AAE 215 Section
November 11, 2011
Figure 1. Market equilibrium
1. Assume Figure 1 represents the tobacco industry. The industry creates
a. positive externalities
b. negative externalities
c. no externalities
d. no equilibrium in the market
2. Assume Figure 1 represents the tobacco industry. Without any government
intervention, the equilibrium price and quantity are
a. $1.90 and 40 units, respectively
b. $1.80 and 35 units, respectively
c. $1.60 and 42 units, respectively
d. $1.35 and 46 units
3. Assume Figure 1 represents the tobacco industry. The socially optimal price and
quantity are
a. $1.90 and 40 units
b. $1.80 and 35 units
c. $1.60 and 42 units
d. $1.35 and 46 units
4. A negative externality arises when a person engages in an activity that has:
a. an adverse effect on a bystander who is not compensated by the person who causes the
effect.
b. an adverse effect on a bystander who is compensated by the person who causes the
effect.
c. a beneficial effect on a bystander who pays the person who causes the effect.
d. a beneficial effect on a bystander who does not pay the person who causes the effect
5. Negative externalities lead markets to produce _______ output levels and positive
externalities lead markets to produce _________ output levels
a. Greater than efficient; smaller than efficient
b. Smaller than efficient; greater than efficient
c. Greater than efficient; efficient
d. Efficient; greater than efficient
6. Suppose that large-scale pork production has the potential to create ground water
pollution. Why might this type of pollution be considered an externality?
a. The groundwater pollution reduces the cost of large-scale pork production.
b. The economic impact of a large-scale pork production facility is localized in a small
geographic area
c. The pollution has the potential for creating a health risk for water users in the region
surrounding the pork production facility.
d. Consumers will not reap the benefits of lower production cost from large-scale pork
production
7. According to the Coase theorem, private markets will solve externality problems and
allocate resources efficiently as long as:
a. private parties can bargain without cost
b. government assigns property rights to the harmed party
c. the externalities that are present are positive and not negative
d. businesses determine an appropriate level of production
8.
Assume labor is the only variable input and that an additional input of labor increases
total output from 72 to 78 units. If the product sells for $6 per unit in a purely
competitive market, the MRP of this additional worker is:
A) $6.
B) $12.
C) $36.
D) $72.
9.
A pure monopolist is:
A) any firm realizing all existing economies of scale.
B) any firm whose demand curve is downsloping.
C) any firm which can engage in price discrimination.
D) a one-firm industry.
10.
Which of the following is a characteristic of pure monopoly?
A) close substitute products
B) barriers to entry
C) the absence of market power
D) "price taking"
11.
Assuming no change in product demand, a pure monopolist:
A) can increase price and increase sales simultaneously because it dominates the
market.
B) adds an amount to total revenue which is equal to the price of incremental sales.
C) should produce in the range where marginal revenue is negative.
D) must lower price to increase sales.
12. The MR = MC rule:
A) applies only to pure competition.
B) applies only to pure monopoly.
C) does not apply to pure monopoly because price exceeds marginal revenue.
D) applies both to pure monopoly and pure competition.
13. If a monopolist's marginal revenue is $3.00 and its marginal cost is $4.50, it will
increase its profits by:
A) reducing output and raising price.
B) reducing both output and price.
C) increasing both price and output.
D) raising price while keeping output unchanged.
The figure below reflects the cost and revenue structure for a monopoly firm. Use it to
answer questions 21-15.
14. Profit on a typical unit sold for a profit maximizing monopoly would equal
a. P3 - P2.
b. P3 - P0.
c. P2 - P1.
d. P2 - P0.
15. At the profit maximizing level of output, average revenue is equal to
a. P3.
b. P2.
c. P1.
d. P0.
16. A profit maximizing monopoly would have a total revenue equal to
a. (P3 - P0) x Q2.
b. (P3 - P0) x Q4.
c. P3 x Q2.
d. P2 x Q4.
17. A profit maximizing monopoly would have a total cost equal to
a. P0 x Q1.
b. P0 x Q2.
c. P0 x Q3.
d. (P1 - P0) x Q2.
18. A profit maximizing monopoly would have profit equal to
a. (P3 - P0) x Q2.
b. (P3 - P0) x Q4.
c. P3 x Q2.
d. P2 x Q4.
19. Deadweight loss to society as a result of the monopoly firm selling at the monopoly
equilibrium price and quantity rather than the competitive equilibrium price and quantity
is equal to:
a. (P3-P0) x Q3
b. P0 x Q2
c. P3 – P2
d. (P3-P1) x (Q4 – Q2) x ½
For the following 4 questions refer to the diagram below:
20. With respect to the following graph which of the following is not true:
$C*
0
a) The input combination represented by pt. A is the cost minimizing
combination for producing Q* amount output
b) The input combination represented by pt. A is the output maximizing
combination of inputs given the level of cost represented by the above isocost line
c) At the input combination represented by pt. A, the marginal physical
products of capital and labor will be equal
d) At the input combination represented by pt. A, the marginal physical
products of both inputs will be positive
21. The ________ at point C is _______ (in absolute value) than at point A.
a) MRTS; Larger;
b) Budget Line; Flatter;
c) MRTS; Smaller;
d) Output; Smaller;
22. At point A the MPP of Capital per dollar is __________ the MPP of Labor per
dollar.
a) Not comparable;
b) Larger than;
c) Smaller than;
d) Equal to;
23. At point B, profits associated with producing output level Q* can be __________ by
using ___________ and ____________ .
a)
b)
c)
d)
Increased; More Labor; Less Capital;
Maximized; More Labor; The Same Amount of Capital;
Decreased; More Labor; Less Capital;
We can make no statements regarding profits here