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SECOND EXAM
Econ 2
1. The firm maximizes its profit by producing that quantity of output for which
a. marginal revenue equals total revenue
b. marginal revenue exceeds marginal cost by the greatest amount
c. price is the greatest distance above average total cost
d. marginal cost equals marginal revenue
e. marginal cost equals average cost
Figure: Market for Pizzas
Market for Pizzas
Quantity of Pizzas per Week
Price per Pizza
S
D
2. (Figure: Market for Pizzas) The accompanying figure shows the weekly
market for pizzas at the Precious Pizza Place. If the market is originally
in equilibrium and the government then imposes an excise tax of $0.
per unit of the good sold, the deadweight loss associated with the tax will
be:
a. $40.
b. $240.
c. $105.
d. $90.
e. None of the above
3. Which of the following represents the economists’ definition of Pareto efficiency?
a. The greatest good for the greatest number, maximizing the utility of the society
b. Nobody can be made better off without making others worse off
c. The distribution of utility among individuals reflects equal pay for equal work
d. Each individual has contributed according to his/her ability and each individual receives goods/
services sufficient for his/her needs
e. none of the above
4. Justina’s operates in a perfectly competitive market. Which of the following is its short-run supply
curve?
a. the MC curve above its point of intersection with the ATC curve
b. the market supply curve, since Justina’s is in a perfectly competitive market
c. the MC curve above its point of intersection with the AVC curve
d. its MC curve
e. none of the above
5. Regardless of market structure, all firms
a. consider the individual actions of rival firms
b. maximize profits by setting average revenue equal to marginal revenue
c. produce standardized products
d. have the ability to set the prices for their products
e. face diminishing marginal returns in the short run
6. Of the following products, which is most standardized?
a. pizza
b. concrete
c. automobiles
d. clothing
e. paintings
7. Which of the following firms is the closest to being a perfectly competitive firm?
a. a hot dog vendor in Chicago
b. Microsoft Corporation
c. KIA Motor Company
d. the campus bookstore
e. a public university
8. Firms are assumed to be price takers in a perfectly competitive market because
a. they are not allowed by law to charge any price other than the market price
b. they must accept any price offered by consumers
c. they earn high enough profits at the market price, so they do not want to hurt consumers by
raising their prices
d. each firm is too small to influence the market price
b. the market demand curve is downward sloping
c. the demand curve facing an individual firm is perfectly elastic
d. in the long run, firms can earn economic profits or suffer economic losses
e. in the long run, firms can enter or exit the market
16. In perfect competition, as the long run approaches, economic losses will cause
a. the exit of existing firms, shifting the market supply curve to the left
b. increased demand and higher prices
c. technological innovation to reduce costs
d. price decreases to increase sales
e. none of the above
17. Carla has been working for a law firm and earning an annual salary of $80,000. She decides to
open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for
equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a
secretary/bookkeeper. Carla will cover her start-up expenses by cashing in a $20,000 certificate of
deposit on which she was earning annual interest of $1,000. Assuming that there are no additional
expenses, Carla’s total annual cost of production will equal
a. $55,
b. $221,
c. $91,
d. $136,
e. None of the above
18. Which of the following factors would be the most useful in determining the structure of a market?
a. the number of firms in the market
b. the price of the product sold in the market
c. the size of the physical structure
d. the geographical dispersion of the market
e. the age of the market
Assume Carrie’s utility information appears above. Assume the price of dolls is $5 and the price of pizza is
$5. Carrie’s income is $25.
Quantity of Marginal Utility Quantity of Marginal Utility
Dolls per Doll Frozen Pizzas per Pizza
19. To maximize utility, how many dolls should Carrie buy?
a. 1
b. 2
c. 3
d. 4
e. 5
20. When Carrie maximizes utility from purchasing pizza and dolls, her total utility will be
a. 154
b. 123
c. 124
d. 92
e. none of the above
21. The law of diminishing marginal returns states that as additional units of a variable input are added
to
a. fixed amounts of other inputs, total output will eventually decline
b. varying amounts of other inputs, total output will eventually decline
c. fixed amounts of other inputs, the resulting increases in total output will eventually become
smaller
d. varying amount of other inputs, the resulting increases in total output will eventually become
smaller
e. a declining amount of output, technology will eventually deteriorate
22. Steak is a normal good. If the price of steak increases,
a. the income effect on the demand for steak will reinforce the substitution effect
b. the income effect on the supply of steak will, to some extent, offset the
substitution effect
c. the budget line will rotate outward
d. consumers' purchasing power will increase
e. the budget line will shift outward
23. The law of diminishing returns is evidenced by
a. rising average fixed cost.
b. falling average variable cost.
c. rising marginal cost.
d. marginal cost below average total cost.
e. none of the above.
