1. Scarcity Is Correctly Described by Which of the Following Statements?

1. Scarcity is correctly described by which of the following statements?

I. Scarcity exists if there are more uses for resources than can be satisfied at one time.

II. Scarcity exists if decisions must be made about alternative uses for resources.

III. Scarcity would not exist in a society in which people wanted to help others instead of themselves.

(A) I only

(B) II only

(D) I and II only

(E) I, II, and III

2. Which of the following situations would necessarily lead to an increase in the price of peaches?

(A) The wage paid to peach farm workers rises at the same time that medical researchers find that eating peaches reduces the chances of a person’s developing cancer.

(B) While the wages of peach farm workers fall drastically, the peach industry launches a highly successful advertising campaign for peaches.

(C) A breakthrough in technology enables peach farmers to use the same amount of resources as before to produce more peaches per acre.

(D) The prices of apples and oranges fall.

(E) Weather during the growing season is ideal for peach production.

3. If the marginal cost curve of a monopolist shifts up, which of the following will occur to the monopolist’s price and output?

Price / Output
(A) / Decrease / Increase
(B) / Decrease / Decrease
(C) / Increase / No change
(D) / Increase / Increase
(E) / Increase / Decrease

4. The diagram above shows the demand and supply curves for a product. The equilibrium price could rise from P1 to P2 if

(A) consumers’ incomes increased

(B) P2 were set as a legal maximum

(D) the price of a complementary product increased

(E) costs of production were substantially lowered

5. A perfectly competitive producer of steel rods and steel beams employs 100 workers with identical skills. If steel rods and steel beams sell for the same price, which of the following rules should the producer always follow to use the 100 workers efficiently?

I. Allocate workers so that the average cost of producing beams equals the average cost of producing rods.

II. Allocate workers so that the marginal product of labor is the same in both rod production and beam production.

III. Allocate half the workers to rod production and half the workers to beam production.

(A) I only

(B) II only

(D) II and III only

(E) I, II, and III

6. Assume a consumer finds that his total expenditure on compact disks stays the same after the price of compact disks declines, other things being equal. Which of the following is true for this price change?

(A) Compact disks are inferior goods to this consumer.

(B) The consumer’s demand for compact disks increased in response to the price change.

(D) The consumer’s demand for compact disks is perfectly price inelastic.

(E) The consumer’s demand for compact disks is unit price elastic.

7. A firm uses workers and seed to grow lettuce. Its output rises from 100 tons to 200 tons when the number of workers increases from 25 to 75. Its production process shows

A. decreasing returns to scale

B. diminishing returns to labor

C. increasing returns to scale

D. increasing returns to labor

E. increasing long-run average cost

8. For a firm buying labor in a perfectly competitive labor market, the marginal revenue product curve slopes downward after some point because as more of a factor is employed, which of the following declines?

(A) Marginal product

(B) Marginal factor cost

(D) Total output

(E) Wage rates

9. Which of the following is always true of the relationship between average and marginal costs?

(A) Average total costs are increasing when marginal costs are increasing.

(B) Marginal costs are increasing when average variable costs are higher than marginal costs.

(D) Average variable costs are increasing when marginal costs are higher than average variable costs.

(E) Average total costs are constant when marginal costs are constant.

Questions 10-11 refer to the following diagram and assume a perfectly competitive market structure.

10. At the price 0A, economic profits are

(A) ABJG (B) ABKH (C) ABLI (D) ACMG (E) C0FM

11. In the short run, the firm will stop production when the price falls below

(A) 0A (B) 0B (C) 0C (D) 0D (E) 0E

12. If the chemical industry in an area has been dumping its toxic waste free of charge into a river, government action to ensure a more efficient use of resources would have which of the following effects on the industry’s output and product price?

Output / Price
(A) / Decrease / Decrease
(B) / Decrease / Increase
(C) / Increase / Decrease
(D) / Increase / Increase
(E) / Increase / No change

13. A market is clearly not perfectly competitive if which of the following is true in equilibrium?

(A) Price exceeds marginal cost.

(B) Price exceeds average variable cost.

(D) Price equals opportunity cost.

(E) Accounting profits are positive.

Questions 14–15 are based on the following information and diagram.

Assume that the original supply and demand curves of a commodity are S and D, respectively. Also assume that the government imposes an excise tax (per unit tax) of t dollars on the commodity, which shifts the supply curve to Sl.

14. The total amount of tax collected by the government is equal to

(A) t x Q0

(B) t x Ql

(D) P0P1GH

(E) P0P2IH

15. Which of the following bears the total tax burden?

(A) The consumers bear it.

(B) The producers bear it.

(D) The group that legally pays the tax bears it.

(E) The government bears it.

16. A President’s claim that the United States could increase its defense budget without sacrificing any of its domestic programs would be correct if

(A) the United States economy were producing at its full potential

(B) the United States economy were operating on its production possibilities frontier

(D) some resources were not being fully employed

(E) the production possibilities frontier for the U.S. economy would shift to the left.

17. If a perfectly competitive industry is in long-run equilibrium, which of the following is most likely to be true?

(A) Some firms can be expected to leave the industry.

(B) Individual firms are not operating at the minimum points on their average total cost curves.

(D) Some factors are not receiving a return equal to their opportunity costs.

(E) Consumers can anticipate price increases.

