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1030 Final Practice

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Without government intervention, public goods tend to be

a. overproduced and common resources tend to be overconsumed.
b. overproduced and common resources tend to be underconsumed.
c. underproduced and common resources tend to be overconsumed.
d. underproduced and common resources tend to be underconsumed.

2. The local fire department wants to buy some new equipment at a cost of $300,000. If a human life is
worth $10 million, the equipment is worth buying if it reduces the risk of someone dying in a fire over the
life of the equipment by at least
a. 1 percentage point.
b. 3 percentage points.
c. 5 percentage points.
d. 30 percentage points.

3. What causes the Tragedy of the Commons?

(i) Social and private incentives differ.
(ii) Common resources are not rival in consumption and are not excludable.
(iii) Common resources are not excludable but are rival in consumption.

a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (i) and (iii) only

Figure 11-1

Rival in Consumption?
Yes No

Yes A B

Excludable?

No C D

4. Refer to Figure 11-1. The box labeled B represents

a. private goods.
b. club goods.
c. common resources.
d. public goods.

5. Refer to Figure 11-1. Cable TV is an example of the type of good represented by Box
a. A.
b. B.
c. C.
d. D.

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 Table 13-14
Listed in the table are the long-run total costs for three different firms.

Quantity 1 2 3 4 5
Firm A 100 100 100 100 100
Firm B 100 200 300 400 500
Firm C 100 300 600 1,000 1,500

6. Refer to Table 13-14. Which firm is experiencing diseconomies of scale?

a. Firm A only
b. Firm B only
c. Firm C only
d. Firm A and Firm B only

7. Suppose that a firm operating in perfectly competitive market sells 200 units of output at a price of $3
each. Which of the following statements is correct?
(i) Marginal revenue equals $3.
(ii) Average revenue equals $600.
(iii) Average revenue exceeds marginal revenue, but we don't know by how much.

a. (i) only
b. (iii) only
c. (i) and (ii) only
d. (i), (ii), and (iii)

8. For an individual firm operating in a competitive market, marginal revenue equals

a. average revenue and the price for all levels of output.
b. average revenue, which is greater than the price for all levels of output.
c. average revenue, the price, and marginal cost for all levels of output.
d. marginal cost, which is greater than average revenue for all levels of output.

9. Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free
air at $15. Which of the following scenarios is a successful example of the Coase theorem?
a. Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke.
b. Mary pays Cathy $16 so that Mary can smoke.
c. Mary pays Cathy $14 so that Mary can smoke.
d. Cathy offers Mary $15 not to smoke. Mary accepts and does not smoke.

10. When one firm sells its pollution permit to another firm,
a. both firms benefit.
b. the total amount of pollution remains the same.
c. the total amount of pollution decreases.
d. Both a and b are correct.

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 Figure 10-5

11. Refer to Figure 10-5. Which price and quantity combination represents the social optimum?
a. P0 and Q1. c. P1 and Q0.
b. P2 and Q1. d. P2 and Q0.

12. Refer to Figure 10-5. Which of the following statements is correct?

a. The marginal benefit of the positive externality is measured by P 3 - P1.
b. The marginal cost of the negative externality is measured by P 3 - P2.
c. The marginal cost of the negative externality is measured by P 3 - P1.
d. The marginal cost of the negative externality is measured by P 3 - P0.

Figure 10-7

13. Refer to Figure 10-7. Which quantity represents the social optimum for this market?
a. Q1. c. Q3.
b. Q2. d. Q4.

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14. Refer to Figure 10-7. To internalize the externality in this market, the government should
a. impose a tax on this product. c. forbid production.
b. provide a subsidy for this product. d. produce the product itself.

15. Bev is opening her own court-reporting business. She financed the business by withdrawing money from
her personal savings account. When she closed the account, the bank representative mentioned that she
would have earned $300 in interest next year. If Bev hadn't opened her own business, she would have
earned a salary of $25,000. In her first year, Bev's revenues were $30,000. Which of the following
statements is correct?
a. Bev's total explicit costs are $25,300.
b. Bev's total implicit costs are $300.
c. Bev's accounting profits exceed her economic profits by $300.
d. Bev's economic profit is $4,700.

Figure 13-2

16. Refer to Figure 13-2. As the number of workers increases,

a. marginal product decreases.
b. total output decreases.
c. marginal product increases but at a decreasing rate.
d. Both a and b are correct.

17. Refer to Figure 13-2. The graph illustrates a typical production function. Based on its shape, what does
the corresponding total cost curve look like?
a. an upward-sloping curve that increases at an increasing rate
b. an upward-sloping curve that increases at a decreasing rate
c. a downward-sloping curve
d. a horizontal straight line

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 Table 14-10
Suppose that a firm in a competitive market faces the following revenues and costs:
Quantity Total Revenue Total Cost
0 $0 $3
1 $7 $5
2 $14 $9
3 $21 $15
4 $28 $23
5 $35 $33
6 $42 $45
7 $49 $59

18. Refer to Table 14-10. At which level of production will the firm maximize profit?
a. 3 units c. 5 units
b. 4 units d. 6 units

19. The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000,
total variable cost to be $130,000, and total revenue to be $125,000. Because of this information, in the
short run, the Brookside Racquet Club should
a. shut down because staying open would be more expensive.
b. lower their prices to increase their profits.
c. stay open because shutting down would be more expensive.
d. stay open because the firm is making an economic profit.

