PracticeExam2

Prof.JohnM.Abowd
Choosethebestpossibleanswer.Thereare50questionsofthesamestyleanddifficultyasthe
actualprelim.Theactualprelimis25questionsandyouwillhave90minutes.Theanswersheetis
linkedattheend.
CommonAbreviations:
ATC=averagetotalcost
AVC=averagevariablecost
D=demand
MC=marginalcost
MR=marginalrevenue
P=price
Q=quantity
S=supply
TC=totalcost
TR=totalrevenue
1.Ifthemarginalproductoflaborisdecreasingataparticularlevelofproduction,then,
A.marginalcostisincreasingatthatlevelofproduction.
B.averagetotalcostisincreasingatthatlevelofproduction.
C.marginalcostisdecreasingatthatlevelofproduction.
D.totalfixedcostsaredecreasingatthatlevelofproduction.
E.averagevariablecostisincreasingatthatlevelofproduction.
2.Ifeconomicprofitsarenegative,inthelongrun
A.somenewfirmsenterthemarket.
B.someexistingfirmsexitthemarket.
C.somefirmsremaininthemarketaslongasaccountingprofitsarepositive.
D.accountingprofitsmustbezero.
E.noneoftheabove.

3.InthefigureabovethereisachoiceamongthreetechnologiesA,B,andC,whatistheminimum
efficientscale?
A.6
B.8
C.11
D.7to9
E.8to12
4.Maiah,acomputerhacker,uses$100,000ofherownmoneytostartabusiness.Shecouldhave
purchasedgovernmentbondspaying10%simpleannualinterestwiththismoney.Ifannual
accountingprofitsarelessthan_______,thenweknowforcertainthatthebusinessmadean
economicloss.
A.$100,000
B.$10,000
C.$15,000
D.$20,000
E.Can'ttellbecausewedon'tknowthevalueofthehacker'stime.

5.Forthemonthlyproductionprocessshowninthetableabove,ifthefirmisacompetitive
supplierinitsmarketandthemarketpriceis$0.28,thebestproductionlevelforthefirmis
A.0
B.8,500
C.9,500
D.10,500
E.12,500
FirmCostData
Units
Average
Produced TotalCost

MarketData
Marginal
Cost

Price

Quantity
Demanded

$100

$100

1,000

$200

800

$250

10

$200

$200

20

$250

$400

$400

550

25

$290

$500

$500

250

40

$425

$800

$800

6.Ifthelongruncoststructureofatypicalfirmandthemarketdemandcurvearegiveninthe
tableabove,whatisthelongrunnumberoffirmsintheindustryandthelevelofprofitsforeach
firm?
A.Firms=80,Profits=200.
B.Firms=200,Profits=10.
C.Firms=100,Profits=0.
D.Firms=80,Profits=0.
E.Firms=27,Profits=20.

7.Inthelongrun,aperfectlycompetitivefirmmakeszeroeconomicprofits.Thisimpliesthat,in
thelongrun,
A.averagerevenueequalsaveragetotalcost.
B.marginalrevenueequalsmarginalcost.
C.averagerevenueequalsmarginalcost.
D.averagetotalcostequalsmarginalcost.
E.alloftheabove.
8.Supposeafirmproducesagoodusinglaborandcapitalasitsonlyinputs.Theproduction
technologyexhibitsincreasingreturnstoscaleif
A.anincreaseinlaborof10%increasesoutputbymorethan10%.
B.anincreaseincapitalandlaborof10%increasesoutputby10%.
C.anincreaseincapitalof10%increasesoutputbylessthan10%.
D.anincreaseincapitalandlaborof10%increasesoutputbymorethan10%.
E.noneoftheabove.
9.Anaturalmonopolyoccursinmarketsforgoodsthat
A.haveaverylargemarketdemand.
B.haveaverysmallmarketdemand.
C.requireaverylargeinitialinvestmentsafterwhichthemarginalcostisverylow.
D.haveamarketdemandthatissmallcomparedtotheminimumefficientscale.
E.haveamarketdemandthatislargecomparedtotheminimumefficientscale.

10.Highsticker,acompetitivefirm,produceshockeystickswiththevariablecoststructuregiven
inthetableaboveandwithfixedcostsof$100perday.Ifthemarketpriceisequalto$25/hockey
stick,whataretheoptimalquantityofhockeysticksproducedperdayandthetotaldailyprofitsof
thefirm?
A.Hockeysticks=20,Profits=0.
B.Hockeysticks=10,Profits=50.
C.Hockeysticks=30,Profits=50.
D.Hockeysticks=40,Profits=100.
E.Hockeysticks=20,Profits=100.
11.Acompetitivefirm'ssupplycurveis
A.itsmarginalrevenuecurve.

