b. probably change, but in an ambiguous direction; decrease c. rise; increase d. not change; probably change, but in an ambiguous direction

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1 Final Exams Exam A decrease in supply shifts the supply curve ; a decrease in demand shifts the demand curve. a. rightward; rightward b. rightward; leftward c. leftward; rightward d. leftward; leftward 12. Which of the following can lead a perfectly competitive market to produce less than the efficient level of output? a. The market is a perfectly competitive industry producing a product with no externalities. b. The product being produced has an external benefit (for example, education). c. The product being produced has an external cost (for example, producing the product creates pollution). d. None of the answers offered above causes a perfectly competitive market to produce less than the efficient level of output. 13. New cars are a normal good and people s incomes rise. As a result of the increase in income, the equilibrium relative price of new cars and the equilibrium quantity. c. falls; decreases d. falls; increases 14. A natural monopoly has no deadweight loss when a. it is left unregulated. b. it is regulated so that it sets its price equal to its average total cost (that is, P = ATC ). c. it is regulated so that it sets its price equal to its marginal cost (that is, P = MC ). d. Both b and c are correct answers. 15. A lot of trade between nations involves trading similar goods (that is, the U.S. both imports and exports automobiles to Japan). Which of the following is NOT a reason for trade in similar goods? a. Diversified tastes. b. Absolute advantage. c. Economies of scale. d. None of the above because they are all reasons for why nations trade similar goods. 16. Which type of industry is characterized by having a few, mutually interdependent firms? a. Perfectly competitive. b. Monopolistically competitive. c. Oligopoly. d. Monopoly. 17. A 10 percent increase in the price of clothing results in a 2 percent decrease in the quantity demanded. Hence the price elasticity of demand equals a b c d A feature of the labor supply curve is that, unlike most supply curves, it a. is always upward (positively) sloped. b. is always downward (negatively) sloped. c. might bend backwards so that at low wages it has a positive slope and at high wages it has a negative slope. d. None of the above. 19. Points outside the production possibilities frontier are a. efficient and attainable. b. inefficient and attainable. c. inefficient but not attainable. d. not attainable. 359

2 360 FINAL EXAMS 10. Between two countries, suppose that one nation has an absolute advantage in the production of all goods. Then a. international trade cannot occur. b. the nation with the absolute advantage will export all goods and import none. c. the nation with the absolute advantage will not gain from international trade. d. the nation with the absolute advantage will still import some goods from the other country. 11. Suppose the government taxes a product. The decrease in the quantity consumed is smaller when the elasticity of demand is. a. higher b. lower c. the premise of the question is wrong because the elasticity of demand has nothing to do with the reduction in the quantity demanded. d. the premise of the question is correct, but more information is needed to answer it. 12. Compared to an otherwise identical perfectly competitive industry, a monopoly firm will hire workers. a. more b. the same number of c. fewer d. sometimes more and sometimes fewer workers, depending on whether the monopoly finds that MR exceeds or is less than P. 13. Which of the following does NOT shift the production possibilities frontier (PPF ) rightward? a. An increase in the nation s capital stock. b. An increase in technology. c. A decrease in inefficiency (so that the nation moves from an inefficient production point to an efficient point). d. All of the above shift the production possibilities curve rightward. 14. Suppose that the cost of acquiring a skill rises. As a result of the increase in cost, the wage rate paid people with that skill will a. rise. b. not change. c. fall. d. probably change but in an ambiguous direction. 15. In the long run, firms in what type of industry structure can earn an economic profit? a. Perfectly competitive. b. Monopolistically competitive. c. Monopoly. d. Both monopolistically competitive and monopoly. 16. In a natural monopoly, a. the firm s MC remains above its ATC curve until the curves cross the demand curve. b. it is hard for a small second firm to compete with a large established firm because the second firm s ATC is higher than the first firm s ATC. c. society faces the problem of trying to insure that several firms compete and do not form a cartel. d. all of the above. 17. The closer a Lorenz curve for income is to the line of equality, a. the more competitive is the industry. b. the less competitive is the industry. c. the more equally is income distributed. d. the less equally is income distributed. 18. The following conditions characterize what type of firm? P > MR, P > ATC. a. Perfectly competitive in the short run. b. Perfectly competitive in the long run. c. Monopolistically competitive in the long run. d. Monopoly in the short run. 19. When MR exceeds MC by the greatest possible amount, the firm is a. maximizing its profit b. not maximizing its profit c. earning an economic profit if P < ATC d. both answers a and c are correct 20. When an increase in income shifts the demand curve for a good leftward, the good is. a. an inferior good b. a normal good c. a complementary good d. a substitute good 21. Which of the following influences does NOT directly shift the supply curve? a. An increase in income. b. Development of new technology. c. An increase in the cost of producing the product. d. A decrease in the number of sellers.

