ECON 202-503, SPRING 2011 Principles of Microeconomics...

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ECON 202-503, SPRING 2011

Principles of Microeconomics

Final Exam

Wednesday, May 11th

Instructor: Sung Ick Cho

1) Tabitha shares a flea market booth with her sister. Her share of the rent is $150

per month. She is considering moving to her own, larger booth which she will not

have to share with anyone. The larger booth rents for $450 per month. Recently, you

ran into Tabitha in the grocery store and she tells you that she has rented the larger

booth. Tabitha is as rational as any other person. As an economics major, you

rightly conclude that

A) Tabitha did not have a choice; her sister was overcharging her.

B) Tabitha figures that the additional benefit of having her own booth (as opposed to

sharing) is at least $300.

C) Tabitha figures that the benefit of having her own booth (as opposed to sharing) is

at least $450.

D) the cost of having one's own booth outweighs the benefits.

Answer: B

Comment: Recurring

Diff: 2 Page Ref: 7/7

Topic: Optimal Decisions Are Made at the Margin

Objective: LO1: Explain these three key economic ideas: People are rational. People

respond to incentives. Optimal decisions are made at the margin.

AACSB: Analytic Skills

Special Feature: None

2) Competition forces firms to produce and sell products as long as the ________ to

consumers exceeds the ________ of production.

A) marginal benefit; marginal cost

B) marginal benefit; marginal benefit

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C) marginal cost; marginal cost

D) marginal cost; marginal benefit

Answer: A

Comment: Recurring


Topic: Efficiency

Objective: LO2: Discuss how an economy answers these questions: What goods and

services will be produced? How will the goods and services be produced? Who will

receive the goods and services?

AACSB: Reflective Thinking


3) The economic analysis of minimum wage involves both normative and positive

analysis. Consider the following consequences of a minimum wage:

a. The minimum wage law causes unemployment.

b. Unemployment would be lower without a minimum wage law.

c. Minimum wage laws benefit some workers and harm others.

d. The minimum wage should be more than $7.25 per hour.

Which of the consequences above are positive statements and which are normative

statements?

A) a, b, and c are positive statements and d is a normative statement.

B) a and b are positive statements, c and d are normative statement.

C) Only a is a positive statement, b, c and d are normative statements.

D) a and c are positive statements, b and d are normative statements

Answer: A


Topic: Normative and Positive Analysis

Objective: LO3: Understand the role of models in economic analysis.


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Special Feature: Don't Let This Happen to YOU!: Don't Confuse Positive Analysis

with Normative Analysis

Figure F-1

4) Refer to Figure F-1. ________ is (are) inefficient in that not all resources are

being used.

A) Point A

B) Point B

C) Point C

D) Points A and C

Answer: A

Comment: Recurring


Topic: Production Possibilities Frontiers

Skill: Graphing

Objective: LO1: Use a production possibilities frontier to analyze opportunity costs

and trade-offs.



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Figure F-2

Figure F-2 shows the production possibilities frontiers for Costa Rica and Guatemala.

Each country produces two goods, pineapples and coconuts.

5) Refer to Figure F-2. Which country has a comparative advantage in the

production of coconuts?

A) Guatemala

B) They have equal productive abilities.

C) Costa Rica

D) neither country

Answer: A

Comment: Recurring

Diff: 2 Page Ref: 46-47/46-47

Topic: Comparative Advantage

Skill: Graphing

Objective: LO2: Understand comparative advantage and explain how it is the basis

for trade.



6) Refer to Figure F-2. If the two countries have the same amount of resources

and the same technological knowledge, which country has an absolute advantage in

the production of both pineapples and coconuts?

A) Guatemala

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B) neither country

C) Costa Rica

D) cannot be determined

Answer: B

Comment: Recurring

Diff: 2 Page Ref: 46-47/46-47

Topic: Absolute Advantage

Skill: Graphing

Objective: LO2: Understand comparative advantage and explain how it is the basis

for trade.



Figure F-3

7) Refer to Figure F-3. An increase in the price of a complement would be

represented by a movement from

A) A to B.

B) B to A.

C) D1 to D2.

D) D2 to D1.

Answer: D

Comment: Recurring

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Topic: Price of Related Goods

Skill: Graphing

Objective: LO1: Discuss the variables that influence demand.



