The final Microeconomics Exam will comprise 25 multiple choice questions worth 1 point each and 5 short answer

questions worth 2
points each. The time allowed is 90 minutes.

MULTIPLE CHOICE. Choose the one alternative that best answers the question.

1) When apples go on sale, people buy apples instead of bananas. This is an example of 1)
A) the income effect. B) the complement effect.
C) the substitution effect. D) the elasticity effect.

2) You only buy two goods, pizza and burritos. Both goods are normal goods. When the price of 2)
pizza goes up, you buy fewer burritos. Based on this information, what must be true about the
income and substitution effect for burritos?
A) The income effect is bigger than the substitution effect.
B) The substitution effect and income effect are the same size.
C) The substitution effect is bigger than the income effect.
D) The substitution effect and income effect have the effect of increasing the number of burritos
you buy.

3) For which good would you expect a price increase of 10% to have the greatest income effect? 3)
A) college tuition B) a television set
C) a Big Mac D) a gallon of gasoline

Figure 6.2

4) Refer to Figure 6.2. At what quantity is the satiation point? 4)

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

5) Refer to Figure 6.2. If the price of the product were zero, what quantity should you choose to buy? 5)
A) A B) B C) C D) D

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 6) Which of the following statements is consistent with the principle of diminishing marginal utility? 6)
A) David thought he would hate Economics, but the more he studies Economics, the more he
likes studying it.
B) The more Mark eats, the hungrier he seems to get.
C) Sue said that she could rock climb forever and never get tired of it.
D) Carrie likes to rent videos but after watching the third video of the night she is ready to play
cards instead.

7) ________ states that the first unit of a good is the most satisfying, after which additional units 7)
provide progressively less and less additional utility.
A) The law of supply
B) The principle of increasing opportunity cost
C) The law of demand
D) The principle of diminishing marginal utility

8) When Kevin has a second cookie, his total utility rises from 15 to 25 utils. Kevin's marginal utility 8)
of the second cookie is
A) 10 utils.
B) 5 utils.
C) 40 utils.
D) not measurable with the information given.

9) Consumers want to maximize 9)

A) marginal utility. B) quantity consumed.
C) total utility. D) all of the above

Table 6.3
Marginal Marginal Marginal
Number of Utility of Utility per Marginal utility per
Football Football dollar for Number of utility of dollar for
Games games football concerts concerts concerts
1 50 1 70
2 45 2 60
3 40 3 50
4 35 4 40
5 30 5 30
6 25 6 20

10) Refer to Table 6.3. If the price of concerts is $20, what is the marginal utility per dollar for the 2nd 10)
concert?
A) 3 B) 6.5 (16.5) C) 1200 D) 1.5

11) Which of the following is not a legal form a firm can operate in? 11)
A) partnership B) corporation
C) dual proprietorship D) sole proprietorship

12) ________ make up a majority of the firms in the United States and ________ receive the majority of 12)
revenues earned by U.S. firms.
A) corporations; corporations B) sole proprietorships; corporations
C) corporations; sole proprietorships D) sole proprietorships; sole proprietorships

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13) Stocks can be issued by 13)
A) partnerships. B) corporations.
C) sole proprietorships. D) all of the above

14) Ivan sells a share of IBM stock on the New York Stock Exchange for $100. Which of the following 14)
statements is accurate?
A) IBM gets the difference between the price Ivan paid for the stock and the price Ivan sold it for.
B) IBM gets paid the price of the stock ($100) when the stock is sold.
C) IBM gets 15% of the price of the stock, in this case $15.
D) IBM does not get any money when Ivan sells his stock.

15) All other things held equal, a corporation's market value increases when the firm's 15)
A) sales increase. B) stock price increases.
C) price of the product it sells increases. D) profits increase.

16) Profit is calculated as 16)

A) total cost - total revenue. B) marginal cost - marginal revenue.
C) total revenue - total cost. D) marginal revenue - marginal cost.

17) Economic analysis of firms usually assumes the goal of firms is to 17)
A) maximize profits. B) minimize costs.
C) maximize revenues. D) maximize market share.

