Test 2 2012
Test 2 2012 Multiple Choice Identify the choice that best completes the statement or answers the question by filling in the bubble on the scantrons. ____
1. Jeff decides that he would pay as much as $4,000 for a new laptop computer. He buys the computer and realizes consumer surplus of $800. How much did Jeff pay for his computer? a. $700 b. $2,300 c. $3,000 d. $3,200 e. $3,700
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2. Which of the following is the most correct statement about tax burdens? a. A tax burden falls most heavily on the side of the market that is elastic. b. A tax burden falls most heavily on the side of the market that is inelastic. c. A tax burden falls most heavily on the side of the market that is closer to unit elastic. d. A tax burden is distributed independently of relative elasticities of supply and demand.
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3. When the government places a tax on a product a. the cost of the tax to buyers and sellers will be less than the revenue raised from the tax by the government. b. the cost of the tax to buyers and sellers will equal the revenue raised from the tax by the government. c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government. d. without additional information, such as the elasticity of demand for this product, it is impossible to compare tax cost with tax revenue.
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4. When evaluating the size of the deadweight loss due to a tax we know that the a. greater the elasticities of supply and demand, the greater the deadweight loss. b. smaller the elasticities of supply and demand, the greater the deadweight loss. c. smaller the decrease in both quantity demanded and quantity supplied, the greater the deadweight loss. d. primary factor that determines the size of the deadweight loss in the percentage the tax is of price.
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Figure 8-2
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5. Refer to Figure 8-2. The amount of tax revenue received by the government is equal to the area a. P3 A C P1. b. A B C. c. P2 D A P3. d. P1 C D P2.
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6. Refer to Figure 8-2. The amount of deadweight loss associated with the tax is equal to a. P3 A C P1. b. A B C. c. P2 A D P3. d. P1 D C P2.
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7. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing clothing, exporting steel, and neither importing nor exporting rugs. We can conclude that producer surplus in Aquilonia is now higher for a. steel, lower for clothing, and the same for rugs. b. clothing and steel, but not rugs. c. clothing and rugs, but not steel. d. clothing, lower for steel, and the same for rugs.
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Figure 9-1
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8. Refer to Figure 9-1. Without trade, consumer surplus would be a. $210. b. $245. c. $420. d. $455. e. $490.
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9. Refer to Figure 9-1. With free trade, this country would a. import 70 baskets. b. export 65 baskets. c. export 35 baskets. d. import 40 baskets. e. export 105 baskets.
____ 10. Refer to Figure 9-1. With free trade, consumer surplus would be a. $45. b. $80. c. $160. d. $210. e. $245. ____ 11. When a country allows trade and becomes an importer of a good, which of the following would NOT be true? a. The gains of domestic consumers exceed the losses of domestic producers. b. The losses of domestic producers exceed the gains of domestic consumers. c. The price paid by domestic consumers of the good decreases. d. The price received by domestic producers of the good decreases. ____ 12. XYZ corporation produced 300 units of output but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. Each of the 275 units sold was sold for a price of $100. Total revenue for the XYZ corporation would be a. -$2,500.. b. $2,500. c. $26,125. d. $27,500. e. $30,000. 3
Figure 7-7
____ 13. Refer to Figure 7-7. If the price decreases from $22 to $16, consumer surplus would increase by a. $120. b. $360. c. $480. d. $600. e. $1,080. ____ 14. Refer to Figure 7-7. Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium quantity increases to 110. The increase in producer surplus due to additional sales would be equal to a. $90. b. $210. c. $360. d. $480. ____ 15. The domestic price of a product will equal the world price a. when the domestic supply of the product increases. b. when the country allows free trade. c. when trade restrictions are imposed on the product. d. if the country chooses to export and not import the product. e. if the government imposes trade restrictions. ____ 16. When a country allows trade and becomes an importer of a good consumer surplus a. and producer surplus will increase. b. and producer surplus will decrease. c. will increase and producer surplus will decrease. d. will decrease and producer surplus will increase.
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____ 17. Economic profit is equal to (i) total revenue - (explicit costs + implicit costs). (ii) total revenue - opportunity costs. (iii) accounting profit + implicit costs. a. b. c. d.
