Miami Dade College ECO 2023 Principles of Microeconomics - Fall 2014 Practice Test #3 1. Papabear Corporation is a single seller of Wonderstuff. There are two substitutes for Wonderstuff. Given this situation, Papabear: A) cannot be a monopoly because there are substitutes for Wonderstuff. B) cannot be a monopoly because two substitutes make it a competitive market. C) can still be a monopoly because it is unknown if the two substitutes are close substitutes. D) acts as if it were competitive and takes the price set in the market. 2. A natural monopoly could possibly arise when: A) there are large economies of scale relative to the industry's demand. B) the government allows unrestricted access to a market. C) there are diseconomies of scale in an industry. D) companies band together to form a larger company. 3. in an industry can be so large that demand will support only one firm. A) Economies of scope B) Diseconomies of scale C) Economies of scale D) None of these can result in this outcome. 4. A very important difference between perfect competition and monopoly is: A) the monopoly faces a downward-sloping demand curve, while the perfect competitor faces a horizontal demand curve. B) the monopoly faces an inelastic demand curve, while the perfect competitor faces an elastic demand curve. C) a monopoly is profitable, while a perfect competitor is only sometimes profitable. D) a monopoly is not regulated by the market, while a perfect competitor is regulated by the market. Page 1
Use the following to answer question 5: Figure: Monopolies Versus Competitive Industries 5. (Figure: Monopolies Versus Competitive Industries) In the graph, consumer surplus, under monopoly is and producer surplus is. A) e + f; g + h B) f; e + h + g C) e + f + i; g + h + j D) f; e + g + h + i + j 6. For a firm to price discriminate, it must: A) sell to customers with identical price elasticities of demand. B) produce a product or service that has a close substitute provided by other firms. C) be able to prevent the resale of its product. D) have different marginal costs for each of the different customers. 7. If Biker's Oasis offers lower prices to women on ladies night, then it would be engaging in: A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) perfect price discrimination. Page 2
8. If a company uses third-degree price discrimination: A) the higher the price elasticity of demand, the higher the price charged. B) the higher the price elasticity of demand, the lower the price charged. C) the more inelastic the demand, the lower the price charged. D) each customer is charged the maximum price he or she is willing to pay. 9. Which of the following is MOST likely to be a natural monopoly? A) an ambulance service in a small town in Wyoming B) Apple, Inc. C) an automobile manufacturer with a national market D) United Parcel Service 10. If the public utility commission allows the water company to earn a normal profit, then it is enforcing a(n): A) marginal cost pricing rule. B) market pricing rule. C) average cost pricing rule. D) customer service rule. Use the following to answer question 11: Figure: Monopolistic Competition Page 3
11. (Figure: Monopolistic Competition) Under monopolistic competition, the price for this good or service in the graph will be: A) e. B) f. C) g. D) d. Use the following to answer question 12: Figure: Long-Run Monopolistic Competition 12. (Figure: Long-Run Monopolistic Competition) Referring to the graph, this monopolistically competitive firm will earn profit in the long run. A) high economic B) less than normal C) abnormal profits D) no economic 13. If Rosco's Tacos competes with eight other fast-food restaurants in the same neighborhood, and two of those rival firms exit the market, then: A) the market demand curve will shift to the left. B) the market supply curve will shift to the right. C) Rosco's demand curve will shift to the right. D) Rosco's supply curve will shift to the right. Page 4
