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Economics 218 Sample Questions Test 2 2013 Dr. Stokes

Place your answer on the answer sheet. There are 50 questions, each worth 2 points.

1) In 1985, Alice paid $20,000 for an option to purchase ten acres of land. By paying the $20,000, she bought the right to buy the land for $100,000 in 1992. When she acquired the option in 1985, the land was worth $120,000. In 1992, it is worth $110,000. Should Alice exercise the option and pay $100,000 for the land? A) Yes. B) No. C) It depends on what the rate of inflation was between 1985 and 1992. D) It depends on what the rate of interest was.

Answer: A

2) Which of the following statements is true regarding the differences between economic and accounting costs? A) Accounting costs include all implicit and explicit costs. B) Economic costs include implied costs only. C) Accountants consider only implicit costs when calculating costs. D) Accounting costs include only explicit costs.

Answer: D

3) In order for a taxicab to be operated in New York City, it must have a medallion on its hood. Medallions are expensive, but can be resold, and are therefore an example of A) a fixed cost. B) a variable cost. C) an implicit cost. D) an opportunity cost. E) a sunk cost.

Answer: A

4) Which of the following statements correctly uses the concept of opportunity cost in decision making?I. "Because my secretary's time has already been paid for, my cost of taking on an additional project is lower than it otherwise would be." II. "Since NASA is running under budget this year, the cost of another space shuttle launch is lower than it otherwise would be." A) I is true, and II is false. B) I is false, and II is true. C) I and II are both true. D) I and II are both false. Answer: D

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Economics 218 Sample Questions Test 2 2013 Dr. Stokes Scenario 7.1:The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced.

5) Refer to Scenario 7.1. The total cost to produce 100 cookies is A) $0.10 B) $0.25 C) $25.00 D) $100.00 E) indeterminate

Answer: C

6) Refer to Scenario 7.1. The total cost to produce 50 cookies is A) $20 B) $25 C) $50 D) $60 E) indeterminate

Answer: A

7) Refer to Scenario 7.1. For 100 cookies, the average total cost is A) falling. B) rising. C) neither rising nor falling. D) less than average fixed cost.

Answer: A

8) Use the following two statements to answer this question: I. The average cost curve and the average variable cost curve reach their minima at the same level of output. II. The average cost curve and the marginal cost curve reach their minima at the same level of output. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Answer: D

9) Which of the following relationships is NOT valid? A) Rising marginal cost implies that average total cost is also rising. B) When marginal cost is below average total cost, the latter is falling. C) When marginal cost is above average variable cost, AVC is rising. D) none of the above

Answer: A

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10) An isocost line reveals the A) costs of inputs needed to produce along an isoquant. B) costs of inputs needed to produce along an expansion path. C) input combinations that can be purchased with a given outlay of funds. D) output combinations that can be produced with a given outlay of funds.

Answer: C

11) Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be A) 500. B) 25/500. C) -4/5. D) 25/20 or 1.25.

Answer: C

12) The curve in the diagram is called

A) the income-consumption curve. B) the long-run total cost curve. C) the expansion path. D) the price-consumption curve. E) none of the above

Answer: C

13) At the optimum combination of two inputs, A) the slopes of the isoquant and isocost curves are equal. B) costs are minimized for the production of a given output. C) the marginal rate of technical substitution equals the ratio of input prices. D) all of the above

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Economics 218 Sample Questions Test 2 2013 Dr. StokesE) A and C only

Answer: D

14) Suppose that the price of labor (PL) is $10 and the price of capital (PK) is $20. What is the equation of the isocost line corresponding to a total cost of $100? A) PL + 20PK B) 100 = 10L + 20K C) 100 = 30(L+K) D) 100 + 30 (PL + PK)E) none of the above

Answer: B

15) An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a river. Use the following two statements to answer this question: I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent. II. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Answer: A

16) A firm's short-run average cost curve is U-shaped. Which of these conclusions can be reached regarding the firm's returns to scale? A) The firm experiences increasing returns to scale. B) The firm experiences increasing, constant, and decreasing returns in that order. C) The firm experiences first decreasing, then increasing returns to scale. D) The short-run average cost curve reveals nothing regarding returns to scale.

Answer: D

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17) The LAC and LMC curves in the diagram below are consistent with a production function that exhibits

A) decreasing returns to scale. B) constant returns to scale. C) increasing returns to scale. D) increasing returns to scale for small levels of output, then constant returns to scale, and eventually decreasing returns to scale as output increases. E) decreasing returns to scale for small levels of output, then constant returns to scale, and eventually increasing returns to scale as output increases.