B.itstotalcostcurve.
C.outputprice.
D.itsmarginalcostcurveabovetheminimumaveragevariablecost.
E.itstotalrevenuecurve.
12.Whatwillhappentotheaverageof40,65,and70whenthenumber50isincludedinthe
average?
A.Theaverageofthefournumberswilllowerbecause50islessthantheaverageofthethreenumbers.
B.Theaveragewillgoupbecause50isgreaterthantheoriginalaverage.
C.Theaveragewillremainconstantbecause50isequaltotheaverage.
D.Thereisnotenoughinformationtoanswerthequestion.
13.Apermanentdecreaseinmarketdemandinacompetitiveindustry
A.resultsinashortrunriseinpricefollowedbyentryoffirmsandadecreaseinprice.
B.neverresultsinexitofexistingfirms.
C.resultsinfewerfirmsonlyifaveragetotalcostisincreasing.
D.impliesentryoffirmsonlyifallfirmsfacethesametechnology.
E.resultsinashortrunfallinpricefollowedbyexitofsomefirmsandasubsequentincreaseinprice.
14.Thebreakevenquantityforafirmisthatquantityofproductionforwhich
A.themarginalcostisexactlyequaltothemarketprice.
B.theaveragefixedcostisexactlyequaltothemarketprice.
C.theaveragetotalcostisexactlyequaltothemarketprice.
D.thefirmmaximizesitsprofit.
E.thefirmismakingonlyeconomicprofits.

15.Inthefigureaboveidentifytheareacorrespondingtothedeadweightlossandthearea
correspondingtogovernment'srevenueswhenaspecifictaxof$Xperunitisimposedinthis
market.
A.Deadweightloss=a+b+f,Government'srevenues=a+c.
B.Deadweightloss=a+b+c+d,Government'srevenues=b+d+f.
C.Deadweightloss=c+d,Government'srevenues=a+b+c+d.
D.Deadweightloss=a+c,Government'srevenues=c+d.

E.Deadweightloss=c+d,Government'srevenues=a+b.
16.Whenexternaldiseconomiesofscaleoccur,ascomparedtotheoriginalequilibrium,an
increaseinmarketdemandwillcause
A.pricetoincreasemoreinthelongrunthanintheshortrun.
B.pricetoincreaselessinthelongrunthanintheshortrun.
C.industryoutputtoriseandthenfall.
D.industryoutputtoincreasemoreintheshortrunthaninthelongrun.
E.pricetofallinthelongrun.
17.Speedys,afastfoodrestaurant,sellsonlycombinationmeals.Acombinationmealconsistsofa
bigSpeedysandwich,largefries,andalargedrink.TheMCofproducingcombinationmealsis
givenbyMC=1+2Q,whereQisthequantityofcombinationmeals.Thedemandforcombination
mealsisgivenbyP=132Q.AssumingSpeedysisamonopoly,whatisthebestpriceforone
combinationmeal?
A.9
B.2
C.2.6
D.7
E.5
18.Thefirsttheoremofwelfareeconomicsstatesthatperfectlycompetitivemarkets
A.guaranteeequitybutnotallocativeefficiency.
B.guaranteebothequityandallocativeefficiency.
C.guaranteeneitherequitynorallocativeefficiency.
D.guaranteeallocativeefficiencybutnotequity.
E.guaranteeequity,allocativeefficiencyandprofit.

19.Inadoubleoralauctionshownabove,MargehasalreadyboughtoneunitandWandahas
alreadysoldoneunit.Ifthecurrentbidis$6.50andthecurrentaskis$7.50,whichofthefollowing
transactionswouldbeParetoefficientifitweretooccur?
A.Margeacceptsthecurrentask.
B.Wandaacceptsthecurrentbid.
C.Margebids$6.
D.Wandaasks$7.
E.Noneoftheabove.
20.Animprovementinproductiontechnologywillshiftmarginalcost
A.downwardanddecreasemarketsupply.
B.upwardandincreasemarketsupply.

C.upwardanddecreasemarketsupply.
D.downwardandincreasemarketsupply.
E.downwardwithnoeffectonmarketsupply.

