Econ 201 WVU Final Exam

In a competitive market, no single producer can influence the market price because

a. many other sellers are offering a product that is essentially identical.

b. consumers have more influence over the market price than producers do.

c. government intervention prevents firms from influencing price.

d. producers agree not to change the price.

a. many other sellers are offering a product that is essentially identical.

3. The short-run supply curve for a firm in a perfectly competitive market is

a. likely to be horizontal.

b. likely to slope downward.

c. determined by forces external to the firm.

d. its marginal cost curve (above average variable cost)

d. its marginal cost curve (above average variable cost)

A price-taking firm produces rubber balls. When the price of rubber balls is below the firm's minimum

average total cost, but above the firm's minimum average variable cost, the firm

a. will experience losses but it will continue to produce rubber balls in the short run.

b. will shut down in the short run.

c. will be earning both economic and accounting profits.

d. should raise the price of its product.

d. should raise the price of its product.

7. The irrelevance of sunk costs is best described by which of the following business decisions?

a. New airlines enter the market and earn accounting profits.

b. Airlines continue to sell tickets even though they are reporting large losses.

c. Airlines exit the market when they report losses.

d. All of the above are correct.

b. Airlines continue to sell tickets even though they are reporting large losses.

One of the most important determinants of the success of free-market capitalism is

a. enlightened governments selecting firms that should not be allowed to exit a market.

b. free entry and exit in markets.

c. government regulation of market participants.

d. having a few large firms rather than thousands of small ones.

b. free entry and exit in markets.

When new firms have an incentive to enter a competitive market, their entry will

a. increase the price of the product.

b. drive down profits of existing firms in the market.

c. shift the market supply curve to the left.

d. All of the above are correct

b. drive down profits of existing firms in the market.

Which of the following is an implicit cost of owning a business?

(i) interest expense on existing business loans

(ii) forgone savings account interest when personal money is invested in the business

(iii) damaged or lost inventory

a. (i) only

b. (ii) only

c. (i) and (ii)

d. All of the above are correct.

b. (ii) only

Economists normally assume that the goal of a firm is to

a. maximize its total revenue. b. maximize its profit.

b. maximize its profit.

c. minimize its explicit costs.

d. minimize its total cost.

b. maximize its profit.

The marginal product of labor can be defined as

a. change in profit/change in labor.

b. change in output/change in labor.

c. change in labor/change in output.

d. change in labor/change in total cost.

b. change in output/change in labor.

Which of these assumptions is often realistic for a firm in the short run?

a. The firm can vary both the size of its factory and the number of workers it employs.

b. The firm can vary the size of its factory, but not the number of workers it employs.

c. The firm can vary the number of workers it employs, but not the size of its factory.

d. The firm can vary neither the size of its factory nor the number of workers it employs.

c. The firm can vary the number of workers it employs, but not the size of its factory.

Average total cost tells us the

a. total cost of the first unit of output, not including fixed cost.

b. cost of a typical unit of output.

c. cost of the last unit of output, including fixed cost.

d. variable cost of a firm that is producing at least one unit of output.

b. cost of a typical unit of output.

When a monopolist increases the amount of output that it produces and sells, the price of its output

a. stays the same.

b. increases.

c. decreases.

d. may increase or decrease depending on the price elasticity of demand.

c. decreases.

The monopolist's profit-maximizing quantity of output is determined by the intersection of

a. marginal cost and demand

b. marginal cost and marginal revenue

c. average total cost and marginal revenue

d. average variable cost and average revenue

b. marginal cost and marginal revenue

A monopolist will choose to increase output when

a. market price increases.

b. at all levels of output, marginal cost increases.

c. at the present level of output, marginal revenue exceeds marginal cost.

d. All of the above are correct.

c. at the present level of output, marginal revenue exceeds marginal cost.

The social problem caused by monopoly is

a. an inefficiently low quantity of output.

b. an inefficiently high value of marginal cost.

c. excessive monopoly profits.

d. excessive producer surplus.

a. an inefficiently low quantity of output.

One problem with regulating a monopolist by setting price equal to its average total cost is that

a. regulators are unable to effectively control prices and/or production.

b. it does not provide an incentive for the monopolist to reduce its cost.

c. a monopolist's costs, by definition, are higher than costs of perfectly competitive firms.

d. a monopolist is still able to generate excessive economic profits.

b. it does not provide an incentive for the monopolist to reduce its cost.

