5. Suppose demand is perfectly elastic, and the supply of the good in question

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1 ECON 1620 Basic Economics Principles nd Semester Mid term test (1) : 40 multiple choice questions Time allowed : 60 minutes 1. When demand is inelastic the price elasticity of demand is (A) a. less than 1, and price and total revenue will move in the same direction. b. less than 1, and price and total revenue will move in opposite directions. c. greater than 1, and price and total revenue will move in the same direction. d. greater than 1, and price and total revenue will move in opposite directions. 2. When total revenue is less than variable costs, a firm in a competitive market will(c) a. continue to operate as long as average revenue exceeds marginal cost. b. continue to operate as long as average revenue exceeds average fixed cost. c. shut down. d. raise its price. 3. The commercial jetliner industry consisting of Boeing and Airbus would best be described as a (an) (C) a. perfectly competitive market. b. monopolistically competitive market. c. oligopoly. d. monopoly. 4. Each firm in a monopolistically competitive firm faces a downward sloping demand curve because (C) a. there are many other sellers in the market. b. there are very few other sellers in the market. c. the firm's product is different from those offered by other firms in the market. d. that firm faces the threat of entry into the market by new firms. 5. Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result, (A) a. the equilibrium quantity decreases, and the equilibrium price is unchanged. b. the equilibrium price increases, and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers total expenditure on the good is unchanged. 1

2 45 barrels G A C F D B bathtubs 6. Refer to the above diagram. Unemployment could cause this economy to produce at which point(s)? (C) a. A, B b. C, D, F, G c. C, F, G d. D batteries B A bagels 7. Refer to the above diagram. Which of the following events would explain the shift of the production possibilities frontier from A to B? (B) a. The economy s citizens developed an enhanced taste for batteries. b. The economy experienced a technological advance in the production of batteries. c. More capital became available in the economy. d. More labor became available in the economy. 2

3 8. If buyers today become more willing and able than before to purchase larger quantities of Vanilla Coke at each price of Vanilla Coke, then (C) a. we will observe a movement downward and to the right along the demand curve for Vanilla Coke. b. we will observe a movement upward and to the left along the demand curve for Vanilla Coke. c. the demand curve for Vanilla Coke will shift to the right. d. the demand curve for Vanilla Coke will shift to the left. 9. When quantity supplied increases at every possible price, we know that the supply curve has (B) a. shifted to the left. b. shifted to the right. c. not shifted; rather, we have moved along the supply curve to a new point on the same curve. d. not shifted; rather, the supply curve has become flatter. 10. Suppose the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market? (D) a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. b. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous. c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. 11. Which of the following statements is (are) true of the prisoners' dilemma? (A) (i) Rational self interest leads neither party to confess. (ii) Cooperation between the prisoners is difficult to maintain. (iii) Cooperation between the prisoners is individually rational. a. (ii) only b. (ii) and (iii) c. (i) and (iii) d. (i), (ii), and (iii) 3

4 12. The government has just passed a law requiring that all residents earn the same annual income regardless of work effort. This law is likely to (C) a. increase efficiency and increase equality. b. increase efficiency but decrease equality. c. decrease efficiency but increase equality. d. decrease efficiency and decrease equality. 13. If the quantity supplied responds only slightly to changes in price, then (B) a. supply is said to be elastic. b. supply is said to be inelastic. c. an increase in price will not shift the supply curve very much. d. even a large decrease in demand will change the equilibrium price only slightly. 14. Because the demand for wheat tends to be inelastic, the development of a new, more productive hybrid wheat would tend to (B) a. increase the total revenue of wheat farmers. b. decrease the total revenue of wheat farmers. c. decrease the demand for wheat. d. decrease the supply of wheat. 15. Economic profit is equal to (B) a. total revenue minus the explicit cost of producing goods and services. b. total revenue minus the opportunity cost of producing goods and services. c. total revenue minus the accounting cost of producing goods and services. d. average revenue minus the average cost of producing the last unit of a good or service. 16. If a shortage exists in a market, then we know that the actual price is (C) a. above the equilibrium price and quantity supplied is greater than quantity demanded. b. above the equilibrium price and quantity demanded is greater than quantity supplied. c. below the equilibrium price and quantity demanded is greater than quantity supplied. d. below the equilibrium price and quantity supplied is greater than quantity demanded. 4

5 17. When a profit maximizing competitive firm finds itself minimizing losses because it is unable to earn a positive profit, this task is accomplished by producing the quantity at which price is equal to (D) a. sunk cost. b. average fixed cost. c. average variable cost. d. marginal cost. 18. If marginal cost is below average total cost, then average total cost (B) a. is constant. b. is falling. c. is rising. d. may rise or fall depending on the size of fixed costs. 19. The minimum points of the average variable cost and average total cost curves occur where (B) a. the marginal cost curve lies below the average variable cost and average total cost curves. b. the marginal cost curve intersects those curves. c. the average variable cost and average total cost curves intersect. d. the slope of total cost is the smallest. 20. Natural monopolies differ from other forms of monopoly because they (D) a. are not subject to barriers to entry. b. are not regulated by government. c. generally don't make a profit. d. are generally not worried about competition eroding their monopoly position in the market. 21. What is the monopolist's profit under the following conditions? The profitmaximizing price charged for goods produced is $12. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $6. Average total cost for 10 units of output is $5. (B) a. $60 b. $70 c. $100 d. $120 5