8) The supply curve for umbrellas

A) shows the supply of umbrellas consumers are willing and able to buy at any given

price.

B) is downward sloping.

C) shows the relationship between the quantity of umbrellas firms are willing and

able to supply and the quantity of umbrellas consumers are willing and able to

purchase.

D) shows the relationship between the price of umbrellas and the quantity of

umbrellas supplied.

Answer: D

Comment: Recurring


Topic: Supply Curves

Objective: LO1: Discuss the variables that influence demand.



Figure F-4

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9) Refer to Figure F-4. The figure above represents the market for coffee

grinders. Assume that the market price is $21. Which of the following statement is

true?

A) There is a shortage that will cause the price to increase; quantity demanded will

then decrease and quantity supplied will increase until the price equals $25.

B) There is a shortage that will cause the price to increase; quantity supplied will

then decrease and quantity demanded will increase until the price equals $25.

C) There will be a shortage that will cause the price to increase; demand will then

decrease and supply will increase until the price equals $25.

D) There is a shortage that will cause the price to decrease; quantity demanded will

then increase and quantity supplied will decrease until the price equals $25.

Answer: A

Comment: Recurring


Topic: Shortage

Skill: Graphing

Objective: LO3: Use a graph to illustrate market equilibrium.



Figure F-5

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Figure F-5 shows the market for granola. The market is initially in equilibrium at a

price of P1 and a quantity of Q1. Now suppose producers decide to cut output to Q2

in order to raise the price to P2.

10) Refer to Figure F-5. What area represents consumer surplus at P2?

A) A

B) A + B

C) B + C

D) A + B + D + F

Answer: A

Comment: Recurring

Diff: 1 Page Ref: 103-104/103-104

Topic: Economic Surplus

Skill: Graphing

Objective: LO2: Understand the concept of economic efficiency.



Figure F-6

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Figure F-6 shows the market for cigarettes. The government plans to impose a unit

tax in this market.

11) Refer to Figure F-6. How much of the tax is paid by buyers?

A) $8

B) $5

C) $4

D) $3

Answer: D

Comment: Recurring


Topic: Tax Incidence

Skill: Graphing

Objective: LO4: Analyze the economic impact of taxes.



12) Refer to Figure F-6. As a result of the tax, is there a loss in producer surplus?

A) Yes, because producers are not selling as many units now.

B) No, because the consumer pays the tax.

C) No, because the market reaches a new equilibrium

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D) No, because producers are able to raise the price to cover their tax burden.

Answer: A

Comment: Recurring


Topic: Tax Incidence

Skill: Graphing

Objective: LO4: Analyze the economic impact of taxes.



13) To calculate the price elasticity of demand we divide

A) the percentage change in quantity demanded by the percentage change in price.

B) the percentage change in price by the percentage change in quantity demanded.

C) rise by the run.

D) the average price by the average quantity demanded.

Answer: A

Comment: Recurring

Diff: 1 Page Ref: 168-169/168-169

Topic: Price Elasticity of Demand

Objective: LO1: Define price elasticity of demand and understand how to measure

it.



Figure F-7

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14) Refer to Figure F-7. The section of the demand curve labeled "A" represents

A) the inelastic section of the demand curve.

B) the unit-elastic section of the demand curve.

C) the elastic section of the demand curve.

D) the perfectly elastic section of the demand curve.

Answer: C

Comment: Recurring


Topic: Elastic and Inelastic Demand

Skill: Graphing

Objective: LO1: Define price elasticity of demand and understand how to measure

it.



15) Suppose when Nablom's Bakery raised the price of its breads by 10 percent, the

quantity demanded fell by 15 percent. What was the effect on sales revenue?

A) Sales revenue increased.

B) Sales revenue remained unchanged.

C) Sales revenue decreased.

D) It cannot be determined without information on prices.

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Answer: C

Comment: Recurring

Diff: 2 Page Ref: 177-178/177-178

Topic: Price Elasticity of Demand and Total Revenue

Objective: LO3: Understand the relationship between the price elasticity of demand

and total revenue.



Table F-1

Price Quantity

Demanded

Quantity

Supplied

$6 5,000 2,000

7 4,000 2,000

8 3,000 2,000

9 2,000 2,000

10 1,000 2,000

The town of Bloomfield is well known for its basketball team. The price of basketball

game tickets is determined by market forces. Table F-1 above shows the demand and

supply schedules for basketball games tickets.

