Practice Exam #3 for Second Midterm

Economics 2010

Dr. Alston

1. A According to the marginal decision rule, if marginal benefit:

a. exceeds marginal cost, an activity should be increased.

b. is less than marginal cost, an activity should be increased.

c. is equal to marginal cost, should be increased

d. exceeds marginal cost, net benefit is maximized.

e. is less than marginal cost, net benefit is maximized.

2. C Utility is the:

a. difference between a firm's total revenue and it total economic cost.

b. good not adequately provided by a free market and usually provided by the government.

c. satisfaction consumers derive from their consumption of a good or service.

d. highest price that buyers are willing to pay for a given quantity of a good.

e. lowest price that sellers are willing to accept for a given good.

3. D If the price of popcorn is $0.50 per box and the price of peanuts is $0.25 per bag, and you have $10 to spend on both goods, the maximum quantity of peanuts that you can purchase is bags.

a. 5

b. 10

c. 15

d. 40

e. 50

4. A Net benefit can be maximized by finding the greatest difference between:

a. total benefit and total cost

b. marginal benefit and marginal cost

c. marginal benefit and total cost

d. total benefit and marginal cost

e. total benefit and marginal benefit.

5. D If the marginal benefit received from a good is greater than the marginal cost of production, then:

a. society's well-being can be improved if production decreases.

b. society's well-being cannot be improved by changing production.

c. the market is producing too much of the good.

d. the market is producing too little of the good.

e. the market is producing an efficient quantity of the good.

6. C The efficiency condition requires

a. marginal costs be generally less than marginal benefits.

b. no one have exclusive property rights to any resource.

c. prices in the marketplace confront decision makers with the marginal benefits and marginal costs of their decisions.

d. more goods be produced than exchanged.

e. more goods be exchanged than produced.

7. E A transferable property right is one that:

a. lets anyone use a resource without cost to society.

b. has some public benefits and some private benefits.

c. does not allow its owners to prevent others from using a resource.

d. equates marginal benefits to marginal costs.

e. can be sold or leased to someone else.

8. C If the residents of Canada receive benefits from national defense provided by the United States, efficient allocation of this public good is possible when:

a. Canada pays all of the costs of the national defense

b. the United States pays all of the costs of the national defense.

c. the United States and Canada both pay their share of the costs of producing defense (as measured by their relative benefits).

d. an international governing body, funded entirely by the United States, is established to provide national defense for both countries.

e. an international governing body, funded entirely by the Canada, is established to provide national defense for both countries.

9. E A normal market demand curve reflects:

a. external costs to buyers.

b. external benefits to sellers.

c. social costs to sellers.

d. private costs to sellers.

e. private benefits to buyers.

10. B A copper mining operation discharges waste products into a river and causes higher costs and discomfort to downstream users of water. In this case:

a. too few of society's resources are being used to produce copper.

b. too many of society's resources are being used to produce copper.

c. the ideal amount of society's resources are being used to produce copper.

d. there is an external benefit to society from producing copper.

e. the externality can be internalized into the market by subsidizing buyers, thereby eliminating any misallocation of resources.

11. C Common property resources tend to be through markets.

a. overpriced

b. efficiency priced

c. overconsumed

d. underconsumed

e. efficiently consumed

12. E When market prices fail, each of the following is true EXCEPT:

a. market prices do NOT equal marginal costs or marginal benefits.

b. government intervention may be required.

c. the extra cost of producing an additional unit is NOT reflected in the price

d. the market does NOT produce an efficient allocation of resources.

e. the extra benefit of producing an additional unit is reflected in the price.

13. B When the net benefits of an activity are maximized, then:

a. the difference between total benefits and total costs is zero.

b. marginal benefits equal marginal costs.

c. total costs will be the smallest.

d. one should add another unit of the activity

e. marginal costs are zero.

14. B At a point of efficient resource allocation and production, price does NOT reflect:

a. the marginal benefits consumers receive from the last unit consumed.

b. the total benefits consumers receive and the total costs producers incur.

c. the marginal costs producers incur from the last unit produced.

d. the extra benefit of an extra unit of output.

e. the extra cost of an extra unit of output.

 15. C If, as a firm goes from 2 workers to 3 workers, total output rises from 38 units to 47 units, then the marginal product of the third worker is and marginal returns are .

a. 9; increasing

b. 9; decreasing

c. 9; insufficient information to say

d. 85; increasing

e. 85; decreasing

16. B For a typical firm producing widgets, which of the following does NOT represent a variable cost in the short run?

a. labor

b. plant size, including drill presses and assembly tables

c. raw materials

d. fuel

e. intermediate materials

17. C If marginal costs are increasing, then

a. marginal product is increasing.

b. total costs are increasing at a decreasing rate

c. marginal product is decreasing

d. total costs are decreasing at a decreasing rate.

e. total product is negative.

18. C A downward sloping long run average cost curve indicates all of the following EXCEPT:

a. the firm has increasing returns to scale

b. the firm's average to total costs are declining as output expands.

c. the firm would be better off producing in several smaller plants rather than expanding the size and/or capacity of the current plant.

d. the firm is experiencing economies of scale

e. increasing the scale of the plant will reduce per unit costs.

