Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes PLEDGE: I have neither given nor received unauthorized help on this exam.

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1 , Fall 2007 Version A Special Codes PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 201 Final Exam 1. For a profit-maximizing monopolist, a. MR < MC < P. b. P > MR > MC. c. P = MR = MC. d. P > MR = MC. 2. A market structure with only a few sellers, offering similar or identical products, is known as a. monopoly. b. oligopoly. c. perfect competition. d. monopolistic competition. 3. The main argument for splitting up monopolies through antitrust action is based on the notion that a. small firms have lower costs. b. competition is more efficient than monopoly. c. greedy monopolies should be punished. d. consumers prefer dealing with small firms. Table 15-1 Quantity Price Total Revenue Average Revenue Marginal Revenue Refer to Table If the monopolist wants to maximize its revenue, how many units of its product should it sell? a. 4 b. 7 c. 6 d Refer to Table What is the marginal revenue for the monopolist for the third unit sold? a b. 87 c. 29 d If a competitive firm sees that its marginal cost exceeds its marginal revenue, then a. the firm is definitely earning a positive profit. b. it can increase its profit by increasing its output. c. the firm is definitely losing money. d. it can increase its profit by decreasing its output. 1

2 Econ201 Final Exam, Fall 2007, Version A Table 13-8: s of Gigaplot Production Quantity of gigaplots Fixed Variable Total 1 $13 $38 2 $28 3 $70 Average Fixed Average Variable Average Total Marginal 7. Refer to Table What is the marginal cost of the 3rd gigaplot? a. $70 b. $20 c. $17 d. $45 8. Refer to Table What is the average variable cost of producing 3 gigaplots? a. $15 b. $14 c. More information is needed. d. $16 9. Refer to Table What is the fixed cost of producing 3 gigaplots? a. $25 b. $12 c. $20 d. More information is needed. 10. When a firm in a competitive market decides to triple the amount of output it sells, as a result a. its profit must increase. b. the price in the market falls. c. its total revenue triples. d. the price in the market rises. 11. Which of the following events will definitely cause equilibrium quantity to fall? a. demand and supply both decrease b. demand decreases and supply increases c. demand and supply both increase d. demand increases and supply decreases 12. During the last few decades, sunscreen sales have increased while the price of sunscreen has risen and the variety of sunscreen products offered has increased. What s the most likely explanation? a. Sunscreen producers increased production out of concern for the public s health. b. Health-conscious consumers heeded health warnings and decided to buy more sunscreen. c. Cancer activists successfully lobbied to obtain government subsidies for sunscreen use. d. Government officials ordered sunscreen producers to produce more sunscreen. 13. When a country allows trade and becomes an exporter of a good, a. everyone in the country loses. b. the losses of the losers exceed the gains of the winners. c. the gains of the winners exceed the losses of the losers. d. everyone in the country benefits. 2

3 Econ201 Final Exam, Fall 2007, Version A 14. What will happen to the equilibrium price and quantity of legal music downloads if ipods become cheaper, it becomes more difficult to download or share music illegally, and payments to musicians by recording companies fall? a. Quantity will fall and the effect on price is ambiguous. b. Price will fall and the effect on quantity is ambiguous. c. Quantity will rise and the effect on price is ambiguous. d. Price will rise and the effect on quantity is ambiguous. 15. The lowest points of the average variable cost and average total cost curves occur where a. the average variable cost and average total cost curves intersect. b. the marginal cost curve intersects those curves. c. the marginal cost curve lies below both curves. d. average total cost is below average variable cost. 16. The defining characteristic of a natural monopoly is a. diseconomies of scale over the relevant range of output. b. constant marginal cost over the relevant range of output. c. constant returns to scale over the relevant range of output. d. economies of scale over the relevant range of output. Figure Refer to Figure To maximize its profit, a monopolist would choose a. 200 units of output and a price of $20 per unit b. 100 units of output and a price of $20 per unit c. 150 units of output and a price of $15 per unit d. 100 units of output and a price of $10 per unit 18. Refer to Figure To maximize total surplus, a benevolent social planner would choose a. 200 units of output and a price of $10 per unit b. 150 units of output and a price of $10 per unit c. 150 units of output and a price of $15 per unit d. 100 units of output and a price of $10 per unit 19. A competitive firm's short-run supply curve is part of which of the following curves? a. Average total cost b. Average variable cost c. Marginal revenue d. Marginal cost 3

4 Econ201 Final Exam, Fall 2007, Version A 20. When an oligopoly market reaches a Nash equilibrium, a. each firm will not have tried to maximize its profit. b. firms will not be concerned about the strategies of competing firms. c. each firm will have chosen its own best strategy, given what the other firms are doing. d. the market price will be different for each firm. 21. The Social Security tax is a tax on a. labor. b. earnings during retirement. c. capital. d. consumption expenditures. Figure Refer to Figure Profit will be maximized by charging a price equal to a. P 3. b. P 2. c. P 1. d. P Refer to Figure The marginal revenue curve for a monopoly firm is depicted by curve a. A. b. B. c. C. d. D. 24. Refer to Figure A profit-maximizing monopoly's profit is equal to a. (P 3 - P 0 ) Q 2. b. P 3 Q 2. c. (P 1 - P 0 ) Q 2. d. (P 3 - P 0 ) Q 4. 4

