Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Firms in a perfectly competitive industry earn zero profits in the long run because ________. 1)
A) the government sets prices
B) costs increase
C) the absence of barriers to entry enables free entry and exit
D) demand decreases

2) The entry and exit of firms in a perfectly competitive market is mostly dependent on ________. 2)
A) the number of consumers in the market B) the profitability of the existing firms
C) the number of firms in the market D) government regulations

3) If new firms enter an existing market, ________. 3)

A) the market price is likely to fall B) the market supply is likely to fall
C) the profits of all firms are likely to increase D) the market demand is likely to increase

4) Which of the following is true of perfect competition in the long run? 4)

A) Firms earn negative economic profit because of free entry and exit of firms.
B) Firms earn positive accounting profit because of government regulations.
C) Firms earn positive economic profit because of economies of scale.
D) Firms earn zero economic profit because of free entry and exit of firms.

The figure below shows the supply and the demand for a good (left) and the cost curves of an individual firm in this market (right).
Assume that all firms in this market, including the potential entrants, have identical cost curves. Initially, the market is in equilibrium at
point A.

5) Refer to the figure above. As firms enter or exit, the market will tend toward the long-run equilibrium, where 5)
each firm earns ________ at the price ________.
A) negative economic profit; $2 B) zero accounting profit; $0
C) zero economic profit; $2 D) positive economic profit; $3

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6) In the figure below, the producer surplus from the tenth unit sold is ________. 6)

A) $0 B) $4 C) $9 D) $7

7) Consider the following graph, which depicts a competitive market. The producer surplus in this market is 7)
equal to ________.

A) $0 B) $500 C) $750 D) $1,000

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Scenario: Jenna makes homemade pastries. Her fixed input in the short run is the mixer. In the long run, she can choose a spatula, hand
mixer, or a stand mixer. The following table shows the short-run fixed cost (F.C
and variable cost (VC) of weekly production using each different level of the capital input.

Output FC VC FC VC FC VC
(pastries) (spatula mixer) (spatula mixer) (hand mixer) (hand mixer) (stand mixer) (stand mixer)
10 5 40 30 20 200 5
20 5 80 30 40 200 10
50 5 200 30 100 200 25
100 5 400 30 200 200 50
200 5 800 30 400 200 100
500 5 2000 30 1000 200 250

8) Refer to the scenario above. If Jenna wants to make 10 pastries per week, which level of capital input should 8)
she choose?
A) Spatula mixer B) Hand mixer
C) Stand mixer D) Any of the three mixers

9) The long-run average total cost (LRATC) shown below exhibits ________. 9)

A) economies of scale over all levels of output

B) diseconomies of scale over all levels of output
C) constant returns to scale over all levels of output
D) none of the above

10) Which of the following situations depicts diseconomies of scale? 10)

A) The average total cost of a firm increasing from $50 to $55 when it increases its production from 10
units to 20 units
B) The average total cost of a firm remaining at $50 when it decreases its production from 20 units to 10
units
C) The average total cost of a firm decreasing from $50 to $40 when it increases its production from 10
units to 20 units
D) The average total cost of a firm remaining at $50 when it increases its production from 10 units to 20
units

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The following table shows the total output produced by different numbers of workers in a shoe factory.

Output per Day (pairs) Number of Workers

0 0
50 1
112 2
180 3
225 4
260 5
280 6

11) Refer to the table above. What is the marginal product of the sixth worker? 11)
A) 46.7 pairs of shoes B) 280 pairs of shoes
C) 60 pairs of shoes D) 20 pairs of shoes

12) A firm sells 20 units of a good at a price of $5 per unit. If the average cost of production of the good equals 12)
$3 per unit, the firm's revenue is ________.
A) $100 B) $120 C) $60 D) $40

13) Which of the following relationships correctly identifies the profit -maximizing condition of a firm that sells a 13)
divisible good in a perfectly competitive market?
A) Marginal cost > Price = Marginal revenue B) Marginal cost = Price < Marginal revenue
C) Marginal cost = Price = Marginal revenue D) Marginal cost < Price = Marginal revenue

14) Given the following price, quantity, and cost numbers, estimate the profit -maximizing output, assuming that 14)
the firm is operating in a perfectly competitive market. What is the fixed cost that the firm faces?

Price ($) Quantity Sold (units) Total Cost ($)

10 0 15
10 1 18
10 2 22
10 3 27
10 4 33
10 5 41
10 6 51
10 7 62

A) 0 B) l8 C) 15 D) 5

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The following table displays the reservation values of eight buyers and eight sellers, who each want to buy or sell a calculator.

