EC120 – Review Questions for the Final 1

Question One

Assume that a market is initially in equilibrium. If the

demand curve shifts left and the supply curve shifts right,
then the equilibrium price _______ and the equilibrium
quantity _______: (each blank is separated by a
semi-colon)
a) Falls; may rise, fall or remain constant
b) Rises; may rise, fall or remain constant
c) Rises, falls or remains constant; falls
d) Rises, falls or remains constant; rises
EC120 – Review Questions for the Final 2

Question One

Solution

a) - Explanation
Demand curve shifts left
Equilibrium price falls and equilibrium quantity falls

Supply curve shifts right

Equilibrium price falls and equilibrium quantity rises

Price definitely falls

Ambiguous effect is on equilibrium quantity
EC120 – Review Questions for the Final 3

Question Two

Suppose Carol’s Candid Cameras wants to increase its

total revenue. If the firm lowers the price of cameras by
2 percent, Carol must be predicting that the quantity:
a) Demanded will decrease by less than 2 percent
b) Supplied will increase by more than 2 percent
c) Supplied will decrease by less than 2 percent
d) Demanded will increase by more than 2 percent
EC120 – Review Questions for the Final 4

Question Two

Solution

Answer d)

If D is elastic: P, Q will by a larger %, so TR

EC120 – Review Questions for the Final 5

Question Three

If the price of a good is not affected by a sales tax, then:

a) Supply is perfectly elastic
b) Demand is perfectly elastic
c) Elasticity of supply is greater than elasticity of
demand
d) Elasticity of demand is greater than elasticity of
supply
e) None of the above
 EC120 – Review Questions for the Final 6

Question Three

Solution:

Perfectly Elastic Demand Curve

S + tax
Price

$5.00 D

$4.25

50 100 Quantity

Demand is perfectly elastic. With no tax, price is $5 and

the quantity is 100. At tax of $0.75 shifts the supply
curve to S + tax. The price remains at $5 and the
quantity decreases to 50. Sellers pay the entire tax.
EC120 – Review Questions for the Final 7

Question Four

Use these diagrams to answer Question Four (p.8)

S
S
2.00  2.00 

D D

Q uantity Q uantity
(a) (b )

S
S

2.00  2.00 
D

D
Q uantity Q uantity
(c ) (d )
EC120 – Review Questions for the Final 8

Question Four (continued)

Suppose a sales tax of $1 is imposed. In which market

would the seller pay the highest portion of the tax?
a) (a)
b) (b)
c) (c)
d) (d)
e) All markets equally
EC120 – Review Questions for the Final 9

Question Four

Solution

Answer c)

Although it is true that the most inelastic supply curve

bears the highest tax burden, as is the case in
Diagram (d); this is not the correct response.

In Diagram (d) the demand curve is perfectly inelastic

and so the consumer bears the entire tax burden.

Diagram c) has the second most inelastic supply curve

EC120 – Review Questions for the Final 10

Question Five

Question Five refers to Table 1 which represents Sam’s

Marginal Utility schedules for bananas and apples:

Table 1:
Bananas Apples
Quantit Marginal MUB/PB Quantit Marginal MUA/PA
y Utility y Utility
1 30 1 40
2 24 2 34
3 18 3 24
4 12 4 16
5 6 5 8
6 0 6 0
Assume the price of bananas PB is $1 a kilogram and the
price of apples PA is $2 a kilogram. Sam’s budget for
bananas and apples is $10.

What is Sam’s marginal utility per dollar spent at each

quantity of apples and bananas?

What is the utility maximizing combination of bananas

and apples for Sam?
EC120 – Review Questions for the Final 11

Question Five

Solution
Table 1:
Bananas PB = $1 Apples PA = $2
Q Marginal MUB/PB Q Marginal MUA/PA
Utility Utility
1 30 30/1 =30 1 40 40/2 = 40
2 24 24/1 = 24 2 34 34/2 = 17
3 18 18/1 = 18 3 24 24/2 = 12
4 12 12/1 = 12 4 16 16/2 = 8
5 6 6/1 = 6 5 8 8/2 = 4
6 0 0/1 = 0 6 0 0/2 = 0
Sam will consume 4 bananas and 3 apples at his utility
maximizing combination.

This combination exhausts Sam’s entire income.

($1 x 4) + ($2 x 3) = $10

 EC120 – Review Questions for the Final 12

Question Six

If the price of bananas rises to $2 a kilogram, how does

Sam’s marginal utility per dollar for bananas change? Fill
in Table 2 with the new marginal utility per dollar spent
for bananas. Assume Sam’s income remains the same.