5 Econ201 Final Exam, Fall 2007, Version A 25. Tommy's Tires operates in a perfectly competitive market. If tires sell for $50 each and average total cost per tire is $40 at the profit-maximizing output level, then in the long run a. some firms will exit from the market, and the price will rise. b. more firms will enter the market, and the price will fall. c. more firms will enter the market, and the price will rise. d. more firms will exit from the market, and the price will fall. 26. The negative relationship between price and quantity demanded a. is represented by a downward-sloping demand curve. b. applies to most goods in the economy. c. is referred to as the law of demand. d. All of the above are correct. 27. In a competitive market the price is $7, and typical firms in the market has ATC = $7.50 and AVC = $7.15. a. In the long run the market will cease to exist. b. In the short run firms will shut down, and in the long run firms will leave the market. c. New firms will likely enter this market to capture any remaining economic profits. d. In the short run firms will produce, but in the long run firms will leave the market. 28. Because there is diminishing marginal product of labor, as the number of workers increases a. the additional output added by one additional worker rises. b. the additional cost of hiring an additional worker rises. c. the additional output added by one additional worker declines. d. the additional cost of an additional unit of output falls. 29. A monopolist can make large positive economic profits in the long run only if the monopolist a. produces the amount of output where average variable cost is at a minimum. b. is protected by barriers to entry. c. produces the amount of output where average total cost is at a minimum. d. operates as a price taker rather than a price maker. Figure Refer to Figure At levels of output below M the firm experiences a. economies of scale. b. economic profit. c. diseconomies of scale. d. accounting profit. 5

6 Econ201 Final Exam, Fall 2007, Version A 31. Refer to Figure In long run competitive market equilibrium, firms might operate on which of the average total cost curves? a. ATC C only. b. ATC B only. c. ATC A only. d. ATC D between M and N. 32. Travis can mow a lawn in two hours or he can trim a tree in one hour. Ricardo can mow a lawn in three hours or he can trim a tree in two hours. a. Travis has a comparative advantage over Ricardo in mowing lawns. b. Travis has an absolute advantage over Ricardo in mowing lawns. c. Ricardo has a comparative advantage over Travis in trimming trees. d. All of the above are correct. Figure 14-4: A typical firm in a COMPETITIVE market 33. Refer to Figure When market price is P 5, a profit-maximizing firm's profit is the area a. P 5 Q 3. b. (P 5 - P 3 ) Q 2. c. (P 5 - P 4 ) Q 3. d. When market price is P 5 there are no profits. 34. Refer to Figure Firms would want to enter this market anytime the price exceeds a. P 2. b. P 1. c. P 3. d. None of the above is correct. 35. When firms have agreements among themselves on the quantity to produce and the price at which to sell output, we refer to their form of organization as a a. monopolistically competitive oligopoly. b. cartel. c. Nash arrangement. d. perfectly competitive oligopoly. 36. The inner and outer loops in the circular-flow diagram represent a. (i) the flows of inputs and outputs and (ii) the flow of dollars. b. (i) the flow of dollars and (ii) other financial flows. c. (i) the flow of goods and (ii) the flow of services. d. (i) inputs into production processes and (ii) outputs from production processes. 6

7 Econ201 Final Exam, Fall 2007, Version A 37. As a group, oligopolists would always earn the highest profit if they would a. produce the perfectly competitive quantity of output. b. charge the same price that a monopolist would charge if the market were a monopoly. c. produce more than the perfectly competitive quantity of output. d. operate according to their own individual self-interests. 38. When determining whether to shutdown in the short run, a competitive firm should a. ignore fixed costs. b. ignore variable costs. c. ignore sunk costs. d. Both a and c are correct 39. When a country allows trade and becomes an importer of a good, a. domestic producers become worse off, and domestic consumers become better off. b. both domestic producers and domestic consumers become worse off. c. both domestic producers and domestic consumers become better off. d. domestic producers become better off, and domestic consumers become worse off. 40. The firm will make the most profits if it produces the quantity of output at which a. marginal revenue equals total revenue. b. profit per unit is greatest. c. marginal cost equals average cost. d. marginal revenue equals marginal cost. 41. Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that a. the nation is producing an efficient combination of goods. b. there will be a large opportunity cost if the nation tries to increase production. c. the nation is producing beyond its capacity, and inflation will occur. d. the nation is not using all available resources or is using inferior technology or both. Table 16-3 The information in the table below shows the total demand for cable TV subscriptions in Laramie, WY. Assume that the variable cost of providing the service is zero, so the firm will maximize profits by maximizing revenue. Quantity Price (per month) 0 $120 3,000 $100 6,000 $ 80 9,000 $ 60 12,000 $ 40 15,000 $ Refer to Table Assume that there are two profit-maximizing digital cable TV companies operating in Laramie, and they initially collude and agree to split the market equally. How many cable TV subscriptions will be sold altogether when this market reaches a Nash equilibrium? a. 9,000 b. 12,000 c. 3,000 d. 6,000 7

8 Econ201 Final Exam, Fall 2007, Version A 43. Refer to Table If there is only one cable TV company in Laramie, what price would it charge if it wants to maximize its profit? a. $40 b. $60 c. $80 d. $ If a surplus currently exists in a market we know that the current price is a. above equilibrium price and quantity supplied is greater than quantity demanded. b. below equilibrium price and quantity demanded is greater than quantity supplied. c. below equilibrium price and quantity supplied is greater than quantity demanded. d. above equilibrium price and quantity demanded is greater than quantity supplied. 45. Suppose a tax of $1 per unit is imposed on french fries. The more elastic the supply of french fries, a. the larger is the deadweight loss of the tax. b. the larger is the tax burden on french fry sellers relative to the tax burden on buyers. c. the smaller is the response of the quantity supplied of french fries to the tax. d. All of the above are correct. 46. Which of the following events would cause both the equilibrium price and equilibrium quantity of Dodge Neons (an inferior good) to increase? a. a decrease in consumer income b. an increase in consumer income c. gas mileage of SUVs and mid-size sedans increases. d. wages of auto workers fall. Figure Refer to Figure Which of the curves is most likely to represent average total cost? a. A b. B c. C d. D 48. The U.S. market for locomotives is divided between two producers: General Electric has 70 percent of the market and General Motors has 30 percent. This market is an example of a. an oligopoly, or duopoly. b. monopolistic competition. c. a collusive monopoly. d. a cartel. 8