(i) only (i) and (ii) (ii) and (iii). All of the above are correct.
Scenario 13-2 Zach took $500,000 out of the bank and used it to start his new cookie business. The bank account pays 4 percent interest per year. During the first year of his business, Zach sold 12,000 boxes of cookies for $3 per box. Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $14,000. ____ 18. Refer to Scenario 13-2. Zach's accounting profit for the year was a. $-478,000. b. $-56,000. c. $2,000. d. $22,000. ____ 19. Refer to Scenario 13-2. Zach's economic profit for the year was a. $-478,000. b. $-56,000. c. $2,000. d. $22,000.
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The figure below depicts a production function for a firm that produces cookies. Use the figure to answer the following questions. Figure 13-1
____ 20. Refer to Figure 13-1. As the number of workers increases, a. total output increases, but at a decreasing rate. b. marginal product increases, but at a decreasing rate. c. marginal product increases at an increasing rate. d. total output decreases. ____ 21. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product? a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers. b. The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers. c. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers. d. All of the above are correct. Scenario 13-4 For the following questions, assume that a given firm experiences decreasing marginal product of labour with the addition of each worker regardless of the current output level. It also has a capital stock which is fixed. ____ 22. Refer to Scenario 13-4. Average fixed cost will be a. always rising. b. always falling. c. U-shaped. d. constant. ____ 23. Refer to Scenario 13-4. Average total cost will be a. always rising. b. always falling. c. constant. d. U-shaped.
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____ 24. The marginal cost curve crosses the average total cost curve at a. the efficient scale. b. the minimum point on the average total cost curve. c. a point where the marginal cost curve is rising. d. All of the above are correct. ____ 25. 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. ____ 26. When a firm in a competitive market produces 11 units of output, it has a marginal revenue of $9.00. What would be the firm's total revenue when it produces 8 units of output? a. $4.80 b. $6.00 c. $48.00 d. $60.00 e. $72.00 ____ 27. If a competitive firm is (i) selling 1,000 units of its product at a price of $9 per unit and (ii) earning a positive profit, then a. its total cost is less than $9,000. b. its marginal revenue is less than $9. c. its average revenue is greater than $9. d. All of the above are correct. ____ 28. If marginal cost exceeds marginal revenue, the firm a. is most likely to be at a profit-maximizing level of output. b. should increase the level of production to maximize its profit. c. must be experiencing losses. d. may still be earning a profit.
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Use the information for a competitive firm in the table below to answer the following questions. Table 14-2 Quantity 0 1 2 3 4 5 6 7 8 9
Total Revenue $0 9 18 27 36 45 54 63 72 81
Total Cost $10 14 19 25 32 40 49 59 70 82
____ 29. Refer to Table 14-2. At a production level of 4 units which of the following is true? a. Marginal cost is $6. b. Total revenue is greater than variable cost. c. Marginal revenue is less than marginal cost. d. All of the above are correct. ____ 30. Refer to Table 14-2. If this firm chooses to maximize profit it will choose a level of output where marginal cost is equal to a. 6. b. 7. c. 8. d. 9. ____ 31. Refer to Table 14-2. If the firm finds that its marginal cost is $11, it should a. increase production to maximize profit. b. increase the price of the product to maximize profit. c. advertise to attract additional buyers to maximize profit. d. None of the above are correct.
____ 32. 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). ____ 33. When price is below average variable cost, a firm in a competitive market will a. shut down and incur fixed costs. b. shut down and incur both variable and fixed costs. c. continue to operate as long as average revenue exceeds marginal cost. d. continue to operate as long as average revenue exceeds average fixed cost.
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____ 34. A profit-maximizing firm in a competitive market produces small rubber balls. When the market price for small rubber balls falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, the firm a. will experience losses but it will continue to produce rubber balls. b. will shut down. c. will be earning both economic and accounting profits. d. should raise the price of its product. ____ 35. When a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which of the following principles is (are) best demonstrated? (i) Fixed costs are sunk in the short run. (ii) In the short run, only fixed costs are important to the decision to stay open for lunch. (iii) If revenue exceeds variable cost, the restaurant owner is making a profitable strategic decision to remain open for lunch. a. b. c. d.
