Practice Exam 2

Question 1

The phenomenon of scarcity stems from the fact that:

(a) most economies’ production methods are not very good.
(b) in most economies, wealthy people consume disproportionate quantities of goods and services.
(c) governments restrict production of too many goods and services.
(d) resources are limited.

Answer 1

(d) resources are limited.

Question 2

A decrease in the price of a good will

(a) increase demand.
(b) decrease demand.
(c) increase quantity demanded.
(d) decrease quantity demanded.

Answer 2

(c) increase quantity demanded.

Question 3

If people can be prevented from using a certain good, then that good is called

(a) rivalrous.
(b) excludable.
(c) a common resource.
(d) a public good.

Answer 3

(b) excludable.

Question 4

Assume the market for cage-free eggs is perfectly competitive. Currently, farmers in this market are making a profit. What is likely to happen to the number of firms and profit in this market in the long run?

(a) the number of firms is likely to increase and profits are likely to remain unchanged.
(b) the number of firms is likely to remain unchanged and profits are likely to increase.
(c) the number of firms is likely to increase and profits are likely to decrease.
(d) the number of firms is likely to decrease and profits are likely to increase.

Answer 4

(c) the number of firms is likely to increase and profits are likely to decrease.

Question 5

What is the difference between an “increase in demand” and an “increase in quantity demanded”?

(a) there is no difference between the two terms; they both refer to a shift of the demand curve.
(b) an “increase in demand” is represented by a movement along a given demand curve, while an “increase in quantity demanded” is represented by a rightward shift of the demand curve.
(c) there is no difference between the two terms; they both refer to a movement downward along a given demand curve.
(d) an “increase in demand” is represented by a rightward shift of the demand curve while an “increase in quantity demanded” is represented by a movement along a given demand curve.

Answer 5

(d) an “increase in demand” is represented by a rightward shift of the demand curve while an “increase in quantity demanded” is represented by a movement along a given demand curve.

Question 6

In a perfectly competitive market, at long-run equilibrium

(a) price is equal to average cost.
(b) firms are making zero economic profit.
(c) marginal cost is equal to average cost.
(d) all of the above are correct.

Answer 6

(a) price is equal to average cost.
(b) firms are making zero economic profit.
(c) marginal cost is equal to average cost.

Question 7

A monopoly differs from monopolistic competition in that

(a) a monopoly has market power while a firm in monopolistic competition does not have any market power.
(b) a monopoly can never make a loss but a firm in monopolistic competition can.
(c) in a monopoly there are significant entry barriers but there are low barriers to entry in a monopolistically competitive market structure.
(d) a monopoly faces a perfectly inelastic demand curve while a monopolistic competitor faces an elastic demand curve.

Answer 7

(c) in a monopoly there are significant entry barriers but there are low barriers to entry in a monopolistically

Question 8

If duopolists individually pursue their own self-interest when deciding how much to produce, the profit-maximising price they will charge for their product will be

(a) less than the monopoly price.
(b) equal to the perfectly competitive market price.
(c) greater than the monopoly price.
(d) possibly less than or greater than the monopoly price.

Answer 8

(a) less than the monopoly price.

- they hold less market power.

Question 9

A government seeking to raise revenue would be most likely to tax a good with a

(a) high income elasticity of demand.
(b) low cross-price demand elasticity.
(c) high price elasticity of demand.
(d) low price elasticity of demand.

Answer 9

(d) low price elasticity of demand.

Question 10

Q: Quantity / TR: Total Revenue / TC: Total Cost
Q3 | TR: 27 | TC: 25
Q4 | TR: 36 | TC| 32

In Table 1, at a production level of 4 units, which of the following is true?

(a) Marginal cost is $6.
(b) Total revenue is greater than total variable cost.
(c) Marginal revenue is less than marginal cost.
(d) All of the above are correct.

Answer 10

(b) Total revenue is greater than total variable cost.

Question 11

Q5 | TR: 45 | TC: 40
Q6 | TR: 54 | TC: 49

In Table 1, at which quantity of output is marginal revenue equal to marginal cost?

(a) 3
(b) 6
(c) 8
(d) All of the above are correct.

Answer 11

(b) 6

MR: 54 - 45 = 9
MC: 49 - 40 = 9

MR = MC

Question 12

In Table 1, if the firm finds that its marginal cost is $5, it should

(a) reduce fixed costs by lowering production.
(b) increase production to maximise profit.
(c) decrease production to maximise profit.
(d) maintain its current level of production to maximise profit.

Answer 12

(b) increase production to maximise profit.

Question 13

In the housing market, rent controls cause quantity supplied to

(a) fall and quantity demanded to fall.
(b) fall and quantity demanded to rise.
(c) rise and quantity demanded to fall.
(d) rise and quantity demanded to rise.

Answer 13

(b) fall and quantity demanded to rise.

Question 14

In a market economy,

(a) households decide which firms to work for and what to buy with their incomes.
(b) firms decide whom to hire and what to make.
(c) a central planner makes decisions about production and consumption.
(d) Both (a) and (b) are correct.

