Sample Review Questions for Final

These are just some sample questions that involve concepts from the chapters in class. Please
make sure that you study more than this sheet, the question on the test will be different from
these ones, they are just for you to test your understanding. The final cumulative, so just these
questions will not be enough to study. You must go through all of your notes, all of the review
sheets and know each of the topics covered.

1. I once had a student who worked at a car wash, he made $10/hr for an 8 hour shift. He decided that
he wanted to take Sundays off to study economics. However, after he quit working at the car wash he
was reading the newspaper and saw a new job posted to work at a video store for $15/hr. He went to
the store and they said he could start whenever he liked and work an 8 hour shift.

a) What was the students opportunity cost of taking Sundays off when he worked at the car wash?
b) What was the students opportunity cost of taking Sundays off when got the job offer at the video
store
c) Do you think that this change in opportunity costs affected his decision to take Sundays off?

2. Some people who run marathons can get $1000 for first place, $500 for second place, and a trophy
for third place. Other people, like me, never place in first, second, or third place in marathons and never
will—but they still participate in the 26 mile run. Is this rational? Explain and remember to define the
rule of rational choice.

3. Which of the following are positive incentives, which are negative incentives? What behaviour are
they trying to encourage or discourage?
a) If you smoke outside the school doors, you can get a fine.
b) If you use your Safeway card when you pay for your groceries, you can get a sale price on some of
the items that you purchase.
c) On my way back from Nelson, I got a speeding ticket.
d) If I got all A’s in high school, my mom was going to take me to Disneyland.

4. Imagine that you are trying to decide whether or not to jog through the woods at 6:00am by yourself.
What are the expected marginal costs and expected marginal benefits? How would the conditions
change if the following occurred?
a) Last week, someone was attacked in the woods.
b) If you go by yourself this time, this will encourage your friend to join you next time.
c) There are rocks and roots all over the pathway.
d) You eat a large piece of cheesecake the night before
5. a) Use the following information to construct a production possibilities curve for consumption goods
and capital goods for a country.

Consumption Goods Capital Goods

55 0
54 1
52 2
49 3
45 4
40 5
34 6
27 7
19 8
10 9
0 10

b) Given the information above, what is the opportunity cost of the going from the 54 th to the 55th
consumption good in this country?

c) What is the opportunity cost of going from the fifth capital good to the sixth capital good? The 8th
capital good to the 9th? What is happening to the opportunity cost? Why is this happening?

d) Would the combination of 40 consumption goods and 4 capital goods be efficient? Why or why not?

e) Would the combination of 9 consumption goods and 10 capital goods be possible? Why or why not?

f) There are two possibilities for this country; they could produce at a point where they are making 52
consumption goods and 2 capital goods. Or, they could produce at a point where they are making 19
consumption goods and 8 capital goods. Draw two graphs of this country; on the first graph show its
economic growth in 20 years with the first combination, one the second graph draw the economic
growth in 20 years of the second combination.

6. 1. What is the impact on the strawberry market if the following happens? Draw a diagram and show
what happens to the new equilibrium price and equilibrium quantity.
a) There is an outbreak of strawberry bugs, they love to eat strawberries and can go through several
tonnes in one hour.
b) There is an increase in the price of strawberries, a crop that can be grown instead of gooseberries.
c) There is a large increase in the population and everyone has an equal income and loves strawberries
just as much as the previous population.
d) There is an increase in the technology of picking strawberries, which reduces the need to hire
workers and reduces the labour costs of strawberry producers.
e) People who eat strawberries have heard on the news that within the next year, global warming will
make it impossible to grow strawberries ever again.
f) There is a decrease in the price of blueberries, which people like to eat instead of strawberries.

7. In the following question, draw the diagram of the resulting situation in the market for gasoline. Say
what happens to the equilibrium price and equilibrium quantity. Use a sentence to describe the factors
that are shifting the curves:
In the summertime, people go on vacations, so driving increases. In the same summer, they found oil
reserves in Manitoba, a province in Canada that has never produced oil before.

8. Use the following information to plot a hypothetical market for bread and the resulting price
controls.
a) If there is a price floor placed in the market for bread that is above the equilibrium, what happens to
the resulting equilibrium quantity and equilibrium price? What is the state of the market?
b) If there is a price floor placed below the market equilibrium, what is the resulting equilibrium
quantity and equilibrium price? What is the state of the market?