3 FINAL EXAMS Which of the following is NOT an argument used by proponents of protection in favor of protectionist policies? a. The infant industry argument. b. The claim that protectionist policies saves American jobs. c. The rich nations exploit developing countries argument. d. The comparative advantage frequently switches argument. 23. The cost of wheat used to produce bread rises. As a result of the increase in cost, the equilibrium relative price of a loaf of bread and the equilibrium quantity produced. c. falls; increases d. falls; decreases 24. A nation can produce at a point outside its PPF a. when it trades with other nations. b. when it is producing products as efficiently as possible. c. when there is no unemployment. d. never. 25. A nation can consume at a point outside its PPF a. when it trades with other nations. b. when it is producing products as efficiently as possible. c. when there is no unemployment. d. never. 26. The government breaks up a monopoly so that the industry becomes perfectly competitive. As a result of the government action, the price of the product, the level of the industry's total output, and the deadweight loss. ; decreases b. falls; decreases; increases c. rises; decreases; decreases d. falls; increases; decreases 27. Suppose Microsoft will sell its Windows operating software to computer manufacturers only if the manufacturers buy Microsoft s Word software. If Microsoft s policy substantially lessens competition, it is a. illegal under the exclusive dealing clause of the Clayton Act. b. illegal under the tying contracts clause of the Clayton Act. c. legal. d. None of the above. 28. Due to a lot of workers taking early retirement, the supply of labor decreases. As a result, the equilibrium wage rate and quantity of employment. c. falls; increases d. falls; decreases 29. Suppose consumers become convinced that eating chicken is healthy while at the same time the price of chicken feed increases. Then, in the short run the equilibrium relative price of chicken will and the equilibrium quantity will. a. rise; probably change, but in an ambiguous direction b. probably change, but in an ambiguous direction; decrease c. rise; increase d. not change; probably change, but in an ambiguous direction 30. The demanders pay all of a sales tax when the demand is a. perfectly elastic. b. more elastic than the supply. c. more inelastic than the supply. d. perfectly inelastic.

4 362 FINAL EXAMS Exam The price of meat used to produce tacos rises. As a result, the equilibrium relative price of a taco and the equilibrium quantity. c. falls; decreases d. falls; increases 12. The total cost of producing 6 pizzas is $24. The total cost of producing 7 pizzas is $35. The marginal cost of the 7th pizza is a. $4.00. b. $5.00. c. $ d. None of the above. 13. Which form(s) of business organization have limited liability? a. Only sole proprietorship. b. Only partnership. c. Only corporation. d. Both sole proprietorships and partnerships. 14. A firm in what type of industry is necessarily characterized by the following conditions? P = ATC, and P = MR. a. Monopoly in the short run. b. Monopolistic competition in the long run. c. Perfect competition in the short run. d. Perfect competition in the long run. 15. For lunch you decide to eat either a slice of pizza or a taco; these are your only two alternatives. Last year, a slice of pizza cost $2 and a taco cost $2; this year, a slice of pizza cost $3 and a taco cost $3. The opportunity cost of a slice of pizza is a. highest last year. b. highest this year. c. the same in both years. d. None of the above. 16. A perfectly competitive firm a. produces a product identical to those of its competitors. b. has P > MR. c. can earn an economic profit in the long run. d. may incur an economic loss in the long run. 17. A good with perfectly elastic demand has a demand curve that is a. upward sloping, but not horizontal nor vertical. b. downward sloping, but not horizontal nor vertical. c. vertical. d. horizontal. 18. Because of technological advances, the price of a CD player falls. Simultaneously, technological advances take place in the production of CDs. As a result, the equilibrium relative price of a CD and the equilibrium quantity.. b. falls; increases. c. rises; probably changes, but in an ambiguous direction d. probably changes, but in an ambiguous direction; increases 19. The equilibrium level of output equals the efficient amount in a industry producing a product with. a. perfectly competitive; no externalities b. perfectly competitive; an external cost c. perfectly competitive; a external benefit d. monopoly; no externalities 10. Of the following, which good would have the most elastic demand? a. Pepsi b. food c. insulin d. oil 11. Which of the following statements about the PPF is correct? a. Technological growth moves the economy to from producing at a point in the interior of the PPF to a point nearer the PPF itself, but does not change the PPF itself. b. The PPF shows that it is not possible for a nation to produce unlimited amounts of all products. c. The PPF shows that it is not possible for a nation to change the mixture of what it produces. d. The PPF shifts inward when the labor force grows because the unemployment rate rises.