21.Thetableaboveshowsthemarginalbenefitandmarginalcostinformationforathree
buyer/threesellerdoubleoralauction.Inthecompetitiveequilibrium,theequilibriumquantity
boughtandsoldis
A.3
B.4
C.5
D.6
E.7
22.Continuingtousethedoubleoralauctiondatafromthetableabove,thetotalsurplusis
A.16
B.27.5
C.30
D.41
E.Noneoftheabove.
23.Priceelasticityofsupplyisgreater
A.intheshortrunbecausestockmarketsreactsoquickly.
B.whenconsumershavetimetoadjustfullytopricechanges.
C.whenproducerscannotchangetheiroutputprices.
D.whenproducerscanadjustalloftheirinputsratherthanjustlabor.
E.thanpriceelasticityofdemandallthetime.

24.Referringtothefigureabove,theprofitmaximizingpriceandoutputare______and______,
respectively.
A.P=$11Q=20
B.P=$11Q=24
C.P=$10Q=20
D.P=$10Q=24
E.P=$7Q=20

25.Usingthedatainthetableabove,diminishingmarginalproductivityoflaborisillustratedby
the
A.increasingoutput.
B.decreasingoutput.
C.outputincreasingatadecreasingrate.
D.outputincreasingatanincreasingrate.
E.increasinginput.
26.Assumethatallproducershavethesamecostcurves,allconsumershavethesamedemand
curves,andthegoodcanbeboughtandsoldinanyquantity,thenParetoEfficiencyisnotachieved
when
A.atthemarketpricemarginalbenefitexceedsmarginalcost.
B.marketpriceequalsthemarginalbenefitofthelastunitpurchasedbyallbuyers.
C.marketpriceequalsthemarginalcostofthelastunitsoldbyallsellers.
D.marginalbenefitofthelastunitpurchasedisthesameforallconsumers.
E.marginalcostofthelastunitsoldisthesameforallproducers.
27.Whichofthefollowingstatementsistrue?
A.IfAVCandAFCaredecreasing,ATCmustbedecreasing.
B.ATCreachesminimumbeforeAVC.
C.IfAVCisincreasing,ATCmustbeincreasing,too.
D.IfMCisincreasing,thenAVCisincreasing.
E.Noneoftheseanswersiscorrect.
28.Inadoubleoralauction,whichofthefollowingstatementsisfalse?
A.TheoutcomeofthemarketisveryclosetoParetoEfficienteventhoughthemarginalbenefitsofthe
buyersandthemarginalcostsofthesellersarenotknowntoalltheparticipants.
B.Everytransactionoccursatthesameprice.
C.Buyersmustincreasetheirbidsuntilaselleraccepts.
D.Sellersmustdecreasetheirasksuntilabuyeraccepts.
E.Anyparticipantcanbeeitherabuyeroraseller.

29.Considerthemarketillustratedinthefigureabove.Allfirmsareidenticalandhavecostcurves
liketheonesshownintheindividualfirmpanel.Whichofthefollowingstatementsisfalse?
A.Theshortrunprice,PSR,isgreaterthanthelongrunpriceinthismarket.
B.Theindividualfirmismakingeconomicprofits.
C.ThepointBisthelongrunequilibriumfortheindividualfirm.
D.ThepointAistheshutdownpointfortheindividualfirm.
E.Inmovingfromtheshortruntothelongruninthisindustrythetotalquantitysoldonthemarketwill
goupandexistingfirmswillincreaseproduction.
30.Thefirstfundamentaltheoremofwelfareeconomics(theinvisiblehand)statesthat
A.noonepersonintheeconomycanbemadebetteroffwithoutmakingatleastoneotherpersonworse
off.
B.anyParetoEfficientoutcomecanbeachievedthroughacompetitivemarket.
C.allbuyersandsellersincompetitivemarketspreferthecompetitiveequilibriumtoanyotherallocation
ofresources.
D.transfersfromonepersontoanotherpersonthatoccurthroughinterventionsinthecompetitivemarket
(forexample,taxesorsubsidies)cannotimprovethewelfareofthegrouptheymostdirectlyaffect.
E.inacompetitiveequilibrium,socialwelfareismaximizedinthesensethatthetotalofconsumerand
producersurplusisaslargeaspossible.
31.AssumethatthemarketdemandfunctionforshoesisQ=20Pandthatthemarketsupply
functionforshoesisQ=4+2P.Supposethataspecifictaxof$3perunitisimposedontheseller,
then
A.ThenewsupplycurveisQ=7+2P.
B.ThenewsupplycurveisQ=1+2P.
C.Totaltaxpaymentsare$30inthenewequilibrium.
D.Totaltaxpaymentsare$33inthenewequilibrium.
E.Thedeadweightlossis0.
32.Whichofthefollowingisleastlikelytoaffectthesupplyofautomobiles?
A.Anincreaseinthepriceofsteel.
B.Animprovementinthetechnologyofautomobilemanufacturing.
C.Anincreaseinthepriceofcarwashes.
D.Adecreaseinthenumberofautomobileproducers.