Table 2

Bananas Apples
Quantity Marginal MUB/PB Quantity Marginal MUA/PA
Utility Utility
1 30 1 40
2 24 2 34
3 18 3 24
4 12 4 16
5 6 5 8
6 0 6 0

At the price of $2 a kilogram for bananas, what is the

new utility maximizing combination of bananas and
apples for Sam?
EC120 – Review Questions for the Final 13

Solution
Table 1:
Bananas PB = $2 Apples PA = $2
Q Marginal MUB/PB Q Marginal MUA/PA
Utility Utility
1 30 30/2 = 15 1 40 40/2 = 40
2 24 24/2 = 12 2 34 34/2 = 17
3 18 18/2 = 9 3 24 24/2 = 12
4 12 12/2 = 6 4 16 16/2 = 8
5 6 6/2 = 3 5 8 8/2 = 4
6 0 0/2 = 0 6 0 0/2 = 0
Sam will consume 2 bananas and 3 apples at his new
utility maximizing combination.

This combination exhausts Sam’s entire income.

($2 x 2) + ($2 x 3) = $10

EC120 – Review Questions for the Final 14

Question Seven

List two points on Sam’s demand curve for bananas.

Sam’s Demand Curve for Bananas

Price

Quantity of Bananas
EC120 – Review Questions for the Final 15

Question Seven

Solution

Sam’s Demand Curve for Bananas

Price

$2

$1
D

2 4

Quantity of Bananas
 EC120 – Review Questions for the Final 16

Question Eight

If the total product of four workers is 156, calculate the

average product of each worker.
a) 39
b) 19.5
c) 78
d) 152
e) 624
EC120 – Review Questions for the Final 17

Question Eight

Solution

AP = TP/L = 156/4 = 39
EC120 – Review Questions for the Final 18

Use the following table to answer Questions Nine

and Ten:

Firm B
Low High
Price Price
Firm A Low A: $2 A: $20
Price B: $5 B: -$15
High A: - $10 A: $10
Price B: $25 B: $20

Question Nine

In equilibrium what are firm A’s profits?

a) -$10
b) $2
c) $10
d) $20

Question Ten

If both firms agree to collude, what would be firm A’s

profits?
a) -$10
b) $2
c) $10
d) $20
EC120 – Review Questions for the Final 19

Question Nine

Solution

In equilibrium what are firm A’s profits?

A must decide what to do:

If B chooses low
A gets $2 for low
A gets -$10 for high
Therefore A should choose low

If B chooses high
A gets $20 for low
A gets $10 for high
Therefore A should choose low

b) In equilibrium – A’s profits are $2

Question Ten

Solution

If both firms agree to collude, what would be firm

A’s profits?
a) -$10
b) $2
c) $10
d) $20
EC120 – Review Questions for the Final 20

Use the following diagram to answer Question Eleven:

The diagram is of a monopolistically-competitive firm in
short-run equilibrium.

(Display Graph)

Question Eleven

What is the firm’s profit maximizing level of

output?

a) Q1

b) Q2

c) Q3

d) Q4
EC120 – Review Questions for the Final 21

MC
P5
P4 ATC
P3
P2

P1 

MR
0 Q1 Q2 Q3 Q4 Quantity
55101920.doc 22

Question Eleven

Solution

What is the firm’s profit maximizing level of

output?

a) Q1

b) Q2

c) Q3

d) Q4
55101920.doc 23

Question Twelve

Under monopolistic competition, long-run economic

profits tend towards zero because of:

a) Product differentiation

b) The lack of barriers to entry

c) Excess capacity

d) Inefficiency
55101920.doc 24

Question Twelve

Solution

Under monopolistic competition, long-run economic

profits tend towards zero because of:

a) Product differentiation

b) The lack of barriers to entry

c) Excess capacity

d) Inefficiency
55101920.doc 25

Use the following diagram to answer Question Thirteen:

55101920.doc 26

Question Thirteen

How much profit does the profit-maximizing monopoly

earn?

a) $960

b) $0

c) $5040

d) $6000

e) $10
55101920.doc 27

Question Thirteen

Solution

How much profit does the profit-maximizing

monopoly earn?

a) $960

b) $0

c) $5040

d) $6000

e) $10
55101920.doc 28

Question Fourteen

Regardless of the type of market in which it

operates, a firm should continue to operate in the
short run as long as it can pay:

a) All of its fixed costs

b) The marginal costs of the last unit produced

c) All of its variable costs

d) All of its total costs

55101920.doc 29

Question Fourteen

Solution

Regardless of the type of market in which it

operates, a firm should continue to operate in the
short run as long as it can pay:

a) All of its fixed costs

b) The marginal costs of the last unit

produced

c) All of its variable costs

d) All of its total costs