Practice Exam A

ECON 251 Exam 2 Pink Fall 2010 (Practice Exam #2A for Spring 2011)

Candy bars Quantity 0 1 2 3 4 5

Total Utility 0 10 16 18 19 19

Bags of potato chips Quantity Total Utility 0 0 1 8 2 14 3 18 4 21 5 23

1. Liz consumes two goods, candy bars and potato chips. Her budget is $4 per day. The price of a candy bar is $1.00 and the price of a bag of chips is 50 cents. Her utility is in the table above. What is Liz’s marginal marginal utility from purchasing the 4th candy bar? a. 1 b. 3 c. 19 d. 38 2. For Liz to maximize her utility given her budget, what combination of candy bars and potato chips should she eat? a. 4 candy bars and 0 bags of potato chips b. 3 candy bars and 2 bags of potato chips c. 2 candy bars and 4 bags of potato chips d. 1 candy bar and 5 bags of potato chips 3. Elle has a weekly income of $100. She only consumes manicures and dresses. The price of a manicure is $10 and the price price of a dress is $20. What is the equation for Elle’s budget line? a. Qmanicures = 10 - 2Qdresses b. 100 = 10Qmanicures - 20Qdresses c. Qmanicures = 2Qdresses - 10 d. Qmanicures = 2Qdresses - 100 4. Elle has a weekly income of $100. She only consumes manicures and dresses. The price of a manicure is $10 and the price price of a dress is $20. What is her marginal marginal rate of substitution when she is maximizing her utility? (Assume that the quantity of dresses is measured on the X-axis and the quantity of manicures is measured on the Y-axis.) a. ½ b. 2 Econ 251 Fall 2010 Exam 2 Pink

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c. 10 d. 20

Econ 251 Fall 2010 Exam 2 Pink

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5. If the price of a good increases and, as a result, the quantity demanded of that good increases: a. we say the good is a Giffen good b. the income effect of the price increase is greater than the substitution effect c. the good must be an inferior good d. all of the above

Use the graph above to answer the following question. 6. Based on the graph, the substitution effect of the decrease in the price of juice _______ the quantity of juice from __________. a. Increases; 1 to 3 b. Increases; 3 to 4 c. Increases; 1 to 4 d. Decreases; 4 to 3 7. Gus consumes only pizza and Coke. Suppose both goods are normal goods for Gus. If the price of pizza falls, then Gus’s real income and the income effect will make him to consume pizzas. a. increases; less b. increases; more c. decreases; less d. decreases; more


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8. Mary consumes two goods: good X (measured on the X axis) and good Y (measured on the Y axis). If her marginal rate of substitution is 3 when she is maximizing her utility given her budget, then, at that point, a. The slope of Mary’s budget line is -1/3. b. Mary is willing to give up 3 units of good Y for one unit of good X. c. Mary is willing to give up 3 units of good X for one unit of good Y. d. The price of good Y is three times the price of good X.

9. Which of the following is NOT true about indifference curves? a. An indifference curve shows combinations of goods that generate the same level of utility b. Indifference curves farther from the origin represent a higher level o f utility than those closest to the origin c. Indifference curves can cross d. The slope of an indifference gets flatter as x increases 10. Which of the following is NOT true when a consumer is maximizing utility? a. The consumer is spending all of his or her income. b. The budget line is tangent to the indifference curve. c. Marginal utilities per dollar are equal across all goods. d. MRS = Py /Px 11. You spend all your money on food and clothing. If the marginal utility per dollar you’re spending on clothes is equal to 8, and the marginal utility per dollar you’re spending on food is equal to 10, what should you do to maximize your utility? a. You should buy more clothing and less food. b. You should buy more food and less clothing. c. You should buy more food and more clothing. d. Cannot be determined without information about the p rices of clothing and food. 12. If marginal product is greater than average product we know average product is: a. Increasing b. Decreasing c. Constant d. At its maximum


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Firm Xbus Gbus Vladmir Bus Scott Coach Hub Coach

Sales $200,000 $1,000,000 $1,500,000 $1,800,000 $500,000

13. The table above shows each firm’s annual sales in inter-city bus service industry. What percentage of total industry sales does Scott Coach have? a. 4% b. 10% c. 18% d. 36% 14. What is the Herfindahl-Hirschman Index for the inter-city bus service industry above? a. 1,212 b. 1,865 c. 2,712 d. 3,141 15. Which one of the following is NOT true? a. The four-firm concentration ratio in a perfectly competitive industry is lower than in a monopoly b. The Herfindahl-Hirschman Index(HHI) in a perfectly competitive industry is greater than the HHI in a monopoly industry c. The higher the four-firm concentration ratio is, the less competitive an industry is. d. A monopoly would have a Herfindahl-Hirschman Index equal to 10,000. 16. The table below represents the short run cost for a firm. The total fixed cost is a. $50 b. $60 c. $30 d. $100 output ATC AVC AFC 1 100 40 2 80 30 3 55 4 85 5 88


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17. Based on the same table, the total variable cost for producing 4 units of output is a. $200 b. $240 c. $260 d. $280 18. Based on the same table, what is the average total cost of producing 5 units of output? a. $3 b. $60 c. $88 d. $100 Output (bags per day) 150 200 250 300 350 400 450 500

Marginal cost ($) 1.80 1.70 1.80 2.00 2.40 3.00 4.00 5.50

AVC ($) 1.90 1.85 1.80 1.90 2.10 2.20 3.00 3.20

19. The table the costs of production for each of 100 identical firms in the perfectly competitive market for potato chips. Each has a total fixed cost of $400 a day. If the market price of a bag of potato chips is $3 per bag, what is the marginal revenue a firm earns from selling the 300th bag of potato chips? a. $1.90 b. $2.40 c. $1.70 d. $3 20. According to the same information, what level of potato chip production would maximize profit for an individual firm when the price is $3 per bag? a. b. c. d.