9. Suppose Phil’s supply curve for widgets is as follows: At $20, he will supply 1; at $30, he will supply 2;
at $40 he will supply 3; at $50 he will supply 4; at $60 he will supply 5.

a) If the price of widgets is $40, what is his producer surplus?

b) if the price of widgets rises from $40 to $50, how much will his producer surplus change?

10. Use the diagram to answer the following problems

Price
S + tax
40
S

30

20

10

D
0
7 10 Quantity

a) At the equilibrium price before the tax is imposed, what is the consumer surplus? What is the
producer surplus?
b) Say that a tax is imposed in the industry. What is the new consumer surplus? What is the new
producer surplus? What is the area of tax revenue?
c) The introduction of a tax reduces quantity and leads to inefficiency, what is the area of the
deadweight loss?

11. Among the following pairs, which is likely to have the greatest price elasticity of demand? Why?

a. cars or Toyotas
b. electricity usage during a month or during a year
c. cable television or an apartment rental

12. After a drought in Alberta, the availability of water (the supply curve) declines by 30 percent. If the
elasticity of demand for water equals 0.75, by how much would the price of water have to rise in order
for quantity demanded to equal the quantity of water available? (Assume that the supply curve for
water is perfectly inelastic.)

13. Use the law of diminishing marginal utility to explain why a pizza parlour might price pizzas in the
following way: "Buy one pizza for $12, get the second pizza for $6." Why not simply charge $9 per pizza
instead?

14 How does the law of demand reflect the law of diminishing marginal utility?

15. What are the characteristics of a perfectly competitive industry?

16. Complete the chart below for a firm that is operating under conditions of perfect competition where
the market price is $22. What level of output maximizes the firm's profits?

Total Marginal Marginal Total Total

Quantity Price Revenue Revenue Cost Cost Profit
20 16 389
21 407
22 427
23 454
24 484
17. Refer to Figure above. The graph above represents a price-taking firm producing q 1 units of output.
Is the firm making a profit, experiencing a loss, or earning a normal profit? Should the firm increase
output, decrease output, or shut down? Explain.

18. Why do short-run profits in a perfectly competitive industry tend to disappear over time? Draw a
industry and individual firm graph to show what will happen over time.

19. Many people believe that a monopolist can set his own price that consumers have little recourse
but to pay, and thereby reap enormous profits. Is this true?

20. What portion of the demand curve will profit-maximizing monopolists choose to operate on: the
inelastic portion or elastic portion? Why?

21. Johnson’s hamburger stand is set up with an industrial grill, toaster, and dressing table (for putting
ketchup, mustard, etc. on the hamburgers). Mr. Johnson estimated the output, number of hamburgers,
that can be produce in fifteen minutes given these facilities. The estimates are shown in the table
below.

Number of employees Number of hamburgers Marginal Product Labour

(15 minutes) (15 minutes)
0 0 ---
1 20
2 50
3 90
4 120
5 140
6 150
7 156
8 160

a) Calculate the marginal product of labour. At what point does the law of diminishing returns set in?

22. The diagram below illustrated the short-run cost curve for a hypothetical firm.

13

10
8

60 70 80 Q
a) What is the total variable costs of producing am output of 70 units?

b) What is the total cost of producing 80 units of output?

c) What is the average variable costs of producing 80 units of output?

d) What is the average fixed costs of producing 80 units of output?

23. The Island Waters Company has a monopoly on selling bottled water from a special spring in Island
thought to have medicinal benefits. The following table shows the demand curve for gallons of Island
Waters per month. The company has no fixed costs and its marginal cost is constant at $4 per gallon.
Price Per gallon Gallons of Water Total revenue Marginal revenue
(in thousands) (in thousands)
$10 0
9 10
8 20
7 30
6 40
5 50
4 60
3 70
2 80
1 90
0 100

a) Complete the table by calculating the total revenue and the marginal revenue associated with
different prices of a gallon of water.
b) Graph the demand curve, marginal revenue curve, marginal cost curve and the average total cost
curve for Island Waters
c) At what price and output will Island Waters maximize profit? How much profit will it earn at that
price and output? What is the price elasticity of demand between $8 and $6? Does the monopolist
produce along the price inelastic portion of the demand curve?
d) If this were a competitive market rather than a monopoly, what would be the equilibrium price and
output?

