Section I

MICROECONOMICS
Section I
Tlme-70 minutes
60 Questions
DlredioDs: Each of the questions or incomplete statements below is followed by five suggested answers or
completions. Select the one that is best in each case and then fill in the corresponding oval on the answer sheet.
1. The basic economic problem of all countries is the
existence of
(! ta" increases and budget deficits
(#! limited resources and unlimited wants
($! unemployment and inflation
(0) government and private industry
(E! unions and monopoly firms
%. ssume that popcom and movie attendance are
complements and that Salty $oncession grows com
suitable for popping. &r. $oncession will most
li'ely sell a greater quantity of popping corn at a
higher price ifwhich of the following occurs(
(! The wages of fann wor'ers and movie theater
employees increase.
(#! A technological improvement results in less
e"pensive and more efficient harvesting of
com.
($! The introduction of new fat)free potato chips
provides new competition in the snac')food
mar'et
(0) The release of three summer movies sets
records for movie attendance.
(E! *ew government regulations force movie
tbeaten to hire more security guards at each
theater.
+. ,n a perfectly competitive mar'et- which of the
following shifts in the supply and demand curves
will definitely cause both the equilibrium price
and quantity to decrease(
Syp.ply Curve
(A) Shifts to the left
(#! Shifts to the left
($! Shifts to the right
(0) *o shift
(E! *oshift
Demand $urve
Shifts to the left
*o shift
Shifts to the right
Shifts to the right
Shifts to the left
/. Ifbologna is an inferior good- which of the
following must be true(
(! The demand curve for bologna is vertical.
(B) The demand curve for bologna is hori0ontal.
($! An increase in the price of bologna will
decrease the supply of bologna.
(D! An increase inconsumer income will decrease
the demand for bologna.
(E! A decrease in consumer income will decrease
the supply of bologna.
1. 2hich of the following events will cause the
demand curve for hamburgers to shift to the right(
(A) An increase in the price of pi00a- a substitute
for hamburgers
(B) An increase in the price of french fries- a
complement to hamburgers
($! An increase inthe price of hamburgers
(D) A decrease inthe price of hamburgers
(E! A decrease inthe cost of producing
hamburgers
G ! T T"# !#$T %AG#
13
Questions 6-7 refer to the graph below, which
shows the cost curves for a profit-maximizing,
perfectly competitive finn.
Marginal Cost
Average
otal Cost
Average
!ariable
Cost
o
Q"A#$%
6. he vertical &istance CF represents the
'A( total cost of pro&ucing Q
1
units of output
')( average total cost of pro&ucing Q
1
units of
output
'C( average fixe& cost of pro&ucing Q
1
units of
output
'*( average variable cost of pro&ucing Q
+
units
of output
',( amount of the firm's loss resulting from pro-
&ucing Q
1
units of output
7. If marginal revenue is e.ual to /$0 all of the
following statements are true ,1C,/2
'A( otal revenue will e.ual total costs.
')( he finn will pro&uce Q
+
units of output.
'C( he firm will pro&uce the efficient level of
output,
'*( he firm will earn a normal profit.
',( he firm will increase pro&uction in the
long run.
Unauthorized copying or reusing
.ny pert of this page Is illeglll.
18
3. 4hich of the following best &escribes a perfectly
competitive mar5et6
'A( Many small firms pro&ucing &ifferentiate&
pro&ucts an& facing significant barriers to
entry
(B) Many small firms pro&ucing a homogeneous
pro&uct an& facing significant barriers to
entry
'C( Many small firms pro&ucing a homogeneous
pro&uct an& facing no significant barriers to
entry
'*( A single large firm pro&ucing a uni.ue pro-
&uct an& facing significant barriers to entry
',( A few large firms pro&ucing a &ifferentiate&
pro&uct an& facing no significant barriers to
entry
G ! " "#$ !$%" &'G$
Section I
9. Assume that a competitive industry producing a normal good is in long1run equilibrium. ITaverage consumer
income decreases, which of the following changes will occur?
Short1un !rice Short1un Industry "utput #ovement of $irms
%A& Increase Increase 'nter
%(& Increase )ecrease '*it
%+& )ecrease Increase '*it
%)& )ecrease )ecrease 'nter
%'& )ecrease )ecrease '*it
,-. .hich of the following statements is true for a
monopolist at the profit1ma*imi/ing output level?
