Practice questions-Microeconomics
1. For each pair of goods listed below, which good would you expect to
have the more elastic demand? Why?
a. cigarettes; a trip to Florida
b. an AIDS vaccine over the next month; an AIDS vaccine over the next
five years
c. beer; Budweiser
d. insulin; aspirin
2. Suppose the Daily News estimates that if it raises the price of its
newspaper from €1.00 to €1.50 then the number of subscribers will fall
from 50,000 to 40,000.
a. What is the price elasticity of demand for the Daily Newspaper when
elasticity is calculated using the midpoint method?
b. What is the advantage of using the midpoint method?
c. If the Daily News's only concern is to maximize total revenue, should it
raise the price of a newspaper from €1.00 to €1.50? Why or why not?
3.The table below provides the demand schedule for motel rooms at
Small Town Motel. Use the information provided to complete the table.
Answer the following questions based on your responses in the table.
Use the midpoint method to calculate the percentage changes used to
generate the elasticities.
a. Over what range of prices is the demand for motel rooms elastic? To
maximize total revenue, should Small Town Motel raise or lower the
price within this range?
b. Over what range of prices is the demand for motel rooms inelastic? To
maximize total revenue, should Small Town Motel raise or lower the
price within this range?
c. Over what range of prices is the demand for motel rooms unit elastic?
1
To maximize total revenue, should Small Town Motel raise or lower the price over this
range?
7. Suppose a consumer only buys two goods: hot dogs and hamburgers.
Suppose the price of hot dogs is €1, the price of hamburgers is €2, and
the consumer's income is €20.
a. Plot the consumer's budget constraint in Exhibit 1. Measure the
quantity of hot dogs on the vertical axis and the quantity of hamburgers
on the horizontal axis. Explicitly plot the points on the budget constraint
associated with the even numbered quantities of hamburgers (0, 2, 4, 6
. . .).
Exhibit 1
b. Suppose the individual chooses to consume six hamburgers. What is
the maximum amount of hot dogs that he can afford? Draw an
indifference curve on the figure above that establishes this bundle of
goods as the optimum.
c. What is the slope of the budget constraint? What is the slope of the
consumer's indifference curve at the optimum? What is the relationship
between the slope of the budget constraint and the slope of the
indifference curve at the optimum? What is the economic interpretation
of this relationship?
d. Explain why any other point on the budget constraint must be inferior to the optimum.
4.Mr. Pencho consumes two goods: celery and cucumbers. The price of celery is 1 lv. per kg.
and the price of cucumbers is 3 lv. per kg. His income for the purpose is 10 lv. The data for
utility from the goods are shown below, where Q=quantity consumed, TU=total utility and
MU=marginal utility.
Celery Cucumbers
Q TU MU Q TU MU
1 20 1 38
2
2 38 2 74
3 53 3 104
4 65 4 124
5 70 5 129
a) complete the table and fill in the missing values for MU. (One formula is sufficient.)
b) How many units (kilograms) of each good will Mr. Pencho consume, e.g., what is the
combination that will maximize his utility? Why? Show your work.
5. Complete the following table. It describes the production and cost of
hamburgers at a roadside stand. All figures are measured per hour.
11. a. The following table contains information about the revenues and costs
for Barry's Golf Ball Manufacturing. All data are per hour. Complete the
first group of columns which correspond to Barry's production if P = €3.
(TR = total revenue, TC = total cost, MR = marginal revenue, MC =
marginal cost)
3
b. If the price is €3 per golf ball, what is Barry's optimal level of
production? What criteria did you use to determine the optimal level of
production?
c. Is €3 per golf ball a long-run equilibrium price in the market for golf
balls? Explain. What adjustment will take place in the market for golf
balls and what will happen to the price in the long run?
d. Suppose the price of baseballs falls to €2. Fill out the remaining three
columns of the table above. What is the profit-maximizing level of
output when the price is €2 per baseball? How much profit does Barry's
Baseball Manufacturing earn when the price of baseballs is €2?
e. Is €2 per golf ball a long-run equilibrium price in the market for golf
balls? Explain. Why would Barry continue to produce at this level of profit.