(i) and (ii) only (ii) and (iii) only (i) and (iii) only All are demonstrated.
____ 36. Susan quit her job as a teacher, which paid her $36,000 per year in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in $3,500 in monthly revenue. a. In the short run, Susan should shut down her business and in the long run she should exit the industry. b. In the short run, Susan should continue to operate her business, but in the long run she should exit the industry. c. In the short run, Susan should continue to operate her business, but in the long run she will probably face competition from newly entering firms. d. In the short run, Susan should continue to operate her business, and she is also in long-run equilibrium.
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In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Use the figure to answer the following questions. Figure 14-7
____ 37. Refer to Figure 14-7. When 100 identical firms participate in this market, at what price will 15,000 units be supplied to this market? a. $1.00 b. $1.50 c. $2.00 d. It cannot be determined from the information provided. ____ 38. Refer to Figure 14-7. If at a market price of $1.75, 52,500 units of output are supplied to this market, how many identical firms are participating in this market? a. 75 b. 100 c. 250 d. 300 ____ 39. When existing firms in a competitive market are profitable, an incentive exists for a. new firms to seek government subsidies that would allow them to enter the market. b. new firms to enter the market, even without government subsidies. c. existing firms to raise prices. d. existing firms to increase production. ____ 40. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will a. fall in the short run. All firms will shut down and some of them will exit the industry. Price will then rise. b. fall in the short run. No firms will shut down, but some of them will exit the industry. Price will then rise. c. not fall in the short run because firms will exit to maintain the price. d. None of the above are correct.
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Figure 7-1
____ 41. Refer to Figure 7-1. Area C represents a. the decrease in consumer surplus that results from a downward-sloping demand curve. b. An addition to consumer surplus from additional sales when the price falls from P2 to P1 . c. an increase in producer surplus when quantity sold increases from Q2 to Q1 . d. a decrease in consumer surplus to each consumer in the market. ____ 42. Refer to Figure 7-1. When the price rises from P1 to P2, which would NOT be true? a. The buyers who still buy the good are worse off because they now pay more. b. Some buyers leave the market because they are not willing to buy the good at the higher price. c. The total value of what is now purchased by buyers is actually higher. d. Consumer surplus in the market falls. ____ 43. There are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited quantities, and all of them have the following cost structure: Output 0 1 2 3 4 5
Total Cost $5 $10 $12 $15 $24 $40
The long-run supply curve for this market is a. positively sloped. b. horizontal at a price of $3.33. c. horizontal at a price of $5. d. horizontal at a price of $7.
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____ 44. What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises and public transportation becomes cheaper? a. Price will fall and the effect on quantity is ambiguous. b. Price will rise and the quantity will fall c. Quantity will fall and price will fall d. Quantity will fall and the effect on price is ambiguous. e. The effect on both price and quantity is ambiguous ____ 45. Last year, Joan bought 50 pounds of hamburger when the household income was $40,000. This year, the household income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant Joan's income elasticity of demand for hamburger is a. positive, so Joan considers hamburger to be an inferior good. b. positive, so Joan considers hamburger to be a normal good and a necessity. c. negative, so Joan considers hamburger to be an inferior good. d. negative, so Joan considers hamburger to be a normal good. ____ 46. The discovery of a new hybrid wheat would tend to increase the supply of wheat. Under what conditions would wheat farmers realize an increase in revenue? a. if the supply of wheat is elastic b. if the supply of wheat is inelastic c. if the demand for wheat is inelastic d. if the demand for wheat is elastic Table 3-2 Labor Hours needed to make one unit of: Quilts Dresses Helen 40 10 Carolyn 80 16
Amount produced in 160 hours: Quilts Dresses 4 16 2 10
____ 47. Refer to Table 3-2. Helen has an absolute advantage in a. dresses and Carolyn has a comparative advantage in quilts. b. both goods and Carolyn has a comparative advantage in dresses. c. quilts and Carolyn has a comparative advantage in dresses. d. both goods and Carolyn has a comparative advantage in quilts. ____ 48. Suppose that the demand for macaroni is price inelastic and the supply of macaroni is price elastic, and that the demand for cigarettes is price inelastic and the supply of cigarettes is price elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the a. sellers of both goods would pay most of the tax. b. buyers of both goods would pay most of the tax. c. sellers of cigarettes and the buyers of macaroni would pay most of the tax. d. We could not be sure who would actually pay most of the tax.
