Summer Exam 3

Question 1

Generally, total utility ________ as consumption rises, whereas marginal utility _______ as consumption rises.

rises; rises
falls; rises
falls; falls
rises; falls

Answer 1

rises; falls

Question 2

Which of the following examples is inconsistent with the law of diminishing marginal utility?

I love to eat a dozen donuts at a time, but the twelfth one isn’t as yummy as the eleventh.
I’ve won four Super Bowls, but none have been as good as the first.
Picking classes for my first semester was delightful, but not it’s sheer drudgery.
I hated the first roller derby that I went to, but I love it now and am going to my thirty-second tomorrow!

Answer 2

I hated the first roller derby that I went to, but I love it now and am going to my thirty-second tomorrow!

Question 3

In the ultimatum game, which of the following is not correct?
Two players participate in an experiment.
Player 2 typically accepts Player 1’s proposal if they are offered 5% - 10% of the available funds.
Player 1 may propose any split of the initial pot of money.
Players fail to act as Homo Economicus.

Answer 3

Player 2 typically accepts Player 1’s proposal if they are offered 5% - 10% of the available funds.

Question 4

Mary likes to buy T-shirts and CDs. At her current consumption bundle, her marginal utility of T-shirts is 20 utils and her marginal utility of CDs is 50 utils. If CDs cost $10 and T-shirts cost $5, then:

Mary is not maximizing utility, and should buy more CDs and fewer T-shirts
Mary is not maximizing utility, and should buy more T-shirts and fewer CDs
Mary is maximizing utility

Answer 4

Mary is not maximizing utility, and should buy more CDs and fewer T-shirts

Question 5

A rational, utility-maximizing consumer purchases dog beds and dog toys. At the optimal consumption bundle, the last dollar spent on each good yields the same amount of utility. If the price of dog beds falls and the consumer optimally responds by changing their consumption of these two goods, what will happen to the marginal utility of the last unit of each type of good consumed?
The marginal utility of dog beds will fall, the marginal utility of dog toys will rise.
The marginal utility of dog beds will fall, the marginal utility of dog toys will fall.
The marginal utility of dog beds will rise, the marginal utility of dog toys will rise.
The marginal utility of dog beds will rise, the marginal utility of dog toys will fall.

Answer 5

The marginal utility of dog beds will fall, the marginal utility of dog toys will rise.

Question 6

You are weighing three options for summer employment: an internship at the Federal Reserve that pays $10,000, an internship at the Blueridge Wildlife Clinic in Boyce which pays $2,000, and operating your own lawn-mowing business. If you go with the lawn-mowing, you’ll pay $1,000 for electric batteries, $3,000 for lawn-mowers, and $250 for a weedwhacker.

You expect to earn about $12,000 in revenue.

What is the accounting profit earned from running your lawn-mowing business?

Answer 6

7,750

Question 7

You are weighing three options for summer employment: an internship at the Federal Reserve that pays $10,000, an internship at the Blueridge Wildlife Clinic in Boyce which pays $2,000, and operating your own lawn-mowing business. If you go with the lawn-mowing, you’ll pay $1,000 for electric batteries, $3,000 for lawn-mowers, and $250 for a weedwhacker.

You expect to earn about $12,000 in revenue.

What is the economic profit earned from running your lawn-mowing business?

Answer 7

-2,250

Question 8

Using the information about productivity in the table below, which country has comparative advantage producing cloaks? Which country has comparative advantage producing producing each good?

Cloaks Brooches
Lothlorien 10 5
Rivendell 3 1

Answer 8

Brooches: Lothlorien, Cloaks: Rivendell

Question 9

If a 9% increase in income causes demand for audiobooks to increase by 27%, then audiobooks are:
inferior goods.
substitutes to smartphone plans.
necessary goods.
luxury goods.

Answer 9

luxury goods.

Question 10

If the price of one good decreasing causes the price of another good to increase, then:

the second good is definitely inferior.
the two goods are complements.
the cross-price elasticity is positive.
demand is inelastic.

Answer 10

the two goods are complements.

Question 11

With the rise of large language models such as ChatGPT, demand for tax prep assistance falls. What happens to the equilibrium price of tax help? What happens to the equilibrium quantity? What happens to the marginal utility of the last tax prep assistance consumed?

Decrease; decrease; decrease
Increase; increase; decrease
Increase; increase; increase
Increase; decrease; decrease
Decrease; increase; increase
Increase; decrease; increase
Decrease; decrease; increase
Decrease; increase; decrease

Answer 11

Decrease; decrease; increase

Question 12

In competitive markets, what is the relationship between price and marginal revenue?
P = MR
P < MR
P > MR
There is no consistent relationship.

Answer 12

P = MR

Question 13

The market for gasoline is perfectly competitive and begins in long-run equilibrium. Suppose that demand for gas rises. Compared to its initial long-run equilibrium value, what happens to the output produced by a single firm when the market settles into the new short-run equilibrium?

Unchanged.
Increase.
Not enough information to say.
Decrease.

Answer 13

Increase.

Question 14

The market for gasoline is perfectly competitive and begins in long-run equilibrium. Suppose that demand for gas rises. Compared to its initial long-run equilibrium value, what happens to the profits earned by a single firm when the market settles into the new short-run equilibrium?

Increase.
Decrease.
Unchanged.
Not enough information to say.