9 Econ201 Final Exam, Fall 2007, Version A 49. If the price of oak lumber increases, what happens to consumer surplus in the market for oak cabinets? a. It will not change consumer surplus; only producer surplus changes. b. It may either increase or decrease. c. It increases. d. It decreases. 50. A good reason why the local gas distribution company is subject to price regulation rather than being broken up through antitrust, is because the gas company is a a. profit-maximizing monopoly. b. producer of externalities. c. revenue-maximizing monopoly. d. natural monopoly. Table 7-1 BUYER WILLINGNESS TO PAY MIKE $50.00 SANDY $30.00 JONATHAN $20.00 HALEY $ Refer to Table 7-1. If the table represents the willingness to pay of four buyers and the price of the product is $28, then their total consumer surplus is a. $24. b. $46. c. $26. d. $ Which of the following changes would not shift the demand curve for Monty Python videos? a. a change in consumer income b. a change in the price of Monty Python videos c. a change in expectations about the future price of Monty Python videos d. a change in the price of Mr. Bean videos, a substitute good 53. Wal-Mart has low costs in part because it is very large. Local retailers often go out of business because their prices are higher than Wal-Mart s. This demonstrates that a. the greed of large sellers like Wal-Mart hurts consumers, especially low-income consumers. b. consumers are angry at local retailers because of their high prices. c. there are economies of scale in retail sales. d. there are diseconomies of scale in retail sales. 54. Susan could work as a telemarketer, earning $25,000 per year. Instead, she has her own catering business. The $25,000 possible telemarketing income is part of her catering business s a. total revenue. b. explicit costs. c. marginal costs. d. implicit costs. 9

10 Econ201 Final Exam, Fall 2007, Version A 55. Kelly and David are both able to repair cars and cook meals. Which of the following is not possible? a. Kelly has an absolute advantage in both repairing cars and in cooking meals. b. Kelly has comparative advantage in car repair and David has comparative advantage in cooking. c. Kelly has absolute advantage in car repair and David has absolute advantage in cooking. d. Kelly has a comparative advantage in both repairing cars and in cooking meals. 10

11 ID: A Econ 201 Final Exam Answer Section MULTIPLE CHOICE 1. ANS: D MSC: Analytical 2. ANS: B MSC: Definitional 3. ANS: B MSC: Interpretive 4. ANS: C MSC: Applicative 5. ANS: D MSC: Applicative 6. ANS: D MSC: Analytical 7. ANS: C MSC: Applicative 8. ANS: A MSC: Applicative 9. ANS: A MSC: Applicative 10. ANS: C MSC: Analytical 11. ANS: A MSC: Applicative 12. ANS: B MSC: Applicative 13. ANS: C MSC: Interpretive 14. ANS: C MSC: Analytical 15. ANS: B MSC: Interpretive 16. ANS: D MSC: Definitional 17. ANS: B MSC: Analytical 18. ANS: C MSC: Analytical 19. ANS: D MSC: Definitional 20. ANS: C MSC: Interpretive 21. ANS: A MSC: Interpretive 22. ANS: A MSC: Analytical 23. ANS: B MSC: Interpretive 24. ANS: A MSC: Analytical 25. ANS: B MSC: Analytical 26. ANS: D MSC: Interpretive 27. ANS: B MSC: Applicative 28. ANS: C MSC: Interpretive 29. ANS: B MSC: Interpretive 30. ANS: A MSC: Analytical 31. ANS: D MSC: Analytical 32. ANS: B MSC: Applicative 33. ANS: C MSC: Analytical 34. ANS: C MSC: Analytical 35. ANS: B MSC: Definitional 36. ANS: A MSC: Interpretive 37. ANS: B MSC: Interpretive 38. ANS: D MSC: Analytical 39. ANS: A MSC: Interpretive 40. ANS: D MSC: Interpretive 41. ANS: D MSC: Interpretive 42. ANS: B MSC: Applicative 43. ANS: B MSC: Applicative 1

12 ID: A 44. ANS: A MSC: Applicative 45. ANS: A MSC: Applicative 46. ANS: A MSC: Applicative 47. ANS: B MSC: Analytical 48. ANS: A MSC: Interpretive 49. ANS: D MSC: Applicative 50. ANS: D MSC: Interpretive 51. ANS: A MSC: Applicative 52. ANS: B MSC: Interpretive 53. ANS: C MSC: Interpretive 54. ANS: D MSC: Interpretive 55. ANS: D MSC: Interpretive 2

13 , Fall 2007 Version B Special Codes PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 201 Final Exam Figure Refer to Figure Profit will be maximized by charging a price equal to a. P 1. b. P 3. c. P 0. d. P Refer to Figure A profit-maximizing monopoly's profit is equal to a. (P 1 - P 0 ) Q 2. b. P 3 Q 2. c. (P 3 - P 0 ) Q 2. d. (P 3 - P 0 ) Q Refer to Figure The marginal revenue curve for a monopoly firm is depicted by curve a. A. b. B. c. C. d. D. 4. The firm will make the most profits if it produces the quantity of output at which a. marginal revenue equals total revenue. b. marginal cost equals average cost. c. marginal revenue equals marginal cost. d. profit per unit is greatest. 1

