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2 PART A: MULTIPLE CHOICE 1. Economics is the study of: a. the Allocation of scarce resources b. money c. demand d. the relationship between government and private industry 2. In the time that is takes Joe to produce 12 apples, he could have produced 8 oranges. His opportunity cost of producing an apple is: a. 2/3 oranges b. 2/3 apples c. 4/3 oranges d. 4/3 apples 3. Ben has always spent ¼ of his income on clothing, and will continue to do so. What is his income elasticity of demand of clothing? a. 1 b c. 4.0 d See the graph above. In the market for computers, a new technology which makes parts less expensive is introduced. This will: a. increase total revenue b. decrease total revenue c. effect on total revenue is ambiguous 5. Looking at the same graph, assume that demand was inelastic. In this case, the new technology will:

3 a. increase total revenue b. decrease total revenue c. effect on total revenue is ambiguous 6. Marginal cost is measured as: a. Percent change in total cost divided by percent change in quantity b. Percent change in quantity divided by percent change in total cost c. change in total cost divided by change in quantity d. Change in quantity divided by change in total cost 7. A lump sum tax is significant because: a. It does not distort incentives b. It is the same monetary value for each individual c. It is more beneficial for the poor d. All of the above e. both A & B 8. Assume Canada institutes a binding price floor on the market for apples. This will cause: a. Demand to increase and supply to decrease, causing a shortage b. Demand to decrease and supply to increase, causing a surplus c. Quantity demanded to increase and quantity supplied to decrease, causing a shortage d. Quantity demanded to decrease and quantity supplied to increase, causing a surplus 9. Which of the following situations best describes diminishing marginal product: a. As Jeff hires more workers, he is able to produce more output b. As Jeff produces more output, he is able to do so with marginally less input each time c. As Jeff hires more workers, each additional worker is not able to produce as much additional output d. As Jeff s costs increase, his incentive to hire more labour diminishes 10. In the market for bananas, a severe storm hurt the crop of bananas for the year. In addition, the price of apples increased. What are the effects on the market for bananas? a. Increases in both price and quantity b. Increases in price but decreases in quantity c. Decreases in price but an increase in quantity d. Increases in price but the effect on quantity is ambiguous 11. What might explain the U shaped average total cost curve?

4 a. At a low output, average fixed cost is very high. As output increases, average variable cost becomes higher and higher. b. At a low output, marginal cost is very high. As output increases, the average total cost curve rises to meet marginal cost c. At a low output, variable costs are very high. As output increases, variable costs low but average fixed costs rise d. All of the above 12. This graph shows: a. Monopolistic competition in the long run b. perfect competition in the long run c. monopoly in the long run d. monopoly in the short run 13. The price of a good in a perfectly competitive market is \$10. For one firm, MC=\$10 at a quantity of 20. Average total cost at the quantity of 20 is \$14. The firm has a fixed cost of \$100. What will this firm do in the short run? a. It will produce but have economic losses in profit b. It will shut down c. It will exit the market d. It will continue to produce and make economic profits 14. As income increases, marginal tax rates increase. This is a: a. Progressive tax b. Regressive tax c. Proportional tax d. consumption tax 15. A downward sloping Average total cost curve is characteristic of a:

5 a. Government created monopoly b. Natural monopoly c. Monopolistic competition d. None of the above 16. The aim of Pigou taxes is to: a. correct externalities b. alleviate inequality and poverty c. discourage and limit imports and exports d. ensure incentives are not distorted while still raising government revenue 17. When a new monopolistically competitive firm enters a market, what does this do to the demand for each individual firm? a. It does not change b. It shifts right c. It decreases d. It does not change, but quantity demanded decreases 18. An agreement among firms to set a particular market price and quantity is known as: a. Monopolistic Competition b. Oligopoly c. Collusion d. Dominant Strategy 19. Which of the following would NOT explain a shift in the labour supply curve? a. Changes in alternative opportunities b. the output price c. Immigration d. changes in tastes/attitudes 20. The value of the marginal product measures: a. the marginal product of labour b. the monetary value of marginal product in terms of output c. The marginal profit d. market wage 21. One problem that arises in some markets is that sellers know more about the good they are selling than buyers (for example used cars). This may cause buyers to be apprehensive of buying these goods (e.g. even lightly used cars are much cheaper than new ones). This is an example of: a. Price discrimination b. Adverse selection c. screening

6 d. Perfect information PART B: SHORT ANSWER Note: for the short and long answer, use as many graphs as necessary. If the question says explain there is a good chance that there is a graph you can use to illustrate it in addition to an explanation in words! 1. Explain the effects of a negative externality on a market. Draw a graph, labelling social cost, private cost, private benefit, and social benefit. Give two examples of negative externalities which may occur in real life. 2. Explain the difference between Average total cost of a perfectly competitive firm in the short run and the long run. Why do large firms experience diseconomies of scale? 3. Explain the difference between the effects of a tax on elastic demand vs inelastic supply. Which has a bigger tax revenue/deadweight loss/tax incidence on sellers? 4. Consider the market for soft drinks. Suppose Coca Cola and Pepsi constitute a duopoly over the market. If both decide to charge high prices on their drinks, they will be able to make \$25 million in monthly profits. If they both charge low prices on their drinks, they will each be able to make \$10 million in profits. If one charges a high price and the other a low price, the one who charges the low price will take the entire market demand, making \$30 million in profits while the other firm charging a high price will make \$0. a. Draw a chart showing the market possibilities b. What is a Nash equilibrium? Does this market have a Nash equilibrium? If so, where is it? c. What is the optimal strategy for these two firms in order to maximize total profits together? How can this be accomplished? Would this achieve a social optimum? Explain why or why not

7 5. Look at the graph above to answer the following question. a. Who will benefit from the introduction of a tariff? Who will lose? b. What is the quantity of imports after the tariff? Before the tariff? c. Assuming Free trade without tariffs, how much will domestic suppliers produce? d. Assuming Autarchy, where will domestic consumers demand? e. Draw a similar graph, labelling labelling consumer surplus, producer surplus, deadweight loss, and tariff revenue. PART C: LONG ANSWER 1. Types of firms and markets a. Explain the key characteristics of monopolistic competition. In what ways is it similar to monopoly? In what ways is it similar to perfect competition? b. How does a monopolistically competitive firm determine output and price? Describe using a graph c. Draw a graph showing a monopolistic competitor making economic profit. Explain what will happen in the long run in this case, drawing a graph to illustrate the long run equilibrium of the firm. Why does this occur? d. Do monopolistically competitive firms produce at the socially optimum level? Explain why or why not. Explain which types of markets do produce at the socially optimum level. e. Explain the differences between economic and accounting profit. Which of the two were we referring to in part C and D?

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