%A& !rice e*ceeds marginal revenue.
%(& #arginal cost e*ceeds price.
%+& )emand is price inelastic.
%)& !rice equals marginal cost, which equals
average total cost.
%'& The demand curve intersects the supply curve.
,,. ITa normal good is produced in a competitive
mar0et, which of the following combinations of
events could cause the price of the good to increase
and the quantity to decrease?
%A& An increase in the average income of con1
sumers and an increase in the number of
producing firms
%(& An increase in the average income of con1
sumers and an increase in the price of a
variable input
%+& An increase in the price of a substitute good
and an increase in the number of producing
firms
(0) A decrease in the number of consumers and a
decrease in the price of a variable input
%'& A decrease in the average income of con1
sumers and an increase in the number of
producing firms
2nauthori/ed copyln9 or ,.u.lng
any p3rt of 4hI, page 5 illegal.
[ 19
,6. #onopolies are inefficient compared to perfectly
competitive firms because monopolies
%A& produce output with average total cost
e*ceeding average revenue
%(& produce more output than is socially desirable
%+& charge a price less than marginal revenue
%)& charge a price greater than marginal cost
%'& charge a price less than average total cost
,7. An individual8s labor supply curve is derived
from that person8s preferences about the trade1
off between income and
(A) wor0
%(& wealth
%+& nominal wages
%)& productivity
%'& leisure
,9. A profit1ma*imi/ing fum will hire
(A) labor until its wage rate equals its average
revenue product
%(& labor until its wage rate equals its marginal
revenue product
%+& labor until its wage rate equals the interest rate
%)& capital until the interest rate equals the wage
rate
%'& capital until the interest rate e*ceeds the wage
rate
GO ON TO THE NEXT PAGE
15. A chemical plant pollutes a river that serves as the
water supply for a nearby tOWD. From an econo.
mist's point of view. pollution from the plant
should be reduced until the
(A mar!inal benefit from cleaner water is e"ual
to the mar!inal cost of ma#in! the water
cleaner
($ marginal benefit from cleaner water is
ma%imi&ed
(' mar!inal benefit from c1eaner water is &ero
'D total benefit from cleaner water is e"ual to
the total cost of ma#in! the water cleaner
(E) total benefit from cleaner water ismaximized
16. All of the followin! are included in computin! the
opportunity cost of attendin! colle!e ()'(*+
(A) interest paid on student loans
($ wa!es the student !ave up to attend colle!e
(' money spent on colle!e tuition
'D money spent on clothin! e%penses
(( money spent on boo#s and supplies
1,. A country can consume beyond its present produc.
tion possibilities curve when it
(A trades with other countries- thus ta#in! advan.
ta!e of different opportunity costs
($ reduces unemployment- thus increasin! output
(' e%periences decreasin! opportunity costs
(D faces an upward.slopin! production possibil.
ities curve
(( faces a downward.slopin! production possibil.
ities curve
Unauthorized copying or ... using
etnt part of this p-se is ille!al.
Questions 18-19 refer to the graph below. The
market is currently in equilibrium.
w
/upply
%
y
Demand
01A2+3r4
15. Ina competitive e"uilibrium- consumer surplus is
the area of
(A) UV
($ !"
(' 671+
'D #Vzy
(( O48/
19. If a price floor is set at #$ the "uantity
demanded will
(A increase from O6 to O/
($ increase from O6 to O+
(' decrease from O/ to O6
'D decrease from O+ to O6
(( not chan!e
G O O N T O T H E N E X T P A G E
:;
20. Which of the following must be true ifthe revenues
of wheat farmers increase when the price of wheat
increases?
(A). The supply of wheat is price elastic.
(B) The supply of wheat is income elastic.
(C) The supply of wheat is income inelastic.
(0) The demand for wheat is price elastic.
(E) The demand for wheat is price inelastic.
2. !The demand curve for a normal good slopes down
for which of the following reasons?
. "n increase in the price of the good induces
consumers to purchase su#stitute products.
n. "n increase in the price of the good reduces
consumers! purchasing power.
m. "n increase in the price of the good increases
consumers! utility from consuming that good.