6 22. For a monopoly, the level of output at which marginal revenue equals zero is also the level of output at which (C) a. average revenue is zero. b. profit is maximized. c. total revenue is maximized. d. marginal cost is zero. 23. Economies of scale occur when a firm s (B) a. marginal costs are constant as output increases. b. long run average total costs are decreasing as output increases. c. long run average total costs are increasing as output increases. d. marginal costs are equal to average total costs for all levels of output. 24. If ABC Company sells its product in a competitive market, then (B) a. the price of that product depends on the quantity of the product that ABC Company produces and sells since ABC Company s demand curve is downward sloping. b. ABC Company's total revenue must be proportional to its quantity of output. c. ABC Company's total cost must be a multiple of its quantity of output. d. ABC Company's total revenue must be equal to its average revenue. 25. Allowing an inventor to have the exclusive rights to market her new invention will lead to (D) (i) a product that is priced higher than it would be without the exclusive rights. (ii) desirable behavior in the sense that inventors are encouraged to invent. (iii) higher profits for the inventor. a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. (i), (ii), and (iii) 26. When a local grocery store offers discount coupons in the Sunday paper it is most likely trying to (D) a. reduce prices for all customers. b. offer their customers a reward for reading the paper. c. gain some pricing power over the other grocery stores in town. d. price discriminate. 6

7 27. Consider a transportation corporation named C.R. Evans that has just completed the development of a new subway system in a medium sized town in the Northwest. Currently, there are plenty of seats on the subway, and it is never crowded. Its capacity far exceeds the needs of the city. After just a few years of operation, the shareholders of C.R. Evans experienced incredible rates of return on their investment, due to the profitability of the corporation. Which of the following statements are most likely to be true? (C) (i) New entrants to the market know they will earn a smaller piece of the market than C.R. Evans currently has. (ii) C.R. Evans is most likely experiencing increasing average total cost. (iii) C.R. Evans is a natural monopoly. a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. (i), (ii), and (iii) 28. If a certain market were a monopoly, then the monopolist would maximize its profit by producing 1,000 units of output. If, instead, that market were a duopoly, then which of the following outcomes would be most likely if the duopolists successfully collude? (C) a. Each duopolist produces 1,000 units of output. b. Each duopolist produces 600 units of output. c. One duopolist produces 400 units of output and the other produces 600 units of output. d. None of the above 29. A monopolist's average revenue is always (C) a. equal to marginal revenue. b. greater than the price of its product. c. equal to the price of its product. d. less than the price of its product. 30. In markets characterized by oligopoly, (A) a. the oligopolists earn the highest profit when they cooperate and behave like a monopolist. b. collusive agreements will always prevail. c. collective profits are always lower with cartel arrangements than they are without cartel arrangements. d. pursuit of self interest by profit maximizing firms always maximizes collective profits in the market. 7

8 31. As the number of firms in an oligopoly increases, (C) a. each seller becomes more concerned about its impact on the market price. b. the output effect decreases. c. the total quantity of output produced by firms in the market gets closer to the socially efficient quantity. d. the oligopoly has more market power and firms earn a greater profit. 32. In the short run, a firm operating in a monopolistically competitive market can earn (D) a. positive economic profits. b. economic losses. c. zero economic profits. d. All of the above are possible. 33. Which of the following statements is not correct? (C) a. Monopolistic competition is similar to monopoly because in each market structure the firm can charge a price above marginal costs. b. Monopolistic competition is similar to perfect competition because both market structures are characterized by free entry. c. Monopolistic competition is similar to oligopoly because both market structures are characterized by barriers to entry. d. Monopolistic competition is similar to perfect competition because both market structures are characterized by many sellers. 34. In a duopoly situation, the logic f self interest results in a total output level that (C) a. equals the output level that would prevail in a competitive market. b. equals the output level that would prevail in a monopoly. c. exceeds the monopoly level of output, but falls short of the competitive level of output. d. falls short of the monopoly level of output. 35. To maximize its profit, a monopolistically competitive firm (D) a. takes the price as given and chooses its quantity, just as a competitive firm does. b. takes the price as given and chooses its quantity, just as a colluding oligopolist does. c. chooses its quantity and price, just as a competitive firm does. d. chooses its quantity and price, just as a monopoly does. 8

9 36. Consider the diagram below, which shows the market demand curve for a particular product. Suppose this market is served by two duopolists who each face the marginal cost curve shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also shown. Which of the following statements is true? (D) a. The total output in this market will likely be 2 units when the market is served by a duopoly. b. The price in this market will likely be $6 when the market is served by a duopoly. c. The total revenue to each firm will likely be more than $16 when the market is served by a duopoly. d. The total output in this market will likely be less than 4 units when the market is served by a duopoly. 37. According to Adam Smith, the success of decentralized market economies is primarily due to (C) a. the basic benevolence of society. b. society's legal system. c. individuals' pursuit of self interest. d. partnerships that are forged between business and government. 38. In the short run, a firm operating in a competitive industry will produce the quantity of output where price equals marginal cost as long as the (C) a. price is less than average total cost. b. marginal revenue exceeds the marginal cost. c. price is greater than average variable cost. d. marginal cost exceeds the marginal revenue. 9

10 39. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. (A) ABC's Decision High output ABC's profit = $3 million Low output ABC's profit = $2.5 million XYZ's Decision High output XYZ's profit = $3 million ABC's profit = $4 million XYZ's profit = $4 million ABC's profit = $3.5 million Low output XYZ's profit = $2.5 million XYZ's profit = $3.5 million The dominant strategy for ABC is to a. produce high output, and the dominant strategy for XYZ is to produce high output. b. produce high output, and the dominant strategy for XYZ is to produce low output. c. produce low output, and the dominant strategy for XYZ is to produce high output. d. produce low output, and the dominant strategy for XYZ is to produce low output. 40. Which of the following statements is true? (D) (i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. a. (ii) only b. (iii) only c. (i) and (ii) d. (ii) and (iii) THE END 10

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