Intermediate Microeconomics EC 111

Pre-final L. A. Lanzona
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1. Which of the following statements is true of a firm with a downward sloping marginal revenue curve?
a. The firm has some control over the price
b. As the firm increases production, it must decrease its price
c. The firm has at least partial monopoly in its market
-d. all of the above
e. none of the above

2. Why is a monopolist likely to produce a lower quantity than the one who would minimize average costs?
a. Because restricting quantity drives up prices.
b. Because monopolist have to cut price as they increase quantity.
c. Because the monopolist profit maximizing level of output is likely to be lower than the costminimizing
level
-d. all of the above

3. When the monopolist increases prices,

a. the deadweight loss decreases.
-b. the deadweight loss increases.
c. the consumer surplus remains constant.
d. the consumer surplus increases.
e. none of the above

4. By adhering to the MC=MR, a monopolist will guarantee himself:

-a. Either maximum profits or minimum losses
b. Large profits
c. Normal profits
d. No losses
e. All of the above

5. A monopolist differs from a purely competitive firm because

a. competitive firms equate marginal revenue with marginal cost to maximize profits.
b. longrun average cost is above the price for the competitive firms.
-c. price is above the marginal revenue under a monopoly.
d. all of the above
e. none of the above

6. A necessary condition for a (thirddegree) price discrimination is:

a. identical tastes among buyers
-b. differences in price elasticities among buyers
c. a single, homogeneous market
d. two or more markets with no economic restrictions between them
e. all of these

7. A central assumption in the theory of monopolistic competition is that

a. demand curves will be the same for the others in the group.
-b. each firm's product is a fairly close, though not a perfect, substitute for the others in the group.
c. there are just a few firms in the group.
d. each firm expects its actions to influence those of its rivals.
e. none of the above

8. What are the characteristics of oligopolistic markets?

a. many firms, unrestricted entry, and differentiated products
b. many firms, restricted entry and differentiated or undifferentiated products
-c. few firms, unrestricted entry, undifferentiated products
-d. few firms, unrestricted entry and differentiated or undifferentiated products

9. A Nash equilibrium occurs when

-a. each player (firm) is doing the best it can given the opponent’s actions
b. each firm chooses the strategy that maximizes his minimum gain
c. a player can choose a strategy that is optimal regardless of the rival’s actions
d. there is no dominant player
e. none of the above

10. When is an oligopoly likely to contain a price leader?

-a. When one firm controls enough of the market and commands enough buyer loyalty to sell what other
firms cannot sell
b. When firms of similar size and power band together to maximize industry wide behavior
c. When prices are changing rapidly and a leader is needed to stabilize the market
d. When budgets can no longer be passed along to consumers as higher prices
e. None of the above

11. An oligopolist with the least average cost will be a price leader because
a. it controls a large share of the market.
-b. it can charge a lower price compared to the other firms.
c. its rivals have the same demand curve.
d. all of the above
e. none of the above

12. In Nash equilibrium,

a. The firm that moves first always has an advantage.
b. -Each firm does the best it can given what the other firms are doing*.
c. Each firm makes the monopoly level of profit.
d. The firms cooperate with each other and earn higher profits than they would if they did not cooperate.

For numbers 28-30, consider an initial allocation of rice and pork between Pedro and Juan where the
MU R
former's MRS between rice and pork (MRSrp= ) is greater than the latter's MRSrp.
MU P

13. The welfare of both individuals can be increased if allocation can be redistributed so that
-a. Pedro receives more rice and less pork.
b. Juan receives more rice and more pork.
c. Pedro receives less rice and more pork.
d. both a and b
e. both a and c
14. Mutually beneficial exchange between the two consumers will be achieved as soon as
a. their MRS continue to differ.
b. they decide not to trade with one another.
c. they are confronted with different prices for their goods.
-d. the two consumers eventually place equal relative values on all products.
e. none of the above

15. A new allocation which transfers more rice and more pork to Pedro will be efficient if
a. the new allocation is within the contract curve.
b. the MRSrp of both consumers are equal in this new allocation.
c. Juan does not resist, and Pedro welcomes such an allocation.
-d. any of the above
e. none of the above

16. The rate of product transformation of X and Y (RPTyx) refers to

a. the absolute value of the slope of the production possibilities frontier.
b. the marginal cost of producing X in terms of a sacrificed Y, or MCx/MCy.
c. the opportunity cost of X in terms of Y.
-d. any of the above
e. none of the above

17. If a point is off the contract curve, we can find

-a. a point on the contract curve that is better.
b. no point on the contract curve is better.
c. a point on the contract curve that is better if and only if the contract curve is a straight line.
d. a point on the contract curve that is better if and only if the contract curve goes through the point of
origin.
e. none of the above

18. A Pareto optimal allocation of resources is one where

a. nobody can benefit from a redistribution of resources.
-b. resources cannot be transferred from one use top another without causing a reduction in somebody's
welfare.
c. resources cannot be transferred from one use top another without causing a reduction in society's welfare.
d. all of the above
e. none of the above