24. P = 100 – Q
ATC = MC = 40

a) What is the equation for MR?

b) For the monopoly, what is the optimal quantity, the optimal price and the consumer surplus?
c) For the perfectly competitive market, what is the optimal quantity, the optimal price and consumer
surplus?
25. If the current output is at a point where marginal revenue is $5, marginal cost is $4, and average
total cost is also $4 (which is at the minimum point of the ATC). Therefore we can conclude that the
monopolist is maximizing profits. Is this true? Explain.

d) What is the profit for the monopolist?

26. Answer all the questions below about the budget line. Suppose an individual has an annual budget of
$600 to spend on two recreation activities: Skiing (at $20 per day) and golf at ($12 per 18-hole round)

a) Draw the budget line for recreation expenditures on the graph below. Label the budget line BL A.

b) Is a combination of 20 units of skiing and 20 rounds of golf attainable? Explain.

c) Suppose an increase in income allowed a 50 percent increase in the recreation budget. Graph the new
budget line and label it BLC—assume prices are unchanged

d) Suppose now that the price of skiing increases to $30 per day. Draw the new budget line and label it BL D.

27. Suppose the price of a bag of popcorn is $1 and the price of a candy bar is $0.50. Given the information in
table below, find the marginal utility per dollar spent

Qp TUp Qc TUc
1 20 1 14
2 36 2 26
3 50 3 36
4 62 4 44
5 72 5 51
6 80 6 57
7 86 7 61
8 90 8 65

a) If the total income that could be spent is $4, what bundles are possible? What is the utility
maximizing bundle (use total utility)?
28. How would one find the optimal quantity if given information on total costs and total benefits?

Answers to Sample Review Questions for Final

1. a) $80 b) $120 c) Yes, your opportunity cost increases the more that you could get paid an hour, so
you might be less likely to take Sunday off.

2. The rule of rational choice = someone will take an action as long as the expected marginal benefits
are greater than the expected marginal costs.
Yes, it is rational since I a benefit of getting exercise with fellow runners which is greater than the cost of
being tired and running far.

3. a) Negative incentive—want you to smoke off school grounds.

b) Positive incentive—they want you to use your Safeway card every time you shop.
c) Negative incentive—they want me to stop speeding.
d) Positive incentive—she wanted me to study hard.

4. They marginal costs are getting tired or getting injured. The marginal benefits are the exercise or the
extra calories I burn when I run.
a) Getting hurt increases the marginal costs of running
b) Getting your friend to come will make it easier for you to run since you have company, so this will
decrease the marginal cost. And, if they encourage you to keep running it could increase your marginal
benefit.
c) Rocks and roots could twist your ankle, this increases you marginal costs.
d) The marginal benefits of running will increase the more calories that you eat.

5. a) make sure that you choose a scale and the PPC is curved or concave.

b) OC = give up = 1 = 1
gain 1

c) OC = give up = 40 - 34 = 6 and OC = give up = 19 - 10 = 9

gain 1 gain 1
As they make more and more capital goods, they have to give up more and more consumption goods (OC
is increasing). This is because as they make more capital good they have to use less and less suitable
resources, leaving less resources available to produce consumption goods.

d) No, since they can get one more capital good without giving up any consumption goods. This point
would be inside the PPC.
e) No, if they produce 10 capital goods, they have used all of their resources, leaving nothing for them to
produce any consumption goods.
f)
Capital goods
Capital goods The economy
will experience
more economic
growth if they
produce more
capital goods.