14 Econ201 Final Exam, Fall 2007, Version B 5. A competitive firm's short-run supply curve is part of which of the following curves? a. Average variable cost b. Average total cost c. Marginal revenue d. Marginal cost 6. During the last few decades, sunscreen sales have increased while the price of sunscreen has risen and the variety of sunscreen products offered has increased. What s the most likely explanation? a. Government officials ordered sunscreen producers to produce more sunscreen. b. Cancer activists successfully lobbied to obtain government subsidies for sunscreen use. c. Health-conscious consumers heeded health warnings and decided to buy more sunscreen. d. Sunscreen producers increased production out of concern for the public s health. 7. What will happen to the equilibrium price and quantity of legal music downloads if ipods become cheaper, it becomes more difficult to download or share music illegally, and payments to musicians by recording companies fall? a. Quantity will rise and the effect on price is ambiguous. b. Price will rise and the effect on quantity is ambiguous. c. Quantity will fall and the effect on price is ambiguous. d. Price will fall and the effect on quantity is ambiguous. 8. As a group, oligopolists would always earn the highest profit if they would a. produce more than the perfectly competitive quantity of output. b. operate according to their own individual self-interests. c. charge the same price that a monopolist would charge if the market were a monopoly. d. produce the perfectly competitive quantity of output. 9. The negative relationship between price and quantity demanded a. applies to most goods in the economy. b. is represented by a downward-sloping demand curve. c. is referred to as the law of demand. d. All of the above are correct. 10. The inner and outer loops in the circular-flow diagram represent a. (i) the flow of dollars and (ii) other financial flows. b. (i) inputs into production processes and (ii) outputs from production processes. c. (i) the flow of goods and (ii) the flow of services. d. (i) the flows of inputs and outputs and (ii) the flow of dollars. Table 7-1 BUYER WILLINGNESS TO PAY MIKE $50.00 SANDY $30.00 JONATHAN $20.00 HALEY $ Refer to Table 7-1. If the table represents the willingness to pay of four buyers and the price of the product is $28, then their total consumer surplus is a. $56. b. $46. c. $26. d. $24. 2

15 Econ201 Final Exam, Fall 2007, Version B Table 16-3 The information in the table below shows the total demand for cable TV subscriptions in Laramie, WY. Assume that the variable cost of providing the service is zero, so the firm will maximize profits by maximizing revenue. Quantity Price (per month) 0 $120 3,000 $100 6,000 $ 80 9,000 $ 60 12,000 $ 40 15,000 $ Refer to Table Assume that there are two profit-maximizing digital cable TV companies operating in Laramie, and they initially collude and agree to split the market equally. How many cable TV subscriptions will be sold altogether when this market reaches a Nash equilibrium? a. 9,000 b. 6,000 c. 12,000 d. 3, Refer to Table If there is only one cable TV company in Laramie, what price would it charge if it wants to maximize its profit? a. $40 b. $100 c. $80 d. $ When a country allows trade and becomes an exporter of a good, a. the gains of the winners exceed the losses of the losers. b. everyone in the country benefits. c. the losses of the losers exceed the gains of the winners. d. everyone in the country loses. Table 13-8: s of Gigaplot Production Quantity of gigaplots Fixed Variable Total 1 $13 $38 2 $28 3 $70 Average Fixed Average Variable Average Total Marginal 15. Refer to Table What is the marginal cost of the 3rd gigaplot? a. $70 b. $17 c. $20 d. $45 3

16 Econ201 Final Exam, Fall 2007, Version B 16. Refer to Table What is the average variable cost of producing 3 gigaplots? a. $15 b. More information is needed. c. $14 d. $ Refer to Table What is the fixed cost of producing 3 gigaplots? a. $12 b. $25 c. $20 d. More information is needed. 18. When an oligopoly market reaches a Nash equilibrium, a. the market price will be different for each firm. b. firms will not be concerned about the strategies of competing firms. c. each firm will not have tried to maximize its profit. d. each firm will have chosen its own best strategy, given what the other firms are doing. Figure Refer to Figure In long run competitive market equilibrium, firms might operate on which of the average total cost curves? a. ATC A only. b. ATC B only. c. ATC C only. d. ATC D between M and N. 20. Refer to Figure At levels of output below M the firm experiences a. diseconomies of scale. b. economies of scale. c. economic profit. d. accounting profit. 4

17 Econ201 Final Exam, Fall 2007, Version B Table 15-1 Quantity Price Total Revenue Average Revenue Marginal Revenue Refer to Table What is the marginal revenue for the monopolist for the third unit sold? a b. 29 c. 23 d Refer to Table If the monopolist wants to maximize its revenue, how many units of its product should it sell? a. 6 b. 5 c. 4 d When firms have agreements among themselves on the quantity to produce and the price at which to sell output, we refer to their form of organization as a a. monopolistically competitive oligopoly. b. perfectly competitive oligopoly. c. cartel. d. Nash arrangement. Figure Refer to Figure To maximize total surplus, a benevolent social planner would choose a. 100 units of output and a price of $10 per unit b. 150 units of output and a price of $15 per unit c. 150 units of output and a price of $10 per unit d. 200 units of output and a price of $10 per unit 5