5 FINAL EXAMS If income is distributed so that everyone has exactly the same income, the Lorenz curve a. is horizontal. b. is vertical. c. lies on the line of equality. d. none of the above and regular mail are substitutes. Suppose that technological advances lowers the price of E- mail. As a result, the equilibrium relative price of regular mail and the equilibrium quantity. c. falls; increases d. falls; decreases 14. Leonardo s Pizza, a local restaurant selling pizza, discovers that a 10 percent increase in the price of their pizza decreases the quantity demanded 5 percent. As a result, the 10 percent increase in the price of pizza a. increases Leonardo s total revenue. b. does not change Leonardo s total revenue. c. decreases Leonardo s total revenue. d. increases Leonardo s average total costs 15. Present value implies that a. $100 to be received in one year is worth more than $100 received today. b. the farther in the future a sum of money will be received, the higher is its present value. c. the present value of money to be received in the future falls when the interest rate rises. d. None of the above because all of the statements are FALSE. 16. With the advent of AIDS, the demand for latex used to make gloves has increased. As a result, the equilibrium relative price of latex and the quantity. c. falls; increases d. falls; decreases 17. Which of the following directly shifts the supply curve? a. A rise in the wage rate paid workers. b. An increase in consumers incomes. c. People deciding they want to buy more of the product. d. A decrease in the number of demanders. FIGURE 1 Price (dollars) P 4 P 3 P 2 P 1 MC MR Q 1 Q 2 Q 3 ATC D Quantity 18. In the figure, a profit maximizing monopoly that does not price discriminate will set its price equal to a. P 1. b. P 2. c. P 3. d. P In the figure, a profit maximizing monopoly that does not price discriminate will produce how much output? a. Q 1. b. Q 2. c. Q 3. d. Q Suppose that the Board of Directors of Ford and General Motors are the same. This situation is a. legal. b. illegal under the Sherman Act. c. illegal under the Clayton Act. d. illegal under the Rule of Reason.

6 364 FINAL EXAMS 21. An increase in the minimum wage rate will a. increase employment. b. not change employment. c. decrease employment. d. increase employment only if the price of the product does not change. 22. Which of the following indicates that a company is earning an economic profit? a. MR = MC b. MR > MC c. P = ATC d. P > ATC 23. Compared to a similar perfectly competitive industry, a single-price monopoly produces output and charges a price. a. more; higher b. more; lower c. less; lower d. less; higher 24. A monopolistically competitive restaurant sells 3 meals for $5 a meal for a total revenue of $15. If it sells 4 meals, its marginal revenue from the 4th meal equals a. $20. b. $15. c. $5. d. some amount that cannot be calculated because not enough information is given 25. The difference between the maximum amount consumers are willing to pay and the amount they actually do pay for a given quantity of a good is called a. deadweight surplus. b. consumer surplus. c. producer surplus. d. total surplus. 26. Technological advances make labor more productive, that is, the marginal product of labor increases. As a result, the equilibrium wage rate and level of employment. c. falls; decreases d. falls; increases 27. Which of the following illustrates the concept of external cost? a. Bad weather decreases the size of the wheat crop. b. A reduction in the size of the wheat crop causes the income of wheat farmers to fall. c. Smoking harms the health of the smoker. d. Smoking harms the health of nearby nonsmokers. 28. Suppose scientists perfect a bio-engineered tomato plant that is resistant to diseases and bears more tomatoes than before. As a result, the equilibrium relative price of a tomato would and the quantity produced would. a. rise; increase b. rise; decrease c. fall; increase d. fall; decrease 29. The production possibilities frontier reveals that if less developed countries want to grow by producing more capital equipment, they must forego some consumption goods. But in the affluent countries of Europe and North America, the production possibilities frontier shows that this opportunity cost is not necessary. a. Both sentences are true. b. The first sentence is true and the second sentence is false. c. The first sentence is true and the second sentence is false. d. Both sentences are false. 30. International trade based on comparative advantage can allow each country to consume a. more of the goods it exports, but always less of the goods it imports. b. more of the goods it imports, but always less of the goods it exports. c. more of the goods it exports and imports. d. less of the goods it exports and imports

7 365 Answers Final Exam 1 Answers 11. d; 12. b; 13. a; 14. c; 15. b; 16. c; 17. d; 18. c; 19. d; 10. d; 11. b; 12. c; 13. c; 14. a; 15. c; 16. b; 17. c; 18. d; 19. b; 20. a; 21. a; 22. d; 23. b; 24. d; 25. a; 26. d; 27. b; 28. b; 29. a; 30. d. Final Exam 2 Answers 11. b; 12. c; 13. c; 14. d; 15. c; 16. a; 17. d; 18. d; 19. a; 10. a; 11. b; 12. c; 13. d; 14. a; 15. c; 16. a; 17. a; 18. c; 19. b; 20. c; 21. c; 22. d; 23. d; 24. d; 25. b; 26. a; 27. d; 28. c; 29. b; 30. c.

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