20. Consider a competitive market with a large number of identical firms. The firms in this market do not use
any resources that are available only in limited quantities. In this market, an increase in demand will
a. increase price in the short run but not in the long run.
b. increase price in the long run but not in the short run.
c. increase price both in the short and the long run.
d. not affect price in either the short or the long run.

21. A natural monopoly occurs when

a. the product is sold in its natural state, such as water or diamonds.
b. there are economies of scale over the relevant range of output.
c. the firm is characterized by a rising marginal cost curve.
d. production requires the use of free natural resources, such as water or air.

22. If a monopoly lowers its price, its

a. total revenue must increase.
b. total revenue must decrease.
c. marginal revenue must increase.
d. marginal revenue must decrease.

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 Figure 15-6

23. Refer to Figure 15-6. In order to maximize profits, the monopolist should produce
a. 9 units.
b. 12 units.
c. 15 units.
d. more than 15 units.

24. Refer to Figure 15-6. A profit-maximizing monopolist would incur total costs of
a. $81.
b. $120.
c. $144.
d. $240.

25. The socially efficient level of production occurs where the marginal cost curve intersects
a. average variable cost.
b. average total cost.
c. demand.
d. marginal revenue.

26. Monopolistic competition differs from perfect competition because in monopolistically competitive
markets
a. there are barriers to entry.
b. all firms can eventually earn economic profits.
c. each of the sellers offers a somewhat different product.
d. strategic interactions between firms are important.

27. In monopolistic competition as well as in monopoly,

a. price exceeds marginal revenue for each firm.
b. profit is zero in a long-run equilibrium for each firm.
c. entry and exit by firms are unrestricted.
d. there are at most a few firms in each market.

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 Figure 16-5

28. Refer to Figure 16-5. Which of the graphs depicts a short-run equilibrium that will encourage the entry
of other firms into a monopolistically competitive industry?
a. panel a c. panel c
b. panel b d. panel d

29. Refer to Figure 16-5. Which of the graphs depicts a short-run equilibrium that will encourage the exit of
some firms from a monopolistically competitive industry?
a. panel a c. panel c
b. panel b d. panel d

30. Refer to Figure 16-5. Which of the graphs depicts a short-run equilibrium that will not encourage either
the entry or exit of firms in a monopolistically competitive industry?
a. panel a c. panel c
b. panel b d. panel d

31. The manufacturer of South Face sells jackets to retail stores for $120 each, and it requires the retail stores
to charge customers $150 per jacket. Any retailer that charges less than $150 would violate its contract
with South Face. What do economists call this business practice?
a. predatory pricing c. tying
b. resale price maintenance d. leverage

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 Table 17-13
Two home-improvement stores (Lopes and HomeMax) 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. Increases in annual profits of the two home-improvement stores
are shown in the table below.

Lopes
Increase the size of store Do not increase the size of
and parking lot store and parking lot
Increase the size
Lopes = $1.0 million Lopes = $0.4 million
of store and
HomeMax = $1.5 million HomeMax = $3.4 million
parking lot
HomeMax
Do not increase
Lopes = $3.2 million Lopes = $2.0 million
the size of store
HomeMax = $0.6 million HomeMax = $2.5 million
and parking lot

32. Refer to Table 17-13. Increasing the size of its store and parking lot is a dominant strategy for
a. Lopes, but not for HomeMax. c. both stores.
b. HomeMax, but not for Lopes. d. neither store.

Scenario 17-1.
Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that
both countries have entered into an agreement to maintain certain production levels in order to maximize
profits. In the world market for oil, the demand curve is downward sloping.

33. Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium level,
both Irun and Urun have the individual incentive to
a. hold production constant. c. increase production.
b. decrease production. d. increase price.

34. Refer to Scenario 17-1. If Irun fails to live up to the production agreement and overproduces, which of
the following statements will be true of Urun's condition?
a. Urun will invariably be worse off than before the agreement was broken.
b. Urun will counter by decreasing its production in order to maintain price stability.
c. Urun's profit will be maximized by holding its production constant.
d. Urun's profit will be unaffected by Irun's actions.

35. The theory of oligopoly provides another reason that free trade can benefit all countries because
a. increased competition leads to larger deadweight losses.
b. as the number of firms within a given market increases, the price of the good decreases.
c. as the number of firms within a given market increases, the profit of each firm increases.
d. All of the above are correct.

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 Figure 17-1

36. Refer to Figure 17-1. Suppose this market is served by a duopoly in which each firm faces the marginal
cost curve shown in the diagram. The marginal revenue curve that a monopolist would face in this market
is also shown. Which of the following statements is true?
a. The total output in this market will likely be 2 units when the market is served by a
duopoly.
b. The price in this market will likely be $6 when the market is served by a duopoly.
c. The total revenue to each firm will likely be more than $16 when the market is served by
a duopoly.
d. The total output in this market will likely be less than 4 units when the market is served
by a duopoly.

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 ID: A

1030 Final Practice

Answer Section

MULTIPLE CHOICE

1. C
2. B
3. D
4. B
5. B
6. C
7. A
8. A
9. B
10. D
11. B
12. C
13. C
14. B
15. D
16. A
17. A
18. A
19. A
20. A
21. B
22. D
23. B
24. B
25. C
26. C
27. A
28. C
29. B
30. A
31. B
32. C
33. C
34. A
35. B
36. D