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The diagram below applies to Questions 49 and 50 and is shows the market for canned tuna. The world price is given by pW and is equal to $1. The Canadian domestic demand and supply curves are denoted by Dc and Sc respectively.
$/can 5.00 4.50
SC 4.00 3.50 3.00 2.50 2.00 1.50
Pw = 1.00 0.50
DC 10
20
30
40
50
60
70
80
90
100
Q
(thousands of cans)
49.
If a $0.50 tariff is imposed on imported tuna then the tariff revenue will equal a) b) c) d) e)
50
$20,000 $30,000 $40,000 $50,000 $60,000
If a $0.50 tariff is imposed on imported tuna, then the reduction in consumer surplus will exceed the gain in the sum of producer surplus and tariff revenue by a) b) c) d) e)
$5,000 $10,000 $15,000 $20,000 $25,000
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Test 2 2012 Answer Section MULTIPLE CHOICE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39.
ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS:
D B C A A B A B B B B D B A B C B D C A A B D D A E A D B D D D A A C B B D B
PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS:
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF:
Average Challenging Challenging Average Challenging Challenging Challenging Challenging Average Challenging Challenging Average Challenging Challenging Average Challenging Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Challenging Average Challenging Average 14
REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF:
146-147 166 168 171 166 166 184-187 184-185 184-185 184-185 186-187 270-271 156-158 156-158 183 186-187 272 272 272 273-275 273-275 279-282 279-282 279-282 294 295 297-300 297-300 297-300 297-300 297-300 297-300 300-301 300-301 300-304 300-304 305-309 305-309 305-309
40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.
ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS:
D B C C C C D B B A A
PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS:
1 1 1 1 1 1 1 1 1 1 1
DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF:
Challenging Challenging Challenging Challenging Challenging Average Challenging Challenging Average Challenging Challenging
15
REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF:
309-311 148-149 148-149 309-311 84-87 104-105 110-111 57-59 135-136 186-187 186-187
1. Jeff decides that he would pay as much as $4,000 for a new laptop computer. He buys the computer and realizes consumer surplus of $800. How much did Jeff pay for his computer? a. $700 b. $2,300 c. $3,000 d. $3,200 e. $3,700
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2. Which of the following is the most correct statement about tax burdens? a. A tax burden falls most heavily on the side of the market that is elastic. b. A tax burden falls most heavily on the side of the market that is inelastic. c. A tax burden falls most heavily on the side of the market that is closer to unit elastic. d. A tax burden is distributed independently of relative elasticities of supply and demand.
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3. When the government places a tax on a product a. the cost of the tax to buyers and sellers will be less than the revenue raised from the tax by the government. b. the cost of the tax to buyers and sellers will equal the revenue raised from the tax by the government. c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government. d. without additional information, such as the elasticity of demand for this product, it is impossible to compare tax cost with tax revenue.
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4. When evaluating the size of the deadweight loss due to a tax we know that the a. greater the elasticities of supply and demand, the greater the deadweight loss. b. smaller the elasticities of supply and demand, the greater the deadweight loss. c. smaller the decrease in both quantity demanded and quantity supplied, the greater the deadweight loss. d. primary factor that determines the size of the deadweight loss in the percentage the tax is of price.
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Figure 8-2
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5. Refer to Figure 8-2. The amount of tax revenue received by the government is equal to the area a. P3 A C P1. b. A B C. c. P2 D A P3. d. P1 C D P2.
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6. Refer to Figure 8-2. The amount of deadweight loss associated with the tax is equal to a. P3 A C P1. b. A B C. c. P2 A D P3. d. P1 D C P2.
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7. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing clothing, exporting steel, and neither importing nor exporting rugs. We can conclude that producer surplus in Aquilonia is now higher for a. steel, lower for clothing, and the same for rugs. b. clothing and steel, but not rugs. c. clothing and rugs, but not steel. d. clothing, lower for steel, and the same for rugs.
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Figure 9-1
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8. Refer to Figure 9-1. Without trade, consumer surplus would be a. $210. b. $245. c. $420. d. $455. e. $490.