18 Econ201 Final Exam, Fall 2007, Version B 25. Refer to Figure To maximize its profit, a monopolist would choose a. 150 units of output and a price of $15 per unit b. 100 units of output and a price of $10 per unit c. 100 units of output and a price of $20 per unit d. 200 units of output and a price of $20 per unit 26. The U.S. market for locomotives is divided between two producers: General Electric has 70 percent of the market and General Motors has 30 percent. This market is an example of a. an oligopoly, or duopoly. b. monopolistic competition. c. a cartel. d. a collusive monopoly. 27. Suppose a tax of $1 per unit is imposed on french fries. The more elastic the supply of french fries, a. the larger is the tax burden on french fry sellers relative to the tax burden on buyers. b. the larger is the deadweight loss of the tax. c. the smaller is the response of the quantity supplied of french fries to the tax. d. All of the above are correct. 28. Tommy's Tires operates in a perfectly competitive market. If tires sell for $50 each and average total cost per tire is $40 at the profit-maximizing output level, then in the long run a. more firms will exit from the market, and the price will fall. b. more firms will enter the market, and the price will fall. c. some firms will exit from the market, and the price will rise. d. more firms will enter the market, and the price will rise. 29. Which of the following changes would not shift the demand curve for Monty Python videos? a. a change in the price of Monty Python videos b. a change in the price of Mr. Bean videos, a substitute good c. a change in expectations about the future price of Monty Python videos d. a change in consumer income 30. A good reason why the local gas distribution company is subject to price regulation rather than being broken up through antitrust, is because the gas company is a a. producer of externalities. b. natural monopoly. c. profit-maximizing monopoly. d. revenue-maximizing monopoly. 31. When a country allows trade and becomes an importer of a good, a. domestic producers become worse off, and domestic consumers become better off. b. both domestic producers and domestic consumers become worse off. c. domestic producers become better off, and domestic consumers become worse off. d. both domestic producers and domestic consumers become better off. 32. In a competitive market the price is $7, and typical firms in the market has ATC = $7.50 and AVC = $7.15. a. In the long run the market will cease to exist. b. New firms will likely enter this market to capture any remaining economic profits. c. In the short run firms will produce, but in the long run firms will leave the market. d. In the short run firms will shut down, and in the long run firms will leave the market. 33. For a profit-maximizing monopolist, a. P > MR > MC. b. P > MR = MC. c. MR < MC < P. d. P = MR = MC. 6

19 Econ201 Final Exam, Fall 2007, Version B 34. When a firm in a competitive market decides to triple the amount of output it sells, as a result a. its profit must increase. b. the price in the market falls. c. its total revenue triples. d. the price in the market rises. 35. Travis can mow a lawn in two hours or he can trim a tree in one hour. Ricardo can mow a lawn in three hours or he can trim a tree in two hours. a. Travis has a comparative advantage over Ricardo in mowing lawns. b. Travis has an absolute advantage over Ricardo in mowing lawns. c. Ricardo has a comparative advantage over Travis in trimming trees. d. All of the above are correct. 36. A market structure with only a few sellers, offering similar or identical products, is known as a. monopolistic competition. b. perfect competition. c. oligopoly. d. monopoly. Figure 14-4: A typical firm in a COMPETITIVE market 37. Refer to Figure Firms would want to enter this market anytime the price exceeds a. P 3. b. P 2. c. P 1. d. None of the above is correct. 38. Refer to Figure When market price is P 5, a profit-maximizing firm's profit is the area a. (P 5 - P 4 ) Q 3. b. When market price is P 5 there are no profits. c. (P 5 - P 3 ) Q 2. d. P 5 Q The Social Security tax is a tax on a. labor. b. capital. c. consumption expenditures. d. earnings during retirement. 7

20 Econ201 Final Exam, Fall 2007, Version B 40. Wal-Mart has low costs in part because it is very large. Local retailers often go out of business because their prices are higher than Wal-Mart s. This demonstrates that a. there are diseconomies of scale in retail sales. b. consumers are angry at local retailers because of their high prices. c. there are economies of scale in retail sales. d. the greed of large sellers like Wal-Mart hurts consumers, especially low-income consumers. 41. If a surplus currently exists in a market we know that the current price is a. below equilibrium price and quantity supplied is greater than quantity demanded. b. above equilibrium price and quantity supplied is greater than quantity demanded. c. below equilibrium price and quantity demanded is greater than quantity supplied. d. above equilibrium price and quantity demanded is greater than quantity supplied. 42. Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that a. the nation is producing an efficient combination of goods. b. the nation is not using all available resources or is using inferior technology or both. c. the nation is producing beyond its capacity, and inflation will occur. d. there will be a large opportunity cost if the nation tries to increase production. 43. If a competitive firm sees that its marginal cost exceeds its marginal revenue, then a. it can increase its profit by decreasing its output. b. the firm is definitely earning a positive profit. c. it can increase its profit by increasing its output. d. the firm is definitely losing money. 44. Susan could work as a telemarketer, earning $25,000 per year. Instead, she has her own catering business. The $25,000 possible telemarketing income is part of her catering business s a. marginal costs. b. total revenue. c. implicit costs. d. explicit costs. 45. Which of the following events would cause both the equilibrium price and equilibrium quantity of Dodge Neons (an inferior good) to increase? a. gas mileage of SUVs and mid-size sedans increases. b. wages of auto workers fall. c. a decrease in consumer income d. an increase in consumer income 46. If the price of oak lumber increases, what happens to consumer surplus in the market for oak cabinets? a. It increases. b. It may either increase or decrease. c. It will not change consumer surplus; only producer surplus changes. d. It decreases. 47. Because there is diminishing marginal product of labor, as the number of workers increases a. the additional cost of hiring an additional worker rises. b. the additional cost of an additional unit of output falls. c. the additional output added by one additional worker rises. d. the additional output added by one additional worker declines. 48. The lowest points of the average variable cost and average total cost curves occur where a. average total cost is below average variable cost. b. the average variable cost and average total cost curves intersect. c. the marginal cost curve lies below both curves. d. the marginal cost curve intersects those curves. 8