6. a. What are the three sources of the barriers to entry that allow a
monopoly to remain the sole seller of a product?
b. What is the entry barrier that is the source of the monopoly power for
the following products or producers? List some competitors that keep
these products or producers from having absolute monopoly power.
1. The UK’s Royal Mail (postal service)
2. Perrier Spring Water
3. Prozac (a brand name drug)
4. DeBeers Diamonds
5. Economics, by N. Gregory Mankiw and Mark P. Taylor (your textbook)
7. Suppose a firm has a patent on a special process to make a unique
smoked salmon. The following table provides information about the
demand facing this firm for this unique product.
4
a. Complete the table above.
b. Suppose that there are no fixed costs and that the marginal cost of
production of smoked salmon is constant at €6 per kilogram. (Thus, the
average total cost is also constant at €6 per kilogram.) What is the
quantity and price chosen by the monopolist? What is the profit earned
by the monopolist?
c. Compare the monopoly solution and the efficient solution (perdect competition). That
is, is the monopolist's price too high or too low? Is the monopolist's quantity
too high or too low? Why? How much would be the perfect competitor’s price and
quantity in this case?
d. Is there a deadweight loss in this market if the monopolist charges the
monopoly price? How much is it? Explain.
h. If the monopolist is able to costlessly and perfectly price discriminate, is
the outcome efficient? Explain. What is the value of consumer surplus and
producer profit then?
11.Which of the following is not a characteristic of a competitive market?
a.
6 All of these answers are characteristics of a competitive market.
.b. There are many buyers and sellers in the market.
c. The goods offered for sale are largely the same.
d. Firms generate small but positive economic profits in the long run.
e. Firms can freely enter or exit the market.
2.Which of the following markets would most closely satisfy the requirements for a competitive
market?
5
a. electricity
b. cable television
c. cola
d. milk
e. All of these answers represent competitive markets.
3.If a competitive firm doubles its output, its total revenue
a. doubles.
b. more than doubles.
c. less than doubles.
d. cannot be determined because the price of the good may rise or fall.
4.For a competitive firm, marginal revenue is
a. total revenue divided by the quantity sold.
b. equal to the quantity of the good sold.
c. average revenue divided by the quantity sold.
d. equal to the price of the good sold.
5.The competitive firm maximizes profit when it produces output up to the point where
a. price equals average variable cost.
b.marginal revenue equals average revenue.
c. marginal cost equals total revenue.
d.marginal cost equals marginal revenue.
6.If a competitive firm is producing a level of output where marginal revenue exceeds
marginal cost, the firm could increase profits if it
a. decreased production.
b. maintained production at the current level.
c. temporarily shut down.
d. increased production.
7.In the short run, the competitive firm's supply curve is the
a. upward-sloping portion of the average total cost curve.
b.upward-sloping portion of the average variable cost curve.
c. portion of the marginal cost curve that lies above the average total cost curve.
d.entire marginal cost curve.
e. portion of the marginal-cost curve that lies above the average variable cost curve.
8.In the long run, the competitive firm's supply curve is the
a. entire marginal cost curve.
b. upward-sloping portion of the average total cost curve.
c. portion of the marginal cost curve that lies above the average total cost curve.
d. upward-sloping portion of the average variable cost curve.
e. portion of the marginal cost curve that lies above the average variable cost curve.
6
9.Accounting profit is equal to total revenue minus
a. implicit costs.
b. variable costs.
c. the sum of implicit and explicit costs.
d. explicit costs.
e. marginal costs.
10. Economic profit is equal to total revenue minus
a. variable costs.
b. implicit costs.
c. explicit costs.
d. marginal costs.
e.implicit and explicit costs
11.Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per
year and sell them for €100 each. It costs Nicole €20,000 for the raw materials to
produce the 1,000 pieces of pottery. She has invested €100,000 in her factory and
equipment: €50,000 from her savings and €50,000 borrowed at 10 per cent.
(Assume that she could have loaned her money out at 10 per cent, too.) Nicole can
work at a competing pottery factory for €40,000 per year. The accounting profit at
Nicole's pottery factory is
a. €30,000.
b. €35,000.
c. €75,000.
d. €70,000.
e. €80,000.
