1.Nation X has a comparative advantage in the production of a product compared to Nation Y when:
A. It imposes a tariff on the import of the product
B. The trading possibilities line shifts outward
C. It is achieving full employment of resources
D. It has the lower domestic opportunity cost of the two countries
2.If the exchange rate changes so that more Mexican pesos are required to buy a dollar, then:
A. the peso has appreciated in value.
B. Americans will buy more Mexican goods and services.
C. more U.S. goods and services will be demanded by the Mexicans.
D. the dollar has depreciated in value.
3.Depreciation of the dollar will:
A. decrease the prices of both U.S. imports and exports.
B. increase the prices of both U.S. imports and exports.
C. decrease the prices of U.S. imports, but increase the prices to foreigners of U.S. exports.
D. increase the prices of U.S. imports, but decrease the prices to foreigners of U.S. exports.
4.Which is not a form of product differentiation for the monopolistically competitive firm?
A. Brand names and trademarks
B. Promotion and packaging
C. Location and accessibility
D. Standard hours and procedures
5.Monopolistic competition is characterized by firms:
A. Producing differentiated products
B. Making economic profits in the long run
C. Producing at optimal productive efficiency
D. Producing where price equals marginal cost
6.An oligopolistic market is consistent with:
A. All firms making economic profits
B. A small number of firms in the industry
C. The existence of barriers to entry
D. All of the above
7.Mutual interdependence means that each firm in oligopolistic industry:
A. Faces a perfectly inelastic demand for its product
B. Considers the reactions of its rivals when it determines its price policy
C. Produces a product identical to the products produced by its rivals
D. Produces a product similar but not identical to the products produced by its rivals
8.A monopoly is most likely to emerge and be sustained when:
A. Output demand is relatively elastic
B. Firms have U-shaped, average-total-cost curves
C. Fixed capital costs are small relative to total costs
D. Economies of scale are large relative to market demand
9.At the profit-maximizing level of output, a monopolist will always operate where:
A. Price is greater than marginal cost
B. Price is greater than average revenue
C. Average total cost equals marginal cost
D. Total revenue is greater than total cost
10.Many people believe that monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing monopoly is determined by:
A. Marginal cost = demand
B. Marginal revenue = demand
C. Average total cost = demand
D. Marginal cost = marginal revenue
11.A profit-maximizing firm should shut down in the short run if the average revenue it receives is less than:
A. Average variable cost
B. Average total cost
C. Average fixed cost
D. Marginal cost
12.When compared with the purely competitive industry with identical costs of production, a monopolist will produce:
A. More output and charge the same price
B. More output and charge a higher price
C. Less output and charge a higher price
D. Less output and charge the same price
13.Which characteristic would best be associated with pure competition?
A. Few sellers
B. Price taker
C. Nonprice competition
D. Product differentiation
14.Which is a feature of a purely competitive market?
A. Price differences between firms producing the same product
B. Significant barriers to entry into the industry
C. The industry's demand curve is perfectly elastic
D. Products are standardized or homogeneous
15.Sam owns a firm that produces tomatoes in a purely competitive market. The firm's demand curve is:
A. A vertical line
B. A horizontal line
C. Upsloping to the right
D. Downsloping to the right
16.Given the table below, what is the short-run profit-maximizing level of output for the firm?
A. 2 units
B. 3 units
C. 4 units
D. 5 units
17.The MR = MC rule applies:
A. to firms in all types of industries.
B. only when the firm is a "price taker."
C. only to monopolies.
D. only to purely competitive firms.
18.A purely competitive firm will be willing to produce at a loss in the short run provided:
A. The loss is no greater than its total variable costs
B. The loss is no greater than its marginal costs
C. The loss is no greater than its total fixed costs
D. Price exceeds marginal costs
19.To the economist, total cost includes:
A. explicit and implicit costs, including a normal profit.
B. neither implicit nor explicit costs.
C. implicit, but not explicit, costs.
D. explicit, but not implicit, costs.
20.
