ECON 201 FINAL EXAM MCQs

 

1. What is total producer surplus in the market depicted below?

 

A. $100

 

B. $125

 

C. $200

 

D. $625

 

 

 

 

2. In the absence of market failures (e.g. externalities or imperfect competition) the market equilibrium is considered efficient because:

 

A. prices are low.

 

B. the price consumers pay equals the profit producers receive.

 

C. no more trades remain that benefit some without harming others.

 

D. it assures that both the buyer and seller earn equal surplus.

 

3. The market equilibrium is only efficient when

 

A. buyers and sellers each earn equal surplus from the transaction.

 

B. consumer surplus and producer surplus are both zero.

 

C. all relevant costs, including those imposed on others, are accounted for.

 

D. income is distributed equitably.

 

4. Which of the following statements expresses the justification for making efficiency the first goal of economic interaction?

 

A. Efficiency gives the poor an incentive to improve their economic status.

 

B. Efficiency guarantees that the poor are always made better off.

 

C. People are not really concerned about the problems of the poor.

 

D. Efficiency maximizes total economic surplus and thereby allows other social goals to be more fully achieved.

 

 

 

 

5. Suppose that jeans initially sell for $60 in the market depicted above. If sellers lower their price to $40, it

 

would create an extra __ of economic surplus. Thus, selling jeans for $60 is __.

 

A. $160; inefficient

 

B. $80; efficient

 

C. $80; the equilibrium price

 

D. $160; efficient

 

Suppose that a firm uses water from a nearby river to cool its machinery and returns the water to the river

 

several degrees warmer, leading to a decline in the fish population downstream from the firm.

 

6. The damage to the downstream fish is a(n)

 

A. relevant cost of production to society.

 

B. relevant cost of production only if the firm is charged a fine for the damage done.

 

C. relevant cost of production only if there are commercial fishing activities downstream.

 

D. implicit cost of production which the firm will take into account in determining profit maximizing output.

 

7. If the firm does not have to pay for the damage to the downstream fish population, the equilibrium quantity

 

in the market for the firm’s output will be:

 

A. efficient

 

B. inefficiently low

 

C. inefficiently high

 

D. profitable

 

8. Suppose that the government fines the firm an amount equal to the damage imposed on the fish for each

 

degree increase in the temperature of water in the river. This government action

 

A. reduces efficiency in the market.

 

B. increases dead weight loss.

 

C. increases efficiency in the market.

 

D. violates the definition of efficiency.

 

9. The cumulative difference between the price producers actually receive for their output and their reservation

 

price (i.e. their marginal cost of production) is:

 

A. producer surplus.

 

B. deadweight loss.

 

C. total economics surplus.

 

D. consumer surplus.

 

10. Compared to the first come, first served allocation scheme airlines used in the past, the voluntary

 

compensation scheme now in place

 

A. discriminates against the poor.

 

B. improves efficiency for only the wealthy.

 

C. tricks the poor into unnecessarily delaying their travel.

 

D. improves efficiency for all travelers.

 

11. Except in the extreme cases of perfectly inelastic or perfectly elastic demand and/or supply curves, where

 

will the burden of a per unit (ad valorem) tax imposed on sellers fall?

 

A. Equally on consumers and producers.

 

B. Partially on consumers and partially on producers.

 

C. Entirely on producers.

 

D. Entirely on consumers.

 

12. Except in the extreme cases of perfectly inelastic or perfectly elastic demand and/or supply curves, where

 

will the burden of a per unit (ad valorem) tax imposed on consumers fall?

 

A. Equally on consumers and producers.

 

B. Partially on consumers and partially on producers.

 

C. Entirely on producers.

 

D. Entirely on consumers.

 

13. The more inelastic is demand, the ______ the burden of the tax borne by ______.

 

A. smaller; consumers

 

B. larger; consumers

 

C. larger; producers

 

D. smaller; consumers and producers

 

14. If a per unit tax is imposed, the more inelastic is demand, the

 

A. smaller the deadweight loss.

 

B. larger the deadweight loss to producers.

 

C. less likely the deadweight loss will be affected.

 

D. larger the deadweight loss.

 

Suppose that the Pennsylvania state legislature is considering increasing the sales tax on two different

 

commodities: prescription drugs and restaurant meals. The price elasticity of demand for prescription drugs is

 

estimated to be -0.08 and the price elasticity of demand for restaurant meals is estimated to be -0.95.

