Economics 165 Final Exam
Spring 1996

1. Microeconomics is the branch of economics that focuses on
a. national economic activity
* b. individual decision makers and markets
c. deficit spending
d. inflation and unemployment
2. Allocative efficiency means that
a. opportunity cost has been reduced to zero
* b. resources are allocated to the use which has the highest value to society
c. technological efficiency has not been achieved
d. only relative scarcity exists
3. Operating inside a society's production possibilities frontier is a:
a. drawback of capitalism relative to socialism
* b. symptom of inefficiency or idle resources
c. way to build reserves to stimulate investment and growth
d. result whenever the capital stock depreciates rapidly
4. The law of __________________________ is illustrated by a production possibilities frontier which is bowed out (concave) from the origin
a. constant opportunity costs
b. decreasing opportunity costs
c. comparative advantage
* d. increasing opportunity costs
e. of large numbers
5. A decrease in consumer preferences for a product, other things being equal, means that
a. supply will decrease
* b. market demand will shift to the left
c. market demand will shift to the right
d. quantity demanded will increase
e. quantity demanded is not a function of price
6. An inferior good is a product
a. that is not expensive
b. for which there is no demand
c. for which demand increases as income increases
* d. for which demand falls as income increases
e. that has an upward-sloping demand curve
7. Substitution and income effects of a change in the price of a good may be used to explain the
a. direct relationship between price and quantity purchased
* b. inverse relationship between price and quantity demanded
c. direct relationship between income and demand
d. direct relationship between price and quantity supplied
8. When there is a shortage in a market
* a. consumers are willing to buy more of the good at the current price
b. the equilibrium price is below zero
c. quantity supplied exceeds quantity demanded
d. firms are willing to sell more of the good at the current price
e. market shortages are not possible
9. The price of good X has increased significantly over the last year. Nonetheless, suppliers still sell the same quantity each week as last year. Evidently there has been
a. a decrease in demand and an increase in supply
b. a decrease in demand and a decrease in supply
c. an increase in demand and an increase in supply
* d. an increase in demand and a decrease in supply
10. Price elasticity of demand measures:
a. the change in quantity supplied to the change in price
b. the extent to which a demand curve shifts from the change in an exogenous variable (outside factor)
c. the response between two goods when the price of one good changes
* d. consumer responsiveness to price changes
11. Suppose the price of a certain good fell from $1.00 to $0.50 and, as a result, the quantity demanded increased from 500 to 750 units. Over this range, the demand curve is:
a. elastic
b. perfectly elastic
c. perfectly inelastic
* d. inelastic
12. The price of good X is $1.50 and that of good Y is $1. If a particular consumer's marginal utility for Y is 30, and he is currently maximizing his total utility, then his marginal utility of X must be:
a. 30 units
* b. 45 units
c. 15 units
d. 20 units
e. 60 units
13. Utility refers to
* a. the satisfaction a consumer receives from consuming a good
b. the usefulness of a good
c. a shift in the demand curve for a good
d. a decline in the supply of a good
14. Assume that rapid price inflation in the United States results in an increase in the demand by Americans for goods produced in Germany. As a result,
a. the supply of U.S. dollars increase, hence the mark price of the dollar rises
b. the demand for U.S. dollars falls; hence the mark price of the dollar falls
* c. the supply of U.S. dollars increases; hence the mark price of the dollar falls
d. the demand for U.S. dollars increases; hence the mark price of the dollar rises
15. A quota protects domestic producers by:
a. lowering the domestic price
b. encouraging competition among domestic producers
* c. setting an absolute limit on the amounts of imports
d. placing a prohibitive tax on imports
16. Economic profit is the difference between a firm's total revenue and its
a. implicit costs
b. accounting costs
c. average costs
d. explicit costs
* e. total costs
17. In the short run, if average variable costs equal $6 and average total costs equal $10 and output equals 100, then total fixed costs equal:
a. $16
b. $1,600
c. $4
* d. $400
e. $0.025
18. If marginal cost lies below average total cost, then
a. average fixed cost must be rising
b. average total cost must be rising
* c. average total cost must be falling
d. marginal cost must be falling
e. marginal cost must be rising
19. In the short-run, total cost at zero output is
* a. total fixed cost (TFC)
b. average total cost (ATC)
c. total variable cost (TVC)
d. average variable cost (AVC)
e. marginal cost (MC)
20. Which economic concept explains why a large drug store chain can produce at a lower average cost than Towne Pharmacy, an individually owned drug store?
a. diseconomies of scale
b. constant returns to scale
c. diminishing marginal returns
* d. economies of scale
21. In which of the following markets would one find many sellers, homogeneous products, and easy entry?
a. monopoly
b. monopolistic competition.
c. oligopoly
* d. perfect competition
22. The price charged by a perfectly competitive firm is determined by
* a. market demand and market supply together
b. the firm's costs alone
c. market supply alone
d. market demand alone
e. the firm's demand curve
23. Where marginal cost is rising and exceeds marginal revenue, a profit-maximizing firm would
a. continue producing the same level of output in the short run
b. shut down in the long run
c. produce more
* d. produce less
24. A perfectly competitive firm will shut down in the short run if
a. it incurs an economic loss
b. normal profit is greater than zero
c. total revenue is greater than total costs
d. total costs are greater than total revenue
* e. total revenue is less than total variable costs
25. Assuming no externalities, perfect competition results in efficient resource allocation (allocative efficiency) because price:
a. is greater than average variable cost
* b. is equal to marginal cost
c. equals average total cost
d. is less than marginal cost
e. is equal to long-run average cost
26. When firms leave a perfectly competitive market, other things equal,
a. market demand will increase and market price will rise
b. market demand will decrease and market price will fall
* c. market supply will decrease and market price will rise
d. market supply will decrease and market price will fall
27. The demand curve facing the monopoly firm
* a. is equivalent to the market-demand curve
b. suggests that the monopolist can sell additional units without lowering the price
c. is perfectly inelastic
d. is equal to its total revenue curve
e. all of the above are correct
28. Monopoly is allocatively inefficient because the monopolist produces where:
a. marginal cost is greater than marginal revenue
b. marginal revenue is greater than marginal cost
c. price equals marginal revenue
* d. price is greater than marginal cost
Use the graph below to answer question number 29