18) Which of the following statements about profit is incorrect? 18)

A) normal profit = total revenue - implicit opportunity costs
B) accounting profit = total revenue - explicit costs
C) economic profit = Accounting profit - implicit opportunity costs
D) economic profit = Accounting profit - normal profit

19) Kathy is considering quitting her job as a professor, where she earns $50,000 per year, to open a 19)
little business renting jet skis on a beautiful beach in the Caribbean. She calculates that she could
make about $80,000 in revenue a year from her business. The cost of jet skis and all her other
equipment would be $35,000 per year. How much are Kathy's economic profits? How much are
Kathy's accounting profits?
A) economic profits = -$5,000; accounting profits = $45,000
B) economic profits = $80,000; accounting profits = $30,000
C) economic profits = $45,000; accounting profits = -$5,000
D) economic profits = $30,000; accounting profits = $80,000

20) A firm is willing to stay in business if it has 20)

A) zero normal profit. B) zero accounting profit.
C) zero economic profit. D) none of the above

21) The breakeven point is when the firm has 21)

A) zero accounting profit. B) zero economic profit.
C) zero total revenue. D) zero normal profit.

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22) When economists refer to the "short run" they are referring to 22)
A) the time frame where managers must consider at least one input in production as fixed in
quantity.
B) the time frame where managers must consider all inputs in production as fixed in quantity.
C) one year.
D) one month.

23) Which of the following statements is true about the law of diminishing returns? 23)
A) the marginal product of using more of a variable input declines
B) The total product curve can still be increasing.
C) There is at least one fixed input in production, meaning the amount of that input can not
change.
D) all of the above

24) Short-run decision making about production focuses 24)

A) only on the fixed inputs. B) only on the variable inputs.
C) on neither the fixed or variable inputs. D) on both the fixed and variable inputs.

25) Marginal product is found by taking 25)

A) change in total product/total labor.
B) change in total product/change in total labor.
C) total product/total labor.
D) total product/change in total labor.

26) When Brady has three workers in his bakery they can make 40 pastries an hour. When he has four 26)
workers they can make 50 pastries an hour. Average product with four workers is
A) 12.5. B) 10. C) 200. D) 160.

27) When Brady has three workers in his bakery they can make 40 pastries an hour. When he as four 27)
workers they can make 50 pastries an hour. The marginal product of the 4th worker is
A) 12.5. B) 10. C) 200. D) 160.

Table 7.3
Number of Workers Total Output
0 0
1 100
2 180
3 240
4 280
5 300

28) Refer to Table 7.3. What is the marginal product of the 3rd worker? 28)
A) 20 B) 60 C) 80 D) 140

29) Refer to Table 7.3. What is the average product of the 5th worker? 29)
A) 20 B) 60 C) 80 D) 140

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30) The point of diminishing returns occurs at the point where 30)
A) the slope of the total product curve is negative.
B) the slope of the total product curve is positive.
C) the slope of the total product curve begins decreasing.
D) the slope of the total product curve is zero.

31) Total variable costs ________ in the short run as the quantity of output increases. 31)
A) increase B) decrease
C) decrease at first and then increase D) remain constant

32) Total cost ________ in the short run as the quantity of output increases. 32)
A) decreases B) decreases at first and then increases
C) remains constant D) increases

33) Your mother yells at you for skipping your Economics class last week. She says, "I paid good 33)
money for you to take that class, now I expect you to attend." You respond to your mother, "I have
learned a lot in economics, and one of the things is that the money you spent on tuition is a
________ so I ________ consider it in making my decision."
A) sunk cost; should not B) opportunity cost; should not
C) sunk cost; should D) opportunity cost; should

34) If a firm has labor as its only variable input, the total cost curve is shaped identically to the 34)
__________
A) total product curve. B) labor requirements curve.
C) fixed cost curve. D) marginal product curve.

