Problem 1. Which of the following industries is perfectly competitive?
a. Chocolate industry (There are many companies in the industry and consumers of chocolate view each company's product as unique.)
b. Rice industry (There are thousands of farmers producing rice and all the rice is the same from the consumers’ perspective.)
c. Cellular telephone service (There are a few producers in the industry and each consumer must select one of them to be their provider of cell phone service.)
d. University apartment service (There are limited apartments available at the university and consumers of these apartments have distinct preferences as to which apartments they prefer.)
Use the statements below to answer the following two questions: Consider the following possible combinations of changes in CPI and prices:
• (I) Increase in the CPI, increase in the nominal wage
• (II) Increase in the CPI, decrease in the nominal wage
• (III) Decrease in the CPI, increase in the nominal wage
• (IV) Decrease in the CPI, decrease in the nominal wage
Problem 2. Which of the above combinations of changes in the CPI and the nominal wage will always lead to an increase in the real wage?
a. (II) only
b. (III) only
c. (I), (II), and (IV) only
d. (I), (III), and (IV) only
Problem 3. Which of the following combinations of changes in the CPI and the nominal wage could lead to a decrease in the real wage?
a. (II) only
b. (III) only
c. (I), (II), and (IV) only
d. (I), (III), and (IV) only
Use the following information to answer the next four questions. This graph shows the cost functions of Moe's mushroom gathering business, which is a firm operating in a perfectly competitive market.
Problem 4. Which of the following statements is true?
a. If marginal cost increases as output increases, then average total cost must also be increasing.
b. If average total cost increases as output increases, then marginal cost must also be increasing.
c. If average total cost decreases as output increases, then average variable cost must also be decreasing.
d. As output increases, average total cost is always increasing.
e. None of the above statements is true.
Problem 5. In the graph above, the average variable cost curve is labeled _____, the average total cost curve is labeled _____, and the marginal cost curve is labeled ______.
a. A; B; C
b. C; B; A
c. B; C; A
d. C; A; B
e. B; A; C
Problem 6. The curve labeled A is upward sloping because
a. there are high fixed costs.
b. the first bushels of mushrooms are the easiest to find, but Moe has to really hunt to find additional mushrooms
c. increased demand for mushrooms has increased the quantity supplied of mushrooms.
d. supply has shifted to the left. e. Moe is operating in the long run.
Problem 7. What is the average fixed cost at quantity 20?
a. $40 per unit of output
b. $30 per unit of output
c. $20 per u nit of output
d. $10 per unit of output
Use the following information to answer the next four questions.
A phone company uses only equipment and workers to provide service.
Problem 8. Suppose that equipment costs $10 per unit and each worker earns $5. Average Variable Cost is minimized when output is approximately
a. 1 unit
b. 4 units
c. 8 units
d. 10 units
e. more than 10 units
Problem 9. Suppose that all companies in this industry have identical costs to this company and each company is producing 4 units of the service. Furthermore, suppose that the market price of the service is $12 per unit. Holding everything else constant, we can predict that
a. the number of firms in the industry is stable.
b. some of the firms in the industry will exit the industry.
c. new firms will enter the industry.
d. the market price customers pay for telephone service must increase.
e. the wage of the workers employed in the telephone industry must increase.
Problem 10. If the price of equipment increased to $20 and nothing else changed
a. Total Cost would increase by $10 per unit of output.
b. Marginal Cost would increase by $20 divided by units of output.
c. Average Variable Cost would increase by $20 divided by units of output.
d. Marginal Cost would not change.
e. Average Total cost would increase by $10 at each level of output.
Problem 11. For this firm, which of the following statements is true about the marginal cost curve? The marginal cost curve
a. Equals Average Variable Cost at Average Variable Cost's minimum point.
b. Equals Average Total Cost at Average Total Cost's maximum point.
c. Is always greater than Average Variable Cost.
d. Is always less than Average Variable Cost.
e. The curve representing Marginal Cost for this firm is always upward sloping as output increases.
Use the following information for the next two questions: Consider the nation of Econburg. Use the following table to answer the next two questions about prices and inflation in Econburg (using a scale factor of 100):
Problem 12. What CPI in 2000 (using 1990 as the base year) would imply that the cost of the market basket in 2000 was $75?
a. 500/3
b. 400/3
c. 60
d. 75
Year Price of Market Basket CPI (Base Year 1990) CPI (Base Year 2000)
1990 $125 100
2000 100
Problem 13. What price of the market basket in 2000 would give a CPI of 50 for 1990 if the base year is 2000?
a. 200
b. 250
c. 300
d. None of the above
Use the following information for the next two questions: Suppose you want to compare the prices and wages in 2010 with what they were back in 1910. You collect the following data:
Problem 14. Using 1910 as the base year, which of the following statements about the real price of gas and the real price of haircuts in 2010 is FALSE ?
a. The real price of gas in 2010 is $0.50.
b. The percent change in the real price of gas from 1910 to 2010 was 100%.
c. The real price of haircuts in 2010 is the same as it was in 1910.
d. The real price increase of haircuts from 1910 to 2010 was $2.50 (in 1910 dollars).
Problem 15. What was the change in the real wage between 1910 and 2010 in terms of 2010 dollars?
a. The real wage increased by $.50 between 1910 and 2010.
b. The real wage decreased by $.50 between 1910 and 2010.
c. The real wage increased by $4.00 between 1910 and 2010.
d. The real wage decreased by $4.00 between 1910 and 2010.
Use the following information to answer the next two questions.
Suppose Jimmy and Beth consume only peanut butter and jelly sandwiches (PBJ’s) and carrots. The price of a PBJ is $2 and the price of a carrot is $1. Currently, Jimmy’s marginal utility from PBJ’s is 5; while Beth’s marginal utility from PBJ’s is only 3. They are each maximizing their utility by consuming 5 PBJ’s and an unknown number of carrots (that is greater than zero).
