MICROECONOMICS PRACTICE EXAM #1

Section 1—Multiple Choice

Directions: You will have 70 minutes to answer the following 60 multiple choice questions.
Each of the questions or incomplete statements below is followed by five suggested answers or
completions. Select the one that is best in each case by choosing the oval next to that answer.

1. The concept of scarcity can be best summed up as:

(A) the fact that there is always a surplus of goods when price is high
(B) the reality that individuals have unlimited wants and limited resources
(C) what an individual gives up when faced with making a decision
(D) the increased amount of product one must give up when choosing to produce more of
another product
(E) the process in which society must determine the optimal price to set in a given market

2. A command economy is most likely to have which of the following characteristics?

(A) the protection of private property rights

(B) the ability for society to choose what will be produced
(C) an economic system that is primarily controlled by a central government
(D) a free market enterprise system that encourages the start-up of new businesses
(E) the enforcement and encouragement of competition in the marketplace

3. Assume that the price elasticity of demand for a product is equal to 2. If the price of this
product increases, which of the following statements is true for the firm that produces this
product?

(A) total revenue will decrease since the percent change in quantity demanded will be more
significant than the percent change in price
(B) total revenue will decrease since the percent change in price will be more significant than the
percent change in quantity demanded
(C) total revenue will increase since there will be an increase in quantity demanded for this
product
(D) total revenue will increase since there will be a decrease in quantity demanded for this
product
(E) there will be no change in total revenue as elasticity and the calculation of total revenue have
no relation with one another
Question 4 refers to the graph below.

If a price floor “Pf” is implemented in the market for grapes as shown above, which of the
following will occur in the market for grapes?

(A) The equilibrium price will increase since there will be a surplus for grapes
(B) The equilibrium price will increase since there will be an increase in the quantity demanded
of grapes
(C) The equilibrium price will decrease since there will be a surplus of grapes
(D) The equilibrium price will decrease since there will be a decrease in the quantity demanded
of grapes
(E) The equilibrium price will remain unchanged as the price floor as shown will have no effect
on the market for grapes

5. Suppose that the market for bicycles is currently in equilibrium. A change in which of the
following will lead to an increase in the quantity supplied of bicycles?

(A) An increase in the market price of bicycles

(B) A decrease in the cost of inputs that are used in the production of bicycles
(C) An increase in the productivity of workers who produce bicycles
(D) A decrease in the price of scooters, which is a substitute for bicycles
(E) An increase in the price of bicycle helmets, which is a complement to bicycles
6. Debbie likes to consume brownies and fudge. At her current consumption, the marginal utility
received from consuming another unit of brownies is 15, and the price of a brownie is $3. If the
price of fudge is currently $5, which of the following statements is true?

(A) Debbie should choose to consume an additional unit of fudge if her marginal utility of fudge
is equal to 20.
(B) Debbie should choose to consume an additional unit of fudge if her marginal utility of fudge
is greater than 25.
(C) Debbie should choose to consume more brownies, regardless of her marginal utility of fudge.
(D) Debbie should choose to consume more brownies if her marginal utility of fudge is equal to
30.
(E) Debbie should choose to consume more brownies if her marginal utility of fudge is equal to
40.

7. The point at which all inputs to production become variable in the production process is
known as the:

(A) law of diminishing returns

(B) short run
(C) shut-down point
(D) long run
(E) profit-maximization rule

8. A given monopolist will maximize profit when marginal revenue is $10, average revenue is
$15, and marginal cost is $10. If the monopolist is currently operating at an output where price
is equal to $8, what should this monopolist do to the price and quantity produced of its product in
order to maximize profits?

Price of Product Quantity Produced of Product

(A) Increase Increase

(B) Increase Decrease
(C) Decrease Increase
(D) Decrease Decrease
(E) No change Decrease

9. Which of the following is true regarding the demand curve for labor in the factor market?

(A) it is perfectly elastic

(B) it is perfectly inelastic
(C) it reflects the inverse relationship between wages paid to laborers and the quantity demanded
of labor by business
(D) it reflects the direct relationship between wages paid to laborers and the quantity demanded
of labor by business
(E) it is upward sloping and has a positive slope
Questions 10-11 refer to the graph below, where MC = Marginal Cost, ATC = Average
Total Cost, AVC = Average Variable Cost, P = Price, and MR = Marginal Revenue.