E.Anincreaseintheproductivityofworkers.

33.Whichofthefollowingstatementsaboutthefigureaboveisfalse?
A.Thedifferencebetweenpriceandmarginalcostforamonopolistis$7.
B.Afirmthatactedlikeacompetitiveindustryinthesamemarketwouldmakeaneconomicprofitof
about$60intheshortrun.
C.Theminimumefficientscaleisclosetothesizeofthemarket.
D.Ataregulatedpriceof$14/unittherewouldbenodeadweightlossifthemonopolistwererequiredto
meetfullmarketdemand.
E.Ataregulatedpriceof$12/unit,themonopolistwouldstillmakeaneconomicprofitevenifrequired
tomeetfullmarketdemand.
34.Ifaprofitmaximizing,competitivefirmisoperatingatalossintheshortrun,then
A.P<AVC.
B.P=AVC+AFC.
C.P<ATC,butP>AVC.
D.averagerevenueislessthanprice.
E.P<MC.
35.Thedifferencebetweenanunregulatedmonopolyandacompetitivefirmismainlythat
A.themonopolycanchangeitsoutput,whereasthecompetitivefirmcannot.
B.themonopolyisnotconcernedwithmarketprice.
C.themonopolyhashighercostcurvesthanthecompetitivefirm.
D.forthemonopoly,thereisamarketdemand,whereasthereisonlyfirmdemandforthecompetitive
firm.
E.themonopolycanaffectmarketprice,whereasthecompetitivefirmcannot.

36.Inthefigureabove,thecompetitivepriceandquantityareillustratedbythepoint
A.A.
B.B.
C.C.
D.D.
E.E.

37.Usingthefigureimmediatelyabove,supposeamonopolistinvestsinresearchanddevelopment
(R&D)thatlowersitsmarginalcost.Whichregioninthegraphaboveshowsthebenefitto
consumers(intermsofincreasedconsumersurplus)fromthisR&D?(Note:areasCandEare
theindicatedshadedrectanglesareasA,B,DandFaretheindicatedtriangles.)
A.A+B+C+D.
B.F.
C.E.
D.C+D.
E.E+F.

38.Satyamakesposters.Thefixedcostsofthebusinessare$5.00.Thevariablecostsof
manufacturingeachposterareshowninthetableabove.Satyacannotmakefractionsofaposter.
Ifthepriceofpostersis$5.00,howmanyshouldhemake?
A.0
B.1
C.2
D.4
E.6

39.Ifthelongruncoststructureofatypicalfirmandthemarketdemandcurveareshowninthe
tableabove,whichofthefollowingstatementsaboutthelongrunequilibriumistrue?Becareful
readingthetabletheFirmandMarketdataarenotaligned.
A.Numberoffirms=30andprofits/firm=$0.
B.Themarketpriceis$200/unit.
C.Thenumberoffirms=28,andmarketquantitydemanded=7,000units.
D.Marketquantitydemanded=6,000unitsandeconomicprofitsare$50/unit.
E.Themarketpriceis$250/unitandaveragetotalcostis$260/unit.
40.Whichstatementistrue?
A.Accountingcostsincludetheopportunitycostoftheowner'stime.
B.Intheshortrunequilibrium,economicprofitsarealwayspositive.
C.Intheshortrunequilibrium,averagetotalcostisataminimum.
D.Itispossiblethatinshortrunequilibrium,boththeaccountingprofitsandtheeconomicprofitsare
negative.
E.Economicprofitsarealwayshigherthanaccountingprofits.
41.Apermanentincreaseinmarketdemandinacompetitiveindustry

A.resultsinashortrunriseinpricefollowedbyentryofnewfirms,whichcausesareductioninpriceas
comparedtotheshortrunequilibrium.
B.neverresultsinentryofnewfirms.
C.resultsinmorefirmsonlyifaveragetotalcostsareincreasing.
D.impliesentryoffirmsonlyifallfirmsfacethesametechnology.
E.resultsinashortrunfallinpricefollowedbyexitofsomefirms,whichcausesanincreaseinpriceas
comparedtotheshortrunequilibrium.

