Exam 2 2018, answers PDF

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QUESTION 1 The phenomenon of scarcity stems from the fact that (a)

most economies’ production methods are not very good.

(b)

in most economies, wealthy people consume disproportionate quantities of goods and services.

(c)

governments restrict production of too many goods and services.

(d)

resources are limited.

QUESTION 2 A decrease in the price of a good will (a)

increase demand.

(b)

decrease demand.

(c)

increase quantity demanded.

(d)

decrease quantity demanded.

QUESTION 3 If people can be prevented from using a certain good, then that good is called (a)

rivalrous.

(b)

excludable.

(c)

a common resource.

(d)

a public good.

QUESTION 4 Assume the market for cage-free eggs is perfectly competitive. Currently, farmers in this market are making a profit. What is likely to happen to the number of firms and profit in this market in the long run? (a)

the number of firms is likely to increase and profits are likely to remain unchanged.

(b)

the number of firms is likely to remain unchanged and profits are likely to increase.

(c)

the number of firms is likely to increase and profits are likely to decrease.

(d)

the number of firms is likely to decrease and profits are likely to increase.

ECON1020, Practice Exam 2

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QUESTION 5 What is the difference between an "increase in demand" and an "increase in quantity demanded"? (a)

there is no difference between the two terms; they both refer to a shift of the demand curve.

(b)

an "increase in demand" is represented by a movement along a given demand curve, while an "increase in quantity demanded" is represented by a rightward shift of the demand curve.

(c)

there is no difference between the two terms; they both refer to a movement downward along a given demand curve.

(d)

an "increase in demand" is represented by a rightward shift of the demand curve while an "increase in quantity demanded" is represented by a movement along a given demand curve.

QUESTION 6 In a perfectly competitive market, at long-run equilibrium (a)

price is equal to average cost.

(b)

firms are making zero economic profit.

(c)

marginal cost is equal to average cost.

(d)

all of the above are correct.

QUESTION 7 A monopoly differs from monopolistic competition in that (a)

a monopoly has market power while a firm in monopolistic competition does not have any market power.

(b)

a monopoly can never make a loss but a firm in monopolistic competition can.

(c)

in a monopoly there are significant entry barriers but there are low barriers to entry in a monopolistically competitive market structure.

(d)

a monopoly faces a perfectly inelastic demand curve while a monopolistic competitor faces an elastic demand curve.

QUESTION 8 If duopolists individually pursue their own self-interest when deciding how much to produce, the profit-maximising price they will charge for their product will be (a)

less than the monopoly price.

(b)

equal to the perfectly competitive market price.

(c)

greater than the monopoly price.

(d)

possibly less than or greater than the monopoly price.

ECON1020, Practice Exam 2

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QUESTION 9 A government seeking to raise revenue would be most likely to tax a good with a (a)

high income elasticity of demand.

(b)

low cross-price demand elasticity.

(c)

high price elasticity of demand.

(d)

low price elasticity of demand.

Use the information for a perfectly competitive firm in Table 1 (below) to answer QUESTIONs 10 to 12. Table 1 Quantity

Total Revenue ($)

Total Cost ($)

0

0

10

1

9

14

2

18

19

3

27

25

4

36

32

5

45

40

6

54

49

7

63

59

8

72

70

9

81

82

QUESTION 10 In Table 1, at a production level of 4 units, which of the following is true? (a)

Marginal cost is $6.

(b)

Total revenue is greater than total variable cost.

(c)

Marginal revenue is less than marginal cost.

(d)

All of the above are correct.

QUESTION 11 In Table 1, at which quantity of output is marginal revenue equal to marginal cost? (a)

3

(b)

6

(c)

8

(d)

All of the above are correct.

ECON1020, Practice Exam 2

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QUESTION 12 In Table 1, if the firm finds that its marginal cost is $5, it should (a)

reduce fixed costs by lowering production.

(b)

increase production to maximise profit.

(c)

decrease production to maximise profit.

(d)

maintain its current level of production to maximise profit.

QUESTION 13 In the housing market, rent controls cause quantity supplied to (a)

fall and quantity demanded to fall.

(b)

fall and quantity demanded to rise.

(c)

rise and quantity demanded to fall.

(d)

rise and quantity demanded to rise.

QUESTION 14 In a market economy, (a)

households decide which firms to work for and what to buy with their incomes.

(b)

firms decide whom to hire and what to make.

(c)

a central planner makes decisions about production and consumption.

(d)

Both (a) and (b) are correct.

QUESTION 15 Studies of human decision-making have detected systematic mistakes that people make. Which of the following have been detected? (a)

people are overconfident

(b)

people give too much weight to a small number of vivid observations

(c)

people are reluctant to change their minds

(d)

All of the above are correct.