16) Refer to Table F-1. What is the most distinctive feature of the supply curve?

A) The supply curve is perfectly inelastic.

B) The supply curve is horizontal.

C) The supply curve is upward sloping.

D) The supply curve is perfectly elastic.

Answer: A

Comment: Recurring

Diff: 2 Page Ref: 185-186/185-186

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Topic: Price Elasticity of Supply

Objective: LO6: Define price elasticity of supply and understand its main

determinants and how it is measured.



Table F-2

Steak & Cheese Steak & Cheese Grilled Chicken Grilled Chicken

Quantity MU MU/P MU MU/P

1 40 10 30 15

2 32 8 24 12

3 20 5 16 8

4 12 3 12 6

5 6 1.5 8 4

6 2 0.5 4 2

17) Refer to Table F-2. For steak and cheese and grilled chicken sandwiches, the

table contains the values of the marginal utility (MU) and marginal utility per dollar

(MU/P) for Mabel Jarvis. Mabel has $14 to spend on steak and cheese and grilled

chicken sandwiches. Which of the following statements is false?

A) The price of steak and cheese sandwiches is $4. The price of grilled chicken

sandwiches is $2.

B) If Mabel maximizes her utility she will buy three grilled chicken sandwiches.

C) If Mable maximizes her utility she will buy two steak and cheese sandwiches.

D) We do not have enough information to determine how many sandwiches Mabel

will buy to maximize her utility.

Answer: D

Comment: Recurring

Diff: 2 Page Ref: 281-284/281-284

Topic: Marginal Utility

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Objective: LO1: Define utility and explain how consumers choose goods and

services to maximize their utility.



Table F-3

Italian Sub Italian Sub Taco Taco Taco

Quantity MU MU/$4 MU MU/$2 MU/$1

1 40 10 30 15 30

2 32 8 24 12 24

3 20 5 16 8 16

4 12 3 12 6 12

5 6 1.5 8 4 8

6 2 0.5 4 2 4

18) Refer to Table F-3, which lists the values of Harry Taber's marginal utility and

marginal utility per dollar for Italian submarine (sub) sandwiches and tacos. Assume

that the price of the sub sandwiches is $4 and the price of tacos is $2. When Harry's

income is $14 he buys two Italian sub sandwiches and three tacos. The last column

lists the values of the marginal utility per dollar for tacos when the price of tacos

decreases to $1. Complete this statement: As a result of the change in price

A) Harry's purchasing power has increased. He will reduce his consumption of tacos

so he can buy one more sub. This is an example of the substitution effect of a price

change.

B) Harry's purchasing power has increased. If tacos are a normal good for Harry he

will buy fewer tacos. This is an example of the income effect of a price change.

C) Harry's purchasing power has increased. If tacos are a normal good for Harry he

will buy more tacos. This is an example of the income effect of a price change.

D) Harry's purchasing power has increased. Harry buys fewer tacos. This is an

example of the substitution effect of a price change

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Answer: C

Comment: Recurring

Diff: 3 Page Ref: 287-288/287-288

Topic: Income and Substitution Effects





19) Refer to Table F-3, which lists the values of Harry Taber's marginal utility and

marginal utility per dollar for Italian submarine (sub) sandwiches and tacos. Assume

that the price of the sub sandwiches is $4 and the price of tacos is $2. When Harry's

income is $14 he buys two Italian sub sandwiches and three tacos. The last column

lists the values of the marginal utility per dollar for tacos when the price of tacos

decreases to $1. Complete this statement: As a result of the change in price, the

marginal utility of each taco Harry consumes increases and

A) the substitution effect of the price change will cause Harry to buy more tacos and

fewer subs.

B) the substitution effect of the price change will cause Harry to buy more tacos if

they are a normal good, and fewer tacos if they are an inferior good.

C) the substitution effect will cause Harry to buy another sub because his purchasing

power has increased.

D) the substitution effect will cause Harry to buy fewer tacos.

Answer: A

Comment: Recurring

Diff: 3 Page Ref: 287-288/287-288

Topic: Income and Substitution Effects





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20) Gertrude Stork's Chocolate Shoppe normally employs 4 workers. When the

Chocolate Shoppe hired a 5th worker the Shoppe's total output decreased.