21 Econ201 Final Exam, Fall 2007, Version B 49. The defining characteristic of a natural monopoly is a. constant marginal cost over the relevant range of output. b. diseconomies of scale over the relevant range of output. c. economies of scale over the relevant range of output. d. constant returns to scale over the relevant range of output. 50. The main argument for splitting up monopolies through antitrust action is based on the notion that a. greedy monopolies should be punished. b. consumers prefer dealing with small firms. c. small firms have lower costs. d. competition is more efficient than monopoly. Figure Refer to Figure Which of the curves is most likely to represent average total cost? a. A b. B c. C d. D 52. When determining whether to shutdown in the short run, a competitive firm should a. ignore fixed costs. b. ignore variable costs. c. ignore sunk costs. d. Both a and c are correct 53. Kelly and David are both able to repair cars and cook meals. Which of the following is not possible? a. Kelly has comparative advantage in car repair and David has comparative advantage in cooking. b. Kelly has a comparative advantage in both repairing cars and in cooking meals. c. Kelly has an absolute advantage in both repairing cars and in cooking meals. d. Kelly has absolute advantage in car repair and David has absolute advantage in cooking. 54. A monopolist can make large positive economic profits in the long run only if the monopolist a. operates as a price taker rather than a price maker. b. produces the amount of output where average variable cost is at a minimum. c. is protected by barriers to entry. d. produces the amount of output where average total cost is at a minimum. 9

22 Econ201 Final Exam, Fall 2007, Version B 55. Which of the following events will definitely cause equilibrium quantity to fall? a. demand increases and supply decreases b. demand and supply both increase c. demand and supply both decrease d. demand decreases and supply increases 10

23 ID: B Econ 201 Final Exam Answer Section MULTIPLE CHOICE 1. ANS: B MSC: Analytical 2. ANS: C MSC: Analytical 3. ANS: B MSC: Interpretive 4. ANS: C MSC: Interpretive 5. ANS: D MSC: Definitional 6. ANS: C MSC: Applicative 7. ANS: A MSC: Analytical 8. ANS: C MSC: Interpretive 9. ANS: D MSC: Interpretive 10. ANS: D MSC: Interpretive 11. ANS: D MSC: Applicative 12. ANS: C MSC: Applicative 13. ANS: D MSC: Applicative 14. ANS: A MSC: Interpretive 15. ANS: B MSC: Applicative 16. ANS: A MSC: Applicative 17. ANS: B MSC: Applicative 18. ANS: D MSC: Interpretive 19. ANS: D MSC: Analytical 20. ANS: B MSC: Analytical 21. ANS: C MSC: Applicative 22. ANS: A MSC: Applicative 23. ANS: C MSC: Definitional 24. ANS: B MSC: Analytical 25. ANS: C MSC: Analytical 26. ANS: A MSC: Interpretive 27. ANS: B MSC: Applicative 28. ANS: B MSC: Analytical 29. ANS: A MSC: Interpretive 30. ANS: B MSC: Interpretive 31. ANS: A MSC: Interpretive 32. ANS: D MSC: Applicative 33. ANS: B MSC: Analytical 34. ANS: C MSC: Analytical 35. ANS: B MSC: Applicative 36. ANS: C MSC: Definitional 37. ANS: A MSC: Analytical 38. ANS: A MSC: Analytical 39. ANS: A MSC: Interpretive 40. ANS: C MSC: Interpretive 41. ANS: B MSC: Applicative 42. ANS: B MSC: Interpretive 43. ANS: A MSC: Analytical 1

24 ID: B 44. ANS: C MSC: Interpretive 45. ANS: C MSC: Applicative 46. ANS: D MSC: Applicative 47. ANS: D MSC: Interpretive 48. ANS: D MSC: Interpretive 49. ANS: C MSC: Definitional 50. ANS: D MSC: Interpretive 51. ANS: B MSC: Analytical 52. ANS: D MSC: Analytical 53. ANS: B MSC: Interpretive 54. ANS: C MSC: Interpretive 55. ANS: C MSC: Applicative 2

25 , Fall 2007 Version C Special Codes PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 201 Final Exam 1. In a competitive market the price is $7, and typical firms in the market has ATC = $7.50 and AVC = $7.15. a. In the long run the market will cease to exist. b. In the short run firms will shut down, and in the long run firms will leave the market. c. In the short run firms will produce, but in the long run firms will leave the market. d. New firms will likely enter this market to capture any remaining economic profits. Figure Refer to Figure To maximize total surplus, a benevolent social planner would choose a. 150 units of output and a price of $10 per unit b. 150 units of output and a price of $15 per unit c. 100 units of output and a price of $10 per unit d. 200 units of output and a price of $10 per unit 3. Refer to Figure To maximize its profit, a monopolist would choose a. 100 units of output and a price of $20 per unit b. 200 units of output and a price of $20 per unit c. 100 units of output and a price of $10 per unit d. 150 units of output and a price of $15 per unit 4. The negative relationship between price and quantity demanded a. applies to most goods in the economy. b. is represented by a downward-sloping demand curve. c. is referred to as the law of demand. d. All of the above are correct. 1

26 Econ201 Final Exam, Fall 2007, Version C Figure 14-4: A typical firm in a COMPETITIVE market 5. Refer to Figure When market price is P 5, a profit-maximizing firm's profit is the area a. (P 5 - P 4 ) Q 3. b. P 5 Q 3. c. When market price is P 5 there are no profits. d. (P 5 - P 3 ) Q Refer to Figure Firms would want to enter this market anytime the price exceeds a. P 2. b. P 3. c. P 1. d. None of the above is correct. 7. During the last few decades, sunscreen sales have increased while the price of sunscreen has risen and the variety of sunscreen products offered has increased. What s the most likely explanation? a. Sunscreen producers increased production out of concern for the public s health. b. Government officials ordered sunscreen producers to produce more sunscreen. c. Cancer activists successfully lobbied to obtain government subsidies for sunscreen use. d. Health-conscious consumers heeded health warnings and decided to buy more sunscreen. 8. A good reason why the local gas distribution company is subject to price regulation rather than being broken up through antitrust, is because the gas company is a a. revenue-maximizing monopoly. b. natural monopoly. c. producer of externalities. d. profit-maximizing monopoly. 2