 

15. If the legislature’s primary goal in increasing taxes is to raise money most efficiently, it should tax

 

A. both prescription drugs and restaurant meals equally.

 

B. prescription drugs because demand is relatively more price inelastic than for meals.

 

C. restaurant meals because they are not a necessity.

 

D. only those prescription drugs that are not life-saving.

 

16. In a perfectly competitive industry, economic profits

 

A. include only explicit costs.

 

B. equal accounting profits plus implicit costs.

 

C. serve to motivate entry or exit.

 

D. are always greater than accounting profits.

 

 

 

 

17. Refer to the figure above. If a tax of one dollar per unit were imposed on the producers of this commodity,

 

what would happen to the price consumers would pay in the market?

 

A. increase by exactly one dollar

 

B. increase by less than one dollar

 

C. increase by more than one dollar

 

D. remain the same as the price before the tax

 

18. Refer to the figure above. The reason that the tax burden is _____________ is because _____________.

 

A. borne mostly by the producers; it is imposed by law on producers

 

B. borne mostly by consumers; consumer demand is relatively more elastic at the market price

 

C. borne mostly by consumers; consumer demand is relatively less elastic at the market price

 

D. shared approximately equally; supply and demand are equally elastic at the market price

 

19. Suppose that instead of taxing the producers, a tax of an equal dollar amount per unit were imposed on

 

consumers in the market shown above. Relative to the tax on producers,

 

A. the tax on consumers would generate more deadweight loss.

 

B. the burden of the tax on consumers would be more equally shared between consumers and producers.

 

C. consumers would bear a greater share of the tax burden.

 

D. the effect on deadweight loss and tax burdens would be the same.

 

20. Demand for cigarettes is relatively price inelastic among adults, but relatively price elastic for teenagers.

 

Therefore, a tax on cigarettes will:

 

A. not raise very much tax revenue.

 

B. generate more tax revenue from adults and have a greater effect on reducing the number of cigarettes smoked

 

by teenagers.

 

C. have a greater effect on the number of cigarettes smoked by adults than by teenagers.

 

D. generate more tax revenue from teenagers than from adults.

 

21. Refer to the figure above. A tax on Commodity A will generate _________ deadweight loss relative to an

 

equivalent tax on Commodity B.

 

A. more

 

B. less

 

C. equal

 

D. zero

 

22. If a firm is earning zero economic profits

 

A. its revenues are sufficient to pay explicit costs, but not implicit costs.

 

B. the owner will not be able to pay himself or herself a salary.

 

C. it will shut down in the long run, but will continue to operate in the short run.

 

D. the owners are earning a return on their time and investment that is equal to the opportunity costs of that time

 

and investment.

 

23. If all firms in a perfectly competitive industry are earning positive economic profits, one would expect that,

 

over time, the number of firms will _______ and the market price will _____.

 

A. rise; fall

 

B. fall; rise

 

C. rise; rise

 

D. rise; stay the same

 

24. In a perfectly competitive industry over the long run,

 

A. economic profits tend to persist.

 

B. the number of firms in an industry grows.

 

C. economic losses tend to persist.

 

D. economic profits and losses are driven towards zero by entry and exit.

 

25. An implication of entry and exit in response to the profit incentive is that, for perfectly competitive firms,

 

A. no firm accepts zero economic profits in the long run.

 

B. firms produce the quantity that minimizes average variable costs in the short run.

 

C. firms produce the quantity that minimizes average total costs in the long run.

 

D. demand is completely inelastic

 

26. Mary Jane is willing to baby-sit for $6 an hour. Her neighbor called and asked her to baby-sit for $8 an

 

hour. Mary Jane will earn

 

A. consumer surplus of $2.

 

B. economic rent of $2

 

C. economic profit of $8.

 

D. accounting profit of $8, but economic profit of 0.

 

Assume that all firms in the industry depicted below have identical cost functions.

 

27. What is roughly the long-run equilibrium price in this industry?

 

A. $15

 

B. $10.

 

C. $5.

 

D. $5 for some firms and $10 for others.

 

The following graphs depict a perfectly competitive firm and its market. Assume that all firms in this industry

 

have identical cost functions.

 

28. What is the long run equilibrium quantity in this industry, and how many firms will there be?

 

A. 300 units; 10 firms

 

B. 500 units; 20 firms

 

C. 700 units; 10 firms

 

D. 25 units; 300 firms

 

29. You have just won the lottery! You may take your winnings in either a single immediate payment of

 

$1,000,000 or in annual payments of $25,000 forever into the future. At what interest rate would you be

 

indifferent between these two choices?

