Fianl Examination of ETP Economics
Fall Term
1. If a country allows trade and, for a certain good, the domestic price without trade is higher than the world price,
a. the country will be an exporter of the good.
b. the country will be an importer of the good.
c. the country will be neither an exporter nor an importer of the good.
d. Additional information is needed about demand to determine whether the country will be an exporter of the good, an importer of the good, or neither.
2. Denmark is an importer of computer chips and is also a price-taker in the chip market. The world price of these computer chips is $12. If Denmark imposes a $5 tariff on chips, the result in Denmark would be that the price of computer chips will be
a. $17 and the quantity purchased will fall.
b. $12 and the quantity purchased will fall.
c. $7 and the quantity purchased will increase.
d. $5 and the quantity purchased will increase.
3. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. We can conclude that domestic producers of
a. incense are now better off, consumers of incense are worse off; producers of steel are worse off, consumers of steel are better off; both producers and consumers of rugs are unaffected.
b. incense are now worse off, consumers of incense are better off; producers of steel are better off, consumers of steel are worse off; both producers and consumers of rugs are unaffected.
c. incense are now worse off, consumers of incense are better off; producers of steel are worse off, consumers of steel are better off; both producers and consumers of rugs are unaffected.
d. incense, steel, and rugs are worse off and consumers of incense, steel and rugs are better off. This is because trade always harms producers and helps consumers.
4. In the figure shown, after the quota, imports would be equal to
a. Q4 – Q1.
b. Q3 – Q2.
c. Q3 – Q1.
d. Q2 – Q1.
5. In the figure shown, after the quota, deadweight loss would be equal to
a. E.
b. B.
c. D + F.
d. B + D + E + F.
6. In the figure shown, area E represents
a. a part of consumer surplus.
b. a part of producer surplus.
c. a surplus for import license holders.
d. government revenue.
Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat.
7. Tony’s accountant would most likely figure the total cost of his wheat planting to equal
a. $25.
b. $130.
c. $300.
d. $380.
8. Tony’s economic profit equals
a. $–130.
b. $–80.
c. $130.
d. $170.
Teacher’s Helper is a small company that has a subcontract to produce instructional materials for disabled children in public school districts. The owner rents several small rooms in an office building in the suburbs for $600 a month and has leased computer equipment that costs $480 a month.
Output (Instructional Modules per Month) / Fixed Costs / Variable Costs / Total Cost / Average Fixed Cost / Average Variable Cost / Average Total Cost / Marginal Cost0 / 1,080
1 / 1,080 / 400 / 1,480 / 400
2 / 965 / 450
3 / 1,350 / 2,430
4 / 1,900 / 475
5 / 2,500 / 216
6 / 4,280 / 700
7 / 4,100
8 / 5,400 / 135
9 / 7,300
10 / 10,880 / 980
9. What is the average variable cost for the month if six instructional modules are produced?
a. $180
b. $533.33
c. $700
d. $713.33
10. How many instructional modules are produced when marginal cost is $1,300?
a. 4
b. 5
c. 7
d. 8
11. In view of what we know about the relationship between average total cost and marginal cost, the marginal cost curve for the firm with a falling average total cost
a. must lie entirely above the average total cost curve.
b. must lie entirely below the average total cost curve.
c. must be upward sloping.
d. does not exist.
12. Average total cost is very high when a small amount of output is produced because
a. average variable cost is high.
b. average fixed cost is high.
c. marginal cost is high.
d. All of the above are correct.
13. “Constant returns to scale” refers to a situation in which, for a firm,
a. all of the firm’s short-run average total cost curves are horizontal.
b. short-run average total cost does not change as the quantity of output changes.
c. long-run average total cost does not change as the quantity of output changes.
d. All of the above are correct.
14. In a competitive market that is characterized by free entry and exit,
a. all firms will operate at efficient scale in the short run.
b. all firms will operate at efficient scale in the long run.
c. the price of the product will differ across firms.
d. the number of sellers in the market will steadily decrease over time.
15. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will
a. fall in the short run. All firms will shut down and some of them will exit the industry. Price will then rise.
b. fall in the short run. No firms will shut down, but some of them will exit the industry. Price will then rise.
c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise.
d. not fall in the short run because firms will exit to maintain the price.
16. Firms would be encouraged to enter this market for all prices that exceed
a. P1.
b. P2.
c. P3.
d. None of the above are correct.
17. When market price is P2, a profit-maximizing firm’s losses can be represented by the area
a. (P3 – P2) ´ Q2.
b. (P2 – P1) ´ Q2.
c. At a market price of P2, the firm does not have losses.
d. At a market price of P2 the firm has losses, but the reference points in the figure don’t identify the losses.
18. Competitive firms differ from monopolies in which of the following ways?
(i) Competitive firms do not have to worry about the price effect lowering their total revenue.
(ii) Marginal revenue for a competitive firm equals price, while marginal revenue for a monopoly is less than the price it is able to charge.
