georgia institute of technology school of...

Georgia Institute of TechnologySchool of Economics

ECON 2106 JK1&JK2! Principles of Microeconomics!!!! Fall 2012

Instructor: Dr. Johnson Kakeu (johnson.kakeu @econ.gatech.edu) TAs: Joseph Greene ([email protected] @gatech.edu)

"Winners must have two things: definite goals and a burning desire to achieve them." - Brad Burden -

PREPTEST -3

1. A factor of production whose quantity can be changed during the short run is: A) a marginal factor of production. B) a fixed factor of production. C) an incremental factor of production. D) a variable factor of production.

2. The long run refers to the period for which: A) a fixed input exists. B) all inputs are variable. C) marginal costs are decreasing. D) diminishing returns causes marginal cost to increase.

3. Which of the following curves is not affected by the existence of diminishing returns? A) the average fixed cost curve B) the average variable cost curve C) the average total cost curve D) the marginal cost curve

4. Average variable cost is the ratio of: A) total cost to the marginal cost. B) variable to fixed inputs. C) variable cost to the quantity of output. D) fixed costs to variable cost.

5. In the short run, as output gets larger and larger: A) fixed cost gets smaller. B) the average variable cost curve gets closer and closer to the average total cost curve. C) marginal cost gets smaller. D) average total cost decreases after the point of diminishing returns.

Use the following to answer question 6.

Figure and Table: Variable, Fixed, and Total Costs

6. (Figure and Table: Variable, Fixed, and Total Costs) Look at the figure and table Variable, Fixed, and Total Costs. In the figure, when 51 bushels of wheat is produced, the average fixed cost is ________, average variable cost is ________, and average total cost is ________.

A) $7.84; $11.76; $19.60 B) $133.33; $200; $333.33 C) $400; $600; $1,000 D) $5.33; $13.33; $18.67


Figure: Short-Run Costs II

7. (Figure: Short-Run Costs II) Look at the figure Short-Run Costs II. Curve 2 is the ________ cost curve.

A) average total B) average variable C) marginal D) total


8. (Table: Costs for Birthday Cakes) Annie has a bakery that specializes in birthday cakes, and her variable costs of producing cakes are shown in the table Costs of Birthday Cakes. Assume that her fixed costs are $10. What is the average total cost of 5 cakes?

A) $110 B) $60 C) $12 D) $2

9. Individuals in a market who must take the market price as given are: A) quantity-minimizers. B) quantity-takers. C) price-takers. D) price-searchers.

10. Perfectly competitive firms will: A) maximize total revenue by using the marginal decision rule. B) increase output up to the point that the marginal benefit of an additional unit of output is

greater than the marginal cost. C) increase output up to the point that the marginal benefit of an additional unit of output is

equal to the marginal cost. D) always attempt to minimize average variable cost.

11. If a perfectly competitive firm sells 300 units of output at a market price of $1 per unit, its marginal revenue is:

A) less than $1. B) $1. C) more than $1 but less than $300. D) $300.

12. Zoe's Bakery operates in a perfectly competitive industry. The variable costs at Zoe's Bakery increase, so all of the cost curves (with the exception of fixed cost) shift leftward. The demand for Zoe's pastries does not change, nor does the firm shut down. To maximize profits after the variable cost increase, Zoe's Bakery will ________ its price and ________ its level of production.

A) raise; increase B) decrease; increase C) raise; decrease D) do nothing to; decrease

13. If a perfectly competitive firm is producing a quantity where P < MC, then profit: A) is maximized. B) can be increased by decreasing the price. C) can be increased by increasing production. D) can be increased by decreasing production.

14. Markets for the right to pollute are: A) created by individual firms when they reduce pollution emissions. B) created by government when it issues tradable pollution permits. C) likely to result in fewer incentives to find and create technology that reduces pollution. D) a means by which more pollution is encouraged.


Figure: The Marginal Decision Rule

15. (Figure: Marginal Decision Rule) Look at the figure The Marginal Decision Rule. Economic profit:

A) exists between q1 and q2. B) exists between the origin and q1. C) exists as a maximum at q1. D) cannot be determined based on the information provided.

Use the following to answer questions 16-18.

Figure: A Perfectly Competitive Firm in the Short Run

16. (Figure: A Perfectly Competitive Firm in the Short Run) Look at the figure A Perfectly Competitive Firm in the Short Run. The firm's total economic profit at its most profitable level of output is:

A) 0GHB. B) EFJS. C) EGHS. D) FGLK.