27 Econ201 Final Exam, Fall 2007, Version C Figure Refer to Figure Which of the curves is most likely to represent average total cost? a. A b. B c. C d. D Table 15-1 Quantity Price Total Revenue Average Revenue Marginal Revenue Refer to Table What is the marginal revenue for the monopolist for the third unit sold? a. 23 b. 87 c. 29 d Refer to Table If the monopolist wants to maximize its revenue, how many units of its product should it sell? a. 6 b. 5 c. 7 d Which of the following events would cause both the equilibrium price and equilibrium quantity of Dodge Neons (an inferior good) to increase? a. gas mileage of SUVs and mid-size sedans increases. b. wages of auto workers fall. c. an increase in consumer income d. a decrease in consumer income 3

28 Econ201 Final Exam, Fall 2007, Version C Table 16-3 The information in the table below shows the total demand for cable TV subscriptions in Laramie, WY. Assume that the variable cost of providing the service is zero, so the firm will maximize profits by maximizing revenue. Quantity Price (per month) 0 $120 3,000 $100 6,000 $ 80 9,000 $ 60 12,000 $ 40 15,000 $ Refer to Table If there is only one cable TV company in Laramie, what price would it charge if it wants to maximize its profit? a. $80 b. $60 c. $40 d. $ Refer to Table Assume that there are two profit-maximizing digital cable TV companies operating in Laramie, and they initially collude and agree to split the market equally. How many cable TV subscriptions will be sold altogether when this market reaches a Nash equilibrium? a. 9,000 b. 12,000 c. 3,000 d. 6, The Social Security tax is a tax on a. labor. b. earnings during retirement. c. capital. d. consumption expenditures. 16. When a firm in a competitive market decides to triple the amount of output it sells, as a result a. the price in the market falls. b. the price in the market rises. c. its total revenue triples. d. its profit must increase. 17. When firms have agreements among themselves on the quantity to produce and the price at which to sell output, we refer to their form of organization as a a. perfectly competitive oligopoly. b. cartel. c. monopolistically competitive oligopoly. d. Nash arrangement. 18. If a surplus currently exists in a market we know that the current price is a. above equilibrium price and quantity demanded is greater than quantity supplied. b. above equilibrium price and quantity supplied is greater than quantity demanded. c. below equilibrium price and quantity demanded is greater than quantity supplied. d. below equilibrium price and quantity supplied is greater than quantity demanded. 4

29 Econ201 Final Exam, Fall 2007, Version C 19. As a group, oligopolists would always earn the highest profit if they would a. produce more than the perfectly competitive quantity of output. b. operate according to their own individual self-interests. c. produce the perfectly competitive quantity of output. d. charge the same price that a monopolist would charge if the market were a monopoly. 20. A competitive firm's short-run supply curve is part of which of the following curves? a. Marginal cost b. Marginal revenue c. Average variable cost d. Average total cost Table 7-1 BUYER WILLINGNESS TO PAY MIKE $50.00 SANDY $30.00 JONATHAN $20.00 HALEY $ Refer to Table 7-1. If the table represents the willingness to pay of four buyers and the price of the product is $28, then their total consumer surplus is a. $46. b. $24. c. $26. d. $ When determining whether to shutdown in the short run, a competitive firm should a. ignore fixed costs. b. ignore variable costs. c. ignore sunk costs. d. Both a and c are correct 23. Travis can mow a lawn in two hours or he can trim a tree in one hour. Ricardo can mow a lawn in three hours or he can trim a tree in two hours. a. Travis has an absolute advantage over Ricardo in mowing lawns. b. Ricardo has a comparative advantage over Travis in trimming trees. c. Travis has a comparative advantage over Ricardo in mowing lawns. d. All of the above are correct. 24. The lowest points of the average variable cost and average total cost curves occur where a. the marginal cost curve intersects those curves. b. the marginal cost curve lies below both curves. c. the average variable cost and average total cost curves intersect. d. average total cost is below average variable cost. 25. When a country allows trade and becomes an exporter of a good, a. everyone in the country benefits. b. the gains of the winners exceed the losses of the losers. c. everyone in the country loses. d. the losses of the losers exceed the gains of the winners. 5

30 Econ201 Final Exam, Fall 2007, Version C Table 13-8: s of Gigaplot Production Quantity of gigaplots Fixed Variable Total 1 $13 $38 2 $28 3 $70 Average Fixed Average Variable Average Total Marginal 26. Refer to Table What is the fixed cost of producing 3 gigaplots? a. $20 b. $12 c. $25 d. More information is needed. 27. Refer to Table What is the average variable cost of producing 3 gigaplots? a. More information is needed. b. $16 c. $14 d. $ Refer to Table What is the marginal cost of the 3rd gigaplot? a. $20 b. $70 c. $45 d. $17 Figure Refer to Figure Profit will be maximized by charging a price equal to a. P 0. b. P 3. c. P 1. d. P 2. 6

31 Econ201 Final Exam, Fall 2007, Version C 30. Refer to Figure The marginal revenue curve for a monopoly firm is depicted by curve a. A. b. B. c. C. d. D. 31. Refer to Figure A profit-maximizing monopoly's profit is equal to a. (P 3 - P 0 ) Q 4. b. P 3 Q 2. c. (P 1 - P 0 ) Q 2. d. (P 3 - P 0 ) Q A monopolist can make large positive economic profits in the long run only if the monopolist a. produces the amount of output where average variable cost is at a minimum. b. is protected by barriers to entry. c. operates as a price taker rather than a price maker. d. produces the amount of output where average total cost is at a minimum. 33. The defining characteristic of a natural monopoly is a. constant returns to scale over the relevant range of output. b. constant marginal cost over the relevant range of output. c. diseconomies of scale over the relevant range of output. d. economies of scale over the relevant range of output. 34. For a profit-maximizing monopolist, a. P > MR = MC. b. MR < MC < P. c. P = MR = MC. d. P > MR > MC. 35. Which of the following events will definitely cause equilibrium quantity to fall? a. demand decreases and supply increases b. demand and supply both decrease c. demand and supply both increase d. demand increases and supply decreases 36. When a country allows trade and becomes an importer of a good, a. domestic producers become better off, and domestic consumers become worse off. b. both domestic producers and domestic consumers become better off. c. both domestic producers and domestic consumers become worse off. d. domestic producers become worse off, and domestic consumers become better off. 7