24. Which of the following formulas is not correct?
a. ATC = AVC + (TFC/Q)
b. TVC = TC/Q
c. TC = TFC + TVC
d. AFC = TFC/Q
e. TVC = AVC Q
25. Figure G-7 shows the total cost for six different levels of output at a particular firm. What is the
average total cost (ATC) of producing four units of output?
a. $
b. $
c. $
c. cash payments for raw materials
d. wages paid to hourly employees
e. foregone rent on office space owned and used by the firm
34. The term utility in economics refers to the
a. satisfaction received by individuals from consuming goods and services
b. real income available to consumers for purchasing goods and services
c. relationship between the demand for a product and the supply of a product
d. slope of the budget line
e. none of the above
35. The law of diminishing marginal utility
a. is valid only after basic necessities (e.g., food, shelter) have been obtained
b. says that marginal utility eventually decreases as more of a good is consumed
c. implies that spending on a good will decrease as more of that good is consumed
d. says that marginal utility decreases as income increases
e. implies that spending on a good will decrease as income increases
36. If Carl asks for a second helping of pancakes, then his
a. second helping must be free
b. marginal utility of the second helping must be rising
c. price per helping is low
d. marginal utility of the second helping must be positive
e. marginal utility of the second helping must be less than the marginal utility of the first helping
37. Mary wants to get more money from her house cleaning business. Why doesn’t Mary try to increase
her revenue by lowering her price below the prevailing market price?
a. she can sell as much as she wishes to at the market price
b. she faces a perfectly inelastic demand curve, so a price change will have no impact
on revenue
c. because her costs will increase
d. if she lowers his price, she will lose all her sales since she faces a horizontal demand curve
e. agreements with other house cleaning companies require her to sell at the market price
38. Indifference curves that are convex from the origin (as they are typically drawn) imply
a. diminishing marginal utility
b. diminishing marginal rate of productivity
c. that as we move down an indifference curve, the marginal rate of substitution increases
d. a. and b.
e. none of the above.
39. Resources are efficiently allocated to the production of goods and services for consumers when
price
a. equals marginal cost.
b. equals marginal revenue.
c. is greater than marginal revenue
d. equals the lowest point on the average variable cost curve.
e. none of the above, since efficiency is a long run, not a short run, concept.
40. External economies may be attributable to
a. Increasing returns to scale.
b. Agglomeration diseconomies
c. Decreases in input prices associated with industry growth.
d. Increasing marginal productivity
e. None of the above
Part B Short Answer
- (5pts.) Jill gets utility from apples and pears. On her $100 per week income she consumes 30 pears, each
costing $2. She spends the rest of her money on boutique apples, costing $4 apiece. When the price of
apples rises to $8, she buys 7 apples.
Illustrate this case using indifference curves and budget constraints.
Fully label your illustration , including all axes and significant points.
- (5 points) Illustrate the case of a typical firm in perfect competition which is making an
economic loss in the short run.
Show the relevant cost and revenue curves.
Show the firm’s supply and demand curves.
Show the amount of profit and the price and quantity choices of the firm.
Show the efficient level of output.
Show how this short run illustration of a typical firm in perfect competition would change as the
market reacts.
Multiple choice answers;
1.d; 2a; 3b; 4c; 5e; 6b; 7a; 8d; 9e; 10b; 11e; 12b; 13c; 14e; 15d; 16a; 17d; 18a; 19c; 20e; 21c; 22a; 23c; 24b; 25e;
26c; 27c; 28d; 29d; 30a; 31b; 32d; 33e; 34a; 35b; 36d; 37a; 38a; 39a; 40c.