Answer: D

18) Which of following is a key assumption of a perfectly competitive market? A) Firms can influence market price.B) Commodities have few sellers. C) It is difficult for new sellers to enter the market. D) Each seller has a very small share of the market. E) none of the above

Answer: D

19 Firms often use patent rights as a:A) barrier to exit.B) barrier to entry.C) way to achieve perfect competition.D) none of the above

Answer: B

20) A few sellers may behave as if they operate in a perfectly competitive market if the market demand

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Economics 218 Sample Questions Test 2 2013 Dr. Stokesis:A) highly inelastic.B) very elastic.C) unitary elastic.D) composed of many small buyers.

Answer: B

21) If managers do not choose to maximize profit, but pursue some other goal such as revenue maximization or growth, A) they are more likely to become takeover targets of profit-maximizing firms. B) they are less likely to be replaced by stockholders. C) they are less likely to be replaced by the board of directors. D) they are more likely to have higher profit than if they had pursued that policy explicitly. E) their companies are more likely to survive in the long run.

Answer: A

22) The textbook for your class was not produced in a perfectly competitive industry because A) there are so few firms in the industry that market shares are not small, and firms' decisions have an impact on market price. B) upper-division microeconomics texts are not all alike. C) it is not costless to enter or exit the textbook industry. D) of all of the above reasons.

Answer: D

23) Which of the following statements identifies a key difference between condominiums and cooperative housing?A) Condos tends to be less expensive.B) Condo owners are not responsible for maintaining the common spaces in the building.C) Co-op owners have more control over who can move into their building.D) Co-op owners generally commit less time to the building governance.

Answer: C

24) A firm maximizes profit by operating at the level of output where A) average revenue equals average cost. B) average revenue equals average variable cost. C) total costs are minimized. D) marginal revenue equals marginal cost. E) marginal revenue exceeds marginal cost by the greatest amount.

Answer: D

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Economics 218 Sample Questions Test 2 2013 Dr. Stokes25) At the profit-maximizing level of output, what is relationship between the total revenue (TR) and total cost (TC) curves? A) They must intersect, with TC cutting TR from below. B) They must intersect, with TC cutting TR from above. C) They must be tangent to each other. D) They cannot be tangent to each other. E) They must have the same slope.

Answer: E

26) If current output is less than the profit-maximizing output, which must be true? A) Total revenue is less than total cost. B) Average revenue is less than average cost. C) Average revenue is greater than average cost. D) Marginal revenue is less than marginal cost. E) Marginal revenue is greater than marginal cost.

Answer: E

27) The perfectly competitive firm's marginal revenue curve is A) exactly the same as the marginal cost curve. B) downward-sloping, at twice the (negative) slope of the market demand curve. C) vertical. D) horizontal. E) upward-sloping.

Answer: D

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28) The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because A) the market price is determined (through regulation) by the government B) the firm supplies a different good than its rivals C) the firm's output is a small fraction of the entire industry's output D) the short run market price is determined solely by the firm's technology E) the demand curve for the industry's output is downward sloping

Answer: C

29) If the market price for a competitive firm's output doubles then A) the profit maximizing output will double B) the marginal revenue doubles C) at the new profit maximizing output, price has increased more than marginal cost D) at the new profit maximizing output, price has risen more than marginal revenue E) competitive firms will earn an economic profit in the long-run.

Answer: B

30) Marginal profit is negative when:A) marginal revenue is negative.B) total cost exceeds total revenue.C) output exceeds the profit-maximizing level.D) profit is negative.

Answer: C

31) Suppose the state legislature in your state imposes a state licensing fee of $100 per year to be paid by all firms that file state tax revenue reports. This new business tax:A) increases marginal cost.B) decreases marginal cost.C) increases marginal revenue.D) decreases marginal revenue.E) none of the above

Answer: E

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Consider the following diagram where a perfectly competitive firm faces a price of $40.

Figure 8.1

32) Refer to Figure 8.1. The profit-maximizing output is A) 30. B) 54. C) 60. D) 67. E) 79.

Answer: D

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33) If a graph of a perfectly competitive firm shows that the MR = MC point occurs where MR is above AVC but below ATC, A) the firm is earning negative profit, and will shut down rather than produce that level of output. B) the firm is earning negative profit, but will continue to produce where MR = MC in the short run. C) the firm is still earning positive profit, as long as variable costs are covered. D) the firm is covering explicit, but not implicit, costs. E) the firm can cover all of fixed costs but only a portion of variable costs.

Answer: B

34) An improvement in technology would result in A) upward shifts of MC and reductions in output. B) upward shifts of MC and increases in output. C) downward shifts of MC and reductions in output. D) downward shifts of MC and increases in output. E) increased quality of the good, but little change in MC.

