UNIVERSITY OF HAWAII AT MANOA
DEPARTMENT OF ECONOMICS
ECON 130 (003): PRINCIPLES OF ECONOMICS (MICRO)
Fall 2003
Professor Russo
Final Examination
Thursday, December 18, 2003
Time: 12:00pm – 2:00pm
Room: ARCH 205
80 MULTIPLE CHOICE QUESTIONS
SELECT THE BEST ANSWER
ONLY ONE CORRECT ANSWER PER QUESTION
ANSWER ALL QUESTIONS
NO PENALTY FOR GUESSING
Signature______
Name______
SSN______
1. Which of the following is a positive economic statement?
a)The salaries of teaching assistants should be increased.
b)Cutting income taxes would be good for Hawaii.
c)There are relatively few males in the labor market for nursing professionals.
d)There are too few female CEOs in major U.S. firms.
e)The five-day work week ought to be reduced to four days.
2. If labor in Canada is less productive than labor in the United States in all areas of
production,
a)neither nation can benefit from trade.
b)Canada can benefit from trade but the U.S. cannot.
c)the U.S. can benefit from trade but Canada cannot.
d)Canada will not have a comparative advantage in any good.
e)both nations can benefit by producing and exporting goods in which they have a comparative advantage.
Questions #3-4 refer to the following table.
Labor hours needed to produce one:
Car Airplane
U.S. 40 160
Japan 30 150
3. The U.S. has a comparative advantage in _____ and Japan has a comparative
advantage in _____.
a)airplanes, airplanes
b)cars, airplanes
c)airplanes, cars
d)neither good, both goods
e)both goods, neither good
4. The U.S. has an absolute advantage in _____ and Japan has an absolute advantage in
_____.
a)airplanes, airplanes
b)cars, airplanes
c)airplanes, cars
d)neither good, both goods
e)both goods, neither good
5. If a market is efficient, then
a)the market allocates output to the buyers that the value it the most.
b)the market allocates buyers to the sellers who can produce the good at least cost.
c)the quantity produced in the market maximizes the sum of consumer and producer surplus.
d)all of the above.
e)none of the above.
Questions #6-8 refer to the following system of equations.
QD = 30 - 2P
QS = -12 + 4P
6. The market equilibrium price and quantity combination is
a)$3, 0
b)$3, 24
c)$7, 16
d)$7, 40
e)$7, 42
7. If a per-unit tax of $6 was imposed on the sale of the good. The price paid by
consumers would be:
a)$11
b)$10
c)$9
d)$8
e)$7
8. The economic incidence of the tax is such that firms pay _____ of the tax and
consumers pay _____ of the tax.
a)1/2; ½
b)1/5; 4/5
c)4/5; 1/5
d)1/3; 2/3
e)2/3; 1/3
9. A binding price floor will make it necessary to
a)develop a better marketing plan because there will be surplus.
b)supply more of the product to satisfy the shortage.
c)develop a way to ration the product due to the shortage.
d)both (b) and (c).
e)do none of the above because the market will clear.
10. If a 3 percent decrease in income results in a 6 percent increase in the quantity
demanded of a good. The income elasticity of demand is:
a)-2 and the good is an inferior good.
b)-1/2 and the good is a normal good.
c)2 and the good is an inferior good.
d)1/2 and the good is a normal good.
e)3 and the good is a complement.
11. Consider the following set of demand functions.
Demand 1: QD = 100 - P
Demand 2: QD = 200 - P
Demand 3: QD = 300 - P
At any given price, we can conclude that,
a) demand curve 1 is the most elastic; demand curve 2 is the next most elastic;
demand curve 3 is the lest elastic
b)demand cure 3 is the most elastic; demand curve 2 is the next most elastic;
demand curve 1 is the least elastic
c)demand curve 1 is the most elastic; demand curve 3 is the next most elastic;
demand curve 2 is the least elastic
d)demand curve 3 is the most elastic; demand curve 1 is the next most elastic;
demand curve 2 is the least elastic.
e)demand curves 1, 2, an 3 have the same elasticity
12. If an increase in the price of Starbucks coffee results in an increase in total revenue,
then
a)the demand for Starbucks coffee is elastic
b)the demand for Starbucks coffee is inelastic
c)the demand for Starbucks coffee is unit elastic
d)the demand for Starbucks coffee is perfectly elastic
e)none of the above is true
13. If the demand for umbrellas is perfectly price inelastic and a new company begins to
manufacture umbrellas, the resultant equilibrium quantity will ______and
equilibrium price will ______.
a)increase…..remain constant
b)decrease…..remain constant
c)increase…..decrease
d)remain constant…..increase
e)remain constant…..decrease
14. If a leftward shift of the demand curve leads to a decrease in total revenue, we can
conclude that
a) supply is price elastic over the region
b) supply is perfectly price elastic over the region
c)supply is price inelastic over the region
d)supply is perfectly price inelastic over the region
e)there is not enough information given
15. A negative cross-price elasticity of demand indicates that
a)the two goods are complements
b)the two goods are substitutes
c)the two goods are not related
d)a decrease in the price of one product will increase the demand for the other
e)both (a) and (d)
Question #16 refers to the following panels.