Answer 14

(a) households decide which firms to work for and what to buy with their incomes.
(b) firms decide whom to hire and what to make.
(d) Both (a) and (b) are correct.

Question 15

Studies of human decision-making have detected systematic mistakes that people make. Which of the following have been detected?

(a) people are overconfident
(b) people give too much weight to a small number of vivid observations
(c) people are reluctant to change their minds
(d) All of the above are correct.

Answer 15

(a) people are overconfident
(b) people give too much weight to a small number of vivid observations
(c) people are reluctant to change their minds

Question 16

If the RMIT T-Shirt Company lowers its price from $6 to $5 and finds that students increase their quantity demanded from 400 to 600 T-shirts, then the demand for T-shirts within this price range is

(a) price inelastic.
(b) price elastic.
(c) unit elastic.
(d) cross elastic.

Answer 16

(b) price elastic.

elasticity = q2-q1/p2-p1 * p1+p2/q1+q2
= (600-400)/(5-6) * (6+5)/(400+600)
= 200/-1 * 0.0111
= -2.2 (answer is always negative)
= Ep > 1 = price elastic

Question 17

The cross-price elasticity of demand for substitute goods must be

(a) greater than one.
(b) less than one.
(c) zero.
(d) greater than zero.

Answer 17

(d) greater than zero.

Question 18

Q | Qd | Qs
12 | 0 | 12
10 | 4 | 10
8 | 8 | 8
6 | 12 | 6
4 | 16 | 4
2 | 20 | 2

According to Table 2, at a price of $4.00, total surplus would be

(a) more than it would be at the equilibrium price.
(b) less than it would be at the equilibrium price.
(c) the same as it would be at the equilibrium price.
(d) There is insufficient information to say.

Answer 18

(b) less than it would be at the equilibrium price.

Question 19

Q | Qd | Qs
12 | 0 | 12
10 | 4 | 10
8 | 8 | 8
6 | 12 | 6
4 | 16 | 4
2 | 20 | 2

According to Table 2, at the equilibrium price, producer surplus would be

(a) $20.
(b) $24.
(c) $28.
(d) $32.

Answer 19

(d) $32.

(equilibrium Q * equilibrium P) / 2

Question 20

Q | Qd | Qs
12 | 0 | 12
10 | 4 | 10
8 | 8 | 8
6 | 12 | 6
4 | 16 | 4
2 | 20 | 2

According to Table 2, at the equilibrium price, total surplus would be

(a) $16.
(b) $24.
(c) $32.
(d) $48.

Answer 20

(d) $48.

Question 21

The production possibilities frontier model shows that

(a) if consumers decide to buy more of a product, its price will increase.
(b) a market economy is more efficient in producing goods and services than is a centrally planned economy.
(c) economic growth can only be achieved by free market economies.
(d) if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good.

Answer 21

(d) if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good.

Question 22

All externalities

(a) cause markets to fail to allocate resources efficiently.
(b) cause equilibrium prices to be too high.
(c) benefit producers at the expense of consumers.
(d) cause equilibrium prices to be too low.

Answer 22

(a) cause markets to fail to allocate resources efficiently.

Question 23

A carbon tax which is designed to reduce pollution is an example of a

(a) command-and-control policy.
(b) government administrative rule.
(c) noneffective incentive.
(d) market-based policy.

Answer 23

(d) market-based policy.

???

Question 24

Price ceilings and price floors

(a) are desirable because they make markets more efficient as well as equitable.
(b) cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price.
(c) can be enacted to restore a market to equilibrium.
(d) are imposed because they can make the poor in the economy better off without causing adverse effects.

Answer 24

(b) cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price.

Question 25

Stuck-On-You Pty Ltd produces and sells staplers. Last year, it produced 5,000 staplers and sold each stapler for $8. In producing the 5,000 staplers, it incurred variable costs of $30,000 and a total cost of $45,000.

Stuck-On-You’s fixed costs amounted to

(a) $15,000.
(b) $30,000.
(c) $40,000.
(d) $50,000.

Answer 25

(a) $15,000.

Fixed costs = Total cost - Variable cost

Question 26

Stuck-On-You Pty Ltd produces and sells staplers. Last year, it produced 5,000 staplers and sold each stapler for $8. In producing the 5,000 staplers, it incurred variable costs of $30,000 and a total cost of $45,000.

In producing the 5,000 staplers, Stuck-On-You’s average variable cost was

(a) $2.
(b) $4.
(c) $6.
(d) $8.

Answer 26

(c) $6.

AVC = VC / total units produced

Question 27

Stuck-On-You Pty Ltd produces and sells staplers. Last year, it produced 5,000 staplers and sold each stapler for $8. In producing the 5,000 staplers, it incurred variable costs of $30,000 and a total cost of $45,000.

Stuck-On-You’s profit for the year was

(a) $–35,000.
(b) $–5,000.
(c) $10,000.
(d) $40,000.