Table 8.2
Fixed Variable Total Marginal Average
Quantity Costs Costs Costs Costs Total Cost
0 300 0 --- ---
1 340
2 200
3 200

35) Refer to Table 8.2. What is the marginal cost of producing the 1st unit? 35)
A) 140 B) 100 C) 40 D) 340

36) Refer to Table 8.2. What is the variable cost of producing the 2nd unit? 36)
A) 100 B) 300 C) 150 D) 50

37) Refer to Table 8.2. What is the total cost of producing the 3rd unit? 37)
A) 300 B) 500 C) 200 D) 450

38) McDonald's has fixed costs of $200. When McDonald's makes 500 hamburgers, their variable costs 38)
are $150. When McDonald's makes 600 hamburgers, their variable costs are $250. The average
total cost when they are making 600 hamburgers is ________. The marginal cost for the range
between 500 and 600 hamburgers is ________.
A) ATC = $0.75; MC = $1.00 B) ATC = $1.30; MC = $2.00
C) ATC = $0.75; MC = $2.00 D) ATC = $1.30; MC = $1.00

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39) The rule of profit maximization says that firms should produce at the point where 39)
A) price equals average cost. B) price equals total cost.
C) marginal revenue equals marginal cost. D) total revenue equals total cost.

Table 8.3
Quantity Sold Total Cost
40 $374
41 376
42 380
43 385
44 390
45 400
46 412
47 425

40) Refer to Table 8.3. If the market price is $10, what quantity of output would the price-taking firm 40)
produce?
A) 43 units B) 42 units C) 45 units D) 46 units

41) Refer to Table 8.3. If the market price is $10, what is the maximum profit a price-taking firm can 41)
earn?
A) $ 40 B) $ 50 C) $ 20 D) $378

Figure 8.5

42) Refer to Figure 8.5. If the market price is $60, what will be the quantity that the firm will sell? 42)
A) 4 B) 3 C) 7 D) 9

43) Refer to Figure 8.5. If the price is $60, how much are the firm's profits? 43)
A) $108 B) $0 C) $40 D) $90

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 Figure 15.2

44) Refer to Figure 15.2. The graph shows the demand, supply, and marginal social cost for a product. 44)
If there were no government intervention, what quantity of the product would be supplied by the
market?
A) 15 B) 20 C) 35 D) 50

45) Refer to Figure 15.2. The graph shows the demand, supply, and marginal social cost for a product. 45)
What is the efficient quantity of the product?
A) 15 B) 20 C) 35 D) 50

46) Refer to Figure 15.2. The graph shows the demand, supply, and marginal social cost for a product. 46)
Which of the following statements is true?
A) The product has a positive externality.
B) The product does not have an externality.
C) The product is a common property resource.
D) The product has a negative externality.

47) Refer to Figure 15.2. The graph shows the demand, supply, and marginal social cost for a product. 47)
For a quantity of 25, what is the marginal external cost of the 25th unit?
A) 150 B) 325 C) 175 D) 100

48) Refer to Figure 15.2. The graph shows the demand, supply, and marginal social cost for a product. 48)
Which of the following statements is true?
A) Marginal external costs are rising with output.
B) Marginal external costs do not change as output changes.
C) Marginal external costs are falling with output.
D) There are no marginal external costs.

49) The social costs of a transaction that has a negative externality are the 49)
A) private costs - external costs. B) private costs + external costs.
C) external costs only. D) private costs only.

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50) A price-taking firm is selling 100 units of a good for the market price. If the marginal cost of the 50)
100th unit is higher than the marginal revenue of that unit,
A) the firm could increase profit by selling more units at the current price.
B) the firm could increase profit by selling fewer units at the current price.
C) the firm could increase profit by lowering the price.
D) the firm could increase profit by increasing the price.