19. A Pareto optimal allocation of resources

a. cannot be achieved under a planned system.
b. is automatically achieved in a market system.
c. is never achieved in reality.
-d. could be achieved if prices conveyed information about relative scarcities.
e. none of the above

20. Market failure occurs because

a. not everyone has heard of the concept of Pareto optimality.
b. the distribution of incomes is not equal.
-c. the market prices do not always reflect the true resource costs.
d. all of the above
e. none of the above
21. Externalities in consumption suggest
a. decreasing marginal utility of consumption.
b. increasing marginal utility of consumption.
c. that the level of consumption of a consumer depends upon the consumption levels of others.
-d. that the level of utility of a consumer depends upon the consumption levels of others.
e. none of the above

22. The Pareto optimal conditions for optimum welfare

a. depend on the interpersonal comparisons of utility.
b. help to determine optimal distribution of income.
-c. are silent concerning the optimal distribution of goods.
d. all of the above
e. none of the above

23. Under which of the following conditions is an economy Pareto efficient?

a. When resources and income are distributed in a way that maximizes the economic welfare of the
economy.
-b. When any change in the allocation of resources that makes anyone better off will make someone else
worse off.
c. When individuals agree on fundamental ethical judgments that they are entitled to the pursuit of
happiness.
d. When no economist can detect inefficiency in the economy.

24. When the price of the firm's good increases and wage remains the same, profit maximization will lead to
a. lower output.
-b. higher output.
c. indeterminate output.
d. no change in output.
e. None of the above

25. Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a
________ price and sell a ________ quantity.
A) higher; larger
B) lower; larger
-C) higher; smaller
D) lower; smaller
E) none of these

26. Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds
marginal cost. We can conclude that the
A) firm is maximizing profit.
-B) firm's output is smaller than the profit maximizing quantity.
C) firm's output is larger than the profit maximizing quantity.
D) firm's output does not maximize profit, but we cannot conclude whether the output is too large or too
small.
27.Marginal cost is the:
a. rate of change in total fixed cost that results from producing one more unit of output.
b. change in total cost that results from producing one more unit of output. *
c. change in average variable cost that results from producing one more unit of output.
d. change in average total cost that results from producing one more unit of output.

28. If a monopolist's marginal revenue is P3.00 and its marginal cost is P4.50, it will increase its profits by:
-a. reducing output and raising price.
b. reducing both output and price.
c. increasing both price and output.
d. raising price while keeping output unchanged.

29. Diseconomies of scale:

a. pertain to the long run.*
b. pertain to the short run.
c. are synonymous with diminishing returns.
d. are synonymous with increasing returns.

30.Which of the following is not characteristic of pure competition?

a. price strategies by firms*
b. a standardized product
c. no barriers to entry
d. a larger number of sellers

31.For a purely competitive seller, price equals:

a. average revenue.
b. marginal revenue.*
c. total revenue divided by output.
d. all of the above.

32. Increasing returns to scale is identified by

a. average cost decreasing as quantity decreases.
b. average cost increasing as quantity increases.
c. average cost decreasing as quantity increases.*
d. average cost equal to zero.
e. the prices of the factors of production.

33. An increase in the price of labor causes a decrease in the supply of the product because
a. each firm is going out of business.
b. barriers to entry exist in the market.
c. each firm produces less at profit maximization.*
d. each firm produces more at profit maximization.

34. What is the welfare impact of a tax on output policy?

-A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.
C) Producer and consumer surplus increase, and these gains are smaller than the government cost.
D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the
subsidy program.
E) None of the above

35. Which of the following is NOT true about price floors?

A) Consumer surplus is always lower than it would be in the competitive equilibrium.
---B) Producer surplus could be lower, higher, or the same as it would be in competitive
equilibrium.
C) Producer surplus could be negative as the result of a price floor.
D) Producers will often respond to a price floor by cutting production to the point at which price
equals marginal cost.
E) The total producer surplus depends on how producers respond to the price floor in determining
their output level.

36. Use the following statements to answer this question:

I. When the market price is held above the competitive price level, it is possible for the loss in
consumer surplus to be fully captured by producers.
II. When the market price is held above the competitive level, there is no deadweight loss
because producer gains exactly equal consumer losses.
A) I and II are true.
B) I is true and II is false.
C) II is true and I is false.
-D) I and II are false.

37. Suppose the market supply curve is upward sloping and market demand is perfectly inelastic.
If the market price is held above the equilibrium level, which of the following statements about the
resulting outcome is not true?
-A) The decrease in consumer surplus is fully captured by the producers.
B) There will be an excess quantity supplied.
-C) Quantity demanded will remain the same.
D) Quantity demanded will decline.