(iii) Monopolies must lower their price in order to sell more of their product, while competitive firms do not.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. All of the above are correct.
19. A reduction in a monopolist’s fixed costs would
a. decrease the profit-maximizing price and increase the profit-maximizing quantity produced.
b. increase the profit-maximizing price and decrease the profit-maximizing quantity produced.
c. not effect the profit-maximizing price or quantity.
d. possibly increase, decrease or not effect profit-maximizing price and quantity, depending on the elasticity of demand.
20. Supply curves tell us how much producers are willing to supply at any given price. Hence, monopoly firms have
a. vertical supply curves.
b. steeper supply curves than competitive firms
c. flatter supply curves than competitive firms.
d. no supply curves.
A monopolist faces the following demand curve:
Price Quantity Demanded
$51 1
$47 2
$42 3
$36 4
$29 5
$21 6
$12 7
21. The monopolist has total fixed costs of $60 and has a constant marginal cost of $15. What is the profit-maximizing level of production?
a. 2 units
b. 3 units
c. 4 units
d. 5 units
22. When regulators use a marginal cost pricing strategy to regulate a natural monopoly, the regulated monopoly
a. will experience a loss.
b. will experience a price below average total cost.
c. may rely on a government subsidy to remain in business.
d. All of the above are correct.
Given a firm’s current situations:
Total revenue=$40,000,
Quantity=10,000,
Total cost=$40,000,
Total variable cost=$30,000,
ATC is at minimum.
23. If this firm is a perfectly competitive firm, what would you recommend it to do in the short run?
a. Increase output level
b. Decrease output level
c. Do nothing
d. Increase the price
e. Shut down immediately
24. If this firm is a monopoly firm, what would you recommend it to do in the short run?
a. Increase output level and decrease price
b. Decrease output level and increase price
c. Do nothing
d. Increase output level and increase price
e. Shut down immediately
25. Which of these situations produces the largest profits for oligpolists?
a. They reach a Nash equilibrium.
b. They reach the monopoly outcome.
c. They reach the competitive outcome.
d. They produce a quantity of output that lies between the competitive outcome and the monopoly outcome.
26. As the number of firms in an oligopolistic market grows larger, the price approaches
a. zero.
b. marginal cost.
c. infinity.
d. the monopoly price.
27. Anna, Bill and Charles are competitors in a local market, and each is trying to decide if it is worthwhile to advertise. If all of them advertise, each will earn a profit of $5,000. If none of them advertise, each will earn a profit of $8,000. If only one of them advertises, the one who advertises will earn a profit of $10,000 and the other two will each earn $2,000. If two of them advertise, those two will each earn a profit of $6,000 and the other one will earn $1,000. If all three follow their dominant strategy, Anna will
a. advertise and earn $5000.
b. advertise and earn $6,000.
c. advertise and earn $10,000.
d. not advertise and earn $8,000.
Two discount superstores (Ultimate Saver and SuperDuper Saver) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Growth-related profits of the two discount superstores under two scenarios are reflected in the table below.
SuperDuper SaverIncrease the size of store and parking lot / Do not increase the size of store and parking lot
Ultimate Saver / Increase the size of store and parking lot / SuperDuper Saver = $50
Ultimate Saver = $65 / SuperDuper Saver = $25
Ultimate Saver = $275
Do not increase the size of store and parking lot / SuperDuper Saver = $250
Ultimate Saver = $35 / SuperDuper Saver = $85
Ultimate Saver = $135
28. When this game reaches a Nash equilibrium, the dollar value of growth-related profits will be
a. Ultimate Saver $35 and SuperDuper Saver $250.
b. Ultimate Saver $65 and SuperDuper Saver $50.
c. Ultimate Saver $275 and SuperDuper Saver $25.
d. Ultimate Saver $135 and SuperDuper Saver $85.
29. The owners of SuperDuper Saver and Ultimate Saver meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. They should both agree to
a. increase their store and parking lot sizes.
b. refrain from increasing their store and parking lot sizes.
c. be more competitive in capturing market share.
d. share the context of their conversation with the Federal Trade Commission.
30. A monopolistically competitive firm is currently making a profit. If other firms enter the market, we would expect that the added competition will cause this firm to adjust its
a. output so that it will operate closer to its efficient scale.
b. output so that it will operate further from its efficient scale.
c. output so that it will no longer be at its efficient scale.
d. output, but it might move either closer to or further from its efficient scale.
31. Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a
a. change in the technology that the firm utilizes.
b. shift of its demand curve.
c. shift of its supply curve.
d. None of the above are correct.
32. A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market
a. is characterized by market share maximization.
b. has no barriers to entry.
c. faces a downward-sloping demand curve for its product.
d. faces a horizontal demand curve at the market clearing price.
33. A monopolistically competitive firm faces the following demand curve for its product:
Price ($) / 10 / 9 / 8 / 7 / 6 / 5 / 4 / 3 / 2 / 1Quantity / 2 / 4 / 6 / 8 / 10 / 12 / 14 / 16 / 18 / 20
The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit. The firm will