19. B An increase in total output can be represented by a movement:

a. to a lower isoquant

b. to a higher isoquant

c. upward along an isoquant

d. downward along an isoquant

e. to a lower isocost curve

20. E Moving from lower to higher levels of output, the shape of the average variable cost curve is , while the shape of the average total cost curve is and the shape of the average fixed cost curve is .

a. U-shaped; U-shaped; upward sloping throughout

b. flat; U-shaped; downward sloping throughout

c. U-shaped; downward sloping throughout; U-shaped

d. upward sloping throughout; U-shaped; U-shaped

e. U-shaped; U-shaped; downward sloping throughout

21. B If two combinations of production factors generate the same level of output, then they are necessarily on:

a. the same isocost curve

b. the same isoquant curve

c. the same marginal product curve

d. different isoquant curves

e. the same total product curve

22. B At the cost-minimizing point of production for a given level of output, which of the following is true?

a. The isoquant for that level of production is tangent to a specific isocost curve that lies above all other isocost curves relevant to that level of production.

b. The isoquant for that level of production is tangent to a specific isocost curve that lies below all other isocost curves relevant to that level of production.

c. The firm cannot produce more by using less of one of the inputs and substituting more of some other input.

d. The mix of inputs is sub-optimal; the firm should probably substitute one of the inputs (use more of one and less of the other) to maximize its output.

e. The firm has maximized it marginal rate of technical substitution.

23. C When a variable factor of production is applied to a set of fixed factors, the marginal productivity of the variable factor will:

a. continually rise

b. first decline, then rise

c. first rise, then decline

d. first rise, then remain constant

e. continually decline.

 24. D At any point on an isocost line, the slope equals the:

a. slope of the total product curve

b. marginal rate of technical substitution

c. marginal cost

d. ratio of the prices of the factor of production on the horizontal axis to the price of the factor on the vertical axis.

e. ratio of the prices of the factor of production on the vertical axis to the price of the factor on the horizontal axis.

25. C As a firm expands production, the relationship between the average variable cost and average total cost curves is characterized by:

a. both curves becoming flatter (measured by slope).

b. the curves becoming further apart (measured vertically).

c. the curves getting closer together (measured vertically).

d. both curves approaching the horizontal axis asymptotically.

e. the AVC curve (but not the ATC curve) approaching the horizontal axis asymptotically.

26. D In terms of indifference curves, a demand curve is generated by changes in:

a. tastes and preferences.

b. income

c. utility

d. the price of one good

e. the price of both goods, simultaneously.

27. E In order to derive a demand curve directly from a consumer's indifference curves economists assume that:

a. tastes and preferences between the two goods are unchanging

b. utility can be measured in cardinal numbers

c. utility can be measured in ordinal numbers.

d. both a and b, but not c.

e. both a and c, but not b.

28. D Consumer equilibrium is achieved at the between the budget constraint and the indifference curve.

a. intersection; least steep

b. intersection; most steep

c. point of tangency; lowest

d. point of tangency; highest

e. intersection; highest

29. D You give $10 each to two friends - Eva and Phil. If this $10 leads to a marginal utility of money equal to 3 units of utility per dollar for Eva and 6 units of utility per dollar for Phil, you can maximize their combined utilities by:

a. giving no money to either Phil or Eva.

b. giving less money to both Phil and Eva.

c. giving less money to Phil and more money to Eva.

d. giving more money to Phil and less money to Eva.

e. not changing the distribution of money between Phil and Eva.

30. D When considering the derivation of a demand curve for good X (from either a utility maximizing or an indifference mapping perspective), the substitution and income effects work in opposite directions for:

a. complementary goods

b. substitute goods

c. normal goods

d. inferior goods

e. public goods

31. E You decide to increase the quantity of pizza purchased each month when the price decreases and therefore purchase fewer hamburgers. This is an indication of the:

a. output effect

b. income effect

c. marginal effect

d. distribution effect

e. substitution effect

32. C An imaginary adjustment of a consumer's income at the same instant a price changes, so the consumer has just enough to buy the same quantities of goods and services (or, alternatively, the same level of satisfaction) at the new price is:

a. the substitution effect

b. the income effect

c. an income-compensated price change

d. a price-compensated utility change

e. the total utility effect.

 33. E According to the utility model of consumer demand, the demand curve is downward sloping because of the law of:

a. consumer equilibrium

b. utility maximization

c. utility minimization

d. diminishing consumer surplus

e. diminishing marginal utility.

34. C Given two commodities, x and y, and a constant marginal utility of money, a consumer is in equilibrium when the last dollar spent on good x yields:

a. a larger marginal utility than the last dollar spent on y.

b. a smaller marginal utility than the last dollar spent on y.

c. the same marginal utility as the last dollar spent on y.

d. the same total utility as all the money spent on y.

e. zero marginal utility for y.

35. A If a consumer exhausts his or her budget by purchasing a combination of commodities x and y such that MUx/Px is given by 1,500/150 and MUy/Py is given by 1,200/100, to maximize utility, the consumer should buy

a. less of x and more of y

b. more of x and less of y

c. more of both x and y

d. less of both x and y

e. neither x or y; he or she should save the money instead.