QUESTION 16 If the RMIT T-Shirt Company lowers its price from $6 to $5 and finds that students increase their quantity demanded from 400 to 600 T-shirts, then the demand for T-shirts within this price range is (a)

price inelastic.

(b)

price elastic.

(c)

unit elastic.

(d)

cross elastic.

ECON1020, Practice Exam 2

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QUESTION 17 The cross-price elasticity of demand for substitute goods must be (a)

greater than one.

(b)

less than one.

(c)

zero.

(d)

greater than zero.

Table 2 (below) shows the market supply and demand for vegetarian pizza. Use it to answer QUESTIONs 18 to 20. Table 2 Price

Quantity Demanded

Quantity Supplied

$12.00

0

12

$10.00

4

10

$8.00

8

8

$6.00

12

6

$4.00

16

4

$2.00

20

2

QUESTION 18 According to Table 2, at a price of $4.00, total surplus would be (a)

more than it would be at the equilibrium price.

(b)

less than it would be at the equilibrium price.

(c)

the same as it would be at the equilibrium price.

(d)

There is insufficient information to say.

QUESTION 19 According to Table 2, at the equilibrium price, producer surplus would be (a)

$20.

(b)

$24.

(c)

$28.

(d)

$32.

ECON1020, Practice Exam 2

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QUESTION 20 According to Table 2, at the equilibrium price, total surplus would be (a)

$16.

(b)

$24.

(c)

$32.

(d)

$48.

QUESTION 21 The production possibilities frontier model shows that (a)

if consumers decide to buy more of a product, its price will increase.

(b)

a market economy is more efficient in producing goods and services than is a centrally planned economy.

(c)

economic growth can only be achieved by free market economies.

(d)

if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good.

QUESTION 22 All externalities (a)

cause markets to fail to allocate resources efficiently.

(b)

cause equilibrium prices to be too high.

(c)

benefit producers at the expense of consumers.

(d)

cause equilibrium prices to be too low.

QUESTION 23 A carbon tax which is designed to reduce pollution is an example of a (a)

command-and-control policy.

(b)

government administrative rule.

(c)

noneffective incentive.

(d)

market-based policy.

Figure 1 (below) depicts a production function for a firm that produces cookies. Use the figure to answer QUESTIONs 24 and 25.

ECON1020, Practice Exam 2

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Figure 1

QUESTION 24 In Figure 1, as the number of workers increases, (a)

total output increases, but at a decreasing rate.

(b)

marginal product increases, but at a decreasing rate.

(c)

marginal product increases at an increasing rate.

(d)

total output decreases.

QUESTION 25 With regard to cookie production, Figure 1 implies (a)

diminishing marginal product of workers.

(b)

diminishing marginal cost of cookie production.

(c)

decreasing cost of cookie production.

(d)

increasing marginal product of workers.

QUESTION 26 Price ceilings and price floors (a)

are desirable because they make markets more efficient as well as equitable.

(b)

cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price.

(c)

can be enacted to restore a market to equilibrium.

(d)

are imposed because they can make the poor in the economy better off without causing adverse effects.

ECON1020, Practice Exam 2

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Use the information below to answer QUESTIONs 27 to 29. Stuck-On-You Pty Ltd produces and sells staplers. Last year, it produced 5,000 staplers and sold each stapler for $8. In producing the 5,000 staplers, it incurred variable costs of $30,000 and a total cost of $45,000. QUESTION 27 Stuck-On-You’s fixed costs amounted to (a)

$15,000.

(b)

$30,000.

(c)

$40,000.

(d)

$50,000.

QUESTION 28 In producing the 5,000 staplers, Stuck-On-You’s average variable cost was (a)

$2.

(b)

$4.

(c)

$6.

(d)

$8.

QUESTION 29 Stuck-On-You’s profit for the year was (a)

$–35,000.

(b)

$–5,000.

(c)

$10,000.

(d)

$40,000.

QUESTION 30 One reason why the "fast-casual" restaurant market is competitive is that (a)

demand for "fast -casual" food is very high.

(b)

it is trendy and therefore is likely to have a customer following.

(c)

barriers to entry are low.

(d)

consumption takes place in public.

ECON1020, Practice Exam 2

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QUESTION 31 The most obvious benefit of specialisation and trade is that they allow us to (a)

work more hours per week than we otherwise would be able to work.

(b)

consume more goods than we otherwise would be able to consume.

(c)

spend more money on goods that are beneficial to society, and less money on goods that are harmful to society.

(d)

consume more goods by forcing people in other countries to consume fewer goods.

QUESTION 32 A market force that can prevent firms from price discriminating is (a)

fluctuating resource prices.

(b)

arbitrage.

