Exam Review 2
1. Assume you set up a sole proprietorship and your lawyer tells you that as the
owner you will face unlimited liability. What does that mean?
a. You are liable for organizing the business.
b. You could stand to lose your personal wealth if the business goes bankrupt
c. There is no legal responsibility of the business in case a customer sues, as
the business is legally untouchable.
d. None of these explain what unlimited liability means
2. How does the owner of a corporation relate to the business?
a. The owners of the business have a separate legal distinction from the
b. The owners of the business have no separate legal distinction from the
c. The personal assets are part of the corporation's assets.
d. None of these describe the legal relationship of corporate owners to the
3. What is the present value of $888 in a one year if the current rate of interest is five
d. none of these
4. How much is a bond that pays $50 in coupon payments for 3 years and $1,000 at
the end of the third year worth if the interest rate is 10%?
5. Jake sells Star Wars memorabilia on eBay. His annual revenue is $42,000 per
year, the explicit costs of his business are $10,000, and the economic costs of his
business are $18,000 per year. What is his economic profit?
6. If Canada has a comparative advantage relative to Mexico in the production of
a. the explicit cost of production for timber is lower in Canada than in
b. the opportunity cost of production for timber is lower in Canada than in
c. the implicit costs of production for timber are lower in Canada than in
d. the average cost of production for timber is lower in Canada than in
Quantity of Quantity of
Total Utility Total Utility
Pita Wraps Bubble Tea
1 60 1 40
2 102 2 70
3 132 3 91
4 144 4 106
5 144 5 112
6 138 6 115
7 128 7 115
Keegan has $30 to spend on Pita Wraps and Bubble Tea. The price of a Pita Wrap is
$6 and the price of a glass of Bubble Tea is $3. Table shows his total utility from
different quantities of the two items.
What is Keegan's optimal consumption bundle?
a. 3 pita wraps and 3 bubble teas
b. 3 pita wraps and 4 bubble teas
c. 4 pita wraps and 2 bubble teas
d. 5 pita wraps and 0 bubble teas
8. Refer to the table above, if Keegan can drink all the bubble tea he wants for free,
how many glasses will he consume?
a. 4 glasses
b. 5 glasses
c. 6 glasses
d. 7 glasses
9. Golda Rush quit her job as a buyer for Home Depot to start her own hair dressing
salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings
of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a
close friend, agreeing to pay 5 percent interest per year. In her first year, Golda
spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred
another $15,000 on equipment and hairdressing material. Based on this
information, what is the amount of her explicit costs?
a. E = average fixed cost curve; F = variable cost curve; G = total cost curve,
H = marginal cost curve
b. E = marginal cost curve; F = total cost curve; G = variable cost curve, H =
average fixed cost curve
c. E = average fixed cost curve; F = average total cost curve; G = average
variable cost curve, H = marginal cost curve
d. E = marginal cost curve; F = average total cost curve; G = average
variable cost curve; H = average fixed cost curve
11. If, for a given output level, a perfectly competitive firm's price is less than its
average variable cost, the firm
a. is earning a profit.
b. should increase price.
c. should increase output
d. should shut down
12. A perfectly competitive firm earns a profit when price is
a. above minimum average total cost
b. equal to minimum average total cost
c. equal to minimum average variable cost.
d. equal to minimum average fixed costs.
13. The marginal revenue from selling the additional unit Qb instead of Qa equals
a. the area G
b. the area (G+H).
c. the area (H-E).
d. the area (E+F) - (G+H).
14. Full in the table.
Quantity of Fixed Cost Variable Cost Total Cost Average Total Cost
lanterns (Dollars) (Dollars) (Dollars) (Dollars)
75 200 170 370 4.93
80 200 230 430 5.36
90 200 7.67
100 200 810
115 200 11.8
117 200 1264 1464 12.5
120 200 1480
15. Suppose the Korean government imposes a $0.25 per pound tariff on rice imports.
Figure below shows the estimated demand and supply curves for rice in Korea
and impact of this tariff. Use the Figure to answer questions a-i.
a. Following the imposition of the tariff, what is the price that domestic
consumers must now pay and what is the quantity purchased?
b. Calculate the value of consumer surplus with the tariff in place.
c. What is quantity supplied by domestic rice growers with the tariff in
d. Calculate the value of producer surplus received by Korean rice growers
with the tariff in place.
e. What is the quantity of rice imported with the tariff in place?
f. What is the amount of tariff revenue collected by the Korean government?
g. The tariff has reduced consumer surplus. Calculate the loss in consumer
surplus due to the tariff
h. What portion of the consumer surplus loss is redistributed to domestic
producers? to the government?
i. Calculate the deadweight loss due to the tariff.
Quantity Price Total Revenue Total Cost
(Dollars) (Dollars) (Dollars)
0 $22 $0 $0 $50
1 20 20 16 66
2 19 38 31 81
3 18 54 45 95
4 17 68 59 109
5 16 80 75 125
6 15 90 93 143
7 14 98 112 162
8 13 104 140 190
9 12 108 180 230
10 11 110 230 280
a. What is the maximum profit-maximizing/loss-minimizing output level and
what is the output price (P)?
b. What is the amount of the firm's loss/profit at its optimal output level?
c. What is its average variable cost of production at its optimal output level?
d. If this firm continue to produce, what is likely to happen to the product's
price in the long run?