Therefore,

A) the marginal product of the 5th worker is negative.

B) the total output of Gertrude Stork's Chocolate Shoppe is negative.

C) the average product of the 5th worker is negative.

D) the 5th worker should be hired only if he is willing to accept a wage lower than the

wage paid to the other 4 workers.

Answer: A

Comment: Recurring


Topic: Marginal Product of Labor

Objective: LO3: Understand the relationship between the marginal product of labor

and the average product of labor.



Figure F-8

Fancy Footwear manufactures shoes. Figure F-8 shows Fancy Footwear's marginal

product of labor and average product of labor curves in the short run.

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21) Refer to Figure F-8. Which of the following statements correctly describes the

curves in the figure?

A) The marginal product of labor curve is represented by curve A and the average

product of labor curve is represented by curve B.

B) The marginal product of labor curve is represented by curve B and the average

product of labor curve is represented by curve A.

C) Curve A could represent either the average product curve or the marginal product

and curve. Curve B represents the total product curve.

D) Curve B could represent either the average product curve or the marginal product

curve. Curve A represents the total product curve.

Answer: B

Comment: Recurring

Diff: 1 Page Ref: 333-334/333-334

Topic: Average Product of Labor

Skill: Graphing

Objective: LO3: Understand the relationship between the marginal product of labor

and the average product of labor.



Figure F-9

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22) Refer to Figure F-9. The figure above illustrates the long-run average cost

curve for a firm that produces picture frames. The graph in Figure 10-7 also includes

short-run average cost curves for three firm sizes: ATCa, ATCb and ATCc. The

minimum efficient scale of output is reached at what rate of output?

A) 10,000 workers

B) 5,000 picture frames

C) 20,000 picture frames

D) 10,000 picture frames

Answer: D

Comment: Recurring

Diff: 1 Page Ref: 340-341/340-341

Topic: Minimum Efficient Scale

Skill: Graphing

Objective: LO6: Understand how firms use the long-run average cost curve in their

planning.



23) Refer to Figure F-9. The figure above illustrates the long-run average cost

curve for a firm that produces picture frames. The graph in Figure 10-7 also includes

short-run average cost curves for three firm sizes: ATCa, ATCb and ATCc. For output

rates greater than 20,000 picture frames per month

A) the firm will not make a profit because the average cost of production will be too

high.

B) the firm will experience diseconomies of scale.

C) the firm will experience diminishing returns.

D) the short-run average total cost will equal the long-run average total cost of

production.

Answer: B

Comment: Recurring

Diff: 1 Page Ref: 340-341/340-341

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Topic: Long-Run Average Cost

Skill: Graphing

Objective: LO6: Understand how firms use the long-run average cost curve in their

planning.



24) If a perfectly competitive firm raises the price it charges to consumers, which of

the following is the most likely outcome?

A) The firm's revenue will not change because some consumers will refuse to pay the

higher price.

B) The firm will not sell any output.

C) The firm's total revenue will increase only if the demand for its product is inelastic.

D) The firm's total revenue will increase only if the demand for its product is elastic.

Answer: B

Comment: Recurring


Topic: Characteristics of Perfectly Competitive Firms

Objective: LO1: Explain what a perfectly competitive market is and why a perfect

competitor faces a horizontal demand curve.



25) For a perfectly competitive firm, average revenue is equal to

A) marginal cost.

B) the market price.

C) total revenue.

D) average fixed cost.

Answer: B

Comment: Recurring

Diff: 1 Page Ref: 371-372/371-372

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Topic: Average Revenue and Marginal Revenue

Objective: LO2: Explain how a firm maximizes profits in a perfectly competitive

market.



Table F-4

Apples

(pounds)

Market Price

per Pound

Total

Revenue

(TR)

Average

Revenue

(AR)

Marginal

Revenue

(MR)

0 $3 $0 ----- -----

100

150

200

250

300

350

400

26) Refer to Table F-4. Table F-4 lists the various pounds (lbs.) of apples that

Margie Stattler can sell. Assume that Margie operates in a perfectly competitive

market. Use Table F-4 to answer the following question. What is Margie's total

revenue if she sells 250 pounds of apples?