51) Which of the following is an example of a negative externality? 51)

A) not studying as much for your econ test as you should have so you get a lower grade than you
want
B) getting your car washed
C) allowing your cell phone to ring in class
D) getting a flu immunization shot

52) Jason loves to listen to his music loudly. He would be willing to pay $10 an hour to have his music 52)
as loud as it is but since he is listening in his own house he doesn't have to pay anything. Mark is
Jason's neighbor and he hates loud music. He would be willing to pay $2 an hour to have Jason
turn down his music. The music Jason listens to is free on the radio so there are no other benefits or
costs involved with Jason listening to music. The private cost of the music is ________ and the
social cost of the music is ________.
A) $10 private cost; $0 social cost B) $0 private cost; $2 social cost
C) $10 private cost; $12 social cost D) $0 private cost; $10 social cost

53) Jason loves to listen to his music loudly. He would be willing to pay $10 an hour to have his music 53)
as loud as it is but since his is listening in his own house he doesn't have to pay anything. Mark is
Jason's neighbor and he hates loud music. He would be willing to pay $2 an hour to have Jason
turn down his music. The music Jason listens to is free on the radio so there are no other benefits or
costs involved with Jason listening to music. The private benefit of the music is ________.
A) $0 B) $12 C) $2 D) $10

Figure 8.10

54) Refer to Figure 8.10. For which range would a doubling of inputs more than double the output the 54)
firm produces?
A) A B) B C) C D) all of the above

8
55) Which of the following is a possible government solution to common property resources? 55)
A) charge fees for the use of the common resources
B) selling the property rights to the common resources to a single user
C) use permits or other regulations to limit production
D) all of the above

56) When the government uses technology mandates to address the problem of pollution it 56)
A) requires firms pay a tax for the pollution they create.
B) instructs producers as to the exact technology to install to reduce pollution.
C) charges a user fee for those who use products that pollute.
D) is appealing to the social conscience of people and exhorting them to do the right thing.

Figure 15.5

57) Refer to Figure 15.5. The graph shows the demand, supply, and marginal social cost of a product. 57)
If the government wants to use a tax on the product to get the efficient quantity of the good, the tax
should be set equal to
A) $125. B) $75. C) $150. D) $45.

58) Which of the following is a difficulty with using taxes to solve the problem of pollution? 58)
A) Taxes do not give firms an incentive to find cheaper ways to reduce pollution.
B) It is difficult to set the appropriate tax level because external damages of pollution may vary
by time and place.
C) It is not possible to put a price on the environment so only an infinitely high tax would result
in the efficient outcome.
D) It imposes all costs of pollution cutbacks on the "moral" firms that are willing to pay the tax.

9
SHORT ANSWER. Write a single paragraph to answer the question. Use a diagram if necessary.

59) How is a secondary market, like the stock market, different from other markets we have 59)
studied?

60) Given that corporations have limited liability, why do so many small businesses choose to 60)
be sole-proprietorships rather than corporations?

61) Brett buys comic books and mystery novels. He has a certain amount he spends per month 61)
on these goods. When the price of comic books increases, explain how the income effect
and substitution effect of this price change will affect the number of comic books and
mystery novels Brett buys.

62) If a product were free, would you want to consume an infinite amount of the product? 62)
Explain.

63) Ruth Anne quits her $1,200 a month job as a secretary to start a typing service out of her 63)
home. She charges $1 per page and types 2,500 pages per month. Ruth Anne's explicit
costs are $1,000 per month. Calculate Ruth Anne's accounting profits and her economic
profits. Would you recommend that Ruth Anne continue with the typing service or go
back to being a secretary?

64) Tom is playing cards with his friends and starts boasting how at work he just ordered 64)
expensive speakers for his computer, a new chair that has real leather, and upgraded all
his airline flights to first class. He said his company is so big that no one will even notice
when he passes the bill on to the company. How does this relate to the principal-agent
problem and what incentives would you suggest Tom's company try?

Table 6.6
Total Utility of Total utility of
Hours of Climbing climbing Hours of Soccer soccer
1 100 1 80
2 180 2 150
3 240 3 210
4 280 4 260
5 300 5 300
6 310 6 330

65) Refer to Table 6.6. The table shows Tina's utility from rock climbing and playing indoor 65)
soccer. Tina's income to spend on these two activities is $60. Determine the combination of
rock climbing and soccer that maximizes Tina's utility if the price of soccer is $10 and the
price of rock climbing is $10.

