B)

C)
D)

24. Which of the following scenarios would cause a speculator in chicken and beef futures to use a
buy low and sell high strategy for chicken?
A report emerges from the Surgeon General that eating red meat in moderate amounts allows for
increased brain power.
Cows are found to be infected with Mad Cow Disease and must be destroyed.
Households begin eating more meals at restaurants.
Chickens are found to spread the Avian Flu disease among humans.

A)
B)
C)
D)

25. Suppose resources are directed through the actions of a central planner, who receives
information on all the different uses of these resources. Why might sellers have an incentive to
provide untruthful information to the central planner?
They want to be able to charge the minimum price for their product
In order to continue producing their product, sellers may overstate the importance of their product.
The information system is too complex to provide correct information.
They want resources to be able to travel to the highest value uses possible

A)
B)
C)
D)

26. Hundreds of thousands of producers working across the world cooperate to ensure that millions
of consumers can have the goods and services they desire. These producers do not know each
other and are not coordinated by a central agency. Their actions are directed simply by:
self interest.
robotic technology.
their governments.
computer technology.

A)

A)
B)
C)
D)

A)
B)
C)
D)

27. After a hurricane knocks out power to thousands of households, the price of electric generators
increases threefold. According to economists:
this is a vivid example of market and class exploitation by capitalists.
this discourages the use of electric generators in low-value uses, making them more readily
available for high-value uses.
the rising price will give an incentive for firms to ship fewer electric generators to the disaster area.
the increase in demand for electric generators should technically cause the price to fall after a
hurricane.
28. If people suddenly expect that a severe drought will reduce the supply of grain, the price of
grain futures will be:
high and then bid lower.
bid higher.
low and bid even lower.
bid lower.

Page 1

A)
B)
C)
D)

29. Suppose that it is summer 2012 and President Obama is running for reelection. In the Iowa
Electronic Markets, a share of Obama is selling for $0.54 and will give $1 if Obama wins the
election. Market participants believe that Obama's probability of winning reelection is:
4.6 percent.
5.4 percent.
54 percent.
46 percent.

A)
B)
C)
D)

30. A barrel of oil can be used to produce both gasoline and asphalt. If the price of gasoline falls, the
supply of asphalt ________ and asphalt prices ________.
increases; decrease
increases; increase
decreases; decrease
decreases; increase

A)
B)
C)
D)

31. The wearing of costumes at Halloween is largely a Western custom. In China, the Halloween
festivals are very different in that they involve more of the presentation of gifts and food to
family members and others that have passed away. Which of the following is a reasonable
explanation for why the Western market for Halloween costumes might be important for
Chinese firms and factories?
The costumes that the Chinese do not use during their festivals can be exported to the West.
Knowledge of the Western Halloween festival and demand for costumes can translate into profits
for Chinese producers who can produce such costumes at low costs.
The West can export costumes for the Chinese to wear during their Halloween Festivals.
Chinese producers can try to market Chinese festivals to American consumers.

32. Which of the following scenarios would cause a speculator to buy low and sell high?
Farmers expect to have a bumper harvest of corn next year.
Imports of corn begin to flood the country.
The government is expected to pass legislation making it mandatory for all vehicles to use cornbased fuels within one year.
D) The government is expected to subsidize corn production for farmers.
A)
B)
C)

A)
B)
C)
D)

33. Asphalt is the refined residue from crude oil. When gasoline prices are high, oil refiners pull
every last drop of gasoline out of a barrel of crude leaving less residue for asphalt production.
This would imply that higher gasoline prices mean a(n):
increased supply of asphalt, causing lower asphalt prices.
increased supply of asphalt, causing higher asphalt prices.
reduced supply of asphalt, causing lower asphalt prices.
reduced supply of asphalt, causing higher asphalt prices.

A)
B)
C)
D)

34. A price floor is:

a maximum price allowed by law.
a minimum price allowed by law.
able to produce an efficient outcome.
a tool used to increase government revenues.

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D)

35. The chronic shortages of goods in the Soviet Union were:

caused by the CIA's manipulation of the Soviet currency.
limited to luxury items, like yachts and airplanes.
the result of too much defense spending that hoarded resources away from the production of
consumer goods.
beneficial to the party elite who traded scarce goods for favors and other scarce goods.

A)
B)
C)
D)

36. The presence of price floors in a market usually is an indication that:

there is an insufficient quantity of a good or service being produced.
the forces of supply and demand are unable to establish an equilibrium price.
sellers of the good or service outnumber the buyers.
policy makers believe the price floor does not involve inequities.