The concern that "political failure" or "government failure" may be worse than "market failure" supports

which of the following public policies toward monopolies?

a. public ownership of monopolies

b. government regulation of monopolies

c. government incentives to promote competition in monopolized industries

d. doing nothing at all

d. doing nothing at all

If a previously non-discriminating monopolist begins to price-discriminate,

a. discrimination will increase consumer surplus.

b. discrimination will reduce total surplus.

c. discrimination will convert consumer surplus and deadweight loss into producer surplus.

d. the price effect will come to dominate the output effect in determining its revenue.

c. discrimination will convert consumer surplus and deadweight loss into producer surplus.

Cartels are difficult to maintain because

a. antitrust laws are difficult to enforce.

b. cartel agreements are conducive to monopoly outcomes.

c. there is always tension between cooperation and self-interest in a cartel.

d. All of the above are correct.

c. there is always tension between cooperation and self-interest in a cartel.

When each firm chooses its own best strategy, given the strategy the other one actually chooses, the market

has reached

a. a competitive equilibrium.

b. an open market solution.

c. a socially optimal solution.

d. a Nash equilibrium.

d. a Nash equilibrium.

The oligopoly game is paradoxical because overall oligopoly profit would be higher if each firm produces the

amount agreed to in the cartel, but

a. each has a good reason to cheat and produce less, which reduces its profit in the end.

b. each has a good reason to cheat and produce more, which reduces its profit in the end.

c. both firms behave irrationally, which reduces their profits in the end.

d. profit for each firm at the Nash equilibrium is greater than its profit under the cartel.

b. each has a good reason to cheat and produce more, which reduces its profit in the end.

Comparative advantage reflects

a. productivity.

b. relative opportunity cost.

c. efficiency.

d. terms of trade advantage.

b. relative opportunity cost.

Which of the following would definitely result in a higher price in the market for Snickers?

a. demand increases and supply decreases

b. demand and supply both decrease

c. demand decreases and supply increases

d. demand and supply both increase

a. demand increases and supply decreases

When supply and demand both increase, equilibrium

a. price will increase.

b. price will decrease.

c. quantity may increase, decrease, or remain unchanged.

d. price may increase, decrease, or remain unchanged.

d. price may increase, decrease, or remain unchanged.

New oak tables are normal goods. What would happen to the equilibrium price and quantity in the market for

oak tables if the price of oak wood rises, and consumer income rises?

a. Price will fall and the effect on quantity is ambiguous.

b. Price will rise and the effect on quantity is ambiguous.

c. Quantity will fall and the effect on price is ambiguous.

d. Quantity will rise and the effect on price is ambiguous.

b. Price will rise and the effect on quantity is ambiguous.

What will happen to the market for pens if the price of pencils falls, and the wages of pen-makers decrease?

a. Price will rise and quantity may rise or fall.

b. Price will fall and quantity may rise or fall.

c. Quantity will rise and price may rise or fall.

d. Quantity will fall and price may rise or fall

b. Price will fall and quantity may rise or fall.

If two supply curves pass through the same point and one is steep and the other is closer to horizontal, which

of the following would be correct?

a. The flatter supply curve is more inelastic.

b. The steeper supply curve is more inelastic.

c. The elasticity of supply will be the same for both curves.

d. Nothing can be said about their relative elasiticities

b. The steeper supply curve is more inelastic.

The discovery of a new type of wheat increases the supply of wheat, which most likely causes

a. consumer surplus to fall and total surplus to increase.

b. consumer surplus to fall and total surplus to fall.

c. consumer surplus to rise and total surplus to fall.

d. consumer surplus to rise and total surplus to rise.

d. consumer surplus to rise and total surplus to rise.

Suppose that the demand for picture frames is price elastic and the supply is inelastic. The burden of a tax of

$1 per frame will fall

a. entirely on consumers.

b. more on consumers than on producers.

c. more on producers than on consumers.

d. on consumers or producers, depending on who gets the tax bill from the government.

c. more on producers than on consumers.

Chad is willing to pay $4.00 for a latté. If he buys a latté for $3.75, his consumer surplus is

a. $0.25.

b. $0.50.

c. $3.75.

d. $4.00.

a. $0.25.

Taxes on luxury goods cause deadweight losses because

a. the government always wastes the money collected.

b. they prevent buyers and sellers from realizing some of the gains from trade.

c. they take more money from the rich than the poor.

d. they treat equally well-off people unequally.

b. they prevent buyers and sellers from realizing some of the gains from trade.

The greater the elasticities of demand and supply the

a. smaller the deadweight loss from a tax.

b. less intrusive a tax will be on a market.

c. greater the deadweight loss from a tax.

d. more equitable the distribution of a tax between buyers and sellers.

c. greater the deadweight loss from a tax.