Answer 27

(b) $–5,000.

Profit = Total revue - total costs 
.......... = (5000*8) - 45,000
.......... = 40,000 - 45,000

Question 28

One reason why the “fast-casual” restaurant market is competitive is that

(a) demand for “fast -casual” food is very high.
(b) it is trendy and therefore is likely to have a customer following.
(c) barriers to entry are low.
(d) consumption takes place in public.

Answer 28

(c) barriers to entry are low.

Question 29

The most obvious benefit of specialisation and trade is that they allow us to

(a) work more hours per week than we otherwise would be able to work.
(b) consume more goods than we otherwise would be able to consume.
(c) spend more money on goods that are beneficial to society, and less money on goods that are harmful to society.
(d) consume more goods by forcing people in other countries to consume fewer goods.

Answer 29

(b) consume more goods than we otherwise would be able to consume.

Question 30

A market force that can prevent firms from price discriminating is

(a) fluctuating resource prices.
(b) arbitrage.
(c) high fixed costs.
(d) All of the above are correct.

Answer 30

(b) arbitrage.

Question 31

Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the af-ter-tax equilibrium quantity and the socially optimal quantity of cigarettes?

(a) They are equal.
(b) The after-tax equilibrium quantity is greater than the socially optimal quantity.
(c) The after-tax equilibrium quantity is less than the socially optimal quantity.
(d) There is not enough information to answer the QUESTION.

Answer 31

(a) They are equal.

Question 32

What do economists call the degree of control that a single firm or small number of firms has over the price and production decisions in an industry?

(a) Price and quantity control.
(b) Command economy.
(c) Industry control.
(d) Market power.

Answer 32

(d) Market power.

Question 33

Bill operates a boat rental business in a competitive industry. He owns 10 boats and pays $1,000 per month on the loan that he took out to buy them. He rents each boat for $200 per month. The variable cost for each boat rental is $50. In the off-season, Bill should

(a) operate his business as long as he rents at least 7 boats per month.
(b) operate his business as long as he rents at least 1 boat per month.
(c) operate his business as long as he rents all 10 boats each month.
(d) raise the price he charges per boat rental.

Answer 33

(b) operate his business as long as he rents at least 1 boat per month.
???

Question 34

For a monopolist, profit is determined by which of the following?

(a) Profit = Total Revenue – Total Cost
(b) Profit = (Average Revenue – Average Total Cost) x Quantity
(c) Profit = (Price – Average Total Cost) x Quantity
(d) All of the above are correct.

Answer 34

(d) All of the above are correct.

Question 35

If the market demand for product A is P=100-2Q and the supply of product A is P=2Q, the market equilibrium price and quantity respectively will be

(a) $50; 25
(b) $25; 50
(c) $40; 30
(d) $30; 40

Answer 35

(a) $50; 25

To work out, make both equations equal to each other.
2Q = 100 - 2Q
4Q = 100
Q = 100/4
Q = 25

2(25) = P
P = 50

Question 36

The outer loop of the circular-flow diagram represents the flows of money (dollars) in the economy. Which of the following does not appear on the outer loop?

(a) Wages.
(b) Income.
(c) Capital.
(d) Rent.

Answer 36

(c) Capital.

Question 37

The music streaming industry, where a firm’s profitability depends on its interactions with other firms, is an example of

(a) perfect competition.
(b) monopolistic competition.
(c) oligopoly.
(d) monopoly.

Answer 37

(c) oligopoly.

Question 38

Which of the following is correct? When oligopolies collude

(a) they make higher profits and consumers of the product are better off.
(b) they make higher profits but consumers of the product are worse off.
(c) they make lower profits and consumers of the product are better off.
(d) they make lower profits and consumers of the product are worse off.

Answer 38

(b) they make higher profits but consumers of the product are worse off.

Question 39

Suppose the government has imposed a price floor on mobile phones. Which of the following events could transform the price floor from one that is binding to one that is not binding?

(a) Mobile phones become less popular.
(b) Traditional landline phones become more expensive.
(c) The components used to produce mobile phones become less expensive.
(d) Firms expect the price of mobile phones to fall in the future.

Answer 39

(b) Traditional landline phones become more expensive.

- because the floor starts to affect another market.

Question 40

The deadweight loss from a tax of $10 per unit will be smallest in a market with

(a) inelastic supply and elastic demand.
(b) inelastic supply and inelastic demand.
(c) elastic supply and elastic demand.
(d) elastic supply and inelastic demand.

Answer 40

(b) inelastic supply and inelastic demand.

Question 41

Suppose that the elasticity of supply of lawn mowers is 1.5. If the price of lawn mowers rises 5 percent, the quantity supplied of lawn mowers would

(a) decline 7.5 percent.
(b) rise 7.5 percent.
(c) rise 1.5 percent.
(d) rise 0.3 percent.

Answer 41

(b) rise 7.5 percent.

On SUPPLY SIDE!
> 1.5 x 5 = 7.5