18. From the point of view of economic efficiency, a monopolist produces

(A) too much of a good and charges too low a price

(B) too much of a good and charges too high a price

(D) too little of a good and charges too high a price

(E) the socially optimal amount of a good

Questions 19–21 are based on the chart below, which gives a firm’s total cost of producing different levels of output.

Output / Total Cost
0 / $13
1 / 20
2 / 25
3 / 28
4 / 32
5 / 43
6 / 60

19. The marginal cost of producing the fourth unit of output is

(A) $ 4

(B) $11

(D) $32

(E) impossible to determine from the information given

20. The total variable cost of producing five units of output is

(A) $ 6

(B) $11

(D) $43

(E) impossible to determine from the information given

21. The profit-maximizing level of output for this firm is

(A) 2

(B) 3

(D) 5

(E) impossible to determine from the information given

22. Compared to perfect competition, monopolistic competition:

A. provides greater product differentiation at the cost of some excess capacity.

B. offers less product differentiation but attains equal productive efficiency.

C. provides greater product differentiation and achieves greater productive efficiency.

D. offers less product differentiation and lower productive efficiency.

E. is more efficient in the long-run

23. The table given below shows how many tons can be produced in India and Canada with one unit of input. To achieve gains from specialization:

Uranium (ton) / Coal (ton)
India / 10 / 10
Canada / 40 / 20

A. India should export Coal to Canada and import Canadian Uranium.

B. India should export Uranium to Canada and import Canadian Coal.

C. Canada should produce both Uranium and Coal and not trade with India.

D. India should produce both Uranium and Coal and not trade with Canada.

E. They should not trade.

24. In an oligopolistic industry:

A. firms behave strategically

B. output is produced at minimum average total cost

C. firms make price and output decisions without regard to the responses of their rivals

D. high profits will attract many new entrants to the industry

E. firms don’t have the ability to collude

25. Refer to the diagrams. Zero long-run economic profits are most likely to occur in markets illustrated by:

A. Figure A only

B. Figure B only

C. Figures B and C

D. Figures C and D

E. Figures B and D

26. Increasing the tax rate for the poor without changing the taxes the rich pay will:

A. Cause the Lorenz Curve to move closer to the 45-degree line.

B. Cause the Lorenz Curve to move further away from the 45-degree line.

C. It will not have any affect on the Lorenz Curve.

D. It will insure that the Lorenz Curve is on the 45-degree line.

E. Decrease the demand for inferior goods

27. A production possibility frontier that is represented by a straight line rather than the usual bowed shape would indicate;

A. Increasing opportunity cost

B. Decreasing opportunity cost

C. Constant opportunity cost

D. Absolute and Comparative Advantage

E. Comparative but not absolute advantage

Figure 1

28. If the current price for the perfectly competitive firm represented in Figure 1 is $10.00, what would be the result of an increase in fixed cost on the firm’s profit maximizing price and quantity?

A. Price increase and Quantity increase

B. Price increase and Quantity decrease

C. Price constant and Quantity constant

D. Price decrease and Quantity decrease

E. Price decrease and Quantity increase

29. If a legal price ceiling is established on a good above the existing equilibrium price, the effect would be to:

A. Raise the price of the good and lower the quantity purchased

B. Have no effect on the price or quantity of the good

C. Lower the price of the good and lower the quantity purchased

D. Raise the price of the good and raise the quantity purchased

E. Lower the price of the good and increase the quantity purchased

Figure 3

30. Chasey Company Inc. is the only producer in a small town. Cost and revenue information for the Chasey Company are shown in Figure 3. Chasey Company would set the price of its product at;

A. $7.50

B. $6.00

C. $4.50

D. $3.75

E. $3.00

31. In Figure 3 the Chasey Company would maximize profits by producing a quantity of;

A. 60

B. 100

C. 120

D. 140

E. 170

32. In Figure 3 the Chasey Company will make a profit of ______;

A. $750

B. $450

C. $300

D. $150

E. $150 loss

Figure 4

Number of workers Output

0 0

1 5

2 11

3 19

4 25

5 29

6 31

7 31

8 30

33. In Figure 4 the law of diminishing returns sets in with the addition of the _____ worker.

A. 1

B. 2

C. 4

D. 7

E. 8

34 Using the data in Figure 4, if workers are paid $35 and the product being produced sells for $10, how many workers would the Chasey Company hire?

A. 1

B. 4

C. 5

D. 7

E. 8.

35. Other things equal, the demand for labor will be more elastic:

A. the greater the demand for the product

B. the more substitutable labor is with other inputs

C. the higher the price of capital

D. the smaller the elasticity of product demand

E. the higher the interest rate

36. Suppose you consume two goods, a and b, such that MUa/Pa < MUb/Pb, then you:

A. can never maximize utility.

B. have maximized total utility.

C. can increase utility by buying more of b and less of a.

D. can increase utility by buying more of a and less of b.

E. are experiencing the law of diminishing marginal utility

Figure 5

37. The profit-maximizing price for a perfectly competitive firm like the one shown in Figure 5 in the long run would be;

A. A

B. B

C. C

D. D

E. E

38. In Figure 5 at a market price of A, the profit-maximizing output for a perfectly competitive firm is

A. 0

B. 1

C. 2

D. 3

E. 4

39. If a natural disaster occurs that adversely affects production and shipping,

A. the firm’s supply curve will shift to the right

B. the firm’s demand curve will shift to the right

C. the firm’s demand curve will shift to the left

D. the firm’s supply curve will shift to the left

E. Neither curve will shift, but instead movement will be along each curve