10. At which quantity will this firm maximize profit?

(A) Q1
(B) Q2
(C) Q3
(D) Q4
(E) Q5

11. Below which price would this firm be advised to shut down in the long run?

(A) P1
(B) P2
(C) P3
(D) P4
(E) P5

12. The difference between the average total cost curve and average variable cost curve can be
best described as the:

(A) sum of the average fixed cost and marginal cost curves
(B) marginal cost curve
(C) long run average total cost curve
(D) difference of the average variable cost and average fixed cost curves
(E) average fixed cost curve

13. Firm XYZ’s marginal revenue and average revenue are always equal to each other,
regardless of the quantity that XYZ produces. The type of industry that Firm XYZ operates in
must be:

(A) perfect competition

(B) monopoly
(C) monopolistic competition
(D) oligopoly
(E) imperfect competition

14. Assume that the pursuit of a college education creates a positive externality. Which of the
following statements is necessarily true?

(A) The socially optimal quantity is less than the private market quantity of college education.
(B) Government should tax the market for college education to arrive at the socially optimal
quantity.
(C) The socially optimal price is less than the private market price of college education.
(D) The free-rider problem will have considerable effects on the market for college education.
(E) Government should subsidize the market for college education in order to arrive at the
socially optimal quantity.

15. Suppose that peanut butter and jelly are complements. If the price of peanut butter increases,
what will happen to the price of jelly and the demand for jelly in the jelly market?

Price of Jelly Demand for Jelly

(A) Decrease Decrease

(B) Decrease Increase
(C) Increase Indeterminate
(D) Increase Increase
(E) Increase Decrease

16. If average total costs increase as a firm increases its production in the long run, this firm must
be experiencing:

(A) economies of scale

(B) economies of scope
(C) constant returns to scale
(D) diseconomies of scale
(E) productive efficiency
17. A monopolistically competitive firm is currently in long-run equilibrium. If the output of the
firm is 20 units and the price the firm receives for each product is $5 at this equilibrium, what is
the average total cost for this firm?

(A) $0
(B) $5
(C) $20
(D) $100
(E) There is not enough information given to determine average total cost.

Question 18 refers to the graph below.

Which of the following could lead to a movement from point “B” to point “D” on the graph
above?

(A) An increase in the unemployment rate

(B) A decrease in the productivity of apple workers
(C) A decrease in orange production and an increase in apple production
(D) An increase in the availability of resources used to produce apples and oranges
(E) A decrease in apple production and an increase in orange production

19. The cross-price elasticity of demand for Good X and Good Y is equal to 2.5. What does this
infer about the relationship between Good X and Good Y?

(A) Good X and Good Y are both inferior goods

(B) Good X and Good Y are both elastic in demand
(C) Good X and Good Y are substitutes
(D) Good X and Good Y are complements
(E) Good X and Good Y are both luxury goods

20. Which of the following is true for a perfectly competitive firm that maximizes profit in the
long run?
(A) Price will be greater than average total cost
(B) Price will equal marginal cost
(C) Marginal revenue will be less than average variable cost
(D) Average fixed cost will be greater than average variable cost
(E) Average revenue will be less than average total cost

21. If marginal productivity increases as the quantity of labor increases, then:

(A) total productivity must be increasing at a decreasing rate

(B) total productivity must be increasing at an increasing rate
(C) total productivity must be decreasing at a constant rate
(D) average productivity must be decreasing at an increasing rate
(E) average productivity must be decreasing at a decreasing rate

22. A monopolist has a marginal cost of $20 and an average variable cost of $25 at a quantity of
10 units of output. If marginal cost is equal to $19 at a quantity of 11 units of output, then:

(A) average total cost must be increasing

(B) average fixed cost must be increasing
(C) average variable cost must be increasing
(D) average variable cost must be decreasing
(E) marginal productivity must be decreasing

23. A firm that operates in an oligopolistic industry:

(A) will always produce where MC = MR

(B) faces no barriers to entry
(C) is productively efficient in the long run
(D) is allocatively efficient in the long run
(E) will make pricing decisions based on the actions of other firms

24. Which of the following is true for both a perfect competitor and a monopolistic competitor in
the long run?

Perfect Competitor Monopolistic Competitor

(A) Price = Marginal Revenue Price > Marginal Revenue

(B) Price < Marginal Cost Price > Marginal Cost
(C) Price = Average Revenue Price < Average Revenue
(D) Demand > Marginal Revenue Demand < Marginal Cost
(E) Demand = Average Revenue Demand < Marginal Revenue
Question 25 refers to the graph below.