(c)

high fixed costs.

(d)

All of the above are correct.

QUESTION 33 Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the af-ter-tax equilibrium quantity and the socially optimal quantity of cigarettes? (a)

They are equal.

(b)

The after-tax equilibrium quantity is greater than the socially optimal quantity.

(c)

The after-tax equilibrium quantity is less than the socially optimal quantity.

(d)

There is not enough information to answer the QUESTION.

QUESTION 34 What do economists call the degree of control that a single firm or small number of firms has over the price and production decisions in an industry? (a)

Price and quantity control.

(b)

Command economy.

(c)

Industry control.

(d)

Market power.

Figure 2 (below) is drawn for a monopolistically competitive firm. Use it to answer QUESTIONs 35 and 36.

ECON1020, Practice Exam 2

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Figure 2

Price

MC 160 140 123.33

ATC

Demand

90 56.67 MR

100

133.33 154.92

Quantity

QUESTION 35 As Figure 2 is drawn, the firm is in (a)

a short-run equilibrium but it is not in a long-run equilibrium.

(b)

a long-run equilibrium but it is not in a short-run equilibrium.

(c)

a short-run equilibrium as well as a long-run equilibrium.

(d)

neither a short-run equilibrium nor a long-run equilibrium.

QUESTION 36 When the firm in Figure 2 is maximising its profit, (a)

TR = $9,000 and TC =$16,000.

(b)

TR = $14,000 and TC =$16,000.

(c)

TR = $16,000 and TC =$16,000.

(d)

MC exceeds MR by $66.66 on the last unit of output produced.

ECON1020, Practice Exam 2

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QUESTION 37 Bill operates a boat rental business in a competitive industry. He owns 10 boats and pays $1,000 per month on the loan that he took out to buy them. He rents each boat for $200 per month. The variable cost for each boat rental is $50. In the off-season, Bill should (a)

operate his business as long as he rents at least 7 boats per month.

(b)

operate his business as long as he rents at least 1 boat per month.

(c)

operate his business as long as he rents all 10 boats each month.

(d)

raise the price he charges per boat rental.

QUESTION 38 For a monopolist, profit is determined by which of the following? (a)

Profit = Total Revenue – Total Cost

(b)

Profit = (Average Revenue – Average Total Cost) x Quantity

(c)

Profit = (Price – Average Total Cost) x Quantity

(d)

All of the above are correct.

QUESTION 39 If the market demand for product A is P=100-2Q and the supply of product A is P=2Q, the market equilibrium price and quantity respectively will be (a)

$50; 25

(b)

$25; 50

(c)

$40; 30

(d)

$30; 40

QUESTION 40 The outer loop of the circular-flow diagram represents the flows of money (dollars) in the economy. Which of the following does not appear on the outer loop? (a)

Wages.

(b)

Income.

(c)

Capital.

(d)

Rent.

ECON1020, Practice Exam 2

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Use the following information and Table 3 (below) to answer QUESTIONs 41 and 42. Two discount superstores (Ultimate Saver and SuperDuper Saver) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. Table 3 depicts the strategic outcomes that result from the game. Growth-related profits of the two superstores under two scenarios are reflected in the payoff matrix in Table 3. Table 3 SuperDuper Saver

Ultimate Saver

Increase the size of store and parking lot

Not increase the size of store and parking lot

Increase the size of store and parking lot

Ultimate Saver = $65 SuperDuper Saver = $50

Ultimate Saver = $275 SuperDuper Saver = $25

Not increase the size of store and parking lot

Ultimate Saver = $35 SuperDuper Saver = $250

Ultimate Saver = $135 SuperDuper Saver = $85

QUESTION 41 In Table 3, the dominant strategy is to increase the size of its store and parking lot for (a)

SuperDuper Saver, but not for Ultimate Saver.

(b)

Ultimate Saver, but not for SuperDuper Saver.

(c)

both stores.

(d)

neither store.

QUESTION 42 In Table 3, when this game reaches a Nash equilibrium, the dollar value of growth-related profits will be (a)

Ultimate Saver $35 and SuperDuper Saver $250.

(b)

Ultimate Saver $65 and SuperDuper Saver $50.

(c)

Ultimate Saver $275 and SuperDuper Saver $25.

(d)

Ultimate Saver $135 and SuperDuper Saver $85.

ECON1020, Practice Exam 2

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QUESTION 43 The music streaming industry, where a firm's profitability depends on its interactions with other firms, is an example of (a)

perfect competition.

(b)

monopolistic competition.

(c)

oligopoly.

(d)

monopoly.

QUESTION 44 Which of the following is correct? When oligopolies collude (a)

they make higher profits and consumers of the product are better off.

(b)

they make higher profits but consum...