7
12.If a production function exhibits diminishing marginal product, its slope
a. is linear (a straight line).
b. becomes steeper as the quantity of the input increases.
c. could be any of these answers.
d. becomes flatter as the quantity of the input increases.
13.Which of the following is a variable cost in the short run?
a. rent on the factory
b.wages paid to factory labour
c. interest payments on borrowed financial capital
d.payment on the lease for factory equipment
e. salaries paid to upper management
14.Fill in the table
Quantity Fixed Variable Total Marginal
of Output Costs Costs Costs Costs
0 €10 €0
1 10 5
2 10 11
3 10 18
4 10 26
5 10 36
The marginal cost of changing production from three units to four
units is
a. €7.
b. €5.
c. €8.
d. €9.
e. €6.
15. When marginal costs are below average total costs,
a. average fixed costs are rising.
b. average total costs are falling.
c. average total costs are rising.
d. average total costs are minimized.
8
16.If marginal costs equal average total costs,
a. average total costs are falling.
b. average total costs are rising.
c. average total costs are maximized.
d. average total costs are minimized.
17.The efficient scale of production is the quantity of output that minimizes
a. average fixed cost.
b. average total cost.
c. average variable cost.
d. marginal cost.
18.Which of the following statements is true?
a. All costs are fixed in the short run.
b. All costs are variable in the long run.
c. All costs are variable in the short run.
d. All costs are fixed in the long run.
119.Which of the following is not a barrier to entry in a monopolized market?
a.
6 A single firm is very large.
.b. The government gives a single firm the exclusive right to produce some good.
c. The costs of production make a single producer more efficient than a large
number of producers.
d. A key resource is owned by a single firm.
120.A firm whose average total cost continually declines at least to the quantity
that
7 could supply the entire market is known as a
.a. natural monopoly.
b. perfect competitor.
c. government monopoly.
d. regulated monopoly.
121.A monopolist maximizes profit by producing the quantity at which
a.
9 marginal revenue equals marginal cost.
.b. marginal revenue equals price.
c. marginal cost equals price.
d. marginal cost equals demand.
e. none of these answers.
222.Which of the following statements about price and marginal cost in
0competitive and monopolized markets is true?
.a. In competitive markets, price equals marginal cost; in
monopolized markets, price exceeds marginal cost.
b. In competitive markets, price equals marginal cost; in
monopolized markets, price equals marginal cost.
9
c. In competitive markets, price exceeds marginal cost; in
monopolized markets, price exceeds marginal cost.
d. In competitive markets, price exceeds marginal cost; in
monopolized markets, price equals marginal cost.
23.Refer to Exhibit 4. The profit-maximizing monopolist will
2
choose the price and quantity represented by point
2
.
a. A.
b. B.
c. C.
d. D.
e. none of these answers.
224.The inefficiency associated with monopoly is due to
a.
4 underproduction of the good.
.b. the monopoly's profits.
c. the monopoly's losses.
d. overproduction of the good.
225.Compared to a perfectly competitive market, a monopoly market will usually
5generate
.a. higher prices and lower output.
b. higher prices and higher output.
c. lower prices and lower output.
d. lower prices and higher output.
26.Using government regulations to force a natural monopoly to charge a price equal to
its marginal cost will
a. cause the monopolist to exit the market.
b. improve efficiency.
c. raise the price of good.
10
d. attract additional firms to enter the market.
27.Which of the follow statements about price discrimination is not true?
a. Perfect price discrimination generates a deadweight loss.
b. Price discrimination can raise economic welfare.
c. Price discrimination requires that the seller be able to separate buyers according
to their willingness to pay.
d. Price discrimination increases a monopolist's profits.
e. For a monopolist to engage in price discrimination, buyers must be unable to
engage in arbitrage.
28.A monopoly is able to continue to generate economic profits in the long run because
a. there is some barrier to entry to that market.
b. potential competitors sometimes don't notice the profits.
c. the monopolist is financially powerful.
d. antitrust laws eliminate competitors for a specified number of years.
e. of all of the things described in these answers
29.If marginal revenue exceeds marginal cost, a monopolists should
a. increase output.
b. decrease output.
c. keep output the same because profits are maximized when marginal revenue
exceeds marginal cost.
d. raise the price
11