A per-unit tax is implemented the market above, leading to a new equilibrium quantity and price
of Q2 and P2. Which of the following statements is true?

(A) The demand for this product is relatively elastic.

(B) The supply for this product is perfectly inelastic.
(C) Consumers will bear a greater portion of the tax than producers.
(D) Producers will bear a greater portion of the tax than consumers.
(E) Consumers and producers will share the burden of tax equally.

26. Assume that the consumption of cigarettes creates additional costs to society. If the
government taxes firms that produce cigarettes, which of the following should occur in the
market for cigarettes?

Quantity Produced Deadweight Loss

(A) Decrease No change

(B) Decrease Increase
(C) Decrease Decrease
(D) Increase No change
(E) Increase Increase
Questions 27-28 are based on the information below, which shows the marginal physical
product and selling price of t-shirts at various quantities of labor. Assume that marginal
physical product represents the amount of t-shirts that can be produced by a given worker
in one day.

27. What is the marginal revenue product of the 6th worker?

(A) $5
(B) $8
(C) $20
(D) $30
(E) $40

28. If this firm can hire as many laborers as it would like at a daily wage of $65, what is the
profit-maximizing number of laborers this firm should hire?

(A) three
(B) four
(C) five
(D) six
(E) seven

29. Which of the following is true if a monopolist can successfully use price discrimination to
earn short-run economic profits?

(A) The monopolist will produce at a quantity that is less than the quantity where marginal cost
equals marginal revenue
(B) The monopolist will produce at a quantity that is greater than the quantity where marginal
cost equals marginal revenue
(C) Consumer surplus will increase as profits increase for the monopolist
(D) Marginal revenue will be negative at the profit-maximizing quantity
(E) There will be no deadweight loss at the profit-maximizing quantity
30. Suppose that the current equilibrium price of grapes is equal to $2.50 per pound. If
producers of grapes charge a price of $3.50 per pound, which of the following will occur in the
market for grapes?

(A) The demand for grapes will increase

(B) The quantity supplied of grapes will decrease
(C) There will be a shortage of grapes
(D) There will be a surplus of grapes
(E) The new equilibrium price of grapes will equal $3.50 per pound

31. A perfectly competitive firm perceives the demand curve for its product to be:

(A) perfectly elastic

(B) relatively elastic
(C) unit elastic
(D) relatively inelastic
(E) perfectly inelastic

32. Consumer and producer surplus in the market for a particular good can be maximized when:

(A) markets are allocatively efficient

(B) excise taxes are imposed
(C) price floors are implemented
(D) deadweight loss increases
(E) monopolists are allowed to operate freely

Questions 33-34 are based on the information in the payoff matrix below. The first entry in
each cell illustrates the profits to Joe, and the second entry in each cell illustrates the
profits to Nancy.

33. What is the predicted Nash equilibrium given the information above?
(A) Joe will price high and Nancy will price high
(B) Joe will price high and Nancy will price low
(C) Joe will price low and Nancy will price high
(D) Joe will price low and Nancy will price low
(E) There is not enough information to determine a Nash equilibrium

34. According to the information above, which of the following is true?

(A) Joe has a dominant strategy to price high while Nancy does not have a dominant strategy
(B) Nancy has a dominant strategy to price low while Joe does not have a dominant strategy
(C) Both Joe and Nancy have a dominant strategy to price low
(D) If Joe prices high, Nancy will be better off if she prices high
(E) If Nancy prices low, Joe will be better off if he prices high

35. Firm X operates in a perfectly competitive industry and is currently in a long-run

equilibrium. Which of the following statements concerning Firm X’s profit is true?

(A) Firm X has a positive accounting profit.

(B) Firm X has a negative accounting profit.
(C) Firm X has a positive economic profit.
(D) Firm X has a negative economic profit.
(E) Firm X has a negative normal profit.

36. Which of the following is the best example of a private good?

(A) Missiles that are produced to support the national defense of an economy
(B) Elementary schools that are built in new communities
(C) The construction of a bridge to connect two highway systems
(D) The addition of a traffic light at a busy intersection
(E) A lighthouse that is converted into hotel rooms for vacationers

37. Assume that Hayden’s Blueberry Farm operates in a perfectly competitive industry. If the
demand for blueberries increases in the market for blueberries, what is true for Hayden’s
Blueberry Farm?