17. (Figure: A Perfectly Competitive Firm in the Short Run) Look at the figure A Perfectly Competitive Firm in the Short Run. If the market price is G, the firm's total cost of producing its most profitable level of output is:

A) BS. B) DK. C) 0FKD. D) 0ESB.

18. (Figure: A Perfectly Competitive Firm in the Short Run) Look at the figure A Perfectly Competitive Firm in the Short Run. The firm will produce in the short run if the price is:

A) at least as high as point F. B) greater than point E. C) greater than point N. D) at least as high as point P.


19. (Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. The table shows his variable costs for lawn-mowing and the number of lawns mowed. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. He calculates the variable costs as shown in the table. What is Alex's break-even price?

A) $100.00 B) $10.00 C) $50.00 D) $27.50

20. (Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry made up of 100 identical firms. The table shows his variable costs for lawn-mowing and the number of lawns mowed. Alex's fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $60, how much is Alex's total cost at the profit-maximizing output?

A) $60 B) $1,100 C) $2,400 D) $2,100


21. (Table: Total Cost and Output) Look at the table Total Cost and Output. The table describes Sergei's costs for his perfectly competitive all-natural ice cream firm. If the market price of a tub of ice cream is $67.50, how many tubs of ice cream will Sergei's firm produce?

A) 1 B) 2 C) 3 D) 4

22. (Table: Total Cost and Output) The table describes Sergei's total costs for his perfectly competitive all-natural ice cream firm. Where does Sergei's short-run supply curve begin?

A) P = $0; Q = 0. B) P = $36.67; Q = 3. C) P = $33.33; Q = 3. D) P = $170; Q = 4.

23. In the short run, a firm will continue to sell its product as long as: A) it is making a positive profit. B) the price is greater than average total costs. C) the price is greater than average variable costs. D) its marginal cost is increasing.

24. A monopolist responds to an increase in demand by ________ price and ________ output. A) increasing; decreasing B) increasing; increasing C) decreasing; increasing D) decreasing; decreasing

25. The monopoly firm's profit-maximizing price is: A) given by the point on the ATC curve for the profit-maximizing quantity. B) given by the point on the demand curve for the profit-maximizing quantity. C) determined for the quantity of output where MR > MC by the greatest amount. D) found where MR > MC at the monopolist's profit-maximizing quantity of output.

26. Which of the following is true regarding monopolies? A) Monopolies produce too much and charge too much from the standpoint of efficiency. B) Monopolies usually are economically efficient because they have economic profits with

which to work. C) Monopolies produce too little and charge too much from the standpoint of efficiency. D) Monopolies create an efficiency problem but are not associated with an equity problem.

27. In order to engage in price discrimination a firm must be: A) a price-taker. B) a price-setter. C) able to identify consumers whose elasticities differ. D) a price-setter, and it must be able to identify consumers whose elasticities differ.

28. Which of the following statements is correct for a firm that can price-discriminate? A) It should adjust prices so that customers with price-inelastic demand pay lower prices

than those with elastic demand. B) It should adjust prices so that customers with price-inelastic demand pay higher prices

than those with elastic demand. C) It should adjust prices so that customers with price-elastic demand pay lower prices than

those with inelastic demand. D) It should adjust prices so that customers with price-elastic demand pay higher prices

than those with inelastic demand.

29. If a monopolist can engage in perfect price discrimination, then: A) it produces at the socially efficient level. B) consumer surplus is maximized. C) producer surplus is minimized. D) the government may impose fines on the monopolist.


Figure: A Rock Climbing Shoe Monopoly

30. (Figure: A Rock Climbing Shoe Monopoly) Look at the figure A Rock Climbing Shoe Monopoly. If the firm acts to maximize profit, the firm will sell ________ pairs of shoes at a price of ________ per pair.

A) Q2; P1

B) Q2; P5

C) Q3; P2

D) Q4; P3


31. (Table: Prices and Demand) Look at the table Prices and Demand. The New Orleans Saints have a monopoly on Saints logo baseball hats. The Saints sell at most one hat to each customer, and the table shows each customer's willingness to pay. The marginal cost of producing a hat is $18. How many hats should the Saints produce, and what price should the organization charge to maximize its profits?

A) 1; $28 B) 2; $26 C) 3; $24 D) 4; $22

32. (Table: Prices and Demand) The New Orleans Saints have a monopoly on Saints logo baseball hats. The Saints sell at most one hat to each customer, and the table shows each customer's willingness to pay. The marginal cost of producing a hat is $18. If the Saints were a perfectly competitive firm in a perfectly competitive industry, their profit-maximizing price and output total surplus would be ________. If the Saints were a profit-maximizing monopoly, total surplus would be _______.