Reservation Value of Reservation Value of

Buyer Seller
Buyer ($) Seller ($)
1 20 1 2
2 17 2 5
3 16 3 6
4 14 4 8
5 12 5 12
6 9 6 15
7 6 7 18
8 2 8 20

15) Refer to the table above. If the market is perfectly competitive, the equilibrium price of calculators is 15)
________.
A) $6 B) $2 C) $12 D) $20

16) Refer to the table above. If the market is perfectly competitive, the equilibrium quantity of calculators is 16)
________.
A) 5 units B) 3 units C) 6 units D) 8 units

Scenario: Suppose a competitive market has ten buyers and ten sellers. The product exchanged in this market is beach hats, which are
indivisible. The following table shows the reservation values for both buyers and sellers.

Buyer Reservation Value of Seller Reservation Value of

Buyer ($) Seller ($)
Adam 15 Ken 1
Ben 14 Lena 2
Casey 13 Matt 4
Dan 12 Noah 6
Eva 11 Oscar 8
Frank 10 Pete 10
Gary 9 Quinn 12
Hank 8 Ray 14
Ian 7 Sam 16
Jeff 6 Tina 18

17) Refer to the scenario above. Suppose the equilibrium price in this market is $10. What is the amount of 17)
producer surplus in this market?
A) $29 B) $6 C) $10 D) $15

18) Refer to the scenario above. Suppose a price floor of $12 is imposed on this market., which does not allow 18)
the price of hats drop below $12. Under this restriction, ________ hats are exchanged in this market, and the
social surplus will be ________.
A) 6; $38 B) 6; $29 C) 2; $40 D) 4; $41

19) If a seller enjoys a producer surplus of $30 when she sells a good for $79, her reservation value for the good 19)
is ________.
A) $49 B) $109 C) $30 D) $79

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The following graph shows the marginal cost curves of two profit-maximizing firms in a perfectly competitive market.

20) Refer to the graph above. At the competitive equilibrium price in this market, Firm 1 produces ________ 20)
compared to Firm 2, and will get ________ in producer surplus.
A) more; more B) less; less C) less; more D) more; less

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Scenario: A manufacturing firm operates three plants with the marginal cost curves shown in the figure and the average total costs
summarized in the table below.

Average Total Average Total Average Total

Cost Cost Cost
Output (Kg) Pla nt 1 Plant 2 Plant 3
100 80 140 440
200 65 80 400
300 70 60 300
400 100 30 200
500 160 40 120
600 250 60 80
700 320 100 50
800 440 180 70
900 660 220 160

21) Refer to the scenario above. If the market price of the firm's product is $80 per 100 kg, what is the firm's 21)
profit?
A) $31,000 B) $23,000 C) $28,000 D) $20,000

22) Refer to the scenario above. If the market price of the firm's product is $60 per 100 kg, which plants should 22)
be used to produce the good?
A) Plants 2 and 3 B) Plants 1 and 2 C) Plants 1 and 3 D) All plants

23) Refer to the scenario above. The firm should exit the market if the price per 100 kg falls below ________. 23)
A) $50 B) $30 C) $60 D) $80

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The following figure depicts the short-run cost curves of a perfectly competitive firm.

24) Refer to the figure above. If the current market price is $9, the profit -maximizing output of this firm is 24)
________.
A) 15 B) 70 C) 85 D) 55

25) Refer to the figure above. Should the market price fall to $4, this firm will ________. 25)
A) shut down immediately and suffer a loss equal to its fixed costs
B) produce 60 units and cover exactly its variable cost
C) continue operating in the short run and suffer a loss that is less than its fixed costs
D) shut down immediately and make zero profit

26) Which of the following statements is true? 26)

A) Production in a perfectly competitive market is Pareto efficient because the government or a central
planner carefully analyzes the needs and requirements of society and instructs firms on what to produce
and in what quantity.
B) Production in a perfectly competitive market is efficient because resources in the market leave those
sectors in which price cannot cover their costs of production and enter those sectors in which price can
cover their costs of production.
C) Production in a perfectly competitive market is Pareto inefficient because the government or a central
planner carefully analyzes the needs and requirements of society and instructs firms on what to produce
and in what quantity.
D) Production in a perfectly competitive market is suboptimal because the absence of free entry and exit of
firms allows firms to specialize in only one particular industry.

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The following figure represents the cost curves of two firms operating in different perfectly competitive industries. This economy consists
only of industries 1 and 2.

27) Refer to the figure above. If the market price in industry 1 is $3 and the market price in industry 2 is $4, we 27)
should expect ________ in the long run.
A) both firms to stay in their respective industries
B) firm A to exit industry 1 and not enter industry 2
C) firm B to exit industry 2 and enter industry 1
D) firm A to exit industry 1 and enter industry 2

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Scenario: The rare earth element neodymium is one of the essential ingredients in the magnets used in computer hard drives and
loudspeakers, among many other devices. The figures below shows a hypothetical pictures of supply and demand for neodymium,
loudspeakers, and computer hard drives. The latter two are accompanied by the pictures of cost curves for a typical firm in those markets.
Initially, all markets are in the long -run equilibrium at the prices shown. Then a surge in demand for loudspeakers takes place due to a
rapidly increasing popularity of hi-fidelity audio equipment in China. This will cause a change in the loudspeaker market (Step 1), which
in turn causes a change in the neodymium market (Step 2), which will cause a change in the hard drive market and the loudspeaker
market (Step 3), and so on.