Answer 14

Increase.

Question 15

The market for gasoline is perfectly competitive and begins in long-run equilibrium. Suppose that demand for gas rises. Compared to its initial long-run equilibrium value, what happens to the output produced by a single firm when the market settles into the new long-run equilibrium?

Decrease.
Increase.
Not enough information to say.
Unchanged.

Answer 15

Unchanged.

Question 16

At its planned level of production, the perfectly competitive firm Alger’s Apples is in the following position:

Output: 1,000 pecks of apples
Market price: $3 per peck
Total cost: $6,000
Fixed cost: $2,000
Marginal cost: $3
If Alger’s Apples aims to maximize profits, it would:

reduce output to zero.
reduce output but keep producing.
leave output unchanged.
increase output but continue to charge $3.

Answer 16

reduce output to zero.

Question 17

When a monopolist sells sweatshirts at a price of $30, consumers demand 9 sweatshirts. In order to sell an 10th sweatshirt, the firm must lower its price to $25. What is this firm’s marginal revenue from selling the 10th sweatshirt? Do not include units in your answer.

Answer 17

-20

Question 18

Under which of the following market structures is consumer surplus maximized? (note: consumer surplus, not social surplus)
Perfect competition with consumption taxes
Perfect competition with no taxes
Single-price monopoly
Perfect competition with a subsidy

Answer 18

Perfect competition with a subsidy

Question 19

Which of the following is true of monopolists?
To maintain their monopoly, there must be barriers to entry into the market.
A monopolist’s cost curves are fundamentally different from those of a competitive firm.
They are “price takers.”
They produce a level of output where marginal cost exceeds marginal revenue.

Answer 19

To maintain their monopoly, there must be barriers to entry into the market.

Question 20

Compared to a monopolist, which of the following is true of the price and quantity produced of a good in a perfectly competitive market?
In a competitive market, the price is lower and the quantity is lower.
In a competitive market, the price is higher and the quantity is higher.
In a competitive market, the price is lower and the quantity is higher.
In a competitive market, the price is higher and the quantity is lower.

Answer 20

In a competitive market, the price is lower and the quantity is higher.

Question 21

Many airlines, including Delta, American, and Southwest, offer flights from Washington DC to New York. The demand for tickets from American for that route will be:
less elastic than overall demand for flights on that route.
increased if new options such as monorail become available on the same route.
more elastic than overall demand for flights on that route.
elastic for business travelers but inelastic for vacation-goers.

Answer 21

more elastic than overall demand for flights on that route.

Question 22

Supply curves slope upward because:
Firms make more money when they offer a bulk discount.
consumers are willing to pay more when they consume more.
producing additional units of output always lowers costs.
increasingly-valuable alternatives are foregone as production expands.

Answer 22

increasingly-valuable alternatives are foregone as production expands.

Question 23

The elasticity of demand for tobacco products is 0.8 (in absolute value), whereas the elasticity of supply is 1.2.

If a tax is levied on the production of tobacco products, what percent of the tax burden will be born by consumers? (Your answer should be a number between 0 and 100, for example, if the answer is 37%, write 37 instead of 0.37; no digits are needed).

Answer 23

60

Question 24

Monopolists can price discriminate because which of the following?
They have increasing marginal cost.
Various customers have different willingnesses to pay.
It is an effective strategy to keep competitors out of the market.
Some consumers must pay taxes, but not all.

Answer 24

Various customers have different willingnesses to pay.

Question 25

Which of the following options yields the highest consumer surplus?
Cartel
Monopoly
Perfect competition with a tax
Perfect competition with a subsidy

Answer 25

Perfect competition with a subsidy

Question 26

Barbara buys artisan soap and listens to metal albums. Each bar of soap costs $10, each album costs $20, and her current consumption bundle (where she spends her entire income) she gets 20 utils from the last bar of soap and 10 utils from the last album. What should Barbara do to increase utility?
Buy more albums, less soap.
Buy more soap, fewer albums.
Buy less of both goods.
Buy more of both goods.

Answer 26

Buy more soap, fewer albums.

Question 27

At its current level of production, the perfectly competitive firm Alger’s Apples is in the following position:

Output: 1,000 pecks of apples
Market price: $3 per peck
Total cost: $4,000
Fixed cost: $3,000
Marginal cost: $3
If Alger’s Apples aims to maximize profit, what would the company do in the long run?

Reduce output to zero.
Reduce output but keep producing.
Leave output unchanged.
Increase output but continue to charge $3.

Answer 27

Leave output unchanged.

Question 28

When a monopoly produces the profit-maximizing quantity, which of the following are always true?
1) Marginal revenue is equal to average cost
4) Marginal revenue is equal to marginal cost
2) Total cost is equal to total revenue
Options 3 and 4 are correct.
Options 1 and 4 are correct.
3) The price is equal to marginal cost.

Answer 28

4) Marginal revenue is equal to marginal cost

Question 29

For goods whose production creates negative externalities: (CHOOSE EACH OF THE CORRECT OPTIONS)

social surplus can be increased with an appropriately-sized tax.
the social benefit of producing the marginal unit exceed the social cost of producing it.
More than the socially-optimal quantity is produced.
social surplus can be increased with an appropriately-sized subsidy.

Answer 29

social surplus can be increased with an appropriately-sized tax.

More than the socially-optimal quantity is produced.