A)
B)
C)
D)

37. Which of the following statements is correct regarding the restrictions on entry into the airline
industry?
Resources were equally allocated because new airlines were kept out of the industry.
Resources were misallocated because low-cost airlines were kept out of the industry.
Resources were efficiently allocated because high-cost airlines were kept out of the industry.
Resources were reallocated because only low-cost airlines were allowed to enter the industry.

A)
B)
C)

Use the following to answer question 38:

Figure: Government Price Controls

A)
B)
C)
D)

38. (Figure: Government Price Controls) Refer to the figure. The government enacts a price control
causing a shortage of 15 units of the good. Therefore, the ________ is set at ________.
price floor; $31
price floor; $17
price ceiling; $10
price ceiling; $17

Page 3

Use the following to answer question 39:

Figure: Price Ceilings and Consumer Valuation

A)
B)
C)
D)

A)
B)
C)
D)

39. (Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price ceiling of
$3 goes into effect. If the goods sold are allocated only to the highest value users, the total
consumer surplus in the market would be:
$180.
$30.
$120.
$150.
40. A deadweight loss is the total of:
consumer and producer surplus when all mutually profitable gains from trade are exploited.
consumer and producer surplus when all mutually profitable gains from trade are not exploited.
lost consumer and producer surplus when all mutually profitable gains from trade are exploited.
lost consumer and producer surplus when all mutually profitable gains from trade are not
exploited.

A)
B)
C)
D)

41. What does the Russian word blat refer to?

a Russian brand of vodka
having connections that enable one to obtain favors
There is no such word.
the amount of time people spend waiting in lines to buy things

A)
B)
C)
D)

42. If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, a
likely result will be:
an increase in the quantity supplied of the product.
an increase in the price of the product.
a decrease in the quality of the product.
a further decrease in the price of the product.

Page 4

A)
B)
C)
D)

43. At a price ceiling of $6 per sheet of drywall, quantity demanded is 100 and quantity supplied is
75. What will happen in the drywall market if there is an increased demand for drywall in the
construction industry?
Equilibrium will be restored.
The shortage of drywall will fall below 25 units.
The shortage of drywall will increase above 25 units.
The surplus of drywall will increase above 25 units.

A)
B)
C)
D)

44. The lower the price ceiling is relative to the market equilibrium price, the:
larger the surplus.
smaller the surplus.
smaller the shortage.
larger the shortage.

A)
B)
C)
D)

45. Rent controls are:

price floors on rental housing.
price ceilings on rental housing.
quality freezes on rental housing.
quantity freezes on rental housing.

Page 5

Answer Key
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.

B
B
A
B
B
C
A
B
C
D
B
D
C
B
C
D
D
B
C
C
D

Alley - Exam 3 - Microeconomics - S14

A
Externalities, Competition, Monopoly, Price Discrimination

Version

1. What version of the exam do you have?

A)
B)
C)
D)
Use the following to answer question 2:
Table: Costs of Antibiotics
Quantity of Marginal Benefit
Antibiotics
to Buyers
1
$25
2
$20
3
$15
4
$10
5
$5

Marginal Cost
to sellers
$5
$10
$15
$20
$25

Page 6

External
Cost
$10
$10
$10
$10
$10

Marginal Social
Cost
?
?
?
?
?

A)
B)
C)
D)

2. (Table: Costs of Antibiotics) Refer to the table. The deadweight loss in the market could
be eliminated if the government:
outlawed the production of the good.
added a $10 tax per unit.
equated marginal benefit with external cost.
subsidized consumption by $5 per unit.

A)
B)
C)
D)

3. An external cost is a cost paid by:

the consumers trading in the market.
the producers trading in the market.
the government regulating the market.
people other than the consumer and the producer trading in the market.

A)
B)
C)
D)

4. Which of the following correctly describes what a Pigouvian subsidy is?

Subsidies received by the producers are called Pigouvian subsidies.
Pigouvian subsidies are awarded to producers whose goods have external benefits.
Taxes on producers creating negative externalities are called Pigouvian subsidies.
Lower corporate tax rates are also known as Pigouvian subsidies.

B)
C)
D)

5. Edgar's expected private benefit from the flu shot is $15, and it would cost him $20 to
get vaccinated. Therefore, which of the following is correct?
It is socially optimal for Edgar to get the flu shot if the social benefits of the shot exceed
$20.
The external benefits of the flu shot equal $5 ($20 $15).
Even without a government subsidy, Edgar is certain to be vaccinated.
The deadweight loss is eliminated if Edgar is vaccinated and the external benefits are $4.

A)
B)
C)
D)

6. Because there are external benefits from higher education:

private markets will over-supply college classes.
government intervention cannot improve the market for college classes.
the government should impose a tax on college students.
private markets will under-supply college classes.

