Practice exam

Question 1

When a market is in equilibrium?

Answer 1

No shortages exists, quantity demanded equals quantity supplied and a price is established that clears the market.

Question 2

If goods J and K are substitutes, an increase in the price of J causes?

Answer 2

A decrease in quantity demanded for J and an outward shift of K’s demand curve.

Question 3

When a good is normal, an increase in income causes the

Answer 3

Demand curve of the good to shift to the right.

Question 4

An improvement in overall technology that allows more output to be produced with
the same level of inputs causes?

Answer 4

A rightward shift of the supply curve so that more is offered for sale at every price.

Question 5

An increase in both demand and supply causes an

Answer 5

Increase in equilibrium quantity and either an increase or decrease in equilibrium
price.

Question 6

In the circular-flow diagram,

Answer 6

Households are sellers in the factors market.

Question 7

Which of the following is an example of market failure?

Answer 7

A firm’s pollution into a river reduces the number of fish that can be caught.

Question 8

In Figure 1 below, a price ceiling at P0 means that

Answer 8

The market is in equilibrium because quantity demanded equals quantity supplied. This is also the intersect of the 2 graphs.

Question 9

In Figure 1 below, excess demand at the of P1 is represented by the
distance AB. The missing words are

Answer 9

“Price ceiling”, which is also the minimum amount someone would pay in a shortage.

Question 10

2. If South Carolina experiences a late frost that damages the state’s peach crop,
   then we would expect

Answer 10

the price of nectarines, a substitute fruit, to rise

Question 11

One example of a centrally planned market is

Answer 11

a law requiring flour to be sold at $3 per kg

Question 12

Gina, a photographer, decides to go to the movies with her friends on Saturday
instead of photographing a wedding for $1000. The opportunity cost she places on
photographing the wedding is

Answer 12

the enjoyment of spending the day with her friends at the movies.

Question 13

Suppose that an increase in the price of garden sheds from $650 to $850
prompts gardening shops to increase the quantity of the garden sheds that they offer
from 80 to 320. Using the midpoint method, what would be the elasticity of supply?

Answer 13

Supply Price Elasticity (Es) = Change in Qs/(Old Qs+NewQs)/2 / Change in Price/(Old Price+New Price)/2

Question 14

Income elasticity of demand allows us to distinguish between different kinds of
goods since

Answer 14

Inferior goods have a negative income elasticity, luxury goods have an income elasticity greater than 1 and necessities have an income elasticity between 0 and 1

Question 15

A recent government survey shows that when the price of cigarettes rises by
10%, the quantity demanded falls by 17%. The price elasticity of demand for
cigarettes is

Answer 15

Elastic

Question 16

In comparison to the price a perfectly competitive firm charges, monopoly pricing
has the effect of causing

Answer 16

The price of output to be higher

Question 17

Coordination of economic activity in a market economy is achieved by

Answer 17

Prices

Question 18

The concept of opportunity cost is best represented by the

Answer 18

Movement along a production possibilities frontier from one point to another.

Question 19

Singapore city council is trying to quantify the social cost of smoking in order to
determine the optimal value of a tax on smoking. What factors should they include
when calculating the social cost of smoking?

Answer 19

The price consumers pay for cigarettes and the costs to the bystanders affected
by the air pollution.

Question 20

Whenever marginal cost is greater than average total cost,

Answer 20

Average total cost is rising

Question 21

The firm’s efficient scale is the quantity of output that minimises.

Answer 21

Average total cost.

Question 22

In a competitive market, the actions of any single buyer or seller will.

Answer 22

Have a negligible impact on the market price,

Question 23

Assuming that James’ Bicycle Shop operates in a competitive market for bicycles,
which of the following statements is/are true?

Answer 23

He chooses the quantity of bicycles that he supplies.

Question 24

Carlo is a wholesale meatball distributor. He sells his meatballs to all the finest
Italian restaurants in town. Nobody can make meatballs like Carlo. As a result, his is
the only business in town that sells meatballs to restaurants. Assuming that Carlo is
maximising his profit, which of the following statements is true?

Answer 24

Meatball prices will exceed marginal cost.

Question 25

Australia exports cattle to Indonesia. If Australia puts an export subsidy on cattle
and the Australian supply of cattle is elastic while the demand for cattle in Indonesia
is inelastic then

Answer 25

Indonesian buyers of cattle will enjoy most of the subsidy’s benefit.

Question 26

Many species of animals are common resources and must be protected by law to
keep them from extinction. Why is the cow not one of these endangered species,
even though there is such a high demand for beef?

Answer 26

Cows are privately owned and many endangered species are owned by no-one.

Question 27

Some shops may provide a lot of information to a customer at a high cost to
the store. If the customer then buys the product cheaper from a different store that
does not provide this information, a free-rider problem emerges. A possible solution
to this problem is

Answer 27

resale price maintenance.

Question 28

When an oligopoly market is in Nash equilibrium,

Answer 28

A firm will choose its best pricing strategy, given the strategies that it observes
other firms taking.

Question 29

The logic of self-interest causes the duopoly’s output level to be which of the
following?

Answer 29

Above the monopoly level and below the competitive level.

Question 30

Reduced competition through merging of companies

Answer 30

May raise social welfare if the benefit from the synergies exceeds the social cost
of increased market power.

Question 31

Product differentiation causes the seller of a good to face what type of demand
curve?

Answer 31

Downward sloping.

Question 32

Monopolistically competitive firm chooses

Answer 32

The quantity of output to produce and the price at which it will sell its output.

Question 33

In the long run, a profit-maximising firm in a monopolistically competitive market
operates at

Answer 33

A level of output at which average total cost is falling.

Question 34

Long-run profit earned by a monopolistically competitive firm is driven to the
competitive level due to a

Answer 34

Shift of its demand curve.

Question 35

Assume that the demand for salt is relatively inelastic and the demand for orange
juice is relatively elastic. Compared to the deadweight loss from the same
percentage tax on orange juice, the deadweight loss from imposing a tax on salt
would be

Answer 35

Lesser

Question 36

The three countries of Ophir, Shem and Turan produce the entire world supply of
carbomite. They have signed an agreement to limit their production of carbomite
in order to act as a monopolist. Each country is deciding if it should honour the
agreement or if it should cheat. If all three countries honour the agreement, each will
earn $100 million. If all three countries cheat on the agreement, each will earn $30
million. If two of the countries honour the agreement and one cheats, then the two
honouring the agreement will each earn $80 million and the cheater will earn $120
million. If only one country honours the agreement and the other two cheat, then the
one honouring the agreement will earn $40 million and the two cheaters will each
earn $70 million. To make the most money, Ophir

Answer 36

Has no dominant strategy.

Question 37

Residents of Hangzhou, China, like seeing fireworks during their Chinese New
Year celebration. Each of the city’s one million residents places a value of $1 on the
fireworks experience. The cost of providing the fireworks is $250,000. Which of the
following statements is most correct?

Answer 37

Fireworks are not excludable so private markets will not produce an efficient outcome

Question 38

Which of the following is the most accurate statement about economic models?

Answer 38

Economic models omit many details to allow us to see what is truly important.

Question 39

Suppose supply is perfectly inelastic, while demand is relatively elastic. A tax of $1 is levied on the buyers of the good. Which of the following statements is correct?

Answer 39

There will be no dead weight loss.

Question 40

Suppose the before-trade domestic price of corn in Australia is $15 per kg. The world
price of corn is $8 per kg. Australia is a price-taker in the corn market.

Answer 40

Equal to $8 per kg.