Use the following to answer question 14: Figure: Kinked Demand Curves and Oligopolies 14. (Figure: Kinked Demand Curves and Oligopolies) Using the graph, an oligopolistic firm facing a kinked demand curve will NOT increase its price when its marginal cost fluctuates between which two points? A) points a and b B) points a and c C) points b and c D) An oligopolistic firm will always change its price when the marginal cost fluctuates. 15. Target executives believe that if they raise prices, then customers will go across the street to shop at Walmart. However, if they lower prices, then Walmart will respond likewise, so no customers will switch from Walmart to Target. This scenario implies that: A) Target should drop its price in an effort to drive Walmart out of business. B) prices charged by both retailers will be relatively stable. C) both retailers are locked in destructive competition. D) Target should not have a pricing strategy. Page 5
16. If an individual's primary objective is to maximize his or her salary, then which of the following actions would NOT be considered a rational decision? A) accepting a miserable job that pays $60,000 per year over a fun job that pays $40,000 per year B) accepting a fun job that pays $70,000 per year over a miserable job that pays $60,000 per year C) accepting a miserable job that pays $95,000 per year over a fun job that pays $90,000 per year D) accepting a fun job that pays $40,000 per year over a miserable job that pays $60,000 per year Use the following to answer question 17: Firm A's Price Firm B's Price $20 $15 $20 $100,000 $60,000 $100,000 $120,000 $15 $120,000 $80,000 $60,000 $80,000 17. (Table) Assume that oligopolists, Firm A and Firm B both charge $20 for the product and face roughly the same costs. Firm A is considering a price decrease to $15. Profits for each firm are given in the payoff matrix (A's profits, B's profits) shown in the table. How will Firm B react? A) Firm B will keep its price at $20 and earn $100,000. B) Firm B will keep its price at $20 and earn $60,000. C) Firm B will lower its price to $15 and earn $60,000. D) Firm B will lower its price to $15 and earn $80,000. Use the following to answer question 18: You Friend Travel Study Travel 85, 60 75, 70 Study 80, 50 70, 80 Page 6
18. (Table) Suppose you and your best friend are each deciding whether to spend the weekend in Key West or to stay home and study for next week's exam. The payoffs for each of the four possible outcomes are shown in the table (where higher numbers are better, the first number in each box represents your payoff, and the second number represents your friend's payoff). Which of the following is the Nash equilibrium? A) You and your friend both travel for a payoff of (85, 60). B) You travel but your friend studies for a payoff of (75, 70). C) You study but your friend travels for a payoff of (80, 50). D) You and your friend both study for a payoff of (70, 80). 19. Both Lowes and Home Depot must choose how much to advertise or whether to advertise at all. The choice of one of these firms to advertise or not is very dependent on the advertising choice of the other. These choices are an example of: A) a competitive market structure. B) a cartel. C) the Prisoner's Dilemma. D) a cooperative game. Use the following to answer question 20: JetBlue High Low Delta High 700, 100 600, 200 Low 550, 70 500, 80 20. (Table) In this game table representing airfare pricing between Delta and JetBlue, does the Nash equilibrium represent a Prisoner's Dilemma, and why? A) Yes, because there is an outcome better for both firms B) Yes, because one firm is unable to achieve the highest payoff C) No, because both firms are earning the highest payoff possible D) No, because one firm is earning the highest payoff possible Page 7
Use the following to answer question 21: Figure: Labor Supply Curve 21. (Figure: Labor Supply Curve) In the graph, the income effect is shown by segment: A) ab. B) ac. C) bc. D) abc. Use the following to answer question 22: Labor Supply Schedule Wage rate ($/hr.) Hours of work (per week) 10 26 15 32 25 36 35 40 45 41 50 38 Page 8
22. (Table) In the table, what must be TRUE about the labor supply curve for wage rates up to $45 per hour? A) As the wage rate rises, more hours of leisure are consumed. B) The income effect dominates the substitution effect. C) The substitution effect dominates the income effect. D) As the wage rate rises, fewer hours of work take place. 23. Which of the following would be an example of a segmented markets approach to economic discrimination? A) hiring a friend B) firing a person for insubordination C) requiring that a job candidate be a union member D) refusing to hire a qualified job candidate because she has a foreign accent 24. Which theory of economic discrimination states that women tend to have to work in certain low-paying jobs, leading to a wage differential versus men? A) the insider-outsider theory B) Becker's theory of discrimination C) the job crowding hypothesis D) the dual labor market hypothesis 25. Jennifer discovered that she receives a substantially lower salary than Ted who has the same level of education and ability as she does. This is considered illegal under the: A) Civil Rights Act of 1964. B) Equal Pay Act of 1963. C) Executive Order 11246. D) Taft-Hartley Act of 1947. Page 9
