) the money supply grows or shrinks.
C) technology changes.
D) the unemployment rate changes.
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11) In a world lacking property rights, it would be
A) easier to realize the gains from trade and there would be less
specialization.
B) easier to realize the gains from trade and there would be more
specialization.
C) harder to realize the gains from trade and there would be less
specialization.
D) harder to realize the gains from trade and there would be more
specialization.
12) If the United States can increase its production of automobiles without
decreasing its production of any other good, the United States must have
been producing at a point
A) within its PPF.
B) on its PPF.
C) beyond its PPF.
D) None of the above are correct because increasing the production of one
good without decreasing the production of another good is impossible.
CHAPTER 3 Individual Markets: Supply and Demand
13) The law of demand implies that if nothing else changes, there is
A) a positive relationship between the price of a good and the quantity
demanded.
B) a negative relationship between the price of a good and the quantity
demanded.
C) a linear relationship between price of a good and the quantity demanded.
D) an exponential relationship between price of a good and the quantity
demanded.
14) The demand for a good increases when the price of a substitute ____ and
also increases when the price of a complement ____.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
15) If income increases or the price of a complement falls,
A) the demand curve for a normal good shifts leftward.
B) the demand curve for a normal good shifts rightward.
C) the supply curve of a normal good shifts leftward.
D) the supply curve of a normal good shifts right ward.
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16) A normal good is a good for which
A) there are very few complements.
B) demand increases when income increases.
C) there are few substitutes.
D) demand decreases when income increases.
17) If a good is an inferior good, then purchases of that good will decrease when
A) income increases.
B) the price of a substitute rises.
C) population increases.
D) the demand for it increases.
18) When we say demand increases, we mean that there is a
A) movement to the right along a demand curve.
B) movement to the left along a demand curve.
C) rightward shift of the demand curve.
D) leftward shift of the demand curve.
19) Which of the following explains why supply
curves slope upward?
A)
B)
C)
D)
Prices and income
Increasing marginal cost
Resources and technology
Substitutes in production and complements in production
20) If the quantity demanded exceeds the quantity supplied, then there is
A) a shortage and the price is below the equilibrium price.
B) a shortage and the price is above the equilibrium price.
C) a surplus and the price is below the equilibrium price.
D) a surplus and the price is above the equilibrium price.
21) The price will rise and the equilibrium quantity might increase, decrease, or
stay the same when the
A) demand and the supply of a good both increase.
B) demand for a good increases and the supply of it decreases.
C) demand for a good decreases and the supply of it increases.
D) demand and the supply of a good both decrease.
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CHAPTER 4 Elasticity
22) Suppose that the quantity of root beer demanded declines from 103,000
gallons per week to 97,000 gallons per week as a consequence of a 10
percent increase in the price of root beer. The price elasticity of demand is
A) 0.60.
B) 1.40.
C) 1.66.
D) 6.00.
D) 1000.0.
23) Teenagers have a higher price elasticity of demand for cigarettes than do
adults. Suppose the price elasticity of teenager’s demand for cigarettes is 1.5,
the price elasticity of adult’s demand for cigarettes is 0.8. If the government
imposes a tax on cigarettes that raises the price by 10 percent, by how much
will it reduce teenage smoking?
A) By 5 percent
B) By 10 percent
C) By 15 percent
D) By 20 percent
24) When the price elasticity of demand for a good equals
A) 0, the demand curve is vertical.
B) 0, the demand curve is horizontal.
C) 1, the demand curve is vertical.
D) 1, the demand curve is horizontal.
25) If the demand for a good is unit elastic,
A) a 5 percent increase in price results in a 5 percent increase in total
revenue.
B) a 5 percent increase in price results in a 5 percent decrease in total
revenue.
C) a 5 percent increase in price does not change total revenue.
D) the demand curve is a straight line with slope of –1.
26) Assuming that your demand for gasoline is inelastic, when the price of
gasoline falls, which of the following is most likely to occur?
A) Your demand curve for gasoline will shift left- ward.
B) Your demand curve for gasoline will shift right- ward.
C) Your total expenditure on gasoline will increase.
D) Your total expenditure on gasoline will decrease.
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27) Of the following, demand is likely to be the least elastic for
A) diamonds.
B) insulin for diabetics.
C) iceberg lettuce.
D) pink grapefruit.
28) If the cross elasticity of demand between goods A and B is negative,
A) the demands for A and B are both price elastic.