(") $ only
(B) n only
(C) monly
(0) Iand nonly
(E) $ and m only
I
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% &t
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O~----~A~------~B~UNIT~~S~O~F~LAB~~O~R
22. The relationship in the graph a#ove #est illustrates
the economic concept of
(") opportunity cost
(B) diminishing marginal utility in consumption
(C) diminishing marginal returns in production
(0) production possi#ilities
(E) comparative advantage
Section I
2'. Which of the following statements is true for a
perfectly competitive firm #ut not true for a
monopoly?
(") The firm!s price is equal to its average
revenue.
(B) The firm cannot affect the mar(et price for its
good.
(C) $t is difficult for other firms to enter the
industry.
(0) The demand for the firm!s product is unit
elastic.
(E) The firm must lower its price in order to sell
more of its product.
2). Ifa perfectly competitive industry were monopo*
li+ed without any changes in cost conditions, the
price and -uantity produced would change in
which of the following ways?
~
(A) $ncrease
(B) $ncrease
(C) $ncrease
(D) .ecrease
(E) .ecrease
/uantity
$ncrease
.ecrease
0ay increase or decrease
$ncrease
.ecrease
21. $n a perfectly competitive industry, the mar(et
price of the product is 22. " firm produces at a
level of output where average total cost is 23,
marginal cost is 23, and average varia#le cost is
24. To ma5imi+e its profit, the finn should
(") decrease its selling price
(B) increase its selling price
(C) decrease output #ut (eep producing
(0) shut down
(E) leave #oth price and output unchanged
23. When a perfectly competitive firm sells additional
units of output, its total revenue will
(") remain constant
(B) increase rapidly at first, then decline
(C) increase at a decreasing rate
(.) increase at an increasing rate
(E) increase at a constant rate
G O O N T O T H E N E X T P A G E
21
27. Antitrust legislation is designed to make it illegal
for a fumto monopolize an industry. Which of the
following best states the economic rationale for
this legislation?
(A) Amonopolist produces too little of the good,
producing an output that minimizes the
aerage cost of production.
(B) Amonopolist produces too little of the good,
charging consumers a price that e!ceeds the
marginal cost of production.
(") A monopolist is more likely to pollute the
enironment than are firms in a competitie
industry.
(D) Amonopolist engages in price discrimination,
charging low&income people with elastic
demand cures a higher price than that
charged to high&income people with
inelastic demand cures.
($) Amonopolist produces too much of a good,
attracting scarce factors of production that
might be better utilized in other industries.
2%. If the price for a product produced in a competi&
tie market increases, which of the following
is most likely to occur in the labor market for
workers who produce that product?
(A) 'he demand for labor and the number of
workers hired both increase.
(() 'he supply of labor and the number of
workers hired both increase.
(") 'he demand for labor and the number of
workers hired both decrease.
(D) 'he supply of labor and the number of
workers hired both decrease.
($) 'here is a moement along the demand for
labor cure, and firms hire more workers.
2). A factor of production will *+' earn economic
rent when its supply is
(A) elastic
(() inelastic
(") unit elastic
(,) perfectly elastic
($) perfectly inelastic
Unauthorized copying or ntusing
any part of thi. -.. ia illega..
/0. Wheneer the production of a good creates
negatie e!ternalities, an unregulated market will
result in
(A) too little of the good being produced
(B) an optimal amount of the good being produced
as long as the market is perfectly competitie
(") society.s marginal cost being higher than the
firm.s marginal cost
(,) the firm.s marginal cost being higher than
society.s marginal cost
(E) the firm.s marginal cost being e1ual to
society.s marginal cost
/2. 'he chart below shows the number of resource
units the countries 3amma and +mega must use
to produce one unit of food or one unit of clothing.
3amma +mega
4ood 20 resource units 5resource units
Clothing 9 resource units 3 resource units
Which of the following statements is true
according to the chart aboe?
(A) 'rade should tae place, with 3amma special&
izing in clothing production and +mega
specializing in food production.
(() 'rade should tae place, with 3amma special&
izing in food production and +mega
specializing in clothing production.
(") $ach country should deote half of its
resources to food production and half to
clothing production and not trade.
(,) 6ince +mega can produce both food and
clothing using fewer resources than !amma"
it cannot benefit from trade with 3amma.