____
9. Refer to Figure 9-1. With free trade, this country would a. import 70 baskets. b. export 65 baskets. c. export 35 baskets. d. import 40 baskets. e. export 105 baskets.
____ 10. Refer to Figure 9-1. With free trade, consumer surplus would be a. $45. b. $80. c. $160. d. $210. e. $245. ____ 11. When a country allows trade and becomes an importer of a good, which of the following would NOT be true? a. The gains of domestic consumers exceed the losses of domestic producers. b. The losses of domestic producers exceed the gains of domestic consumers. c. The price paid by domestic consumers of the good decreases. d. The price received by domestic producers of the good decreases. ____ 12. XYZ corporation produced 300 units of output but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. Each of the 275 units sold was sold for a price of $100. Total revenue for the XYZ corporation would be a. -$2,500.. b. $2,500. c. $26,125. d. $27,500. e. $30,000. 3
Figure 7-7
____ 13. Refer to Figure 7-7. If the price decreases from $22 to $16, consumer surplus would increase by a. $120. b. $360. c. $480. d. $600. e. $1,080. ____ 14. Refer to Figure 7-7. Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium quantity increases to 110. The increase in producer surplus due to additional sales would be equal to a. $90. b. $210. c. $360. d. $480. ____ 15. The domestic price of a product will equal the world price a. when the domestic supply of the product increases. b. when the country allows free trade. c. when trade restrictions are imposed on the product. d. if the country chooses to export and not import the product. e. if the government imposes trade restrictions. ____ 16. When a country allows trade and becomes an importer of a good consumer surplus a. and producer surplus will increase. b. and producer surplus will decrease. c. will increase and producer surplus will decrease. d. will decrease and producer surplus will increase.
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____ 17. Economic profit is equal to (i) total revenue - (explicit costs + implicit costs). (ii) total revenue - opportunity costs. (iii) accounting profit + implicit costs. a. b. c. d.
(i) only (i) and (ii) (ii) and (iii). All of the above are correct.
Scenario 13-2 Zach took $500,000 out of the bank and used it to start his new cookie business. The bank account pays 4 percent interest per year. During the first year of his business, Zach sold 12,000 boxes of cookies for $3 per box. Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $14,000. ____ 18. Refer to Scenario 13-2. Zach's accounting profit for the year was a. $-478,000. b. $-56,000. c. $2,000. d. $22,000. ____ 19. Refer to Scenario 13-2. Zach's economic profit for the year was a. $-478,000. b. $-56,000. c. $2,000. d. $22,000.
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The figure below depicts a production function for a firm that produces cookies. Use the figure to answer the following questions. Figure 13-1
____ 20. Refer to Figure 13-1. As the number of workers increases, a. total output increases, but at a decreasing rate. b. marginal product increases, but at a decreasing rate. c. marginal product increases at an increasing rate. d. total output decreases. ____ 21. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product? a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers. b. The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers. c. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers. d. All of the above are correct. Scenario 13-4 For the following questions, assume that a given firm experiences decreasing marginal product of labour with the addition of each worker regardless of the current output level. It also has a capital stock which is fixed. ____ 22. Refer to Scenario 13-4. Average fixed cost will be a. always rising. b. always falling. c. U-shaped. d. constant. ____ 23. Refer to Scenario 13-4. Average total cost will be a. always rising. b. always falling. c. constant. d. U-shaped.
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____ 24. The marginal cost curve crosses the average total cost curve at a. the efficient scale. b. the minimum point on the average total cost curve. c. a point where the marginal cost curve is rising. d. All of the above are correct. ____ 25. 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. ____ 26. When a firm in a competitive market produces 11 units of output, it has a marginal revenue of $9.00. What would be the firm's total revenue when it produces 8 units of output? a. $4.80 b. $6.00 c. $48.00 d. $60.00 e. $72.00 ____ 27. If a competitive firm is (i) selling 1,000 units of its product at a price of $9 per unit and (ii) earning a positive profit, then a. its total cost is less than $9,000. b. its marginal revenue is less than $9. c. its average revenue is greater than $9. d. All of the above are correct. ____ 28. If marginal cost exceeds marginal revenue, the firm a. is most likely to be at a profit-maximizing level of output. b. should increase the level of production to maximize its profit. c. must be experiencing losses. d. may still be earning a profit.