Problem 16. If Beth's current income is $16 per week, how many carrots must she be consuming?
a. 4 carrots
b. 5 carrots
c. 6 carrots
d. 7 carrots
Problem 17. Beth’s marginal utility from carrots must be _____ and Jimmy’s marginal utility from carrots must be _____.
a. 1.5; 2.5
b. 3; 6
c. 1; 3.5
d. 1; 4
Use the statements below to answer the following question: Suppose that Arnold Palmer is currently maximizing his utility by purchasing lemonade and sweet tea.
(I) His marginal utility of sweet tea must be equal to his marginal utility from lemonade.
(II) His marginal utility of sweet tea divided by the price of lemonade must be equal to his marginal utility of lemonade divided by the price of sweet tea.
(III) His marginal utility of sweet tea divided by the price of sweet tea must be equal to his marginal utility of lemonade divided by the price of lemonade.
(IV) Given a graph of his preferences with lemonade on the horizontal axis, the slope of the indifference curve at the utility maximization point is equal to (-Price of lemonade/Price of sweet tea).
(V) Given a graph of his preferences with lemonade on the horizontal axis, the slope of the indifference curve at the utility maximization point is equal to (-Price of sweet tea/Price of lemonade).
Problem 18. Of the above statements, __________ true.
a. only (I) is
b. only (III) is
c. only (III) and (IV) are
d. only (III) and (V) are
e. only (II), (IV), and (V) are
Use the following graphs to answer the next three questions.
The points A, B, and C correspond to the notation used in class (i.e. A is the original bundle and B is the new bundle after the change). Bundles A, B and C all represent consumption bundles that represent a utility maximization given the individual’s preferences, income and the prices of good X and good Y. Assume that the budget line that is just tangent to consumption bundle C is a budget line that corresponds to the budget line discussed in class as BL3.
Problem 19. In the above graphs, _________ show(s) an increase in the price of good X and _______ show(s) an increase in income.
a. (I) and (III); (II), (IV), and (V)
b. (II), (IV), and (V); (I) and (III)
c. (II); (III)
d. (IV) and (V); (I)
Problem 20. In which of the graphs is X a normal good?
a. (I), (II) and (V)
b. (IV) only
c. (III) and (V)
d. (II), (III), and (V)
Problem 21. In which of the graphs is X an inferior good?
a. (I) and (II)
b. (IV)
c. (III) and (V)
d. (III) and (IV)
Use the following information to answer the next four questions. Assume the graph of the single representative firm includes the cost curves: MC, ATC, and AVC.
Problem 22. If the market price is $15, what is the individual firm’s profit?
a. $105
b. $150
c. $210
d. $245
e. $525
Problem 23. Firms in this industry will shut down in the short run if the price is
a. less than $5.
b. less than $10.
c. less than $15.
d. Firms never shut down in the short run.
Problem 24. In the long run, there will be ______ firms in this market.
a. 10
b. 15
c. 25
d. 50
e. 100
Problem 25. Each individual firm in this industry faces a demand curve that
a. is downward sloping, and flatter than the market demand curve.
b. is the same as the market demand curve.
c. is a horizontal line at the market price.
d. is the same as the marginal cost curve.
e. is the same as the average total cost curve
Problem 26. In which of the following situations will a producer have sufficient incentive to produce one additional unit of its product?
a. The consumers of the product want to buy one additional unit of the product.
b. The resources needed to produce one additional unit of the product are available.
c. The price that could be charged for one additional unit of the product is greater than the price that was charged for the last unit the firm produced.
d. The cost of producing one additional unit of the product is less than the revenue gained by selling the additional unit of the product.
e. The firm’s marginal cost curve is upward sloping and the profit that the firm could earn from selling one additional unit of the product is greater than the profit the firm earned from selling the last unit of the product they produced.
Problem 27. Which of the following statements is true?
a. In the long run if the price of the good in a perfectly competitive industry is above the breakeven point, new firms will enter the industry.
b. In the short run if the market price in a perfectly competitive industry is less than average variable cost the firm will not produce.
c. If one firm in a perfectly competitive industry can not earn a positive profit, the firm should shut down immediately.
d. For a perfectly competitive firm the average total cost of producing a particular level of output should always be higher than the marginal cost of producing that output.
Problem 28. All of the following are rational production decisions EXCEPT
a. Fixed costs are irrelevant to a firm's optimal short-run production.
b. A firm will cease production in the short-run if the market price falls below its break- even price.
c. When market price exceeds a firm's minimum average variable cost, the firm produces the quantity of output at which marginal cost equals market price.
d. The short-run individual firm’s supply curve corresponds to the firm’s marginal cost curve where marginal cost is greater than or equal to the minimum of average variable cost.
Use the following information to answer the next two questions:
Suppose that Brock spends all of his income on flapjacks (pancakes) and new potatoes, abbreviated F and N respectively. Currently, a flapjack costs PF = $2 per stack and new potatoes cost PN = $4 per pound. Brock works for the lumber yard, and makes $80 per day.
Problem 29. What is the equation for Brock’s budget line?
a. N = 20 – 1/4 F
b. F = 20 – 1/2 N
c. 40 = 2N + F
d. F = 80 – 2N
Problem 30. Without knowing anything about his indifference curves, which of the following combinations of meat and potatoes could it be optimal for Brock to consume?
a. 15 stacks of flapjacks; 10 pounds of new potatoes
b. 5 stacks of flapjacks; 15 pounds of new potatoes
c. 10 stacks of flapjacks; 10 pounds of new potatoes
d. 40 stacks of flapjacks; 0 pounds of new potatoes