16. Each of the above diagrams demonstrates a consumer’s preferences for goods X and
Y. Which of the following correctly ranks the preferences according to the degree of
complementarity, the first being the most complementary?
a)A, B, C
b)B, C, A
c)B, A, C
d)C, A, B
e)C, B, A
17. The rate at which a consumer is willing to exchange one good for another while maintaining a constant level of satisfaction is called ______and is measured by ______.
a)the marginal rate of substitution; the slope of the budget constraint
b)the marginal rate of substitution; the slope of the indifference curve
c)the relative price ratio; the slope of the budget constraint
d)the relative price ratio; the slope of the indifference curve
e)the indifference curve; the relative price ratio
Question #18 refers to the following diagrams. Each diagram has the same initial budget constraint with a new budget constraint (bold) resulting from changes in prices and/or income.
18. Which of the above diagrams depicts the following changes in prices and income?
The price of good X, the price of good Y and income all increase by an equal
proportion.
a)A
b)B
c)C
d)D
e)None of the above.
19. Giffen's paradox occurs:
a)whenever there is a change in the price of any good.
b)when the income and substitution effects are reinforcing and the substitution effect is stronger than the income effect.
c)when the income and substitution effects are reinforcing and the income effect is stronger than the substitution effect.
d)when the income and substitution effects are offsetting and the income and substitution effects are of equal magnitude.
e)when the income and substitution effects are offsetting and the income effect is stronger than the substitution effect.
Question #20 refers to the following diagram.
20. Consider the diagram above. The consumer’s initial position is point A. After the
decline in the price of good x, the consumer selects consumption bundle B. From the
graphical decomposition of the price effect, we can conclude that:
a)good x is an inferior good over the relevant range and that the income effect only partially offsets the substitution effect. Therefore, the ordinary demand curve for good x is downward sloping.
b)good x is an inferior good over the relevant range and that the income effect completely overwhelms the substitution effect. Therefore, the ordinary demand curve for good x is upward sloping, over the relevant range.
c)good x is a normal good over the relevant range and that the substitution effect and income effect reinforce each other. Therefore, the ordinary demand curve for good x is downward sloping.
d)good x is Giffen good.
e)both answers (a) and (d) are correct.
Question #21 refers to the following figure.
The figure shows a consumer’s budget line in 2002 was AB. As a result of income and price changes, the consumer faces a budget line CD in 2003. Assume that preferences are unchanged from 2002 to 2003.
21. If the consumer’s consumption bundle in 2002 was represented by point E, then in
2003 the consumer:
a)is definitely better off.
b)is definitely worse off.
c)is just as well off, but not any better off.
d)is at least as well off, perhaps better off.
e)could be better off, worse off, or just as well off. The answer is indeterminate.
Question #22 refers to the following figure.
The figure shows a consumer’s budget line in 1998 was AB. As a result of income and price changes, the consumer faces a budget line CD in 1999. Assume that preferences are unchanged from 1998 to 1999.
22. If the consumer’s consumption bundle in 1998 was represented by point E, then in
1999 the consumer:
a)is definitely better off.
b)is definitely worse off.
c)is just as well off, but not any better off.
d)is at least as well off, perhaps better off.
e)could be better off, worse off, or just as well off. The answer is indeterminate.
Questions #23-24 refer to the following diagram.
23. Assume that the consumer depicted has an income of $30 and currently optimizes at
point A. If the consumer’s income doubles and prices remain unchanged, he would now choose to optimize his welfare by consuming
a)10 marshmallows and 10 chocolate chips
b)3 marshmallows and 9 chocolate chips
c)5 marshmallows and 5 chocolate chips
d)9 marshmallows and 6 chocolate chips
e)10 marshmallows and 0 chocolate chips
24. Assume that the consumer depicted has an income of $42 and currently optimizes at
point B. If the price of marshmallows doubles and the consumer’s income remains
unchanged, then he would now choose a bundle where his marginal rate of
substitution is
a)½
b)1
c)2
d)3/2
e)2/3
Questions #25-27 refer to the following diagram.