($) 6ince 3amma can produce both food and
clothing using fewer resources than +mega.
it cannot benefit from trade with +mega.
G O O N T O T H E N E X T P A G E
22
Section I
32. The table below represents points on an economy's
current production possibilities curve.
34. The following chart shows the total utility that Juan
receives from consuming various amounts of
chocolate candy bars each day.
Good X
!"""
990
980
970
Good Y
o
""
200
3""
#umber of $andy %ars
$onsumed per &ay
o

2
3
4
'
Total (tility
o
40
70
)"
""
80
The opportunity cost of increasing the production
of good * from " to 2"" is
+,- !"""units of .
+%- 980 units of X
+$- 2"" units of .
(0) 20 units of X
+/- ' units of .
0hich of the following statements about Juan's
marginal utility is correct1
+,- 2is marginal utility from the first candy bar
is greater than his marginal utility from the
second candy bar.
+%- 2is marginal utility from the fourth candy bar
is greater than his marginal utility from the
third candy bar.
+$- 2is marginal utility increases at a constant
rate.
(0) 2e first e3periences diminishing marginal
utility with the consumption of the fifth
candy bar.
(E) 2is greatest marginal utility comes from his
consumption of the fourth candy bar.
33. 0hich of the following situations best illustrates
the law of demand1
+,- ,s real incomes of (nited States citi4ens
have decreased over the past year! the
demand for housing bas also decreased
+%- 5ecent decreases inthe price of imported
wine have led toan increase inthe consump6
tion of domestic wine.
+$- In the past several months! as the price of
compact disc players bas decreased. the
7uantity of compact disc players sold bas
increased.
(0) The increase in the price of 7uality health
foods bas increased the revenues of firms
producing these goods.
+/- ,s the demand for computers has increased!
the number of wor8ers inthe computer
industry has increased.
(nauttlori4ed copying Of reusing
eIf'9 J:of this JNge ia Illegal.
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23
UJ
o
i : 2
0..
$1.2 0
$1.00
$0.80
Supply
Demand
900 1.000 1.100 QUAN1TfY OF GASO!N"
#$!UONSOF
GAONS %"& '""()
*+. The ,-ap. a/01e 2.032 the 2upply and demand
4u-1e2 f0- ,a20li ne. '.i 4. 0f 5.e f0ll03i n, 3i ll
044u- if5.e ,01e-nmen5 e25a/li 2.e2 a p-i 4e 4ei li n,
0f $1.2 0 pe- ,all0n6
#A) A 2.0-5a,e 0f 900 mi lli 0n ,all0n2
#7) A 2.0-5a,e 0f 2 00 mi lli 0n ,all0n2
#8) A 2.0-5a,e 0f 100 mi lli 0n ,all0n2
#D) A 2u-plu2 0f 100 mi lli 0n ,all0n2
#") Nei 5.e- a 2u-plu2 n0- a 2.0-5a,e
$a-,i nal Fi 9ed
O0an5i 5y 8025 8025
0 2 0
1 1+
2 10
* 1+
*:. A440-di n, 50 the 5a/le a/01e; 3.i 4. 2.032 5.e
40252 0f p-0du45i 0n f0- a firm, 5.e a1e-a,e 505al
4025 0f p-0du4i n, * uni 52 0f 0u5pu5 i 2
#A) +.00
#7) 11.:<
#8) 1*.**
#D) 1+.00
#") 2 0.00
*<. In5.e 2.0-5 -un; a de4-ea2e i n p-0du45i 0n 40252 0f
a p-0du45 3i ll 2.i f5
#A) /05. 5.e demand 4u-1e and 5.e 2upply 4u-1e
50 the -i ,.5
(B) 5.e demand 4u-1e 50 5.e lef5 and the 2upply
4u-1e 50 5.e -i ,.5
#8) 0nly 5.e 2upply 4u-1e 50 5.e -i ,.5
#D)= 0nly 5.e 2upply 4u-1e 50 5.e lef5
(E) 0nly 5.e demand 4u-1e 50 5.e lef5
*8. A pe-fe45ly 40mpe5i 5i 1e fi -m. ea-ni n, e40n0mi 4
p-0fi 52; p-0du4e2 and 2ell2 100 uni 52 0f 0u5pu5 a5
a p-i 4e 0f $2 0 pe- uni 5. Ifi 52 ma-,i nal 4025 0f
i n4-ea2i n, 0u5pu5 50 a -a5e 0f 101 uni 52 i 2 $18;
3.i 4. 0f the f0ll03i n, 25a5emen52 i 2 40--e456
#A) T.e 505al -e1enue f-0m 2elli n, 101 uni 52 i 2
5.e 2ame a2 5.e 505al -e1enue f-0m 2elli n,
100 uni 52.