A) $250

B) $500

C) $750

D) There is not enough information in the table to determine Margie's total revenue.

Answer: C

Comment: Recurring


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Topic: Total Revenue


market.



Figure F-10

27) Refer to Figure F-10. If the firm is producing 500 units,

A) it is making a profit.

B) it is making a loss.

C) it should maintain its output to maximize profit.

D) it should increase its output to maximize profit.

Answer: C

Comment: Recurring

Diff: 1 Page Ref: 372-374/372-374

Topic: Profit-Maximizing Level of Output

Skill: Graphing


market.

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Figure F-11

28) Refer to Figure F-11. Which panel best represents the perfectly competitive

organic produce market in which some firms are experiencing short-run losses, and

consumers are displaying an increased preference for organic produce?

A) Panel A

B) Panel B

C) Panel C

D) Panel D

Answer: D

Comment: Recurring

Diff: 3 Page Ref: 382-386/382-386

Topic: Long-Run Equilibrium

Skill: Graphing

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Objective: LO5: Explain how entry and exit ensure that perfectly competitive firms

earn zero economic profit in the long run.



Figure F-12

29) Refer to Figure F-12. What is the marginal revenue of the sixth unit of output?

A) $4

B) $5

C) $9

D) $54

Answer: A

Comment: Recurring

Diff: 2 Page Ref: 402-404/402-404

Topic: Demand and Marginal Revenue

Skill: Graphing

Objective: LO1: Explain why a monopolistically competitive firm has downward-

sloping demand and marginal revenue curves.



Table F-5

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Quantity

Sold Price

Total

Revenue

Marginal

Revenue

Total

Cost

Marginal

Cost Profit

0 $10 $0 ----- $2 ----- -$2

1 9 9 8

2 8 16 13

3 7 21 17

4 6 24 20

5 5 25 22

6 4 24 26

30) Refer to Table F-5. The table above estimated revenues and costs (per week)

for plastic vials (100 vials per box) for the Victoria Biological Supplies Company.

Victoria sells plastic vials to university and private research laboratories. Victoria's

profit-maximizing quantity sold (Q) and price (P) are:

A) Q = 3; P = $7.

B) Q = 4; P = $6.

C) Q = 5; P = $5.

D) Q = 6; P = $4.

Answer: B

Comment: Recurring

Diff: 2 Page Ref: 404-406/404-406

Topic: Short-Run Profit Maximization

Objective: LO2: Explain how a monopolistically competitive firm maximizes profits

in the short run.



Figure F-13

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Figure F-13 shows short-run cost and demand curves for a monopolistically

competitive firm in the footwear market.

31) Refer to Figure F-13. Which of the following statements describes the best

course of action for the firm depicted in the diagram?

A) The firm should exit the industry because its price is less than its average total

cost.

B) The firm should minimize its losses by producing Qy units and charging a price of

P0.

C) The firm should minimize its losses by producing Qy units and charging a price of

P2.

D) The firm should minimize its losses by producing Qy units and charging a price of

P1.

Answer: D

Comment: Recurring

Diff: 2 Page Ref: 404-406/404-406


Skill: Graphing


in the short run.



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32) Refer to Figure F-13. Which of the following is the area that represents the

profit or loss experienced by the firm?

A) A loss represented by the rectangle P2uvP1.

B) A loss represented by the rectangle P2uwP0.

C) A loss represented by the rectangle P1vwP0.

D) An accounting profit equal to P1vwP0.

Answer: A

Comment: Recurring

Diff: 2 Page Ref: 404-406/404-406


Skill: Graphing


in the short run.



33) Economists use game theory to analyze oligopolies because

A) real markets are too complicated to analyze without using games.

B) it is more enjoyable for economists and students to learn by playing games.

C) game theory helps us to understand why interactions among firms are crucial in

determining profitable business strategies.

D) game theory is useful in understanding the actions of firms that are price takers.

Answer: C

Comment: Recurring

Diff: 1 Page Ref: 435-436/435-436

Topic: Game Theory

Objective: LO2: Use game theory to analyze the strategies of oligopolistic firms.



Table F-6

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Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale

town of Montecito. Each firm must decide on whether to increase its advertising

spending to compete for customers. If one firm increases its advertising budget but

the other does not, then the firm with the higher advertising budget will increase its

profit. Table F-6 shows the payoff matrix for this advertising game.