25. In the figure shown, the domestic price and quantity demanded after the tariff would be
- P2, Q3.
- P1, Q2.
- P2, Q2.
- P1, Q4.
- P1, Q1.
26. In the figure shown, producer surplus after the tariff can be represented by the area
- G
- A + B
- G + C
- C + D + E
- C + D + E + F
27. The deadweight loss due to the tariff can be represented by the area
a. D
- B
- F
- D + F
- D + E + F
Questions #28-29 refer to the following diagram.
28. The above figure shows a production function. All except one of the following
statements concerning the marginal and average product of labor are correct.
Which is not?
a)The marginal product is the slope of the production function.
b)At L3, the average product equals the marginal productivity
c)The average product at L2 equals the average product at L4.
d)The average product initially rises with L and then declines.
e)The marginal product reaches a maximum at L3.
29. The above figure shows a production function. Which of the following statements
about the marginal and average product of labor is correct?
a)The average product falls between C and D.
b)The marginal product rises everywhere between A and C.
c)The average product reaches its minimum at C.
d)The marginal product reaches its maximum beyond C.
e)The average product rises everywhere between B and D.
30. A competitive firm’s short run supply curve is its:
a)marginal cost curve above its average variable cost curve.
b)average variable cost curve above the marginal cost curve.
c)marginal cost curve above its average total cost curve.
d)average variable cost curve above the marginal revenue curve.
e)average total cost curve above the marginal revenue curve.
Question #31 refers to the following graph.
31. The above figure shows a firm’s total cost curve. Which of the following graphs
shows the corresponding marginal and average cost curves?
32. For a profit-maximizing firm in a perfectly competitive industry, marginal revenue
equals:
a)average revenue.
b)marginal cost.
c)price.
d)All of the above.
e)None of the above.
33. For a perfectly competitive market (with all firms facing identical cost structures) in
a long run equilibrium, each firm will be operating at the point where _____.
a)MC = MR
b)P = MC
c)P = ATC
d)MC = ATC
e)All of the above.
Questions #34-35 refer to the following diagram depicting a perfectly competitive firm.
34. The breakeven point for this perfectly competitive firm is when the market price is
equal to
a)MC4
b)MC3
c)MC2
d)MC1
e)A price lower than MC1
35. When the market price is equal to MC3, the firm’s total profit or loss is represented
by which area?
a)(MC3)Q3 - (MC2)Q3; loss
b)(MC3)Q3 - (MC2)Q3; profit
c)(MC3)Q2 - (MC2)Q2; loss
d)(MC3)Q2 - (MC2)Q2; profit
e)(MC3)Q3 - (MC2)Q2; profit
Questions #36-37 refer to the following total cost function:
C = Q2 + 2Q + 500
36. If a firm produces according to the above cost function, what is the firm’s average
total cost?
a)Q + 2 + (500/Q)
b)Q + 2
c)(500/Q)
d)2Q + 2
e)2Q + 2 + (500/Q)
- If a firm produces according to the above cost function, what is the firm’s average variable cost?
a)Q + 2 + (500/Q)
b)Q + 2
c)(500/Q)
d)2Q + 2
e)2Q + 2 + (500/Q)
- A profit-maximizing monopolist finds that at the present level of output, marginal
revenue equals $20 and marginal cost is $12. The price for this output has been
determined from the demand curve. What action should the monopolist take to
increase profits?
a)Continue at the same output and price level.
b)Increase output and reduce price.
c)Increase output and price.
d)Reduce output and price.
e)Reduce output and increase price.
- Let P denote price, MR denote marginal revenue, and MC denote marginal cost. A
monopolist sets _____ to maximize profit. For a monopolist, it is always the case that
_____.
a)MR>MC; MR<P
b)MR=MC; MR=P
c)MR=MC; MR<P
d)MR>MC; MR=P
e)MR<MC; MR>P
40. A firm is termed a natural monopoly when its:
a)average variable costs are initially falling.
b)average fixed costs continue to decline at outputs beyond those sustainable in the market.
c)total costs are declining at outputs beyond those sustainable in the market.
d)average costs of production continue to decline at outputs beyond those sustainable in the market.
e)marginal revenue is less than price.
41. If a regulatory body required a natural monopoly to charge the economically efficient
price, price would equal _____ and the firm would make _____.
a)marginal cost; a loss
b)average cost; zero profit
c)marginal cost; zero profit
d)average cost; a positive profit
e)marginal cost; a positive profit
Questions #42-44 refer to the figure above.