#7) T.e 505al p-0fi 5 f-0m 2elli n, 10! uni 52 i 2 $2
,-ea5e- than 5.e 505al p-0fi 5 f-0m 2elli n,
100 uni 52.
#8) T.e 505al 4025 0f p-0du4i n, 101 uni 52 i 2 $2
,-ea5e- than 5.e 505al 4025 0f p-0du4i n,
100 uni 52.
#D) T0 2ell 101 uni 52; 5.e fummu25 -edu4e i 52
p-i 4e /el03 $2 0.
#") T0 2ell 101 uni 52; 5.e firmmu25 -ai 2e i 52 p-i 4e
a/01e $2 0.
*9. !n the 2.0-5 run i n pe-fe45 40mpe5i 5i 0n; the
i ndu25-y=2 demand 4u-1e and a fi -m=2 demand
4u-1e .a1e 3.i 4. 0f the f0ll03i n, 2l0pe26
!ndu25-y=2
Demand Curve
#A) >0-i ?0n5al
(B) >0-i ?0n5al
#8) D03n3a-d 2l0pi n,
#D) D03n3a-d 2l0pi n,
#") @e-5i 4al
Fi -m=2
Demand Curve
D03n3a-d 2l0pi n,
>0-i ?0n5al
>0-i ?0n5al
D03n3a-d 2l0pi n,
>0-i ?0n5al
G O O N T O T H E N E X T P A G E
24
Marginal Cost
Average
Total Cost
S20
S15
SIO
S5
Demand
.0
40. Which of the following statements ao!t the finn
whose cost and reven!e c!rves are shown aove
is correct"
#A$ Its %rofit.ma'imi(ing %rice is )5.
#*$ Its %rofit.ma'imi(ing o!t%!t level is 200 !nits.
#C$ Its maximum %rofit is )4+000.
#D$ Ifit %rod!ces 250 !nits+ it will earn no
economic %rofits.
#,$ At the %rofit.ma'imi(ing level of o!t%!t+ its
total cost is SI+OOO.
41. Interde%endence among firms is a characteristic
%rimaril- associated with
#A$ labor markets
#*$ %erfect com%etition
#C$ mono%son-
#D$ oligo%ol-
#,$ mono%ol-
42. Mono%olisticall- com%etitive firms are inefficient
eca!se the-
#A$ %rod!ce a lower level of o!t%!t at a higher
average cost than do %erfectl- com%etitive
firms
#*$ !se %rod!ction %rocesses that are more ca%ital.
intensive than do %erfectl- com%etitive firms
#C$ face downward.slo%ing demand c!rves+
ens!ring that marginal reven!e is greater
than average reven!e
#D$ %rod!ce at that level of o!t%!t where %rice
equals marginal cost
#,$ realize diseconomies of scale
Section I
4/. In a %erfectl- com%etitive laor mar0et for n!rses+
all of the following statements are tr!e ,1C,234
#A$ 3he im%osition of an effective minim!m
wage will res!lt in !nem%lo-ment.
#*$ An increase in the marginal %rod!ct of n!rses
will increase the demand for n!rses and
increase wages.
#C$ An increase in the s!%%l- of n!rses will
create !nem%lo-ment and leave wages
!nchanged.
(D) An increase in the demand for health care
will increase the demand for n!rses and
increase wages.
#,$ 5evo0ing wor0 %ermits for foreign n!rses
will increase wages of domestic n!rses.
44. 6or a certain f!m+ the marginal reven!e %rod!ct
for the last !nit of laor is S70+ and the marginal
reven!e %rod!ct for the last !nit of ca%ital is )100.