Answer: D

Figure 8.2

35) Refer to Figure 8.2. At P = $80, the profit-maximizing output in the short run is A) 22. B) 34. C) 39. D) 50. E) 64.

Answer: C

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Figure 9.1

36) Refer to Figure 9.1. If the market is in equilibrium, the consumer surplus earned by the buyer of the 1st unit is ________.A) $5.00 B) $15.00 C) $22.50 D) $40.00

Answer: D

37) Refer to Figure 9.1. If the government establishes a price ceiling of $20, how many widgets will be sold? A) 20 B) 30 C) 40 D) 50 E) 60

Answer: A

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38) When government intervenes in a competitive market by imposing an effective price ceiling, we would expect the quantity supplied to ________ and the quantity demanded to ________. A) fall; rise B) fall; fall C) rise; rise D) rise; fall

Answer: A

39) In an unregulated, competitive market consumer surplus exists because some A) sellers are willing to take a lower price than the equilibrium price. B) consumers are willing to pay more than the equilibrium price. C) sellers will only sell at prices above equilibrium price (or actual price). D) consumers are willing to make purchases only if the price is below the actual price.

Answer: B

40) In 1970s the federal government imposed price controls on natural gas. Which of the following statements is true? A) These price controls caused a chronic excess supply of natural gas. B) Consumers gained from the price controls, because consumer surplus was larger than it would have been under free market equilibrium. C) Producers gained from the price controls because producer surplus was larger than it would have been under free market equilibrium. D) This episode of price controls was unusual, because it resulted in no deadweight loss to society.

Answer: B

41) Price ceilings A) cause quantity to be higher than in the market equilibrium. B) always increase consumer surplus. C) may decrease consumer surplus if demand is sufficiently elastic. D) may decrease consumer surplus if demand is sufficiently inelastic. E) always decrease consumer surplus.

Answer: D

42) Consider the following statements when answering this question I. When a competitive industry's supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are consumers. II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false.

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Answer: B

43) Government intervention can increase total welfare when A) there are costs or benefits that are external to the market. B) consumers do not have perfect information about product quality. C) a high price makes the product unaffordable for most consumers. D) all of the above E) A and B only

Answer: E

44) For national security reasons a government decides that all of its base metal industry should not be located in the same geographical region, as it presently is. The government decides to allocate production quotas to firms in different parts of the country, but does not restrict in any way the transactions between consumers and base metal producers. This scheme is A) efficient as consumers still buy from whoever they like. B) efficient as those consumers who value base metals the most can purchase them. C) likely to be inefficient as some of the industry's output is not produced by the firms with the lowest cost. D) likely to be inefficient as the scheme will require subsidies to work. E) efficient as learning by doing effects will be strongest in the firms set up in new geographical regions.

Answer: C

45) Consider the following statements when answering this question I. Waiting lists for kidney transplants have been caused by a 1984 congressional law forbidding humans to sell their kidneys. II. Randomly choosing citizens to serve on juries is an efficient mechanism for selecting jurors. A) I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) I and II are false.

Answer: B

46) A situation in which the unregulated competitive market outcome is inefficient because prices fail to provide proper signals to buyers and sellers is known as:A) an imperfectly competitive market.B) a market failure.C) a deadweight loss.D) a disequilibrium.

Answer: B

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47) Suppose the government raises the price of cheese above the market equilibrium level (P0) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the change in producer surplus after this policy is adopted?

A) Producers lose area C but gain area A.B) Producers lose area C but gain area A+B.C) Producers gain A.D) Producers gain area A+B+D.

Answer: D

48) A country's government would like to raise the price of one its most important agricultural crops, coffee beans. Which of the following government programs will result in higher prices for coffee beans? A) An import quota on coffee beansB) An acreage limitation program which provides coffee bean farmers financial incentives to leave some of their acreage idleC) An import tariff on coffee beansD) all of the above

Answer: D

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Figure 9.7

49) The policy shown in Figure 9.7 is a A) price floor of $50. B) price support of $50. C) price ceiling of $30. D) quota of 2000. E) quota of 4000.

Answer: D

50) As noted in the text, the major Japanese auto manufacturers agreed to "voluntary" import restrictions that reduced the number of cars they could ship to the U.S. market in the 1980s. One of the key outcomes from this policy is that the Japanese manufacturers were able to:A) focus on more profitable auto markets in other countries.B) raise their prices of autos in the U.S. market and capture higher profit margins on the imported cars.C) cut their costs by more than the import tariff, so profit per auto increased.D) all of the above

Answer: B

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