If the labor supply curve is nearly vertical, a tax on labor

a. has a large deadweight loss.

b. will raise small amounts of tax revenue.

c. has little impact on the amount of work workers are willing to do.

d. will be fair.

c. has little impact on the amount of work workers are willing to do.

Which of the following would NOT shift the demand curve for a good or service?

a. a change in income

b. a change in the price of the good or service

c. a change in expectations about the price of the good or service

d. a change in the price of a related good

b. a change in the price of the good or service

If the current price of roses is $40.00, but the equilibrium price of roses is $30.00, we expect a

a. shortage to exist and the market price of roses to increase.

b. shortage to exist and the market price of roses to decrease.

c. surplus to exist and the market price of roses to increase.

d. surplus to exist and the market price of roses to decrease.

d. surplus to exist and the market price of roses to decrease.

Suppose that the incomes of buyers in a particular market for a normal good decline and there is also a

reduction in input prices paid by sellers. What would occur in this market?

a. Equilibrium price would increase, but quantity may rise or fall.

b. Equilitbrium price would decrease, but quantity may rise or fall.

c. Both equilibrium price and equilibrium quantity would increase.

d. Equilibrium quantity would increase, but equilibrium price may rise or fall.

b. Equilitbrium price would decrease, but quantity may rise or fall.

For a profit-maximizing monopolist,

a. MR < MC < P.

b. P > MR > MC.

c. P = MR = MC.

d. P > MR = MC.

d. P > MR = MC.

A market structure with only a few sellers, offering similar or identical products, is known as

a. monopoly.

b. oligopoly.

c. perfect competition.

d. monopolistic competition.

b. oligopoly.

The main argument for splitting up monopolies through antitrust action is based on the notion that

a. small firms have lower costs.

b. competition is more efficient than monopoly.

c. greedy monopolies should be punished.

d. consumers prefer dealing with small firms.

b. competition is more efficient than monopoly.

If a competitive firm sees that its marginal cost exceeds its marginal revenue, then

a. the firm is definitely earning a positive profit.

b. it can increase its profit by increasing its output.

c. the firm is definitely losing money.

d. it can increase its profit by decreasing its output.

d. it can increase its profit by decreasing its output.

When a firm in a competitive market decides to triple the amount of output it sells, as a result

a. its profit must increase.

b. the price in the market falls.

c. its total revenue triples.

d. the price in the market rises.

c. its total revenue triples.

Which of the following events will definitely cause equilibrium quantity to fall?

a. demand and supply both decrease

b. demand decreases and supply increases

c. demand and supply both increase

d. demand increases and supply decreases

a. demand and supply both decrease

When a country allows trade and becomes an exporter of a good,

a. everyone in the country loses.

b. the losses of the losers exceed the gains of the winners.

c. the gains of the winners exceed the losses of the losers.

d. everyone in the country benefits

c. the gains of the winners exceed the losses of the losers.

What will happen to the equilibrium price and quantity of legal music downloads if iPods become cheaper, it becomes more difficult to download or share music illegally, and payments to musicians by recording companies fall?

a. Quantity will fall and the effect on price is ambiguous.

b. Price will fall and the effect on quantity is ambiguous.

c. Quantity will rise and the effect on price is ambiguous.

d. Price will rise and the effect on quantity is ambiguous

c. Quantity will rise and the effect on price is ambiguous.

The lowest points of the average variable cost and average total cost curves occur where

a. the average variable cost and average total cost curves intersect.

b. the marginal cost curve intersects those curves.

c. the marginal cost curve lies below both curves.

d. average total cost is below average variable cost.

b. the marginal cost curve intersects those curves.

The defining characteristic of a natural monopoly is

a. diseconomies of scale over the relevant range of output.

b. constant marginal cost over the relevant range of output.

c. constant returns to scale over the relevant range of output.

d. economies of scale over the relevant range of output.

d. economies of scale over the relevant range of output.

A competitive firm's short-run supply curve is part of which of the following curves?

a. Average total cost

b. Average variable cost

c. Marginal revenue

d. Marginal cost

d. Marginal cost

When an oligopoly market reaches a Nash equilibrium,

a. each firm will not have tried to maximize its profit.

b. firms will not be concerned about the strategies of competing firms.

c. each firm will have chosen its own best strategy, given what the other firms are doing.

d. the market price will be different for each firm.

c. each firm will have chosen its own best strategy, given what the other firms are doing.

The Social Security tax is a tax on

a. labor.

b. earnings during retirement.

c. capital.

d. consumption expenditures.

a. labor.