42. If the monopolist depicted above is unregulated, the deadweight loss to society can
be represented by the area
a)ABE.
b)ABC.
c)CDE.
d)BEC.
e)There will be no deadweight loss.
43. If the monopolist is regulated and required to price at marginal cost, then the
deadweight loss to society can be represented by the area
a)ABE.
b)ABC.
c)CDE.
d)BEC.
e)There will be no deadweight loss.
44. If the monopolist is unregulated and practices first degree price discrimination, then
the deadweight loss to society can be represented by the area
a)ABE.
b)ABC.
c)CDE.
d)BEC.
e)There will be no deadweight loss.
45. A profit-maximizing monopolist finds that at the present level of output, marginal
revenue equals $2 and marginal cost is $3. What action should the monopolist take to
increase profits?
a)Continue at the same output and price level.
b)Increase output and reduce price.
c)Increase output and price.
d)Reduce output and price.
e)Reduce output and increase price.
46. When movie theaters charge different prices for adults and children, they are
engaging in _____. (Assume the costs of providing service to adults and children are
the same.) If the adult price is higher than the price for a child, then we may infer
that the demand by adults is _____ than the demand by children.
a)1st degree price discrimination; more elastic
b)1st degree price discrimination; less elastic
c)perfect price degree discrimination; more elastic
d)3rd degree discrimination; less elastic
e)3rd degree discrimination; more elastic
47. An amusement park charges each person a $10 park entry fee then charges an
additional fee of $1 for each ride taken. This type of pricing behavior is most closely
related to
a)Price-gouging.
b)1st degree price discrimination.
c)2nd degree price discrimination.
d)3rd degree price discrimination.
e)4th degree price discrimination.
48. The greatest economic profits could be earned by a monopolist by:
a)using first degree price discrimination.
b)using second degree price discrimination.
c)using third degree price discrimination.
d)charging only one price where MR=MC.
e)charging only one price equal to the average cost.
Use the following table of numbers to answer questions #49-52.
TotalAverageMarginal
QuantityPriceRevenueRevenueRevenue
13535
2643229
329
417
52311
6120
717-1
8-7
99911-13
10880
49. If the monopolist sells 8 units of its product, how much revenue will it receive from
the sale?
a)-56
b)40
c)60
d)112
e)Can't tell from the information provided.
50. If the monopolist wants to maximize its revenue, how many units of its product
should it sell?
a)5
b)6
c)7
d)9
e)10
51. What is the average revenue received from selling 4 units of the monopolist's product?
a. 17
b. 23
- 25
- 26
- 29
52. What is the marginal revenue for the monopolist for the sixth unit sold?
a)5
b)11
c)14
d)17
e)20
Questions #53-56 refer to the following figure.
53. The area 0EFJ represents the firm’s:
a)total cost.
b)total revenue.
c)total variable cost.
d)total fixed cost.
e)profit.
54. The area 0DGJ represents the firm’s:
a)total cost.
b)total revenue.
c)total variable cost.
d)total fixed cost.
e)profit.
55. The firm’s profits:
a)are positive.
b)are negative.
c)are zero.
d)are infinite.
e)cannot be determined.
56. If the firm was required to operate at the efficient level of production, it would
produce where_____ and its profit would be _____.
a)MC=AR; negative.
b)MC=AR; positive.
c)MC=MR; negative.
d)MC=MR; positive.
e)MC=MR; zero.
The figure below depicts the demand, marginal revenue and marginal cost curves of a profit-maximizing monopolist. Use the figure to answer questions #57-58.
57. According to the graph, what is the deadweight loss to society if the industry for this
good goes from all firms being perfectly competitive to one with a monopolist?
a)J + K
b)G + J + K
c)A + B
d)F
e)G
58. The monopolist’s total cost can be represented by the area
a)H + J + K
b)H + J
c)H
d)E + F +H
e)E + F
Questions #59-61 refer to the following inverse demand function.
P= 10 - Q
59. If a monopolist faces the above demand for its product, what is the marginal
revenue?
a)10 - Q
b)10Q - Q2
c)10
d)10 - 2Q
e)-Q
60. Assume that marginal cost is constant and equal to 2. What is the profit maximizing
quantity for the monopolist?
a)2
b)4
c)5
d)10
e)Cannot be determined
61. Still assuming that marginal cost is constant and equal to 2. What is the profit
maximizing price for the monopolist?
a)$5