10
66) The following table shows Kristine's utility from cross-country skiing and rock climbing. 66)
The price of rock climbing is $5 and the price of skiing is $5. Calculate the combination of
rock climbing and skiing that maximizes Kristine's utility if she has $30 to spend. Calculate
the combination of rock climbing and skiing that maximizes Kristine's utility if she has $40
to spend. How does an increase in income affect Kristine's quantity demanded for rock
climbing and for skiing? In this example, are rock climbing and skiing normal goods?

Total Marginal Marginal Marginal

Hours Utility Utility Utility Total Marginal Utility
Rock Rock Rock per Hours Utility Utility per
Climbing Climbing Climbing dollar Skiing Skiing Skiing dollar
0 0 - 0 0 -
1 30 30 1 20 20
2 50 20 2 35 15
3 60 10 3 45 10
4 65 5 4 50 5
5 67 2 5 52 2

67) Explain what we mean by consumer equilibrium and what is necessary for a consumer to 67)
be in equilibrium.

68) Why does the law of diminishing returns only apply in the short run? 68)

69) Refer to the graph below. At what quantity of labor is the point of diminishing returns? 69)
Explain what this means.

70) Why is it necessary to have a fixed input in order to have diminishing marginal returns? 70)

71) What is the rule of profit maximization? Why does this maximize profit? 71)

11
 Figure 15.4

72) Refer to Figure 15.4. The graph shows the demand, supply, and marginal social costs for a 72)
product. Does this product have a positive externality, a negative externality, or no
externality? Explain.

73) Refer to Figure 15.4. The graph shows the demand, supply, and marginal social costs for a 73)
product. If there is no government intervention, will the market result in the efficient
quantity of the good? Explain. In your explanation, state what quantity will be the market
quantity and what the efficient quantity is if it is different from the market quantity.

74) Refer to Figure 15.4. The graph shows the demand, supply, and marginal social costs for a 74)
product. For a quantity of 40, state what the marginal private cost of the 40th unit is, what
the marginal external cost of the 40th unit is, and what the marginal social cost of the 40th
unit is. For each of the three costs, briefly explain where on the graph the information
came from.

12
 Figure 15.8

75) Refer to Figure 15.8. The graph shows the marginal external cost of pollution emissions 75)
and the demand for pollution emissions from firms. If there were no government
intervention in the market, what quantity of emissions would there be? Is this the efficient
quantity of emissions? Explain, and if it is not the efficient quantity include the efficient
quantity in your explanation.

76) Refer to Figure 15.8. The graph shows the marginal external cost of pollution emissions 76)
and the demand for pollution emissions from firms. If the government were to issue
marketable permits for pollution, where each permit allows one unit of pollution, how
many permits should be issued? How much pollution abatement will this result in?

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Answer Key
Testname:

1) C
2) A
3) A
4) C
5) C
6) D
7) D
8) A
9) C
10) A
11) C
12) B
13) B
14) D
15) B
16) C
17) A
18) A
19) A
20) C
21) B
22) A
23) D
24) B
25) B
26) A
27) B
28) B
29) B
30) C
31) A
32) D
33) A
34) B
35) C
36) A
37) B
38) A
39) C
40) C
41) B
42) D
43) D
44) B
45) A
46) D
47) A
48) A
49) B
50) B
14
Answer Key
Testname:

51) C
52) B
53) D
54) A
55) D
56) B
57) B
58) B
59) In a secondary market, the firm that produces the product is not involved in the sale. Rather, whoever bought the
product then sells it to another person or business. For example, with the stock market when a share of IBM stock is
sold on the stock market, IBM is not involved in the transaction and does not receive any money from the sale of the
stock.
60) Corporations have to pay corporate income tax. This means that an individual who owns a corporation has to pay tax
on profits twice once as the corporation and the second time as personal income. In addition, corporations have
reporting and procedural requirements that sole proprietorships do not have to worry about.
61) The increased price reduces Brett's purchasing power resulting in his purchasing fewer comic books and mystery
novels. The substitution effect of the price increase is to substitute more mystery novels for the now more expensive
comic books. The result is Brett will buy fewer comic books and may purchase more or less mystery novels depending
on if the income effect or substitution effect is larger.
62) No. When the marginal utility of a free good reaches zero, you will move on to other goods that offer positive
marginal utility.
63) Accounting = Total Revenue - Explicit costs = $1 * 2,500 - $1,000 = $1500
Economic profits = $300
She should stay with the typing business since it has positive economic profits.
64) Tom's goals do not line up with the goals of the owners of his company. His company's owners want to make a profit
while Tom wants to make his life easier. Since the company is big, there is more distance between Tom and the owners
so Tom might be able to get away with his behavior. Tom's company might want to try an incentive pay system where
Tom's pay increases if the company is more profitable. They could also try a stock-option plan where Tom can buy
shares of stock in the company at a fixed price, thus being able to make money on the investment if the stock price rises
because the company is profitable. Either type of incentive will increase Tom's incentive to see the company be
profitable, the goal of the owners.
65) three rock climbing and three soccer
66) With $30 to spend: three rock climbing, three skiing. With $40 to spend: four rock climbing, four skiing. An increase
in income increases the quantity demanded for both rock climbing and skiing. Therefore, both goods must be normal
goods.
67) Consumer equilibrium means the consumer is maximizing utility subject to a budget constraint. This happens when
the rule of utility maximization is followed. The marginal utility per dollar spent must be the same for all goods.
68) The law of diminishing returns is predicated on the fact that some input in production is fixed. If there is only a
limited amount of capital, then as more workers are added each unit of labor has less capital to work with. In the long
run, more capital can be added (such as a larger factory) and marginal product does not have to decline.
69) Diminishing returns begins after 5 units of labor. The quantity of output increases from 10 to 15 when the 5th worker
is added, for a marginal product of 5. The quantity of output only increases from 15 to 18 when the 6th worker is
added, for a marginal product of 5. This is where marginal product begins declining, the point of diminishing returns.
Diminishing returns means that as additional workers are added, the incremental change in output from adding the
worker decreases.
70) If there is not a fixed input, then all inputs could be increased and average total product would not go down. For
example, a farmer could increase the size of land that is planted as well as increasing fertilizer and seeds. This will
increase the crop proportionally. If, however, the amount of land is fixed, then adding more fertilizer and seeds will
have a diminishing return because there is only a certain area of land to grow the crop.

15
Answer Key
Testname:

71) The rule is firms should produce to the point at which marginal revenue equals marginal cost. This maximizes profit
because it results in selling all units of the good that have a marginal profit. If marginal revenue is greater than
marginal cost, the unit is sold. However, if marginal revenue is less than marginal cost, the unit is not sold.
72) The product has a negative externality. The marginal social costs of the good are higher than the private costs (which
is given by the supply curve). The difference between the supply curve and the marginal social cost curve is the
amount of the external cost.
73) The market quantity will be where supply crosses demand, at a quantity of 80. This is more than the efficient quantity
of 60 (where marginal social costs crosses demand). The market supplies more than the efficient quantity of the good
because consumers only consider the price they have to pay for the good (the private costs) and not the external costs
being imposed on others. There is a negative externality so that the marginal social costs are greater than the marginal
private costs and the result the market supplies more than the efficient quantity.
74) The marginal private cost is given by the supply curve. For a quantity of 40, the marginal private cost is $4. The
marginal external cost is the difference between the marginal private cost (supply curve) and the marginal social cost.
The marginal private cost is $4 and the marginal social cost is $8 so the marginal external cost is $8 - $4 = $4. It is the
distance between the supply curve and the marginal social cost curve. The marginal social cost is given by the
marginal social cost curve. For a quantity of 40, the marginal social cost is $8.
75) Without government intervention the price of pollution emissions is zero, so firms will pollute whatever pollution
brings them positive benefits as shown by the demand curve. The result is 100 units of pollution. This is not the
efficient quantity. The efficient quantity is where marginal benefits of pollution (given by the demand curve) equals
the marginal cost of pollution, a quantity of 40. The market will provide more than the efficient quantity of pollution
because firms do not have to pay the cost of pollution.
76) The efficient quantity of pollution is 40 units. Therefore, the government should issue 40 permits. This results in 60
units of pollution abatement because without the permits the market would have 100 units of pollution.

16