B) the demands for A and B are both price inelastic.
C) A and B are complements.
D) A and B are substitutes.
29) An increase in Abigail’s income decreases her demand for cassette tapes.
For her, cassette tapes are
A) a normal good.
B) an inferior good.
C) a complement to any good.
D) a substitute good.
30) Fred’s income has just risen from $940 per week to $1,060 per week. As a
result, he decides to purchase 9 percent more steak per week. The income
elasticity of Fred’s demand for steak is
A) 0.75.
B) 0.90.
C) 1.00.
D) 1.33.
CHAPTER 5 Economic Efficiency
31) When the efficient quantity of output is produced
A) the marginal benefit of the last unit produced is equal to the marginal cost
of the last unit produced.
B) the sum of consumer surplus and producer surplus is maximized.
C) resources are used in the activities in which they are most highly valued.
D) All of the above answers are correct.
32) As we move down along the demand curve for hot dogs,
A) the maximum price that people are willing to pay for hot dogs increases.
B) the value of hot dogs decreases.
C) the marginal cost of hot dogs increases.
D) the consumer surplus of hot dogs increases.
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33) When the Smith’s were shopping for their present home, the asking price
from the previous owner was $250,000.00. The Smith’s had decided they
would pay no more than $245,000.00 for the house. After negotiations, the
Smith’s actually purchased the house for $239,000.00. Therefore, the
previous owner earned a producer surplus of
A) $250,000.00.
B) $11,000.00.
C) $5,000.00.
D) an amount unknown given the information in the question.
34) Adam Smith argued that each person in a competitive market is led to
promote the
A) efficient use of society’s resources, because each person’s intention is to
make society better off.
B) efficient use of society’s resources, even though it is no person’s intention
to make society better off.
C) inefficient use of society’s resources, even though each person’s intention
is to make society better off.
D) inefficient use of society’s resources, because it is no person’s intention to
make society better off.
35) The deadweight loss from producing an inefficient amount is
A) a loss to the consumer but a gain to the producer.
B) a loss to the producer but a gain to the consumer.
C) a gain to the consumer and the producer, but a loss to the rest of society.
D) a loss to the consumer and to the producer.
CHAPTER 6 Markets in Action
36) The short run effect of a decrease in the supply of housing is a ________ in
the rent and ________ in the quantity of housing units.
A) rise; a decrease
B) rise; an increase
C) fall; a decrease
D) fall; an increase
37) A minimum wage set above the equilibrium wage will
A) create a shortage of labor.
B) create a surplus of labor.
C) have no effect because the equilibrium level of employment is not affected
by a minimum wage above the employment wage.
D) create a lower wage rate for skilled workers than for unskilled workers.
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38) The buyers pay the entire sales tax levied on a good when demand is
perfectly ________ or supply is perfectly _________.
A) elastic; inelastic
B) elastic; elastic
C) inelastic; inelastic
D) inelastic; elastic
39) When a good is made illegal, which of the following definitely results in the
price rising?
A) a much higher fine on sellers than on buyers.
B) a much higher fine on buyers than on sellers.
C) any fine imposed on buyers while sellers are not penalized.
D) Both answers B and C are correct.
CHAPTER 18 Inequality
40) From left to right, the horizontal axis of the Lorenz curve ranks households
from
A) smallest to largest.
B) largest to smallest.
C) poorest to richest.
D) richest to poorest.
41) In national wealth statistics, wealth is measured as the value of
A) human capital.
B) a stock of assets but not human capital.
C) a stock of assets plus human capital.
D) current pre-tax income.
42) If customer discrimination does not exist, firms that discriminate on the basis
of race or sex will
A) have higher costs than those that do not.
B) have the same level of costs as those that do not.
C) have lower costs than those that do not.
D) tend to survive whereas firms that do not discriminate will tend to fail.
43) An income tax in which the average tax rate increases with income is called
a
A) regressive income tax.
B) proportional income tax.
C) flat-rate income tax.
D) progressive income tax.
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CHAPTER 7 Utility Maximization
44) Joe has $50 to spend on pizza and movies. If movies are $5 each and a
pizza is $10 then, assuming he spends all his money, he can buy
A) 6 movies and 2 pizzas.
B) 8 movies and 4 pizzas.
C) 2 movies and 6 pizzas.
D) 6 movies and 4 pizzas.
45) Which of the following is NOT an assumption of marginal utility theory?
A) A consumer derives utility from the goods consumed.