(A) Average revenue will decrease

(B) Marginal cost will decrease
(C) Average total cost will increase
(D) Hayden’s Farm should increase its output in order to maximize profits
(E) Hayden’s Farm should decrease its output in order to maximize profits
38. A simultaneous decrease in the supply and demand for a good will cause the equilibrium
price and quantity of that good to change in which of the following ways?

Equilibrium Price Equilibrium Quantity

(A) Indeterminate Increase

(B) Indeterminate Decrease
(C) Decrease Increase
(D) Decrease Decrease
(E) Increase Indeterminate

39. Suppose that Tori only consumes two goods, Good A and Good B. If the price of Good A
increases while the price of Good B remains unchanged, which of the following is true?

(A) The income effect will predict an increase in demand of Good A.

(B) The substitution effect will predict a decrease in demand of Good A.
(C) The marginal utility per dollar of Good A will increase.
(D) The marginal utility per dollar of Good B will increase.
(E) The marginal utility per dollar of Good A and B will remain unchanged.

40. The following question is based on the table below.

Assume that the disposal of chemicals in a community has created toxic waste. If the first
column represents the quantity of toxic cleanup that can be undertaken, what is the socially
optimal quantity of cleanup for this community?

(A) one
(B) two
(C) three
(D) four
(E) five

41. A decrease in tariffs on foreign automobiles will have which of the following effects in the
market for domestic automobiles in the United States?
(A) The demand for domestic automobiles will decrease since the cost of foreign automobiles
will become less expensive
(B) The demand for domestic automobiles will remain unchanged as tariffs will have no effect
on the demand for domestic automobiles
(C) The supply for domestic automobiles will increase since there will be a decrease in the cost
of inputs to production for domestic automobiles
(D) Domestic automobiles will tend to become inferior goods while foreign automobiles will
tend to become luxury goods
(E) Domestic automobiles will tend to become luxury goods while foreign automobiles will tend
to become inferior goods

42. A monopolistic competitor is currently maximizing profits at a quantity of 500 units. At this
quantity, marginal cost is $30, average total cost is $35, and the price of each unit sold is $40.
What is this firm’s overall profit at a quantity of 500 units?

(A) $500
(B) $2,500
(C) $5,000
(D) $15,000
(E) $20,000

43. A nation has a comparative advantage in the production of a particular good if:

(A) the opportunity cost of producing the good is less than that of another country
(B) it can produce more units of the good than another country can given the same amount of
resources
(C) it can operate at an output that is on its production possibilities curve
(D) it can operate at an output that is inside its production possibilities curve
(E) its resources can specialize in the production of the good

44. A monopolist:

(A) minimizes average total cost when it produces at the profit-maximizing quantity
(B) minimizes deadweight loss when it produces at the profit-maximizing quantity
(C) produces at a profit-maximizing output that is comparatively less than that of a perfectly
competitive firm
(D) charges a lower price at the profit-maximizing output than that of a perfectly competitive
firm
(E) breaks even in the long run
45. A lump-sum tax that is imposed on firms engaged in monopolistic competition will:

(A) decrease the profit-maximizing quantity of firms in the industry

(B) increase the profit-maximizing quantity of firms in the industry
(C) increase the average variable cost curves of firms in the industry
(D) increase the marginal cost curves of firms in the industry
(E) increase the average fixed cost curves of firms in the industry

46. Which of the following is the best example of a negative externality?

(A) The construction of a new road that will reduce traffic during morning and afternoon hours
(B) An increase in the availability of flu vaccines
(C) Loud music that is played by a resident in an apartment building
(D) Excise taxes that are levied on the purchase of cigars
(E) The proliferation of an insect that feeds on termites, which can damage wood that is used in
the construction of homes

Question 47 refers to the graph below, which shows the labor market for a monopsony.

47. If a minimum wage of $12 is implemented by the government in the monopsony above, what
will be the profit-maximizing quantity of labor that will be hired and the wage that will be paid
to laborers?