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Use the information for a competitive firm in the table below to answer the following questions. Table 14-2 Quantity 0 1 2 3 4 5 6 7 8 9
Total Revenue $0 9 18 27 36 45 54 63 72 81
Total Cost $10 14 19 25 32 40 49 59 70 82
____ 29. Refer to Table 14-2. At a production level of 4 units which of the following is true? a. Marginal cost is $6. b. Total revenue is greater than variable cost. c. Marginal revenue is less than marginal cost. d. All of the above are correct. ____ 30. Refer to Table 14-2. If this firm chooses to maximize profit it will choose a level of output where marginal cost is equal to a. 6. b. 7. c. 8. d. 9. ____ 31. Refer to Table 14-2. If the firm finds that its marginal cost is $11, it should a. increase production to maximize profit. b. increase the price of the product to maximize profit. c. advertise to attract additional buyers to maximize profit. d. None of the above are correct.
____ 32. 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). ____ 33. When price is below average variable cost, a firm in a competitive market will a. shut down and incur fixed costs. b. shut down and incur both variable and fixed costs. c. continue to operate as long as average revenue exceeds marginal cost. d. continue to operate as long as average revenue exceeds average fixed cost.
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____ 34. A profit-maximizing firm in a competitive market produces small rubber balls. When the market price for small rubber balls falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, the firm a. will experience losses but it will continue to produce rubber balls. b. will shut down. c. will be earning both economic and accounting profits. d. should raise the price of its product. ____ 35. When a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which of the following principles is (are) best demonstrated? (i) Fixed costs are sunk in the short run. (ii) In the short run, only fixed costs are important to the decision to stay open for lunch. (iii) If revenue exceeds variable cost, the restaurant owner is making a profitable strategic decision to remain open for lunch. a. b. c. d.
(i) and (ii) only (ii) and (iii) only (i) and (iii) only All are demonstrated.
____ 36. Susan quit her job as a teacher, which paid her $36,000 per year in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in $3,500 in monthly revenue. a. In the short run, Susan should shut down her business and in the long run she should exit the industry. b. In the short run, Susan should continue to operate her business, but in the long run she should exit the industry. c. In the short run, Susan should continue to operate her business, but in the long run she will probably face competition from newly entering firms. d. In the short run, Susan should continue to operate her business, and she is also in long-run equilibrium.
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In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Use the figure to answer the following questions. Figure 14-7
____ 37. Refer to Figure 14-7. When 100 identical firms participate in this market, at what price will 15,000 units be supplied to this market? a. $1.00 b. $1.50 c. $2.00 d. It cannot be determined from the information provided. ____ 38. Refer to Figure 14-7. If at a market price of $1.75, 52,500 units of output are supplied to this market, how many identical firms are participating in this market? a. 75 b. 100 c. 250 d. 300 ____ 39. When existing firms in a competitive market are profitable, an incentive exists for a. new firms to seek government subsidies that would allow them to enter the market. b. new firms to enter the market, even without government subsidies. c. existing firms to raise prices. d. existing firms to increase production. ____ 40. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will a. fall in the short run. All firms will shut down and some of them will exit the industry. Price will then rise. b. fall in the short run. No firms will shut down, but some of them will exit the industry. Price will then rise. c. not fall in the short run because firms will exit to maintain the price. d. None of the above are correct.
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Figure 7-1
____ 41. Refer to Figure 7-1. Area C represents a. the decrease in consumer surplus that results from a downward-sloping demand curve. b. An addition to consumer surplus from additional sales when the price falls from P2 to P1 . c. an increase in producer surplus when quantity sold increases from Q2 to Q1 . d. a decrease in consumer surplus to each consumer in the market. ____ 42. Refer to Figure 7-1. When the price rises from P1 to P2, which would NOT be true? a. The buyers who still buy the good are worse off because they now pay more. b. Some buyers leave the market because they are not willing to buy the good at the higher price. c. The total value of what is now purchased by buyers is actually higher. d. Consumer surplus in the market falls. ____ 43. There are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited quantities, and all of them have the following cost structure: Output 0 1 2 3 4 5
Total Cost $5 $10 $12 $15 $24 $40
The long-run supply curve for this market is a. positively sloped. b. horizontal at a price of $3.33. c. horizontal at a price of $5. d. horizontal at a price of $7.