Which of the following cominations of factor
%rices wo!ld e necessar- for the finn to ma'imi(e
%rofits"
2rice of 8aor
S 2
) 3
)10
) 2
$60
#A$
#*$
(C)
(0)
#,$
2rice of Ca%ital
) 5
) 20
$ 10
$ 25
)100
45. In the 9nited States+ the federal government
redistri!tes income %rimaril- -
#A$ setting !% %lanning commissions to set wage
rates
(B) ta'ing different income levels at different
rates
#C$ g!aranteeing ever- %erson a minim!m
income thro!gh minim!m.wage laws
(D) %roviding the same goods and services to all
citi(ens
#,$ relocating and retraining str!ct!rall-
!nem%lo-ed %eo%le
G O O N T O T H E N E X T P A G E
25
CI}
c
o
8
~
CI}
~
u
CAPITAL GOODS
46. The diagram above shows an economys c!rren"
#rod!c"ion #ossibi$i"ies c!rve %or ca#i"a$ goods
and cons!mer goods. I% socie"y chooses #oin" &
over #oin" A' socie"y is choosing
(A) more %!"!re cons!m#"ion in e*change %or $ess
c!rren" cons!m#"ion
(&) more c!rren" ca#i"a$ goods in e*change %or
$ess %!"!re cons!m#"ion
(C) more %!"!re and c!rren" cons!m#"ion
(D) $ess %!"!re cons!m#"ion in e*change %or more
c!rren" cons!m#"ion
(+) $ess c!rren" ca#i"a$ goods in e*change %or
grea"er %!"!re cons!m#"ion
4,. -hich o% "he %o$$owing is "r!e in "he e$as"ic range
o% a %inns demand c!rve.
(A) The %irm sho!$d e*#and o!"#!" "o increase
economic #ro%i"s.
(&) An increase in #rice wi$$ a$so $ead "o an
increase in "o"a$ cos".
CC) A decrease in #rice wi$$ $i/e$y $ead "o an
increase in"o"a$ reven!e.
(0) 0argina$ reven!e is nega"ive.
(+) The %irm is ma*imi1ing "o"a$ reven!e.
48. The s!##$y c!rve %or a!"omobi$es wi$$ shi%" "o "he
$e%" in res#onse "o
CA) an increase in"he e%%iciency o% robo"
"echno$ogy
(&) an increase inwages in"he a!"omobi$e
ind!s"ry
(C) a decrease in"he n!mber o% cons!mers
#!rchasing a!"omobi$es
(D) a decrease in "he in"eres" ra"es %or a!"omobi$e
$oans
(+) a decrease in cons!mers income
Un.uthorized copyingor ,.u"ng
.ny #.r" of .hI ,#ege I , i$$eg..
42. An increase in which o% "he %o$$owing wi$$ mos"
$i/e$y res!$" ina $ong3r!n s!r#$!s o% a #rod!c".
(A) The n!mber o% s!##$iers o% "he #rod!c"
(&) A #rice that is se" by $aw above "he
e4!i$ibri!m #rice
(C) The demand %or "he #rod!c"
(0) The cos"s o% reso!rces !sed "o #rod!ce the
#rod!c"
(+) The %!"!re e*#ec"ed #rice o% "he #rod!c"
56. S!##ose that a cons!mer #!rchases "wo goods
7 and 8 and "ha" the margina$ !"i$i"y o% 7 is
09
*
: "he "o"a$ !"i$i"y o% 7 is T9*' "he margina$
!"i$i"y o% 8 is 09
y
: and "he "o"a$ !"i$i"y o% 8 is
T9
y
I f the #rices o% 7 and 8 are Px and PY'
res#ec"ive$y' whicb o% "he %o$$owing e*#ressions
de%ines cons!mer e4!i$ibri!m.
(A) T9* ;T9
y
(&) 09
x
; U
y
(C) T9*<P
*
!T9y$P
y
(0) U"#. !Uy"#
y
(+) (0D*) (P*) $(09
y
) (Py) ; =
5=. Ass!me "ha" "o"a$ %i*ed cos"s are >46' "ha" "he
average #rod!c" o% $abor is 5 !ni"s when =6 !ni"s
o% o!"#!" are #rod!ced. and "ha" "he wage ra"e is
>=?. I f $abor is "he on$y variab$e in#!"' wha" is the
average "o"a$ cos" o% #rod!cing =6 !ni"s o% o!"#!".