0 300 400 500

21. What level of profit is each firm making when the price is $3 per bag? a. $0 b. Negative $80 c. $240 d. $1,200 Econ 251 Fall 2010 Exam 2 Pink

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22. If the price in the market for potato chips above fell to $1.70 per bag, what level of output would maximize profit for each firm in the market? a. 0 b. 200 c. 300 d. 400 23. Which of the following statements about the difference between the short and long run is NOT true? a. In the long run, all inputs are variables but in the short run at least one input is fixed b. In perfect competition, firms make zero economic profit in the long run, but in the short run firms can make a positive economic profit c. In the short run, firms should shut-down if price is less than average total cost, but in the long run firms should only shut-down if price is less than average variable cost d. In the long run, all costs are variable costs.

$ MC

ATC 2 AVC 1.20 1

8,000

10,000

Output (pencils per day)

24. The figure above shows Flax Pencils' costs of producing pencils, where the total fixed cost is $5,000 per day. What is the average total cost of producing 10,000 pencils? a. $0.50 b. $1.20 c. $1.70 d. $2


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25. Assume the pencil market (shown above) is perfectly competitive. If the market price of a pencil is $2, then Flax will produce pencils per day and will earn a profit of per day in the short-run. a. 8,000; $10,000 b. 8,000; $2,000 c. 10,000; $8,000 d. 10,000; $3,000 26. A competitive market satisfies allocative efficiency because a. the market produces where marginal cost equals average total cost. b. the market produces where marginal benefit equals marginal cost. c. the market produces where marginal cost equals average variable cost. d. the market produces where marginal benefit equals marginal revenue. 27. Which one of the following is NOT true at the long-run equilibrium for that industry? a. In a monopolistically competitive market, each firm has excess capacity. b. Each firm in a perfectly competitive market earns zero profit. c. Each firm in a monopolistically competitive market earns zero profit. d. In a perfectly competitive market, each firm has excess capacity.

28. When firms in a perfectly competitive market earn positive profits in the short run, some firms will the market in the long-run, the market supply ,and the equilibrium price a. Enter; increases; falls b. Exit; decreases; rises c. Enter; decreases; rises d. Exit; increases; rises


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$ 40 MC

30 24 20

10

D

100

150

MR

Q

29. Consider the graph above representing a monopoly. When the monopoly charges a single price for its product and maximizes profit, it will charge for each unit of output and produce _________ units of output. a. $24; 150 b. $20; 100 c. $30; 100 d. $24; 100 30. When the monopolist above maximizes profit, consumer surplus is equal to a. $1,200 b. $1,000 c. $500 d. $600 31. If the monopolist above can practice perfect price discrimination, then it will produce _____ units of output and the consumer surplus is ________. a. 150; $2,250 b. 100; $900 c. 100; $500 d. 150; $0


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Price ($ per bottle) 9 8 7 6 5 4 3

Quantity demanded (thousand bottles) 1 2 3 4 5 6 7

32. The table above gives the demand schedule for water bottled by Spring Healthy Waters. If it is a single price monopoly, what is the marginal revenue from selling the 5 th bottle of water? a. $1 b. $24 c. $25 d. Negative $3 33. At which of the following points on the demand curve for Spring Healthy Waters is demand inelastic and how do you know? a. Demand is inelastic at the point (3, $7) because the marginal revenue from selling the 3rd bottle of water is negative. b. Demand is inelastic at the point (3, $7) because the marginal revenue from selling the 3rd bottle of water is positive. c. Demand is inelastic at the point (6,$4) because the marginal revenue from selling the 6th bottle of water is negative. d. Demand is inelastic at the point (7,$3) because the marginal revenue from selling the 7th bottle of water is positive. 34. Which of the following is NOT true in a monopolistically competitive market? a. There are no barriers to entry or exit in the market b. Goods produced by firms are slightly differentiated c. Demand curves facing each firm are more elastic than the market demand curve would be d. Each firm faces a perfectly elastic demand. 35. A firm in a monopolistically competitive industry is producing 300 units of output at a price of $8 where the ATC is $4, the MC is $8, and the AVC is $2. Based on this information, what should the monopolistically competitive firm do to maximize profit? a. Expand production b. Decrease production c. Shut down d. The firm is already making positive profit, so it should not change the level of output it’s producing.


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36. In the long run, firms in monopolistically competitive industries earn profit that is ________, implying that price is _______ average cost. a. Zero; equal to b. Positive; greater than c. Negative; less than d. Zero; greater than

37. A natural monopoly exists when there are a. Diseconomies of scale b. External diseconomies c. Economies of scale d. External economies 38. Profit is zero for a natural monopoly if the monopoly is regulated to produce where a. Price equals average cost b. Price equals marginal cost c. Price equals marginal revenue d. All of the above generate zero profit for a natural monopoly. 39. In a monopolistically competitive industry, a. There is a small number of firms b. Firms are identical c. Firms can engage in advertising to differentiate their products d. All of the above are true 40. Firms in monopolistic competition produce with “excess capacity”. This means that a. Firms produce more than the efficient level of output b. Firms produce the level of output that minimizes average costs in the long run c. Firms produce less than the efficient scale d. All of the above occur


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Practice Exam A

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