B) Each additional unit of consumption yields additional utility.
C) Consumers maximize their total utility.
D) As more of a good is consumed, the decrease in the marginal utility from
the good means that the total utility from the good decreases also.
46) Brian consumes only pizza and soda. When the price of a soda is $2 and the
price of a slice of pizza is $4, Brian maximizes his utility by buying 5 sodas
and 10 slices of pizza. If the marginal utility of the 5th soda is 100 units of
utility, then the marginal utility of the 10th slice of pizza must be ____ units of
utility.
A) 200
B) 100
C) 50
D) More information is needed to determine the marginal utility of the 10th
slice of pizza.
47) Marginal utility theory predicts that when income increases
A) a person’s total utility will not change.
B) a person might increase the consumption of some normal goods and
decrease the consumption of other normal goods.
C) a person‘s consumption of normal goods will increase.
D) None of the above answers is correct because marginal utility theory does
not address how demand changes in response to changes in income.
48) If the marginal utility of the good changes sharply as consumption increases,
the
A) demand for the good is elastic.
B) demand for the good is inelastic.
C) supply of the good is elastic.
D) supply of the good is inelastic.
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CHAPTER 10 Output and Cost
49) The short run is a period of time in which
A) the quantities of some resources the firm uses are fixed.
B) the amount of output is fixed.
C) prices and wages are fixed.
D) nothing the firm does can be altered.
50) The marginal product of labor is the
A) change in output resulting from a one-unit increase in labor.
B) maximum output attainable with fixed factors when labor is the only
variable factor.
C) output level above which the slope of the total product curve falls.
D) output level above which the rate of total product per unit of labor falls.
51) The law of diminishing returns states that as
A) the size of a plant increases, the firm’s fixed cost decreases.
B) the size of a plant increases, the firm’s fixed cost increases.
C) a firm uses more of a variable input, given the quantity of fixed inputs, the
marginal product of the variable input eventually diminishes.
D) a firm uses more of a variable input, given the quantity of fixed inputs, the
firm’s average total cost will decrease eventually.
52) Marginal cost is calculated as
A) total cost divided by output.
B) the increase in total cost divided by the increase in output.
C) the increase in total cost divided by the increase in labor, given the
amount of capital.
D) total cost minus total fixed cost.
53) A firm’s average total cost is $80, its fixed cost is $1000, and its output is 100
units. Its average variable cost
A) is less than $40.
B) is between $40 and $60.
C) is more than $60.
D) cannot be determined without more information.
54) A firm is operating in its range of economies of scale and is on both its LRAC
curve and its short-run ATC curve. At that level of output, the slope of its
LRAC curve is
A) zero and the slope of its ATC curve is zero.
B) zero and the slope of its ATC curve is negative.
C) negative and the slope of its ATC curve is zero.
D) negative and the slope of its ATC curve is negative.
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55) When long-run average costs increase as output increases, there are
A) economies of scale.
B) diseconomies of scale.
C) constant returns to scale.
D) constant marginal costs.
CHAPTER 11 Perfect Competition
56) In perfect competition, an individual firm
A) faces unitary elasticity of demand.
B) has a price elasticity of supply equal to one.
C) faces a perfectly elastic demand.
D) has perfectly elastic supply.
57) In perfect competition, a firm that maximizes its economic profit will sell its
good
A) below the market price.
B) at the market price.
C) above the market price.
D) below the market price if its supply curve is inelastic and above the market
price if its supply curve is elastic.
58) For any perfectly competitive firm, marginal revenue is
A) always greater than marginal cost.
B) equal to price.
C) always less than marginal cost.
D) all of the above.
59) A perfectly competitive firm’s marginal revenue exceeds its marginal cost at
its current output. To increase its profit, the firm will
A) lower its price.
B) raise its price.
C) decrease its output.
D) increase its output.
60) A firm’s shutdown point is the quantity and price at which the firm’s total
revenue just equals its
A) total cost.
B) total variable cost.
C) total fixed cost.
D) marginal cost.
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61) The short-run supply curve for a perfectly competitive firm is its
A) marginal cost curve above the horizontal axis.
B) marginal cost curve above its shutdown point.
C) average cost curve above the horizontal axis.
D) average cost curve above its shutdown point.
62) News reports indicate that eating turnips helps people remain healthy. The
news shifts the demand curve for turnips rightward. In response, new farms
enter the turnip industry. During the period in which the new farms are
entering, the price of a turnip ____ and the profit of each existing firm ____.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
63) In the long run, fixed costs are
A) zero and variable costs are zero.