(A) > ?
(&) s %
(C) s ,
(0) s 2
(+) >=?
G O O N T O T H E N E X T P A G E
?6
52. Which of the following best explains why it is
difficult to maintain lasting collusive agreements?
(A) There is an unavoidable conflict inthat a
collusive agreement can increase the profits
of some but not all firms in the industry.
(B) There is little potential for gain from collusion
unless there is a large number of consumers
in the mar!et
(") #ach fum in the industry views itself as facing
a vertical demand curve even though the
mar!et demand curve is downward sloping.
"$ ) The firms in the industry have a common
incentive to increase output to a more
competitive level.
(#) #ach fum reali%es that its profits would
increase if it were the only firm to violate
the collusive agreement by increasing its
production slightly.
5&. If labor is the only variable input and it costs
'(5 per hour and if the marginal product of labor
is & units per hour the short7run marginal cost of
1unit of output is approximately
(A) s *.2*
(+) s &.**
(") s 5.**
"$ ) '(5.**
(#) ',5.**
5,. If a perfectly competitive finn wishes to maximi%e
profits and is producing where price exceeds both
marginal cost and average variable cost then the
fum is
(A) producing too little output
(+) producing wbere its marginal revenue is less
than its marginal cost
(") using too much of the variable input
"$ ) charging too high a price for its output
(#) not earning any economic profits
-nauthori%ed copy./ or reualnsl
eny pert of thi.page Ie illegel.
0ection 1
55. A+" 2imited 1nc. sells its product in a perfectly
competitive mar!et for a price of '(5 per unit and
hires wor!ers at a daily wage of '35. 2abor is the
only factor cost and the firm is currently earning
profits. 1f A+" hires one more wor!er and output
increases by 5 units per day. the firm4s profits will
(A) decrease by '5
(B) decrease by '35
(") increase by '35
(D) increase by '(5
(#) remain unchanged
55. The condition for allocative efficiency is violated
when
(A) firms are price ma!ers (price searchers)
(B) short7run profits exist in a competitive
industry
(") price e6uals average total cost
(D) the mar!et demand curve is inelastic in a
competitive industry
(#) the mar!et demand curve is elastic ina
competitive industry
53. 1n which of the following cases is the govern7
ment4s action appropriate for reducing
inefficiency?
(A) Taxation of the output of a chocolate factory
that emits an aroma that residents of the city
en8oy
(+) 9egulation that reduces the output of a mono7
poly
(") A lump7sum tax on a monopolist
($ ) A subsidy for the consumption of a good
produced by a plant that emits a pollutant as
a by7product
(#) A toll on a congested bridge
GO ON TO THE NEXT PGE
23
58. The concept of derived demand is described by
which of the following?
(A) A decrease inthe demand for theater tickets
will decrease the demand for actresses and
actors.
(B) Ifthe salaries of basketball players increase,
the !antity of basketball players demanded
will decrease.
(") An increase in the income of cons!mers will
increase the demand for opera tickets.
(0) An increase in the demand for movie tickets
will decrease the demand for video rentals.
(#) A decrease in the price of movie tickets will
increase the demand for movie tickets.
5$. %hich of the following is the best e&ample of a
negative e&ternality?
(A) An increase inthe price of oil d!e to the
imposition of environmental reg!lations
(B) An increase in the price of oil d!e to action
taken by the 'rgani(ation of )etrole!m
#&porting "o!ntries (')#")
(") A decline in oil stock prices as a res!lt of bad
management
(*) 'il leakages from drilling platforms in the
+!lf of ,e&ico
(#) *eclining restrictions on the importation of
foreign-made cars
./. )rivate s!pply of p!blic goods is most likely to
res!lt in
(A) less than the efficient level of o!tp!t, d!e to
the free-rider problem
(B) less than the efficient level of o!tp!t, d!e to
the problem of ins!fficient competition
(") more than the efficient level of o!tp!t. d!e to
lower costs of private firms
(0) more than the efficient level of o!tp!t, d!e to
the e&istence of e&ternalities
(#) an over!se of these goods
#0* '1 2B"34/0 3.
28