Consumption goods Consumption goods

6. You must draw the diagrams yourselves.
a) This will decrease the supply of strawberries, shifting the supply curve inward. Equilibrium price will
be higher and equilibrium quantity will be lower.
b) There is a change in the strawberry’s price. This will cause a movement along the supply and
demand curve for strawberries, creating a surplus in the strawberry market.
c) This will increase the demand for strawberries, shifting the demand curve to the right. Equilibrium
price increase, equilibrium quantity will increase.
d) This will increase the supply of strawberries, shifting the supply curve outward. Equilibrium price will
be lower and equilibrium quantity will be higher.
e) This will change people’s expectations, they will expect not to be able to eat strawberries in the future
“the people who eat strawberries” are the demanders or consumers, so this will increase the demand for
strawberries. Equilibrium price increase, equilibrium quantity will increase.
f) Blueberries and strawberries are substitutes, so if the price of blueberries decreases, the demand for
strawberries will decrease. The demand curve will shift inward. Equilibrium price will decrease and
equilibrium quantity will decrease.

7. Price Price
S1
S1
S2
P2

P1 P1 D2
S2

P2 D1
D1 D2
Q1 Q2 Q1 Q2
Quantity
Quantity
In the above, you must have two cases! And you must have a sentence that states what is happening with
the quantity and the price:

The oil fields found in Manitoba are going to shift the supply curve outward, since inputs are increasing
and the price of inputs will go down at the same time it will increase the supply of gasoline. The increase
in driving is going to increase the demand for gasoline, shifting the demand curve outward. Equilibrium
price is ambiguous, but equilibrium quantity will increase.

8. a) A price floor must be placed above the equilibrium in order to be binding. If this is the case, the
quantity demanded will decrease and the quantity supplied will increase. The state of the market after the
price floor will be a surplus.

Price
S
Surplus
Price Floor

Qd Qs
Quantity

b) A price floor that is placed below the market equilibrium is non-binding, so it will not work and the
market will just go back to equilibrium.

Price
S

P*

Price Floor

Q* Quantity
9. a) $30, He will produce 3 units, with total revenue of $120 and total cost of $90.
b) Producer surplus will increase from $30 to $60; he will now produce 4 units, with total revenue of
$200 and total cost of $140. The loss in producer surplus will be $30.

10. a) the consumer surplus is equal to ((40-20) x 10/ 2 = $100. The producer surplus is equal to (20 x
10)/2 = $100
b) the consumer surplus is equal to ((40-30) x 7)/2 = $35. The producer surplus is equal to (10 x 7)/2 =
$35. The area of tax revenue is equal to ((30-10) x 7) = $140
c) The area of DWL equals ((30-10) x (10-7))/2 = $30

11.
a. The price elasticity of demand is likely greater for Toyotas. The more and better the available
substitutes, the greater is the price elasticity of demand. There are many more close substitutes
for Toyotas than there are close substitutes for cars in the marketplace.
b. The price elasticity of demand is likely greater for electricity usage over a one-year period
than it is over one month's time. Over time, consumers are better able to adjust their habits and
thus their energy usage.
c. The price elasticity of demand is higher for an apartment rental than for cable television
because rent on an apartment comprises a much greater share of a consumer's budget.

12. The price of water would have to rise by 40 percent to induce a 30 percent decrease in quantity
demanded, given that the price elasticity of demand equals 0.75.

13. The second pizza gives less marginal utility than the first. The pizza parlour is trying to encourage
consumers to buy the second pizza by charging a price that reflects its relatively lower marginal utility. If
price is set equal to $9 per pizza, some consumers with low marginal valuations for a second pizza might
elect not to purchase a second one. If enough customers elect not to purchase a second pizza at a price of
$9, the pizza parlour might be worse off than when employing the "buy one for $12, get the second pizza
for $6" strategy.

14. The law of demand states that when the price of a good is reduced, the quantity of that good
demanded will increase. At lower prices, consumers will buy more because they are getting relatively
more satisfaction for each dollar spent on a good.

15. In a perfectly competitive industry there are many buyers and sellers and there are relatively low
barriers to entry and exit from the industry. Firms are price takers since they are such a small portion of
the total market and produce homogeneous products. Both buyers and sellers have perfect information
about each other

16.
Total Marginal Marginal Total Total
Quantity Price Revenue Revenue Cost Cost Profit
20 $22 440 22 16 389 51
21 $22 462 22 18 407 55
22 $22 484 22 20 427 57
23 $22 506 22 27 454 52
24 $22 528 22 30 484 44

The firm maximizes profit when it produces 22 units of output.

17. This price-taking firm is operating at a loss. It should shut down immediately because the firm is not
covering its variable costs, much less any of its fixed costs. The average variable cost exceeds price at all
levels of output. The firm could minimize its losses by discontinuing production.