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____ 44. What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises and public transportation becomes cheaper? a. Price will fall and the effect on quantity is ambiguous. b. Price will rise and the quantity will fall c. Quantity will fall and price will fall d. Quantity will fall and the effect on price is ambiguous. e. The effect on both price and quantity is ambiguous ____ 45. Last year, Joan bought 50 pounds of hamburger when the household income was $40,000. This year, the household income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant Joan's income elasticity of demand for hamburger is a. positive, so Joan considers hamburger to be an inferior good. b. positive, so Joan considers hamburger to be a normal good and a necessity. c. negative, so Joan considers hamburger to be an inferior good. d. negative, so Joan considers hamburger to be a normal good. ____ 46. The discovery of a new hybrid wheat would tend to increase the supply of wheat. Under what conditions would wheat farmers realize an increase in revenue? a. if the supply of wheat is elastic b. if the supply of wheat is inelastic c. if the demand for wheat is inelastic d. if the demand for wheat is elastic Table 3-2 Labor Hours needed to make one unit of: Quilts Dresses Helen 40 10 Carolyn 80 16
Amount produced in 160 hours: Quilts Dresses 4 16 2 10
____ 47. Refer to Table 3-2. Helen has an absolute advantage in a. dresses and Carolyn has a comparative advantage in quilts. b. both goods and Carolyn has a comparative advantage in dresses. c. quilts and Carolyn has a comparative advantage in dresses. d. both goods and Carolyn has a comparative advantage in quilts. ____ 48. Suppose that the demand for macaroni is price inelastic and the supply of macaroni is price elastic, and that the demand for cigarettes is price inelastic and the supply of cigarettes is price elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the a. sellers of both goods would pay most of the tax. b. buyers of both goods would pay most of the tax. c. sellers of cigarettes and the buyers of macaroni would pay most of the tax. d. We could not be sure who would actually pay most of the tax.
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The diagram below applies to Questions 49 and 50 and is shows the market for canned tuna. The world price is given by pW and is equal to $1. The Canadian domestic demand and supply curves are denoted by Dc and Sc respectively.
$/can 5.00 4.50
SC 4.00 3.50 3.00 2.50 2.00 1.50
Pw = 1.00 0.50
DC 10
20
30
40
50
60
70
80
90
100
Q
(thousands of cans)
49.
If a $0.50 tariff is imposed on imported tuna then the tariff revenue will equal a) b) c) d) e)
50
$20,000 $30,000 $40,000 $50,000 $60,000
If a $0.50 tariff is imposed on imported tuna, then the reduction in consumer surplus will exceed the gain in the sum of producer surplus and tariff revenue by a) b) c) d) e)
$5,000 $10,000 $15,000 $20,000 $25,000
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Test 2 2012 Answer Section MULTIPLE CHOICE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39.
ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS:
D B C A A B A B B B B D B A B C B D C A A B D D A E A D B D D D A A C B B D B
PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS:
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF:
Average Challenging Challenging Average Challenging Challenging Challenging Challenging Average Challenging Challenging Average Challenging Challenging Average Challenging Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Challenging Average Challenging Average 14
REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF:
146-147 166 168 171 166 166 184-187 184-185 184-185 184-185 186-187 270-271 156-158 156-158 183 186-187 272 272 272 273-275 273-275 279-282 279-282 279-282 294 295 297-300 297-300 297-300 297-300 297-300 297-300 300-301 300-301 300-304 300-304 305-309 305-309 305-309
40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.
ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS:
D B C C C C D B B A A
PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS:
1 1 1 1 1 1 1 1 1 1 1
DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF: DIF:
Challenging Challenging Challenging Challenging Challenging Average Challenging Challenging Average Challenging Challenging
15
REF: REF: REF: REF: REF: REF: REF: REF: REF: REF: REF:
309-311 148-149 148-149 309-311 84-87 104-105 110-111 57-59 135-136 186-187 186-187