42.Nixauhasthegradedistributionshowninthetableabove.IfhetakesBantuinaddition,andhe
getsanA(worth4.0points),whatistheleastcreditsshouldithavesothathisGPAincreases?
A.4
B.3
C.2
D.1
E.0
43.Considerapricetakingfirmintheumbrellamarket.Currently,anumbrellasellsforamarket
priceof$10.Thefirm'smarginalcostcurveisMC=2QanditstotalcostsareTC=Q2+20,where
Qisthenumberofumbrellasproducedbythefirm.Whatarethefirm'smaximumeconomic
profits.
A.$15
B.$5
C.$0
D.$5
E.$15
44.Considerthesamepricetakingfirmintheumbrellamarketasinthepreviousquestion(P
=$10,MC=2QandTC=Q2+20).Inthelongrunequilibriumintheumbrellamarket,ifallfirms
havethesamecostfunctionsasthisfirm,then
A.themarketpricewillriseandsomeumbrellafirmswillleavethemarket.
B.themarketpricewillfallandsomeumbrellafirmswillleavethemarket.
C.themarketpricewillriseandsomenewfirmswillentertheumbrellamarket.
D.themarketpricewillfallandsomenewfirmswillentertheumbrellamarket.
E.themarketpriceof$10/umbrellaisalongrunequilibriuminthiscase.
45.Martagrowstulipsonlandwhichcosts$1,000/yeartorentona10yearlease(rentpayments
mustbemadeforthenext10years,atleast).Martamustpayparttimeworkers$6.00/hour.Last
year,Martahired2workers,whoeachworked500hours,andshebought$200worthoftulip
bulbs,which,inadditiontorentingtheland,wereheronlycosts.Shesold20,000tulipsat$1.00per
tuliplastyear.MartacouldhaveworkedfulltimeatNick'sGreenhousegrowingtulipsfor
$8,000/yearbutonlyifshepermanentlyclosedherowntulipfarm.Whichofthefollowing
statementsisfalse?

A.Marta'saccountingcostsarelessthanhereconomiccosts.
B.Marta'sfixedcoststotaled$9,000lastyear.
C.Atlastyear'slevelofproduction,Marta'saveragevariablecostwas$0.31.
D.Marta'seconomicprofitslastyearwere$12,800.
E.Marta'stotalrevenuewas$20,000.
46.MauriceandEdbothdecidetobecometomatofarmers,aperfectlycompetitiveindustry.They
useidenticaltechnologies,haveidenticalproductionfunctions,andhirelaboratidenticalprices
andamounts.TheonlydifferenceisthatMauriceknowsthelocalmachinerydealer,andisableto
gethisequipmenttractorsandwagons(bothfixedcosts)atadiscount,whileEdpaysthefullprice.
Ifweconsideronlytheshortrun,whichofthefollowingisfalse?:
A.Ed'saveragetotalcostsaregreaterthanMaurice'satalllevelsofproduction.
B.Mauricewillearnhigherprofits.
C.Mauriceislesslikelytoshutdown.
D.EdandMauricearepricetakers.
E.ItispossibleforMauricetoearnpositiveaccountingprofits,whileEdisearningnegativeaccounting
profits.

47.ThefigureaboveshowsthreealternativetechnologiesA,B,andCforthemanufactureof
machinepartsinthousandsofparts/week.Whatistheminimumefficientscaleofoperationfor
thismarket?
A.5,000parts/week
B.8,000parts/week
C.11,000parts/week
D.6,000to10,000parts/week
E.11,000to14,000parts/week
48.Usingthesamefigure,again,iftheindustryexhibitsneitherexternaleconomiesofscalenor
externaldiseconomiesofscale,thenthelongrunindustrysupplycurveis

A.horizontalat$26/part.
B.fallingfrom$33/partto$26/partthenrisingfrom$26/partto$30/part
C.horizontalat$30/part.
D.horizontalat$33/part.
E.risingfrom$26/partto$30/part.

49.Thetableaboveshowstheinformationforatwobuyer/twosellerdoubleoralauction.Inthe
competitiveequilibriumforthismarket,thetotalsurplusis
A.$16
B.$13
C.$29
D.$63
E.$14.50
50.Continuingtousethedoubleoralauctiondatafromthetableabove,whichofthefollowing
statementsaboutthecompetitiveequilibriumistrue.
A.Theequilibriumquantityboughtandsoldis4.
B.InequilibriumBuyerAbuys2units.
C.InequilibriumSellerZsells3units.
D.Inequilibriumthecombinedproducerssurplusofbothsellersisatleast16.
E.Theequilibriumpriceis$12.
Gettheanswersheet.

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