B) zero and variable costs are positive.
C) positive and variable costs are zero.
D) positive and variable costs are positive.
64) An example of an external cost is
A) pollution.
B) the price that a firm pays for a consultant’s advice.
C) the price that a consumer pays for a new car.
D) the damage created by a tornado.
CHAPTER 12 Monopoly
65) Unregulated monopolies
A) take the market price as given.
B) cannot incorporate.
C) cannot change the market quantity.
D) can influence the market quantity and price.
66) Public franchises create monopolies by restricting
A) demand.
B) prices.
C) entry.
D) profit.
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67) An industry in which one firm can supply the entire market at a lower price
than two or more firms can is called a
A) legal monopoly.
B) natural monopoly.
C) single-price monopoly.
D) price-discriminating monopoly.
68) If the price elasticity of demand is less than 1, a monopoly’s
A) total revenue increases when the firm lowers its price.
B) total revenue decreases when the firm lowers its price.
C) marginal revenue is undefined.
D) marginal revenue is zero.
69) In the long-run, a single-price monopolist will
A) not be able to continue to earn economic profits and will break even with a
normal profit.
B) be able to continue to earn economic profits as long as the market
remains a monopoly.
C) end up being regulated by the government because it is making short-run
economic profits.
D) Both answers A and C are correct.
70) Compared to a single-price monopoly, a perfectly competitive industry
produces
A) less output and has a lower price.
B) less output and has a higher price.
C) more output and has a lower price.
D) more output and has a higher price.
71) Which of the following statements regarding an average-cost pricing rule for
a natural monopoly is incorrect?
A) It sets price equal to average total cost.
B) It is efficient.
C) The firm earns a normal profit.
D) More output is produced than if the firm maximized profit.
72) The fundamental reason a single-price monopoly creates a deadweight loss
is that it
A) raises variable cost.
B) raises fixed cost.
C) restricts output.
D) reduces the elasticity of demand.
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CHAPTER 13 Monopolistic Competition and Oligopoly
73) All of the following characteristics apply to monopolistic competition EXCEPT
A) a large number of firms compete.
B) each firm produces the same identical product.
C) firms compete on product quality, price, and marketing.
D) there are no barriers to enter or exit the industry.
74)
A)
B)
C)
D)
In the short run, a firm in monopolistic competition produces where
MR = MC and economic profit is equal to zero.
MR = MC.
the given market price is equal to MC and economic profit is equal to zero.
the given market price is equal to MC.
75) The kinked demand curve model of oligopoly is based on the assumption that
each firm believes that
A) if it raises or lowers its price other firms will follow.
B) if it raises its price other firms will not follow, and if it lowers its price other
firms will follow.
C) if it raises or lowers its price other firms will not follow.
D) if it raises its price other firms will follow, and if it lowers its price other firms
will not follow.
76) In the dominant firm model of oligopoly,
A) all firms are price setters.
B) the dominant firm sets market price, and all other firms are price takers.
C) all firms have the same costs.
D) all firms are roughly of equal size.
CHAPTER 16 Public Goods and Common Resources
77) When consumption of a good is nonrival and nonexcludable, the good is a
A) public good.
B) private good.
C) mixed good.
D) service.
78)
A)
B)
C)
D)
A good or service or a resource is rival if
it is possible to prevent someone from enjoying the benefits of it.
it is not possible to prevent someone from en joying the benefits of it.
its use by one person decreases the quantity available for someone else.
its use by one person does not decrease the quantity available for
someone else.
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79) Which of the following is the best example of a common resource?
A) A Villanova sweatshirt
B) Fish in the Pacific Ocean
C) Satellite radio
D) A flu vaccination
80) A free rider is someone who
A) produces a good and never gets paid for it.
B) consumes a good without paying for it.
C) enjoys leisure more than work, at the margin.
D) generates externalities in production.
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ANSWER KEY
Question
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Answer
B
A
D
B
A
B
B
B
A
C
C
A
B
B
B
B
A
C
B
A
Question
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
Answer
B
A
C
A
C
D
B
C
B
A
D
B
D
B
D
A
B
D
A
C
Question
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
Answer
B
A
D
A
D
A
C
B
A
A
C
C
C
D
B
C
B
B
D
B
Question
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
16
Answer
B
D
B
A
D
C
B
B
B
C
B
C
B
B
B
B
A
C
B
B