 

A. 4%

 

B. 25%

 

C. 2.5%

 

D. 0.25%

 

Suppose that the city of Austin, TX chooses to regulate the number of street vendors operating near the

 

University of Texas by requiring each vendor to own a permit in order to operate. The city gives permits to all

 

existing vendors and announces that no new permits will ever be issued. Prior to regulation, the costs (including

 

implicit costs) of operating were $85,000 and revenues were $150,000, and these costs and revenues are

 

expected to persist indefinitely for all vendors. Once distributed, the city ordinance allows the permits to be

 

bought and sold without restriction. The permits have no expiration date. The interest rate for the indefinite

 

future is 10 percent.

 

30. Prior to this ordinance, how much were street vendors earning?

 

A. Economic profits of zero.

 

B. Accounting profits of $65,000.

 

C. A normal profit.

 

D. Economic profits of $65,000.

 

31. At what price will existing street vendors be willing to sell their permits?

 

A. $650,000.

 

B. $150,000.

 

C. $65,000.

 

D. $6,500.

 

32. Generic Brands is expected to earn a profit of $1 million each year forever into the future. If the interest rate

 

is 5%, and there are 20,000 shares of company stock outstanding, how much will investors be willing to pay for

 

a single share of Generic Brands stock?

 

A. $50

 

B. $100

 

C. $500

 

D. $1000

 

33. The efficient-markets hypothesis states that

 

A. all markets produce an efficient outcome.

 

B. production is always technically efficient.

 

C. all relevant information about a company’s current and future earnings prospects is embodied in its stock

 

price.

 

D. most of the relevant information about a company’s current and future earnings prospects is embodied in its

 

stock price.

 

34. The existence of a negative externality will result in

 

A. a less than optimal level of production.

 

B. a greater than optimal level of production.

 

C. prices that are artificially high.

 

D. elimination of deadweight loss.

 

Taylor lives in a residential neighborhood that prides itself on well-groomed lawns. Taylor’s neighbors find that

 

the collective marginal benefit of someone else’s well-groomed lawn is $10. Taylor, however, dislikes yard

 

work and receives zero net benefit from an unkempt lawn and a net benefit of -$1 for a well-groomed lawn –

 

the cost of maintaining the lawn is a dollar more than the benefit of having a well-groomed lawn.

 

35. If Taylor acts independently, Taylor’s lawn will be __________ and total economic surplus to the

 

neighborhood will be __________.

 

A. well groomed; $10

 

B. well groomed; $5

 

C. unkempt; 0

 

D. unkempt; $5

 

36. Provided that bargaining is costless, the Coase Theorem suggests that:

 

A. the rest of the neighborhood will have to tolerate Taylor’s unkempt lawn.

 

B. Taylor could pay the neighbors to stop complaining about the lawn, making everyone in the neighborhood

 

better off.

 

C. Taylor’s neighbors could pay Taylor to have a well-groomed lawn, making Taylor and the neighbors better

 

off.

 

D. Taylor’s neighbors could pay Taylor to have a well-groomed lawn, making Taylor better off and the

 

neighbors worse off.

 

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve

 

months. A one bedroom, one bath apartment is $500 per month while a two bedroom, one bath apartment is

 

$800. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to

 

Moe’s snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month.

 

37. The least costly solution to the externality present in this situation is for

 

A. Curly to endure Moe’s snoring.

 

B. both to live alone.

 

C. Moe to eliminate his snoring.

 

D. Moe to pay Curly for his discomfort.

 

Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel can contain. These

 

controls are designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the

 

regulation is estimated to increase the equilibrium price paid by consumers for a gallon of diesel fuel by 10

 

cents.

 

38. Assuming that the supply of diesel fuel is upward sloping and demand is downward sloping, then one can

 

infer that

 

A. the external benefit of using diesel fuel is less than 10 cents.

 

B. the external cost of using diesel fuel is greater than 10 cents.

 

C. the external cost of using diesel fuel is less than 10 cents.

 

D. the external cost of using diesel fuel is equal to 10 cents.

 

39. Refer to the figure above. From this graph, you can infer that paper production

 

A. generates no externalities at quantities less than 300 tons per day.

 

B. generates negative externalities equal to approximately $50 per ton per day.

 

C. generates negative externalities equal to approximately $25 per ton per day.

 

D. should be prohibited.

 

40. Refer to the figure above. Assume that Coasian bargaining is impractical for solving the externality problem

 

illustrated. The efficient equilibrium could be achieved by

 

A. banning production of the good.

 

B. compensating those injured by the externality.

 

C. taxing the good by an amount equal to the external cost.

 