18. Economic profits tend to exist only in the short run in a perfectly competitive industry because an
increase in demand causes firms to earn economic profits, attracting new firms to the industry. New firms
continue to enter, increasing the market supply and reducing the price of the product, until economic
profits are reduced to zero.

Individual Industry
S1
P P
S2
Economic
Profit Zero MC
Economic ATC
Profit

MR1

MR2 Long Run Supply

D
Q
Q
Q1 Q2
Q2 Q1

19. A monopolist can set his own price for a good or service in the marketplace. However, a firm cannot
make consumers purchase any particular quantity of a good. The monopolist is bound by the market
demand curve. In order to sell more of output and increase total revenue, he will have to lower his price
not only on the marginal units he wishes to sell, but also on all of the units. As a result, there is no
guarantee that the best a monopolist could do, at the quantity where MR = MC, allows it to earn any
economic profits.

20. When demand is inelastic, quantity demanded changes by a smaller percentage than does the price.
As a result, a firm could increase total revenue simply by reducing output and raising price. At the same
time, reducing output reduces total production costs. If total revenue rises and total costs fall, profit
increases. Therefore, a profit-maximizing monopolist should reduce output and increase price until it is
no longer operating along the inelastic portion of the demand curve. Rather, a profit-maximizing
monopolist will always operate along the elastic portion of the demand curve.
21. Johnson’s hamburger stand is set up with an industrial grill, toaster, and dressing table (for putting
ketchup, mustard, etc. on the hamburgers). Mr. Johnson estimated the output, number of hamburgers,
that can be produce in fifteen minutes given these facilities. The estimates are shown in the table below.

Number of employees Number of hamburgers Marginal Product Labour

(15 minutes) (15 minutes)
0 0 ---
1 20 20
2 50 30
3 90 40
4 120 30
5 140 20
6 150 10
7 156 6
8 160 4

a) Calculate the marginal product of labour. At what point does the law of diminishing returns set in?

Diminishing returns set in after the 3rd unit of labour or with the 4th unit of labour

22. The diagram below illustrated the short-run cost curve for a hypothetical firm.

13

10
8

60 70 80 Q

a) What is the total variable costs of producing am output of 70 units?

Output is 70 and AVC is 8, so the total variable costs are 70*8 = 320

b) What is the total cost of producing 80 units of output?

Output is 80 and ATC is 10, so the total costs are 10 * 80 = 800

c) What is the average variable costs of producing 80 units of output?

The output is 80 and the AVC is 8

d) What is the average fixed costs of producing 80 units of output?

The ATC is 10 and the AVC is 8 so the AFC = 10 – 8 = 2

23. The Island Waters Company has a monopoly on selling bottled water from a special spring in Island
thought to have medicinal benefits. The following table shows the demand curve for gallons of Island
Waters per month. The company has no fixed costs and its marginal cost is constant at $4 per gallon.
Price Per gallon Gallons of Water Total revenue Marginal revenue
(in thousands) (in thousands)
$10 0 0
9 10 90 9
8 20 160 7
7 30 210 5
6 40 240 3
5 50 250 1
4 60 240 -1
3 70 210 -3
2 80 160 -5
1 90 90 -7
0 100 0 -9

a) Complete the table by calculating the total revenue and the marginal revenue associated with different
prices of a gallon of water.

b) Graph the demand curve, marginal revenue curve, marginal cost curve and the average total cost curve
for Island Waters
Price per gallon

12
11
10
9
8
7
6
5
4 MC = ATC
3
2
1 D
MR
0
10 20 30 40 50 60 70 80 90 100 110 Gallons of water
(in thousands)
c) At what price and output will Island Waters maximize profit How much profit will it earn at that price
and output? What is the price elasticity of demand between $8 and $6? Does the monopolist produce
along the price inelastic portion of the demand curve? (No, never)
A price of $7 and an output of 30 000
Profit = (P – ATC)Q = ($7-$4)30 000 = $90,000
Price Elasticity of Demand = % change in quantity demanded
% change in price
= 20000/(40,000+20000)/2 = 20,000/30,000 = 66.7% = 2.33
2/(8+6)/2 2/7 28.6%
The price elasticity of demand is greater than 1, therefore, demand is price elastic.

d) If this were a competitive market rather than a monopoly, what would be the equilibrium price and
output?