Tommy's Tires operates in a perfectly competitive market. If tires sell for $50 each and average total cost per tire is $40 at the profit-maximizing output level, then in the long run

a. some firms will exit from the market, and the price will rise.

b. more firms will enter the market, and the price will fall.

c. more firms will enter the market, and the price will rise.

d. more firms will exit from the market, and the price will fall.

b. more firms will enter the market, and the price will fall.

The negative relationship between price and quantity demanded

a. is represented by a downward-sloping demand curve.

b. applies to most goods in the economy.

c. is referred to as the law of demand.

d. All of the above are correct.

d. All of the above are correct.

In a competitive market the price is $7, and typical firms in the market has ATC = $7.50 and AVC = $7.15.

a. In the long run the market will cease to exist.

b. In the short run firms will shut down, and in the long run firms will leave the market.

c. New firms will likely enter this market to capture any remaining economic profits.

d. In the short run firms will produce, but in the long run firms will leave the market.

b. In the short run firms will shut down, and in the long run firms will leave the market.

Because there is diminishing marginal product of labor, as the number of workers increases

a. the additional output added by one additional worker rises.

b. the additional cost of hiring an additional worker rises.

c. the additional output added by one additional worker declines.

d. the additional cost of an additional unit of output falls.

c. the additional output added by one additional worker declines.

A monopolist can make large positive economic profits in the long run only if the monopolist

a. produces the amount of output where average variable cost is at a minimum.

b. is protected by barriers to entry.

c. produces the amount of output where average total cost is at a minimum.

d. operates as a price taker rather than a price maker.

b. is protected by barriers to entry.

Travis can mow a lawn in two hours or he can trim a tree in one hour. Ricardo can mow a lawn in three hours

or he can trim a tree in two hours.

a. Travis has a comparative advantage over Ricardo in mowing lawns.

b. Travis has an absolute advantage over Ricardo in mowing lawns.

c. Ricardo has a comparative advantage over Travis in trimming trees.

d. All of the above are correct.

b. Travis has an absolute advantage over Ricardo in mowing lawns.

When firms have agreements among themselves on the quantity to produce and the price at which to sell

output, we refer to their form of organization as a

a. monopolistically competitive oligopoly.

b. cartel.

c. Nash arrangement.

d. perfectly competitive oligopoly.

b. cartel.

As a group, oligopolists would always earn the highest profit if they would

a. produce the perfectly competitive quantity of output.

b. charge the same price that a monopolist would charge if the market were a monopoly.

c. produce more than the perfectly competitive quantity of output.

d. operate according to their own individual self-interests.

b. charge the same price that a monopolist would charge if the market were a monopoly.

When determining whether to shutdown in the short run, a competitive firm should

a. ignore fixed costs.

b. ignore variable costs.

c. ignore sunk costs.

d. Both a and c are correct

d. Both a and c are correct

When a country allows trade and becomes an importer of a good,

a. domestic producers become worse off, and domestic consumers become better off.

b. both domestic producers and domestic consumers become worse off.

c. both domestic producers and domestic consumers become better off.

d. domestic producers become better off, and domestic consumers become worse off

a. domestic producers become worse off, and domestic consumers become better off.

The firm will make the most profits if it produces the quantity of output at which

a. marginal revenue equals total revenue.

b. profit per unit is greatest.

c. marginal cost equals average cost.

d. marginal revenue equals marginal cost.

d. marginal revenue equals marginal cost.

Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that

a. the nation is producing an efficient combination of goods.

b. there will be a large opportunity cost if the nation tries to increase production.

c. the nation is producing beyond its capacity, and inflation will occur.

d. the nation is not using all available resources or is using inferior technology or both.

d. the nation is not using all available resources or is using inferior technology or both.

If a surplus currently exists in a market we know that the current price is

a. above equilibrium price and quantity supplied is greater than quantity demanded.

b. below equilibrium price and quantity demanded is greater than quantity supplied.

c. below equilibrium price and quantity supplied is greater than quantity demanded.

d. above equilibrium price and quantity demanded is greater than quantity supplied.

a. above equilibrium price and quantity supplied is greater than quantity demanded.

Suppose a tax of $1 per unit is imposed on french fries. The more elastic the supply of french fries,

a. the larger is the deadweight loss of the tax.

b. the larger is the tax burden on french fry sellers relative to the tax burden on buyers.

c. the smaller is the response of the quantity supplied of french fries to the tax.

d. All of the above are correct.

a. the larger is the deadweight loss of the tax.

Which of the following events would cause both the equilibrium price and equilibrium quantity of Dodge

Neons (an inferior good) to increase?

a. a decrease in consumer income

b. an increase in consumer income

c. gas mileage of SUVs and mid-size sedans increases.

d. wages of auto workers fall.

a. a decrease in consumer income