A) $0; $0 B) $27; $36 C) $36; $27 D) $18; $27

33. Monopoly is inefficient because some consumer surplus is transferred to producer surplus. A) True B) False

34. If a monopoly can engage in perfect price discrimination, then its marginal revenue is equal to price, in contrast to the usual situation for a monopoly, in which price is higher than marginal revenue.

A) True B) False

35. The most important source of oligopoly in an industry is: A) economies of scale. B) government regulation. C) technological inferiority. D) ownership of plentiful resources.

36. Which of the following Herfindahl–Hirschman indices is most likely to indicate a perfectly competitive market?

A) 100 B) 1,800. C) 10,000. D) 100,000.

37. The largest HHI possible is ________ and the industry is a(n) ________ . A) 10; monopoly B) 10,000; monopoly C) 100,000; monopoly D) 100,000; oligopoly

Use the following to answer questions 38-39.

Figure: Collusion

38. (Figure: Collusion) In the figure Collusion, panel (c) gives the combined marginal revenue, demand, and marginal cost curves for an industry containing several firms. Panels (a) and (b) give marginal cost curves for two of those firms. The price charged by the industry with collusion is shown by:

A) W. B) X. C) Y. D) Z.

39. (Figure: Collusion) In the figure Collusion, panel (c) gives the combined marginal revenue, demand, and marginal cost curves for an industry containing several firms. Panels (a) and (b) give marginal cost curves for two of those firms. The quantity of output produced by firm 2 when there is collusion in the industry is shown by:

A) H. B) J. C) K. D) L.


Figure: Payoff Matrix for Gehrig and Gabriel

40. (Figure: Payoff Matrix for Gehrig and Gabriel) The figure Payoff Matrix for Gehrig and Gabriel refers to two people who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. If both follow a tit-for-tat strategy, equilibrium will be reached when:

A) each produces 5,000 figurines. B) each produces 7,000 figurines. C) Gehrig produces 7,000 figurines and Gabriel produces 5,000 figurines. D) Gehrig produces 5,000 figurines and Gabriel produces 7,000 figurines.

41. Two large universities, Humongous State (HSU) and Behemoth State (BSU), dominate college basketball. Each basketball program aggressively recruits the best athletes to attend the university, but the best athletes can skip college and jump immediately to pro basketball. Each school could choose to illegally pay top players to attend their schools and thus increase the winning percentage of the team, or each program can follow the rules and not pay top athletes to play college basketball, thus losing them to the pro ranks. The table shows the payoff matrix of winning percentages that each school would receive from their recruiting decision, given the recruiting decision of their rival. Winning percentages in each cell of the payoff matrix are given as (HSU, BSU).a) What is the noncooperative Nash equilibrium?b) Suppose that each school considers the future and devises a tit-for-tat strategy. Neither school will pay players to play basketball so long as the other does the same. If one school breaks the agreement and pays players, the other school will do the same and continue to do so until the first school stops paying players. If both schools adopt the tit-for-tat strategy, what are the winning percentages every year? Will this be effective at eliminating the illegal practice of paying college athletes to play basketball?

42. Oscar owns a meat processing plant whose unpleasant odors waft across the city. Because the production of processed meat provides a negative externality to the community, at the market equilibrium quantity, the marginal social:

A) cost of processed meat exceeds the market price. B) benefit of processed meat exceeds the market price. C) cost of processed meat is lower than the market price. D) benefit of processed meat is lower than the market price.

43. Which of the following statements about environmental standards and emissions taxes is correct?

A) An emissions tax is a more efficient way to reduce pollution than an environmental standard, because an emissions tax leads to an equalization of the marginal benefit of pollution from all sources.

B) An environmental standard is a more efficient way to reduce pollution than an emissions tax, because an environmental standard can be structured to lead to an equalization of the reduction in pollution from all sources.

C) If an emissions tax and environmental standards lead to the same total reduction in pollution, then they will also lead to the same reduction in pollution by individual polluters.

D) It is easy to set emissions taxes at the “correct” level, since the relationship between emissions taxes and the reduction in emissions that they induce has been extensively studied and is well known.


Figure: City with Two Polluters

44. (Figure: City with Two Polluters) Look at the figure City with Two Polluters. If the government does not intervene in the pollution market, equilibrium will occur where firm A produces ________ tons of pollution and firm B produces ________ tons of pollution for a total of ________ tons of pollution.

