... Multiple choice questions. Answers and explanations needed. Answer all questions up to number 55

UNITS OF MANUFACTURED GOODS AND 33. If a severe drought destroys a significant portion SERVICE GOODS PRODUCED USING of the peanut crop and peanut farmers' revenues ONE HOUR OF LABOR increase, which of the following is true over the observed range of prices? Country Manufactured Service Goods Goods (A) The demand for peanuts must be unit price elastic. A 100 units 300 units (B) The demand for peanuts must be price elastic. B 75 units 150 units (C) The demand for peanuts must be price inelastic. (D) The supply of peanuts must be price inelastic. 31. According to the information in the table above, which of the following statements is true if both (E) The supply of peanuts must be price elastic. countries have the same number of workers? 34. Promoters of a rock group know that if they (A) Country A has both an absolute and charged $8 a ticket, 400 people would buy tickets a comparative advantage in manufactured for a concert, and if they charged $4 a ticket, goods. 800 people would buy tickets. Over this price (B) Country A has an absolute advantage in range, the demand for the concert tickets for the manufactured goods but a comparative rock group is advantage in service goods. (A) elastic C) Country B has a comparative advantage in (B) inelastic service goods but no absolute advantage (C) unit elastic in either good. (D) perfectly elastic (D) Country A has an absolute advantage in (E) perfectly inelastic service goods but a comparative advantage in manufactured goods. (E) Country B has an absolute advantage in manufactured goods, but without more information, it is not possible to tell in which product it has a comparative advantage. 32. Which of the following would most likely result in a decrease in the equilibrium price of oranges? (A) The weather during this orange-growing season is not as good as it was last year. (B) The price of apples, a substitute for oranges, is higher this year than last year. (C) New studies suggest that oranges contain traces of cancer-causing substances due to pesticide residue. (D) A tree-killing fungus spreads through orange orchards across the country. (E) Firms in the orange industry launch an effective advertising campaign. Unauthorized copying or reuse of any part of this page is illegal. GO ON TO THE NEXT PAGE. -11- 35. Assume that people like onions on their 37. At a firm's current rate of output, the marginal hamburgers. If the supply of hamburgers cost is $65, the average variable cost is $35, the decreases, the demand for onions will most likely average fixed cost is $30, and the product price is (A) remain unchanged because hamburgers and $65. Which of the following statements is true for onions are different goods the firm? (B) increase because hamburgers and onions are (A) Economic profits are zero because marginal substitutes revenue equals marginal cost. (C) increase because hamburgers and onions are (B) Economic profits are negative because total complements revenue is less than total cost. (D) decrease because hamburgers and onions are (C) Economic profits are positive because total complements revenue is greater than total cost. (E) decrease because hamburgers and onions are (D) Economic profits are negative because price substitutes is greater than average variable cost. (E) Economic profits are zero because price 36. If labor is the only variable input in the production equals average total cost. process, the short-run marginal cost curve is upward sloping because which of the following occurs as more and more labor is added? Marginal Cost (A) Output decreases, and thus marginal cost Average Total Cost PRICE increases. (B) Output increases, and thus marginal cost increases. Average (C) Output increases at an increasing rate, and Variable Cost thus the cost of producing each additional unit of output increases. (D) Output increases at a decreasing rate, and thus the cost of producing each additional unit of output increases. (E) Output increases at a decreasing rate, and QUANTITY thus the cost of producing each additional unit of output decreases. 38. The graph above shows the short-run cost curves of a firm in a perfectly competitive market. Which of the following are true at the firm's profit- maximizing output level? I. Price exceeds average total cost. II. Economic profits are zero. III. Marginal cost equals average total cost. IV. New firms are likely to enter the market in(E) Economic profits are zero because price 36. If labor is the only variable input in the production equals average total cost. process, the short-run marginal cost curve is upward sloping because which of the following occurs as more and more labor is added? Marginal Cost (A) Output decreases, and thus marginal cost Average Total Cost PRICE increases. (B) Output increases, and thus marginal cost increases. Average (C) Output increases at an increasing rate, and Variable Cost thus the cost of producing each additional unit of output increases. (D) Output increases at a decreasing rate, and thus the cost of producing each additional unit of output increases. (E) Output increases at a decreasing rate, and QUANTITY thus the cost of producing each additional unit of output decreases. 38. The graph above shows the short-run cost curves of a firm in a perfectly competitive market. Which of the following are true at the firm's profit- maximizing output level? I. Price exceeds average total cost. II. Economic profits are zero. III. Marginal cost equals average total cost. IV. New firms are likely to enter the market in the long run. (A) I and II only (B) I and III only (C) I and IV only (D) II, III, and IV only (E) I, II, III, and IV Unauthorized copying or reuse of any part of this page is illegal. GO ON TO THE NEXT PAGE. -12- 39. Which of the following best describes an 40. The payoff matrix below shows the per-unit oligopolistic market? profits associated with the production strategies (A) Many sellers with identical products and no of two utility companies, UA and UB. Each barriers to entry firm has two choices: to reduce production by (B) Many sellers, each with a clearly 10 percent or by 20 percent. The first entry in differentiated product, and no barriers to each cell indicates the profits to UA, and the second, the profits to UB. entry (C) A few competing sellers with similar UB products and high barriers to entry (D) A few competing sellers of identical products Reduces Reduces and no barriers to entry Production Production (E) No competition among sellers and high by 20 by 10 barriers to entry Percent Percent Reduces Production by 20 $150, $150 $50, $250 UA Percent Reduces Production by 10 $250, $50 $100, $100 Percent Based on the information, and assuming no cooperation, which of the