Quantity of Labor Wage Rate

(A) 25 $18
(B) 25 $10
(C) 40 $16
(D) 40 $12
(E) 60 $14

48. The law of diminishing marginal productivity states that:

(A) all inputs to production will become variable once productivity begins to decrease
(B) the amount of satisfaction received from the consumption of a good will decrease as more
and more of the good is consumed
(C) productivity will at some point begin to decrease as more and more of a variable input is
added to a set amount of fixed inputs
(D) productivity will decrease during the early stages of production but will increase as more
labor is added to a set amount of fixed inputs
(E) total productivity must be decreasing if marginal productivity is decreasing

49. It is easiest for oligopolies to collude with one another when:

(A) the number of firms in the industry is small

(B) pricing information is not available to all firms
(C) supply quotas are not enforced
(D) firms in the industry act as perfect competitors
(E) the products that each firm produces are unique

Questions 50-51 are based on the information below, which shows the distribution of
income for the countries of Lumingston and Ambronia.

50. The second quintile of households in Ambronia earn approximately:

(A) 3.4% of total income in Ambronia

(B) 8.4% of total income in Ambronia
(C) 11.8% of total income in Ambronia
(D) 15.4% of total income in Ambronia
(E) 27.2% of total income in Ambronia
51. Which of the following statements is true according to the tables above?

(A) Income is distributed more equally in Ambronia than it is in Lumingston.

(B) Average income in Lumingston is greater than the average income in Ambronia.
(C) Average income in Ambronia is greater than the average income in Lumingston.
(D) The gini coefficient of Ambronia is greater than the gini coefficient of Lumingston.
(E) The gini coefficient of Lumingston is greater than the gini coefficient of Ambronia.

52. A monopolist is currently producing at an unregulated profit-maximizing output. If the

government decides to regulate this monopoly and requires it to produce at the allocatively
efficient level of output, which of the following statements is necessarily true?

(A) The area of total consumer surplus will increase.

(B) Total revenue for the monopoly will decrease.
(C) Price will equal average total cost.
(D) Marginal revenue will equal zero.
(E) A per-unit tax will be required in order for the monopolist to earn short-run economic profits.

53. George has a total of 10 hours to study for two final exams, Geology and Physics. If he uses
all 10 hours to study for Geology, he estimates that he can earn a 100% in Geology and a 65% in
Physics. If he uses all 10 hours to study for Physics, he estimates that he can earn a 95% in
Physics and an 80% in Geology. Assuming constant opportunity costs, what exam scores should
George expect to receive if he studies for 7 hours in Physics and for 3 hours in Geology?

Physics Grade Geology Grade

(A) 94 percent 86 percent

(B) 94 percent 91 percent
(C) 86 percent 94 percent
(D) 86 percent 86 percent
(E) 91 percent 94 percent

Question 54 refers to the graph below.

54. Which of the following could cause a decrease in supply as shown in the graph above?

(A) A decrease in consumer income

(B) An increase in the price of a substitute good
(C) An increase in technology that is used to produce this product
(D) A negative change in consumer tastes relating to this product
(E) An increase in the cost of inputs that is used to produce this product

55. Which of the following is true if a firm is experiencing constant returns to scale in the long
run?

(A) The firm should increase its output in order to maximize profits.
(B) The firm should decrease its output in order to decrease costs.
(C) Average fixed costs for the firm are constant.
(D) The short-run average total cost curve will be less than the long-run average total cost curve.
(E) The firm is minimizing average total costs.

56. If marginal revenue for a monopolist is equal to zero, then:

(A) demand for the good must be elastic

(B) total revenue must be maximized
(C) marginal cost must be minimized
(D) price must be less than marginal revenue
(E) average revenue must equal marginal revenue

57. The free rider problem is most often associated with:

(A) negative externalities

(B) positive externalities
(C) rivalrous goods
(D) public goods
(E) private goods

58. The short-run supply curve for a perfect competitor is equal to:

(A) the section of the marginal cost curve where price is greater than average variable cost.
(B) the entire marginal revenue curve.
(C) the section of the average variable cost curve where price is less than average total cost.
(D) the entire average total cost curve.
(E) the long run supply curve for a monopolist.

59. If Stacey’s income increases by 50 percent, her demand for designer purses will increase by
100 percent. As a result, Stacey would consider designer purses to be a:

(A) necessity
(B) luxury good
(C) inferior good
(D) Giffen good
(E) Veblen good

60. Assume that computers are produced in a perfectly competitive labor market. If the demand
for computers increases, what will happen to the wages of workers who produce computers and
the marginal revenue product of those same workers?

Wages of Workers Marginal Revenue Product

Producing Computers of Computer Workers

(A) No change Increase

(B) Decrease Increase
(C) Decrease Decrease
(D) Increase Decrease
(E) Increase Increase