D. subsidizing the good by an amount equal to the external benefit.

 

41. Refer to the figure above. If the firm were forced to pay the external cost, the firm would

 

A. increase the price of paper by the full amount of the external cost.

 

B. be unable to increase the price of paper, and so would bear the entire burden of the increased cost.

 

C. produce more paper than it does at the private market equilibrium

 

D. share the burden of the higher cost with paper consumers.

 

42. An imperfectly competitive firm is one

 

A. that attempts but fails to compete perfectly.

 

B. with the ability to set price at any level it wishes.

 

C. that possesses some degree of control over its price.

 

D. that faces perfectly inelastic demand.

 

43. Patents and copyrights, which act as barriers to entry and confer market power upon their owners, exist to

 

A. protect consumers from imitations.

 

B. ensure excessive profits to the holders.

 

C. protect research, development and creative expression.

 

D. magnify the dominance of large firms.

 

44. A firm is most likely to experience economies of scale if it has _____ start up costs and ______ marginal

 

costs.

 

A. high; increasing

 

B. high; low

 

C. high; high

 

D. low; decreasing

 

45. When a perfectly competitive firm sells additional output, __________, and when a monopolist sells

 

additional output, ___________

 

A. total revenues always rise; total revenues may rise, fall, or remain unchanged.

 

B. total revenues remain unchanged; total revenues always rise.

 

C. marginal revenues stay the same; marginal revenues rise.

 

D. total revenues always rise; total revenues always fall.

 

46. Refer to the figure above. At a price of $8/unit, total revenue for a monopolist would be ____, while

 

marginal revenue earned from the last whole unit sold would be ____.

 

A. $8; 8

 

B. $24; 8

 

C. $32; 4

 

D. $40; 0

 

47. If the demand curve facing a monopolist is P = 50 – 10*Q, at what quantity are marginal revenues zero?

 

A. 50

 

B. 10

 

C. 5

 

D. 2.5

 

48. The reason that economists consider monopoly to be socially undesirable is that monopolists

 

A. always earn excessive profits.

 

B. can charge any price they want.

 

C. exploit the inelastic nature of demand.

 

D. produce less than the socially efficient amount.

 

49. The profit maximizing rule MR = MC applies to

 

A. all firms.

 

B. monopolists only.

 

C. perfect competitors only.

 

D. all firm types except perfect competitors.

 

50. Compared to a monopolist charging a single price to everyone, perfect price discrimination makes

 

A. the monopolist better off and all consumers worse off.

 

B. society worse off.

 

C. the monopolist worse off and consumers better off.

 

D. the monopolist and some consumers better off.

 

SHORT ANSWER QUESTIONS

 

1. The figure below depicts the domestic market for sugar—a competitively-produced commodity—with and without the provision of a subsidy for each unit sold. In the absence of the subsidy, the domestic market price is determined on the global market.

 

a. Without the subsidy, what is the amount of consumer and producer surplus?

 

b. With the subsidy, what is the amount of consumer and producer surplus, and what is the cost to the government of providing the subsidy?

 

c. What effect does the subsidy have on total economic surplus?

 

2. The figure below depicts a market before and after the introduction of a per unit (ad valorem) tax.

 

a. In the absence of a tax, what is the amount of total economic surplus in this market?

 

b. If a $1 per unit (ad valorem) tax is imposed on sellers, what will be the new equilibrium price paid by consumers and the new after-tax price received by producers? How is the burden of the tax shared?

 

c. How much revenue is collected by this tax, and what is the deadweight loss in the market?

 

d. Suppose you learn that production in this market generates an external cost of $1 per unit produced.

 

What is the deadweight loss from the $1 tax in that case?

 

3. A village has five residents, each of whom has accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the common to graz e, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the common, which in turn depends on the number of goats sent onto the common, as shown in table below.

 

a. If the villagers each behave on the basis of their own private incentives, how many goats will villagers send onto the commons?

 

b. Suppose that instead of each villager deciding what to do independently, a village elder decides the total number of goats and bonds to invest in with the goal of maximizing total village income. How many goats will the village elder choose to send onto the common?

 

.

 

4. The figure below represents the demand and marginal revenue curves facing a single firm operating as a natural monopoly along with the firm’s cost curves.

 

a. How much output will this monopolist produce in order to maximize profits, what will be the market price, and what will be the firm’s profits at that point?

 

b. What would be the monopolist’s profits if it were instead required to produce at the socially optimal level?

 

c. What is the deadweight loss in this market resulting from monopoly pricing?