following statements is rue? (A) Neither company has a dominant strategy. (B) Both companies have an incentive to reduce production by 10% (C) Both companies have an incentive to reduce production by 20%. (D) Only UA has an incentive to reduce production by 20%. (E) Only UB has an incentive to reduce production by 20%. Unauthorized copying or reuse of any part of this page is illegal. GO ON TO THE NEXT PAGE.41. In order to minimize short-run losses, a profit- 43. If a firm employs only labor and capital in its maximizing firm will necessarily shut down production process, which of the following best production under which of the following describes the optimal combination of inputs for conditions? the firm in the long run? (A) Total revenue is less than total cost. (A) The marginal product per dollar spent on labor (B) Marginal cost is greater than average total is equal to the marginal product per dollar cost. spent on capital. (C) Marginal cost is less than marginal revenue. (B) The marginal product of labor is equal to the (D) Average revenue is less than average variable marginal product of capital. cost. (C) The total product of labor is equal to the total (E) Average revenue is less than average total product of capital. cost. (D) The marginal product of labor and capital are both zero. 42. An increase in the effective minimum wage will (E) All marginal products are equal to all average have less of an impact on employment if the products. demand for labor is (A) a derived demand 44. Most economists argue that a monopoly is (B) decreasing inefficient because it C) relatively elastic (A) has no incentive to minimize its costs (D) relatively inelastic (B) produces too little output and sets a price (E) unit elastic above marginal cost (C) earns too much profit by charging consumers any price it wants (D) produces too much output and thus wastes scarce resources (E) usually produces unsafe products if not regulated by government Unauthorized copying or reuse of any part of this page is illegal. GO ON TO THE NEXT PAGE. -14- PERCENTAGE OF INCOME RECEIVED, 2010 Quintile Before Taxes After Taxes and Transfers and Transfers Lowest 20 percent 1.1 5.1 Second 20 percent 7.9 11.1 Third 20 percent 15.5 16.5 Fourth 20 percent 24.7 23.8 Highest 20 percent 50.7 43.5 45. The table above shows the distribution of income in Country X in 2010 before and after taxes and transfer payments. Which of the following can be concluded about the effect of the government's tax and transfer policies on income distribution in Country X? (A) The distribution of income is significantly less equal after accounting for the impact of government policies. (B) The distribution of income is about the same after accounting for the impact of government policies. (C) The largest gainers from government policies are the third and fourth quintile groups. (D) The only quintile to benefit from government policies is the lowest quintile. (E) The major transfer of income is from the highest quintile to the two lowest quintiles.Unauthorized copying or reuse of any part of this page is illegal. GO ON TO THE NEXT PAGE. -15- 46. After graduating from high school, Peggy Smith 49. At her current level of consumption, a consumer decided to enroll in a two-year program at the local is willing to pay up to $1.50 for a bottle of water community college rather than to accept a job that and up to $1,500 for a diamond ring because the offered a salary of $12,000 per year. If the annual tuition and fees are $4,600, the annual opportunity (A) total utility of diamond rings is greater than cost of attending the community college is the total utility of water (B) total utility of water is less than the marginal (A) $4,600 utility of a diamond ring (B) $7,400 C) marginal utility of a bottle of water is less (C) $12,000 than the marginal utility of a diamond ring (D) $16,600 (D) marginal utility of a bottle of water is greater (E) $24,000 than the marginal utility of a diamond ring (E) consumer is irrational and does not 47. In which of the following situations is a good understand that water is more important NOT scarce? than a diamond (A) Consumers give up nothing to obtain more of the good. 50. If a firm's production process exhibits economies (B) Consumers can purchase as much of the good of scale, which of the following will occur when as they want at its current market price. the firm's output increases? (C) Large quantities of the good are available in (A) Its short-run average total costs will rise. the marketplace. (B) Its long-run average total costs will rise. (D) There is a surplus of the good at some positive (C) Its long-run average total costs will fall. price. (D) Its short-run total costs will fall. (E) There is a shortage of the good at some (E) Its long-run total costs will fall. positive price. 48. Suppose that the market supply curve for shoes is upward sloping and the market demand curve is downward sloping. How will the imposition of a sales tax on shoes affect the consumer surplus, the producer surplus, and the total surplus? Consumer Producer Total Surplus Surplus Surplus (A) Decrease Decrease Decrease (B) Decrease Increase Increase (C) Decrease Increase Decrease (D) Increase Decrease Decrease (E) Increase Increase Increase g or reuse of any part of this page is illegal. GO ON TO THE NEXT PAGE. -16- 51. Which of the following helps explain why the 53. If total revenue is increasing as output increases, demand curve for a normal good is downward marginal revenue is always sloping? (A) equal to average revenue (A) The income and substitution effects move the (B) less than average revenue quantity demanded in the same direction. (C) increasing (B) The income effect moves the quantity (D) decreasing demanded in the opposite direction of the (E) greater than zero substitution effect. (C) The income effect dominates the substitution 54. Let P = price, MR = marginal revenue, effect. MC = marginal cost, and ATC = average total (D) The substitution effect dominates the income cost. In monopolistic competition, which of the effect. following most accurately describes the long-run (E) With an increase in income, the consumer equilibrium conditions for a firm? decreases consumption of the good. (A) P > ATC, MR = MC, and P > MC (B) P > ATC, MR > MC, and P = MC Total Total (C) P = ATC, MR = MC, and P > MC (D) P = ATC, MR = MC, and P = MC Cost Revenue (E) P = ATC, MR > MC, and P > MC 55. In a perfectly competitive free market economy, a COST/REVENUE wage gap between two workers can be explained by differences in all of the following EXCEPT their (A) years of schooling (B) occupations (C) marginal products (D) marginal revenue products (E) tastes for luxury goods Q4 QUANTITY 52. The graph above shows the total revenue and total cost curves for a firm in which type of market