A) 2,000; 2,000; 4,000 B) 0; 1,000; 1,000 C) 1,000; 0; 1,000 D) 800; 1,400; 2,200

45. Which of the following is usually associated with a positive externality? A) smoking cigarettes B) listening to a new CD with earbuds C) innovation in the semiconductor industry D) an indoor classical music concert with tickets that cost $50


Figure: Model of a Competitive Market

46. (Figure: Model of a Competitive Market) Given the figure Model of a Competitive Market, if there are no external benefits or costs, the output at Q will be:

A) larger than is socially desirable. B) smaller than is socially desirable. C) efficient. D) inefficient.

47. As the quantity of pollution emissions rises, the marginal social cost of pollution: A) remains constant. B) falls. C) rises. D) rises at first but eventually falls.

48. A copper mining operation discharges waste products into a river and causes higher costs and discomfort to downstream users of the water for which they are not compensated. In this case:

A) too little of society's resources is being used to produce copper. B) too much of society's resources is being used to produce copper. C) the optimal amount of society's resources is being used to produce copper. D) there is an external benefit to society from copper production.


Figure: The Optimal Quantity of Pollution

49. (Figure: The Optimal Quantity of Pollution) The figure The Optimal Quantity of Pollution shows the marginal social cost (MSC) and marginal social benefit (MSB) for firms that pollute the air with sulfur dioxide. Using the figure, the optimal Pigouvian tax per unit of pollution is:

A) $500. B) $250. C) $167. D) $83.

50. A Pigouvian subsidy is: A) designed to discourage activities generating externalities. B) designed to encourage activities generating external benefits. C) appropriate when the marginal social cost curve is above the marginal cost of production

curve. D) appropriate when the marginal social cost curve and the marginal social benefit curve

intersect at an inefficient level.


51. (Table: Externalities from Parks) The table Externalities from Parks shows the marginal social benefit and the marginal social cost of preserving various amounts of land in a city for a public park. If 5 acres is dedicated to the park, this outcome is _________ because _______ .

A) efficient; MSB = MSC B) efficient; MSB > MSC C) inefficient; MSB > MSC D) inefficient; MSB < MSC


Figure: Negative Externalities and Raising Pigs for Pork

52. (Figure: Negative Externalities and Raising Pigs for Pork) Refer to the figure Negative Externalities and Raising Pigs for Pork. If the marginal external cost of raising a pig for pork is $400, then the socially optimal quantity of pigs to raise is ________ and the socially optimal price is ________.

A) 150; $900 B) 200; $800 C) 250; $700 D) 300; $1,200

53. The total external cost of air pollution in Tennessee shows up in the final price of goods in Tennessee, assuming that the government does not intervene in the marketplace.

A) True B) False

54. The economically efficient level of an externality is zero. A) True B) False

55. In an unregulated market, how much pollution will be emitted as goods and services are produced? Why is this market outcome inefficient?


Figure: Marginal Private Benefits and Marginal Social Benefits

56. (Figure: Marginal Private Benefits and Marginal Social Benefits) Look at the figure Marginal Private Benefits and Marginal Social Benefits. Without government intervention, this market will produce ________ units at a price of ________.

A) Q0; P0

B) Q1; P0

C) Q1; P2

D) Q2; P1

Answer Key - PREPTEST-3

1. D 2. B 3. A 4. C 5. B 6. A 7. A 8. C 9. C 10. C 11. B 12. D 13. D 14. B 15. D 16. D 17. C 18. D 19. C 20. D 21. D 22. C 23. C 24. B 25. B 26. C 27. D 28. C 29. A 30. A 31. C 32. B 33. False 34. True 35. A 36. A 37. B 38. A 39. B 40. A 41. a) The noncooperative Nash equilibrium is for both schools to illegally pay players. Paying

players is a dominant strategy.b) As this hypothetical game is designed, a tit-for-tat strategy will not be effective at eliminating the illegal practice of paying players to attend a school. The outcome where neither school pays players is unstable because both schools could tacitly agree to pay players and both schools will win more games.

42. A 43. A 44. A 45. C 46. C 47. C 48. B 49. C

50. B 51. D 52. B 53. False 54. False 55. An unregulated market will emit pollution to the point where MSB = 0. This is inefficient

because at that quantity of pollution, the marginal social cost is greater than zero. Because MSC > MSB, reducing pollution by one unit will reduce damage to the environment by a greater amount than the cost to polluters to avoid that unit of pollution. Because this reduction of pollution increases total surplus to society, the market outcome must have been inefficient.

56. C

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