Use the following to answer question 26: Figure: Determining Labor and Wages 26. (Figure: Determining Labor and Wages) A competitive firm will hire workers, and a firm with monopoly power will hire workers. A) L 0 ; L c B) L 0 ; L 0 C) L c ; L c D) L c ; L 0 27. The cost of using an additional unit of an input is called the marginal: A) product of labor. B) physical product cost. C) factor cost. D) revenue product. 28. What percentage of families with small children are two-earner households? A) less than 10% B) 10 25% C) 25 50% D) more than 50% Page 10
29. What types of industries have been outsourced from the United States because of international trade? A) industries that require a large amount of labor B) industries that require high-skilled workers C) industries that require cell-phone connectivity D) industries that require a high degree of technology Use the following to answer question 30: Figure: Determining Labor and Wages 2 30. (Figure: Determining Labor and Wages 2) What will the competitive firm in the product market, which is also a monopsonist in the input market (as shown in the graph), elect for the number of workers hired and wages paid? A) L 0 and W 0 B) L C and W c C) L 0 and W 1 D) Lc and W 1 Page 11
Use the following to answer question 31: Figure: Determining Externalities 31. (Figure: Determining Externalities) Total consumer surplus plus producer surplus at point i is: A) $75,000. B) $80,000. C) $100,000. D) $125,000. Page 12
Use the following to answer question 32: Figure: Nail Polish Externalities 32. (Figure: Nail Polish Externalities) In the figure, S p (MPC) represents the private supply curve of a particular type of nail polish, whose manufacture is associated with the release of toxic chemicals into the atmosphere. S S (MSC) includes the costs of that toxicity borne by others. What is the socially optimal price of this nail polish? A) P 1 B) P 2 C) d D) 0 Page 13
Use the following to answer question 33: Figure: Determining Consumer and Producer Surplus 33. (Figure: Determining Consumer and Producer Surplus) Point represents consumer surplus. A) a B) b C) c D) d 34. All of the following are considered private goods, EXCEPT: A) street lights. B) an ice cream cone. C) a car. D) a house. Use the following to answer question 35: Q P 1 P 2 P 3 P 4 1 9 8 7 6 2 7 6 5 4 3 5 4 3 2 4 3 2 1 0 Page 14
35. (Table) In the table, P 1 through P 4 are the prices that four consumers are willing to pay for different quantities of a public good. If the demand curve were created for this public good, the price associated with the third unit would be: A) $5. B) $9. C) $12. D) $14. 36. Which of the following is the BEST example of a common property resource? A) lobsters off the coast of Maine B) a hospital C) an international airport D) an army base 37. Which of the following is NOT both exhaustible and renewable? A) soil B) forests C) oil D) fisheries 38. All of the following are considered negative externalities, EXCEPT: A) cigarette smoke. B) noise from a neighbor's house. C) dogs barking. D) overstock of a flu vaccine. Use the following to answer question 39: Quantity of Pollution Abatement Marginal Cost Marginal Benefits 1,000 150,000 550,000 1,500 200,000 400,000 2,000 300,000 300,000 2,500 450,000 150,000 Page 15
39. (Table) Referring to the table, the optimal quantity for pollution abatement is: A) 1,000. B) 1,500. C) 2,000. D) 3,000. 40. Combating emissions that lead to global warming differs from other types of pollution abatement because the process of combating global warming is: A) long run and cumulative. B) long run and not cumulative. C) short run and cumulative. D) short run and not cumulative. Page 16
ECO 2023 Principles of Microeconomics Fall 2014 Practice Test #3 - Answer Key 1. C 2. A 3. C 4. A 5. B 6. C 7. C 8. B 9. A 10. C 11. B 12. D 13. C 14. C 15. B 16. D 17. D 18. B 19. C 20. D 21. C 22. C 23. C 24. C 25. B 26. D 27. C 28. D 29. A 30. C 31. D 32. B 33. A 34. A 35. D 36. A 37. C 38. D 39. C 40. A Page 17