34) Refer to Table F-6. Does Alistair have a dominant strategy and if so, what is it?

A) Yes, Alistair should increase its advertising budget.

B) Yes, Alistair should keep its advertising budget as is.

C) There are two dominant strategies: if Baine increases its advertising budget, then

Alistair's best bet is to keep its budget the same but if Baine does not increase its

spending then Alistair should raise its advertising budget

D) No, there is no dominant strategy.

Answer: A

Diff: 2 Page Ref: 437-438/437-438

Topic: Business Strategy



Special Feature: Solved Problem: Is Advertising a Prisoner's Dilemma for Coca-

Cola and Pepsi?

35) Refer to Table F-6. What is the Nash equilibrium in this game?

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A) There is no Nash equilibrium.

B) Baine increases its advertising budget, but Alistair does not.

C) Alistair increases its advertising budget, but Baine does not.

D) Both Alistair and Baine increase their advertising budgets.

Answer: D

Diff: 2 Page Ref: 437-438/437-438

Topic: Nash Equilibrium



Special Feature: Solved Problem: Is Advertising a Prisoner's Dilemma for Coca-

Cola and Pepsi?

Figure F-14

A few years ago Netflix (N) pioneered an online DVD rental service. Blockbuster (B),

a brick and mortar DVD/video rental company, waited until Netflix had been in

business for over a year before deciding whether to establish its own online rental

service. At this point, Netflix had to decide whether or not to lower its subscription

price in order to deter Blockbuster's entry into the market. Figure F-14 shows the

decision tree for the Netflix-Blockbuster entry game.

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36) Refer to Figure F-14. Does it make sense for Netflix to lower its price in order

to deter Blockbuster's entry into the online DVD rental market?

A) Yes, because Netflix stands to make a profit of $7 million by lowering its price and

keeping Blockbuster out of the market.

B) No, because Netflix will make a higher profit by keeping its subscription price

unchanged, whether Blockbuster enters the market or not.

C) Yes, because it is always profitable to remain a monopoly.

D) No, because Blockbuster will enter the market regardless of Netflix's decision

about its subscription price.

Answer: B

Comment: Recurring

Diff: 3 Page Ref: 443-444/443-444

Topic: Sequential Games and Business Strategy

Objective: LO3: Use sequential games to analyze business strategies.



37) Some economists argue that Microsoft become a monopoly in the market for

computer software by developing MS-DOS, an operating system used for the first

IBM personal computers. The more people who used MS-DOS-based programs, the

greater the usefulness of a using a computer with an MS-DOS operating system.

The explanation for Microsoft's monopoly is

A) the development of new technology that other firms could not copy.

B) control of a key resource which, in this case, is the MS-DOS operating system.

C) network externalities.

D) patents Microsoft obtained when it developed the MS-DOS operating system.

Answer: C

Comment: Recurring

Diff: 2 Page Ref: 466-467/466-467

Topic: Network Externalities

30

Objective: LO2: Explain the four main reasons monopolies arise.



Figure F-15

Figure F-15 shows the cost and demand curves for a monopolist.

38) Refer to Figure F-15. The profit-maximizing output and price for the

monopolist are

A) output = 62; price = $24.

B) output = 62; price = $18.

C) output = 83; price = $22.

D) output = 104; price = $20.80.

Answer: A

Comment: Recurring


Topic: Profit Maximization

Skill: Graphing

Objective: LO3: Explain how a monopoly chooses price and output.

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39) Refer to Figure F-15. The monopolist earns a profit of

A) $0.

B) $170.

C) $248.

D) $372.

Answer: C

Comment: Recurring


Topic: Profit Maximization

Skill: Graphing

Objective: LO3: Explain how a monopoly chooses price and output.



40) Baxter International, a manufacturer of hospital supplies, acquired American

Hospital Supply, a distributor of hospital supplies. This is an example of

A) a conglomerate merger.

B) a horizontal merger.

C) a vertical merger.

D) a two-dimensional merger.

Answer: C

Comment: Recurring

Diff: 1 Page Ref: 477-479/477-479

Topic: Mergers

Objective: LO5: Discuss government policies toward monopoly.



ECON 202-503, SPRING 2011 Principles of Microeconomics...

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