28) Refer to the scenario above. What is expected to happen in the loudspeaker market after the surge in demand 28)
for loudspeakers (in Step 1)?
A) There will be a decrease in the quantity demanded due to higher price.
B) There will be an increase in the supply due to entry.
C) The market will remain at the initial equilibrium.
D) There will be a decrease in supply due to exit.

29) Without any restrictions in a perfectly competitive market, if there is a sudden rightward shift in the demand 29)
for a good, sellers of the good will ________.
A) increase the quantity of the good supplied in the market
B) decrease the supply of the good at the same price
C) decrease the quantity supplied
D) increase the supply of the good at the same price

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30) Which of the following statements is true? 30)
A) Price controls always benefit sellers and make buyers worse off.
B) Price controls always benefit buyers and make sellers worse off.
C) Price controls strengthen the functioning of the invisible hand.
D) Price controls weaken the functioning of the invisible hand.

The following figure shows the demand and supply curves for a good. The initial demand curve is D1 and the supply curve is S. Later,
due to an external shock, the demand curve shifts to D2.

31) Refer to the figure above. After the demand curve shifts to D2, if the price is held below the new equilibrium, 31)
then ________.
A) there will be zero deadweight loss
B) the quantity demanded will be less than the quantity supplied
C) the quantity demanded will be greater than the quantity supplied
D) the quantity demanded will equal the quantity supplied

32) When the price of one pen is $1, the number of notebooks demanded is 50. When the price per pen increases 32)
to $5, the number of notebooks demanded decreases to 30. What is the cross-price elasticity of demand
between the two goods using the arc elasticity method?
A) 0.375 B) 3 C) 0.1 D) 3

33) From a firm's point of view, when the demand for a good has a price elasticity of 0.5, then, all things 33)
remaining the same, a(n) ________.
A) change in the price of the good will not affect the firm's revenue
B) increase in the price of the good will increase the firm's revenue
C) change in the price of the good will not affect the quantity demanded of the good by consumers
D) increase in the price of the good will decrease the firm's revenue

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34) Given the following price, quantity, and cost numbers, estimate the profit -maximizing output, assuming that 34)
the firm is operating in a perfectly competitive market. What is the profit at the profit-maximizing output?

Price ($) Quantity Sold (units) Total Cost ($)

10 0 15
10 1 18
10 2 22
10 3 27
10 4 33
10 5 41
10 6 51
10 7 62

A) 14 B) 9 C) 18 D) 60

35) When the price of margarine is $2 per pound, 10 pounds of butter are demanded. When the price of 35)
margarine increases to $6 per pound, 30 pounds of butter are demanded. What is the cross -price elasticity
between the two goods?
A) 1 B) 1 C) 5 D) 2

36) The cross-price elasticity of demand for a good is the ________. 36)
A) percentage change in the quantity demanded of the good due to a percentage change in tax rates
B) percentage change in the quantity demanded of the good due to a percentage change in consumer's
income
C) percentage change in the quantity demanded of the good due to a percentage change in the good's price
D) percentage change in the quantity demanded of the good due to a percentage change in the prices of
related goods

37) Gary consumes 10,000 kilowatt-hours of electricity when his income is $500. When his income increases to 37)
$1,000, his consumption of electricity increases to 18,000 kilowatt-hours. What is Gary's income elasticity of
demand for electricity?
A) 0.8 B) 2 C) 1.8 D) 0.5

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38) The following graph shows the supply curve of a product. What is the arc price elasticity of supply of this 38)
product when its price changes from $12 to $8?

A) 1.25 B) 0.75 C) 1 D) 0.50

39) The supply curve of good A, and the supply curve if good B are both depicted in the following graph. Which 39)
statement is true?

A) Supply of good B is more elastic than the supply of good B.

B) Supply of good A is more elastic than the supply of good B.
C) Supply of good B is perfectly inelastic.
D) Supply of good A is unit elastic.

40) If the price elasticity of supply of a good is 2, a 200 percent increase in the price of the good will change the 40)
quantity supplied by ________.
A) 50 percent B) 400 percent C) 200 percent D) 100 percent

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Answer Key
Testname: MIDTERM_2_SAMPLE_F1

1) C
2) B
3) A
4) D
5) C
6) B
7) B
8) A
9) C
10) A
11) D
12) A
13) C
14) C
15) C
16) A
17) A
18) D
19) A
20) B
21) A
22) A
23) B
24) B
25) C
26) B
27) B
28) B
29) A
30) D
31) C
32) A
33) B
34) B
35) B
36) D
37) A
38) A
39) A
40) B

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