29. If this monopolistically competitive firm is a profit maximizer it will realize a short-run:
a. loss of $250
b. loss of $320
c. economic profit of $160
* d. economic profit of $320
e. economic profit of $600
30. When a monopolistically competitive firm is in long-run equilibrium, it is:
a. making a zero economic profit
b. allocatively inefficient since it produces where its price exceeds its marginal cost
c. technologically (productively) inefficient since it produces an output smaller than the one which would minimize its average costs of production
* d. all of the above are true
31. The number of firms in an oligopoly must be
a. large enough that firms cannot closely monitor each other
* b. small enough that firms are interdependent in decision making
c. less than a dozen
d. large enough that firms cannot collude
e. large enough that firms will see no reason to engage in nonprice competition
32. The kinked demand curve model
* a. assumes that oligopolistic rivals will ignore a price increase on the part of a rival and match a price decrease
b. assumes that oligopolistic rivals will match both a price decrease and a price increase
c. requires a collusive oligopoly
d. assumes that oligopoly pricing is flexible upward and downward
e. assumes product differentiation
33. For imperfectly competitive firms (monopoly, monopolistic competition, and oligopoly firms)
a. price is the same as marginal revenue at all output levels
b. price is either less than marginal revenue at particular output levels or the same as marginal revenue
c. price is less than marginal revenue at all or most output levels
* d. price is greater than marginal revenue at all or most output levels
Use the graph below to answer question number 34


34. The cost and revenue curves of a certain firm are shown in the graph to the right. In order to maximize profits or minimize losses the firm should produce:
a. OM units and charge price NM
* b. OE units and charge price OA
c. OE units and charge price OB
d. OL units and charge price LK
e. OE units and charge price OC
35. When economists say that the demand for labor is a derived demand, they mean that the demand for labor is
* a. related to the demand for the product labor is producing
b. dependent upon government expenditures for social goods and services
c. based on the assumption that workers are trying to maximize their money incomes
d. based upon the desire of businessmen to exploit labor by paying below equilibrium wage rates
36. The law of diminishing marginal product (returns) implies
a. a negatively sloped marginal factor cost curve
b. a positively sloped marginal physical product curve
* c. a negatively sloped marginal revenue product curve
d. a positively sloped marginal revenue product curve
Use the graph below to answer question number 37


37. The firm in the graph above will pay its workers a wage of $____.
* a. 0-C
b. 0-D
c. 0-A
d. 0-B
38. Consider a situation in which there is perfect competition in both the input and output markets. The firm will hire that input level which equates
* a. marginal revenue product with marginal factor cost
b. marginal physical product with marginal factor cost
c. marginal factor cost with supply
d. marginal revenue product with demand
e. marginal revenue product with marginal physical product
Use the table below to answer question number 39

Marginal Revenue Product
Q of Labor
Wage Rate
Marginal Factor Cost
-
0
$10
-
$70
1
$20
$20
$65
2
$30
$40
$60
3
$40
$60
$55
4
$50
$80
$50
5
$60
$100

39. Above are a firm's marginal revenue product, wage rate, and marginal factor cost schedules. At the profit-maximizing employment level, the firm will pay a wage of:
* a. $40
b. $60
c. $10
d. $20
40. Assume that a firm can sell all the product it wants at $5 per unit. If the wage is $15 per worker, the firm is employing the profit maximizing quantity of labor if the marginal product of labor is
a. 5
b. 1/3
c. 2
* d. 3
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