If the market were a competitive market, equilibrium market output would be 60,000 gallons of water and
the equilibrium price would be $4

24. P = 100 – Q
ATC = MC = 40

a) What is the equation for MR?

it has twice the negative slope of demand, so MR = 100 – 2Q

b) For the monopoly, what is the optimal quantity, the optimal price and the consumer surplus?

The equilibrium quantity in a monopoly is 30, since MR = MC, so 100 – 2Q = 40, -2Q = -60, Q = 30
The equilibrium price is $70, since P = 100 – Q, so P = 100 – 30, P = 70
The consumer surplus is B x H x ½ = 30 x (100 – 70) x ½ = 450

c) For the perfectly competitive market, what is the optimal quantity, the optimal price and consumer
surplus?

The equilibrium quantity for a PC market is 60 since D = MC, so 100 – Q = 40,Q = 60

The equilibrium price is $40 since P = MC for PC markets.
The consumer surplus is B x H x ½ = 60 x (100 – 40) x ½ = 1800

d) What is the profit for the monopolist?

Profit is (P – ATC) Q = (70 – 40)x 30 = 900

25. Since MR is bigger than MC, it is better for the firm to produce more, so that they can increase
profits, so they are not at optimal output even though the ATC is minimized.
26. Answer all the questions below about the budget line. Suppose an individual has an annual budget of
$600 to spend on two recreation activities: Skiing (at $20 per day) and golf at ($12 per 18-hole round)

a) Draw the budget line for recreation expenditures on the graph below. Label the budget line BL A.

20Qs + 12Qg = 600

600/20 = Qs = 30 and 600/12 = Qg = 50

Skiing

50
BLD
40
BLC
30

20 BLA

10

10 20 30 40 50 60 70 80 90 Golfing

b) Is a combination of 20 units of skiing and 20 rounds of golf attainable? Explain.

The Combination of 20 units of each activity lies outside the budget line BL A therefore it is unattainable
with a budget line of BLA. Check slope of budget line is -30/50 =-0.6 and the slope of the two points is
(20-30)/(20-0) = -10/20 = -0.5, so the points could not be on the same curve

c) Suppose an increase in income allowed a 50 percent increase in the recreation budget. Graph the new
budget line and label it BLC—assume prices are unchanged

The intercepts of BLc are now 45 days of skiing (900/20) and 75 rounds of golf (900/12)

d) Suppose now that the price of skiing increases to $30 per day. Draw the new budget line and label it
BLD.

The intercept of golf will be 75 rounds of golf (stays the same). The skiing intercept changes to 30 days
(900/30)
27. Suppose the price of a bag of popcorn is $1 and the price of a candy bar is $0.50. Given the
information in table below, find the marginal utility per dollar spent

Qp TUp
1 20
2 38
3 50
4 62
5 72
6 80
7 86
8 88
Qc TUc
1 14
2 26
3 36
4 44
5 51
6 57
7 61
8 65

a) If the total income that could be spent is $4, what is the utility maximizing quantity (use total utility)?
With an income of $4, then the budget line will have bundles: 4/1 = (4,0) popcorn, and 4/0.5 = (0,8)
candy
Other bundles : PpQp + PcQc = 4
1(1) + 0.5Qc = 4 1(2) + 0.5Qc = 4 1(3) + 0.5Qc = 4 1(4) +
0.5Qc = 4

Qc = 3/0.5 = 6 Qc = 2/0.5 = 4 Qc = 1/0.5 = 2 Qc = 0

(1,6) (2, 4) (3, 2) (4,0)—seen above

TU for bundles is: 2 popcorn and 4 candy

Qp Tup Qc Tuc TU bundle

4 62 0 0 62
3 50 2 26 76
2 38 4 44 82**
1 20 6 57 77
0 0 8 65 65

28. How would one find the optimal quantity if given information on total costs and total benefits?

You could find Total Net gain (TB – TC) and find the highest number, or you could calculate the marginal
benefits and marginal costs and find the marginal net benefit (MB – MC) and find where it’s closest to
zero without being negative