The total variable cost of producing 5 units is:
A. $61.
B. $48.
C. $37.
D. $24.
21.The price elasticity of demand is a measure of the:
A. steepness or slope of a demand curve.
B. absolute changes in quantity demanded and price.
C. responsiveness of quantity demanded to a change in price.
D. sensitivity of the quantity demanded for one good to a change in the price of another good.
22.If a 5 percent fall in the price of a product causes the quantity demanded of the product to increase by 10 percent, the demand is:
A. inelastic.
B. elastic.
C. unit elastic.
D. perfectly elastic.
23.If a business decreased the price of its product from $10 to $9 when demand was price inelastic, then total revenues would:
A. decrease.
B. increase.
C. remain unchanged.
D. be perfectly inelastic.
24.The demand curve shows the relationship between:
A. money income and quantity demanded.
B. price and production costs.
C. price and quantity demanded.
D. consumer tastes and the quantity demanded.
25.Which of the following will not cause the demand for product K to change?
A. a change in the price of close-substitute product J
B. an increase in consumer incomes
C. a change in the price of K
D. a change in consumer tastes
26.Other things equal, which of the following might shift the demand curve for gasoline to the left?
A. the discovery of vast new oil reserves in Montana
B. the development of a low-cost electric automobile
C. an increase in the price of train and air transportation
D. a large decline in the price of automobiles
27.
Refer to the above table. If demand is represented by columns (3) and (2) and supply is represented by columns (3) and (5), equilibrium price and quantity will be:
A. $10 and 60 units.
B. $9 and 50 units.
C. $8 and 60 units.
D. $7 and 50 units.
28.The key economic concept that serves as the basis for the study of economics is:
A. inflation.
B. unemployment.
C. money.
D. scarcity.
29.The production possibilities curve represents which of the following?
A. the amount of goods attainable with variable resources
B. the maximum amount of goods attainable with variable resources
C. maximum combinations of goods attainable with fixed resources
D. the amount of goods attainable if prices decline
30.A reduction in the level of unemployment would have which effect with respect to the nation's production possibilities curve?
A. It would shift the curve to the right.
B. It would shift the curve to the left.
C. It would not shift the curve; it would be represented by moving from a point inside the curve toward the curve.
D. It would not shift the curve; it would be represented by moving from a point on the curve to a point to the right of the curve.
---- Short answer /Essay Questions ----
31.
Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3000 per year. Total annual revenue from pottery sales is $72,000. Calculate the accounting profit and the economic profit for Gomez’s pottery firm (30 points).
Accounting Profit =
Economic Profit =
32.Explain: “The short-run rule for operating or shutting down is P > AVC, operate; P < AVC shut down. The long-run rule for continuing in business or exiting the industry is P ≥ ATC, continue; P < ATC, exit.” (30 points)
33.Chewables Gum Factory produces two types of gum, Spearmint and Wintergreen. Their production procedures illustrate the law of increasing opportunity costs (40 points).
a.Use a production possibilities frontier to illustrate their production options. Be sure to label your drawing.
b.Identify a point that is efficient. Label the point “A”.
c.Identify a point that is inefficient. Label the point “B”.
d.Identify a point that is unattainable. Label the point “C”.
e.Using your diagram, illustrate the opportunity cost of producing more Wintergreen Gum. Label your new production level “D”. Explain your findings.
34.Classify each of the following businesses by their characteristics. For parts a. through d., write Pure Competition, Pure Monopoly, Monopolistic Competition or Oligopoly. Answer the questions in parts e. and f. (50 points)
a.Rick owns a Greek restaurant in a small, rural town. There are four other restaurants in town and five other fast food establishments; however, none of the others sell Greek Cuisine. (6 points)
b.Katie owns her own research firm. Much by accident she stumbled onto a chemical combination that, when inhaled, cures the common cold in a matter of minutes with no adverse side effects. She has a patent on the new drug. (6 points)
c.Ted and Chris own the only two gas stations in a 40 mile radius. When Ted lowers his price, Chris quickly follows because his sales start to fall off very quickly. Ted experiences the same result when Chris decides to lower his price. (6 points)
d.Sophia owns a farm and produces wheat. When she takes her wheat to sell it, she can sell her entire harvest, but she has to accept the going price on the market because there are so many other wheat farmers. (6 points)
e.In which market structure is there the greatest opportunity for economic profits? (6 points)
f.In which market structure(s) are there no economic profits in the long run? (6 points)
g.Let’s assume that Monopolistically Competitive firms in a particular industry are earning short-run economic profits. What will happen? What will the end result be? (7 points)
h.Why won’t a purely competitive firm earn economic profits in the long run? (7 points)