A)

Page 7

A)
B)
C)
D)

7. The paper industry and brewery industry each emit 60 tons of particulates into the air. It
costs the paper industry $1,000 to remove 1 ton of particulates and it costs the brewery
industry $1,400 to remove 1 ton of particulates. In an effort to reduce particulate
pollution, the government gives each industry tradeable allowances worth 50 tons of
particulates. We would expect that:
the paper industry will buy tradeable allowances from the brewery industry at a cost
between $1,000 and $1,400 per allowance.
the paper industry will buy tradeable allowances from the brewery industry at a cost
greater than $1,400 per allowance.
the brewery industry will buy tradeable allowances from the paper industry at a cost
between $1,000 and $1,400 per allowance.
the brewery industry will buy tradeable allowances from the paper industry at a cost
greater than $1,400 per allowance.

A)
B)
C)
D)

8. The Coase theorem says that private bargains can ensure an efficient market equilibrium
even when externalities exist if:
the government does not involve itself in the process.
the market is sufficiently competitive.
the number of market participants is large.
transaction costs are low and property rights are clearly defined.

A)
B)
C)
D)

9. Government solutions to externality problems include:

taxing the consumption of goods that cause externalities.
subsidies.
allowing firms to trade the rights to create pollutants.
All of the answers are correct.

A)
B)
C)
D)

10. Which of the following answers correctly identifies social cost?

market price + external cost = social cost
external cost market price = social cost
market price + cost of production = social cost
negative externality + positive externality = social cost

Page 8

Use the following to answer question 11:

Figure: Profits and Competitive Firms

11. (Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which of
the panels shows a competitive firm making positive economic profits?
A) Panel A
B) Panel B
C) Panel C
D) Panel D

A)
B)
C)
D)

12. The amount of money that the firm pays for wages is called:
marginal cost.
total cost.
variable cost.
fixed cost.

Use the following to answer question 13:

Table: Competitive Firm
Quantity (Units) Total Revenue ($)
0
0
1
90
2
180
3
270
4
360
5
450
6
540
7
630
8
720

Total Cost ($)

50
80
120
170
230
300
380
470
570

Page 9

13. (Table: Competitive Firm) Refer to the table. The fixed cost for this firm is:
A) $80.
B) $90.
C) $50.
D) $100.
Use the following to answer question 14:
Figure: Costs

14. (Figure: Costs) Use the figure. At a price of $20 which of the following statements is
FALSE?
A) AC = $15
B) Profit = (20 15)15
C) Average profit = $5
D) MC < AC

A)
B)
C)
D)

15. Whenever marginal cost is greater than the average total cost:
marginal cost is falling.
average cost is falling.
average cost is constant.
average cost is rising.

A)
B)
C)
D)

16. Firms will enter an industry when the:

price rises above the minimum of the marginal cost curve.
price rises above the minimum of the average total cost curve.
marginal cost rises above the minimum of the average total cost curve.
average cost rises above the minimum of the marginal cost curve.

Page 10

Use the following to answer question 17:

Figure: Profits and Competitive Firms

17. (Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which of
the panels shows a competitive firm making zero economic profits?
A) Panel A
B) Panel B
C) Panel C
D) Panel D
Use the following to answer question 18:
Table: Barrels of Oil
Barrel of Oil
Produced
Total Revenue
1
$50
2
100
3
150
4
200
5
250
6
300
7
350
8
400
9
450
10
500

Total Cost
$4
10
21
38
61
90
126
176
266
390

Page 11

Price
$50
50
50
50
50
50
50
50
50
50

18. (Table: Barrels of Oil) Refer to the table. What is the marginal cost of producing the
seventh barrel of oil?
A) 36
B) 50
C) 90
D) 126
19. As the price of a good fluctuates, a profit-maximizing firm will expand or contract
production along its:
A) average cost curve.
B) average product curve.
C) marginal cost curve.
D) marginal product curve.
20. Damien produces 400 gallons of milk a day in a very competitive industry. The market
price for a gallon of milk is $2. Damien's marginal revenue per gallon of milk is:
A) $200.
B) $800.
C) $2.
D) There is not enough information to answer the question.
21. The marginal revenue (MR) for a firm is a constant $45, and the firm's marginal cost
(MC) is given by MC = 1.5Q (where Q is quantity of output). What is the firm's profitmaximizing level of output?
A) 67.5
B) 30
C) 45
D) 15

Page 12

Use the following to answer question 22:

Figure: Two-Firm Industry

22. (Figure: Two-Firm Industry) Refer to the figures. At a market price of $20, the total
quantity supplied in the industry is:
A) 32 units.
B) 45 units.
C) 15 units.
D) 25 units.
Use the following to answer question 23:
Table: Competitive Firm
Quantity (Units) Total Revenue ($)
0
0
1
80
2
160
3
240
4
320
5
400
6
480
7
560
8
640

Total Cost ($)

30
50
80
120
170
230
300
380
470

Page 13

23. (Table: Competitive Firm) Refer to the table that shows revenue and cost schedules for a
competitive firm. At the profit-maximizing quantity, which of the following is TRUE?
I. MR = MC
II. Producer surplus is maximized.
III. Profits are equal to $180.
A) I only
B) I and II only
C) I and III only
D) I, II, and III
Use the following to answer questions 24-25:
Table: Oil Pumps
Oil Pump One
Quantity
Marginal
(Barrels of Oil)
Cost
1
5
2
10
3
15
4
20
5
25
6
30
7
35

Oil Pump Two

Quantity
Marginal
(Barrels of Oil)
Cost
1
10
2
12
3
14
4
16
5
18
6
20
7
22

24. (Table: Oil Pumps) Refer to the table. An oil producer owns two pumps: Oil Pump One
and Oil Pump Two. If the market price of oil is $20 per barrel, how many barrels of oil
get produced?
A) 4
B) 14
C) 10
D) 6
25. (Table: Oil Pumps) Refer to the table. Suppose that this market is producing six barrels
of oil from Oil Pump One and two barrels of oil from Oil Pump Two. What happens to
the total costs of production if we produce one less barrel of oil from Oil Pump One and
one more barrel of oil from Oil Pump Two?
A) The total costs of production fall by $16.00.
B) The total costs of production rise by $7.00.
C) The total costs of production fall by $30.
D) The total costs of production rise by $14.

Page 14

26. Since a competitive firm sets MR = P to determine all quantities in the short run, we can
conclude that:
A) each firm in the industry faces very large fixed costs.
B) the demand curve faced by each individual competitive firm is perfectly elastic.
C) the demand curve faced by each individual competitive firm is downward sloping.
D) the industry demand curve is perfectly elastic.
27. For a competitive firm, which of the following conditions describes the profit
maximization condition?
I. P = MC
II. MR = MC
III. TR = TC
A) II only
B) I and II only
C) II and III only
D) I, II, and III

A)
B)
C)
D)

28. The elimination principle:

holds in all places and in all times.
says that below-normal profits may be eliminated by the entry of new firms.
depends on government protection.
says that above-normal profits are eliminated by entry and below-normal profits are
eliminated by exit.

29. Which of the following statements is TRUE?

I. A free market minimizes the total costs of producing output.
II. In a free market, P = MC1 = MC2 = . . . MCN.
III. Every firm faces the same price in a competitive market.
A) I and II only
B) III only
C) I and III only
D) I, II, and III

A)
B)
C)
D)

30. Profit maximization occurs when:

TR > TC.
MR = MC.
MC = AC.
P = AC.

Page 15

31. Suppose that you own two farms on which to grow corn. In order to lower the cost of
production, you determine to increase production on Farm 1 and reduce it on Farm 2.
This implies that the marginal cost of production on Farm 1 is:
A) greater than the marginal cost of production on Farm 2.
B) less than the marginal cost of production on Farm 2.
C) equal to the marginal cost of production on Farm 2.
D) The difference of the marginal costs between the two farms cannot be determined.
Use the following to answer question 32:
Table: Oil Pumps
Oil Pump One
Quantity
Marginal
(Barrels of Oil)
Cost
1
5
2
10
3
15
4
20
5
25
6
30
7
35

Oil Pump Two

Quantity
Marginal
(Barrels of Oil)
Cost
1
10
2
12
3
14
4
16
5
18
6
20
7
22

32. (Table: Oil Pumps) Refer to the table. Suppose that we want to produce seven barrels of
oil. To minimize costs, we should produce:
A) all seven barrels of oil from Oil Pump Two.
B) three barrels of oil from Oil Pump One and four barrels of oil from Oil Pump Two.
C) one barrel of oil from Oil Pump One and six barrels of oil from Oil Pump Two.
D) all seven barrels of oil from Oil Pump One.
33. A competitive firm maximizes profit when marginal cost:
A) equals the price.
B) is less than the price.
C) is greater than the price.
D) is minimized.

Answer Key
1. (No Answer Provided)
2. B
3. D
Page 16

4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.

B
A
D
C
D
D
A
C
C
C
D
D
B
B
A
C
C
B
C
D
C
A
B
B
D
D
B
B
B
A

Page 17