32 Econ201 Final Exam, Fall 2007, Version C Figure Refer to Figure At levels of output below M the firm experiences a. accounting profit. b. diseconomies of scale. c. economies of scale. d. economic profit. 38. Refer to Figure In long run competitive market equilibrium, firms might operate on which of the average total cost curves? a. ATC C only. b. ATC A only. c. ATC B only. d. ATC D between M and N. 39. Tommy's Tires operates in a perfectly competitive market. If tires sell for $50 each and average total cost per tire is $40 at the profit-maximizing output level, then in the long run a. some firms will exit from the market, and the price will rise. b. more firms will exit from the market, and the price will fall. c. more firms will enter the market, and the price will rise. d. more firms will enter the market, and the price will fall. 40. If the price of oak lumber increases, what happens to consumer surplus in the market for oak cabinets? a. It decreases. b. It will not change consumer surplus; only producer surplus changes. c. It may either increase or decrease. d. It increases. 41. A market structure with only a few sellers, offering similar or identical products, is known as a. perfect competition. b. monopoly. c. oligopoly. d. monopolistic competition. 42. If a competitive firm sees that its marginal cost exceeds its marginal revenue, then a. the firm is definitely losing money. b. it can increase its profit by decreasing its output. c. the firm is definitely earning a positive profit. d. it can increase its profit by increasing its output. 8

33 Econ201 Final Exam, Fall 2007, Version C 43. Which of the following changes would not shift the demand curve for Monty Python videos? a. a change in expectations about the future price of Monty Python videos b. a change in the price of Mr. Bean videos, a substitute good c. a change in the price of Monty Python videos d. a change in consumer income 44. The firm will make the most profits if it produces the quantity of output at which a. profit per unit is greatest. b. marginal cost equals average cost. c. marginal revenue equals marginal cost. d. marginal revenue equals total revenue. 45. When an oligopoly market reaches a Nash equilibrium, a. each firm will not have tried to maximize its profit. b. each firm will have chosen its own best strategy, given what the other firms are doing. c. the market price will be different for each firm. d. firms will not be concerned about the strategies of competing firms. 46. The inner and outer loops in the circular-flow diagram represent a. (i) the flow of goods and (ii) the flow of services. b. (i) inputs into production processes and (ii) outputs from production processes. c. (i) the flow of dollars and (ii) other financial flows. d. (i) the flows of inputs and outputs and (ii) the flow of dollars. 47. The U.S. market for locomotives is divided between two producers: General Electric has 70 percent of the market and General Motors has 30 percent. This market is an example of a. a cartel. b. an oligopoly, or duopoly. c. monopolistic competition. d. a collusive monopoly. 48. The main argument for splitting up monopolies through antitrust action is based on the notion that a. small firms have lower costs. b. consumers prefer dealing with small firms. c. competition is more efficient than monopoly. d. greedy monopolies should be punished. 49. Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that a. the nation is producing an efficient combination of goods. b. the nation is producing beyond its capacity, and inflation will occur. c. there will be a large opportunity cost if the nation tries to increase production. d. the nation is not using all available resources or is using inferior technology or both. 50. Because there is diminishing marginal product of labor, as the number of workers increases a. the additional cost of an additional unit of output falls. b. the additional cost of hiring an additional worker rises. c. the additional output added by one additional worker declines. d. the additional output added by one additional worker rises. 51. Kelly and David are both able to repair cars and cook meals. Which of the following is not possible? a. Kelly has an absolute advantage in both repairing cars and in cooking meals. b. Kelly has comparative advantage in car repair and David has comparative advantage in cooking. c. Kelly has absolute advantage in car repair and David has absolute advantage in cooking. d. Kelly has a comparative advantage in both repairing cars and in cooking meals. 9

34 Econ201 Final Exam, Fall 2007, Version C 52. Susan could work as a telemarketer, earning $25,000 per year. Instead, she has her own catering business. The $25,000 possible telemarketing income is part of her catering business s a. explicit costs. b. total revenue. c. implicit costs. d. marginal costs. 53. What will happen to the equilibrium price and quantity of legal music downloads if ipods become cheaper, it becomes more difficult to download or share music illegally, and payments to musicians by recording companies fall? a. Quantity will fall and the effect on price is ambiguous. b. Price will fall and the effect on quantity is ambiguous. c. Price will rise and the effect on quantity is ambiguous. d. Quantity will rise and the effect on price is ambiguous. 54. Suppose a tax of $1 per unit is imposed on french fries. The more elastic the supply of french fries, a. the smaller is the response of the quantity supplied of french fries to the tax. b. the larger is the deadweight loss of the tax. c. the larger is the tax burden on french fry sellers relative to the tax burden on buyers. d. All of the above are correct. 55. Wal-Mart has low costs in part because it is very large. Local retailers often go out of business because their prices are higher than Wal-Mart s. This demonstrates that a. there are economies of scale in retail sales. b. consumers are angry at local retailers because of their high prices. c. the greed of large sellers like Wal-Mart hurts consumers, especially low-income consumers. d. there are diseconomies of scale in retail sales. 10

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