38. A situation in which the unregulated competitive market outcome is inefficient because prices
fail to provide proper signals to buyers and sellers is known as:
A) an imperfectly competitive market.
-B) a market failure.
C) a deadweight loss.
D) a disequilibrium.

39. When the market price is held above the competitive level, the deadweight loss is composed of:
A) producer surplus losses associated with units that used to be traded on the market but are no
longer exchanged.
B) consumer surplus losses associated with units that used to be traded on the market but are no
longer exchanged.
-C) producer and consumer surplus losses associated with units that used to be traded on the market
but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.
40. In a perfectly competitive market in which no market failure occurs and no government
policy interferes with the equilibrium price and quantity,
A) consumer surplus is maximized.
B) producer surplus is maximized.
C) deadweight loss is maximized.
D) All of the above.
-E) A and B only.

41. Which of the following agricultural programs will result in the smallest deadweight loss
assuming farmers receive the same level of benefit in each case?
A) Instituting an acreage limitation program by paying farmers to take land out of production
-B) Paying money to farmers directly
C) Instituting a price support program with the government purchasing any surplus of the
good
D) All of the above have the same effect on deadweight loss because farmers receive the same
benefit in each case.

42. Having seen the quantity of drugs supplied by pharmaceutical companies in a competitive
market, a government decides to force companies to sell exactly the same quantity of drugs at
prevailing market prices. The government then forbids additional drug sales and allows doctors to
prescribe the drugs at no cost to patients in need. This government scheme is
A) efficient as the quantity of drugs traded is the same as under a free market.
B) efficient as the price of drugs paid by the government is the same as under a free market.
C) efficient as consumer surplus is maximized.
-D) likely to be inefficient as doctors are unlikely to prescribe drugs to the consumers who are
willing to pay the most for the drugs.
E) likely to be inefficient as drug producers have a captive buyer.

43. Under a binding price ceiling, what does the change in producer surplus represent?
A) The gain in surplus for those sellers who are still willing to supply the product at the lower
price.
-B) The loss in surplus associated with those units that used to be produced at the higher price but
are no longer produced at the lower price.
C) The gain in surplus associated with the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

44. Suppose a competitive market is in equilibrium at price P' and quantity Q'. If the demand curve
becomes less elastic, but the same price-quantity equilibrium is maintained, what happens to
consumer and producer surplus?
A) Both PS and CS increase
B) CS increases and PS decreases
-C) CS increases and PS remains the same
D) Both CS and PS decrease
45. Consider the following statements when answering this question
I. Overall, the sick will always gain from a price ceiling on prescription drugs.
II. The reduction of supply caused by the imposition of a price ceiling is greater the more
inelastic the market supply curve.
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
-D) I and II are false.

46. Which of the following correctly describes how a firm's monopoly power would
decrease?
A) If other firms are reluctant to raise their price, the firm's demand will become more
inelastic.
-B) If the market demand curve becomes more elastic, the firm's demand curve will become
more elastic.
C) If the number of firms increases, the firm's demand will become more inelastic.
D) If the production process includes more fixed inputs, the firm's demand will become more
elastic.
E) If the cost of production increases, the firm's demand will become more elastic.

47. Suppose a small group of manufacturers in the auto parts industry currently enjoy
considerable monopoly power. How would you expect monopoly power in this industry to
change in the long run?
A) The demand curve facing each firm will become more elastic as the number of firms in
the industry increases. Thus, monopoly power will increase over time.
B) The demand curve facing each firm will become more inelastic as the number of firms in
the industry decreases. Thus, monopoly power will increase over time.
C) The market demand curve will become more elastic as the number of firms in the industry
increases. Thus, monopoly power will diminish over time.
D) The market demand curve will become more inelastic as the number of firms in the
industry decreases. Thus, monopoly power will increase over time.
-E) The demand curve facing each firm will become more elastic as the number of firms in
the industry increases. Thus, monopoly power will diminish over time

48. In which of the following labor markets is there likely to be substantial monopsony power?
A) The market for university professors.
-B) The market for coal miners in a small mountain town.
C) The market for website developers.
D) The market for counter help in fast-food restaurants.

49. Why will a monopolist's output increase if the government forces it to lower its price?
Monopoly output increases with a binding or effective price ceiling because
A) marginal revenue will fall to zero for all quantities lower than the quantity demanded.
-B) marginal revenue will equal the price ceiling for all quantities lower than the quantity
demanded.
C) marginal cost will equal average cost for all quantities higher than the quantity demanded.
D) marginal cost will equal the price ceiling for all quantities lower than the quantity
demanded.
E) marginal revenue will equal the price ceiling for all quantities higher than the quantity
demanded.

50. If the government wants to set a price ceiling that maximizes the monopolist's output,
what price should it set?
The government should set a price where
-A) marginal cost equals demand.
B) marginal cost equals average cost.
C) demand equals average cost.
D) marginal revenue equals marginal cost.
E) marginal revenue equals supply.