UNIVERSITY OF NEW BRUNSWICK

ECON1013 INTRODUCTION TO MICROECONOMICS WINTER 2017 M2

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Multiple Choice Problems

Circle one correct answer for the following problems. Each problem is 2 points.

1. In the graph above, Amy must decide how to allocate her budget between hot dogs and
hamburgers. Which one of the following combinations is unaffordable to Amy?

a) 3 hot dogs and 2 hamburgers

b) 10 hot dogs and no hamburgers
c) no hot dogs and 5 hamburgers
d) 6 hot dogs and 1 hamburger
e) 8 hot dogs and 5 hamburgers

2. In the graph above, Amy must decide how to allocate his budget between hot dogs and
hamburgers. If hamburgers cost $2 each, how much is Amy’s budget?

a) $5
b) $10
c) $15
d) $20
e) $25
3. How will an increase in the price of one item change a consumer’s budget line?

a) The budget line will rotate toward the origin.

b) The budget line will rotate away from the origin.
c) The budget line will shift outward.
d) The budget line will shift inward.
e) The budget line will not change.

4. How will an increase in a consumer’s income change her budget line?

a) The budget line will rotate toward the origin.

b) The budget line will rotate away from the origin.
c) The budget line will shift outward.
d) The budget line will shift inward.
e) The budget line will not change.

5. Diminishing marginal utility means that ...

a) the more money a consumer spends, the less is available to purchase other goods.
b) money should transferred from wealthy people to poor people.
c) utility cannot be compared across different people.
d) additional units of consumption produce less additional utility than previous units.
e) utility always increases through additional consumption.

6. An indifference curve illustrates …

a) how consumers are indifferent about the location of their own consumption levels relative
to their reference points.
b) how consumers get more utility, the more they consume of any particular good.
c) how a consumer might trade off different levels of consumption of each of two goods, while
staying at the same utility level.
d) the limitations on spending dictated by a consumer’s income and prices.
e) B and D

7. Which one of the following is an economic, but not an accounting, cost?

a) The cost of paper

b) The wages a business owner could have received from a full-time job elsewhere
c) The wages paid to a part-time employee
d) Taxes
e) Interest paid on a loan
8. Which one of the graphs above illustrates the typical shape of a utility function with
diminishing marginal utility?
a) Graph A
b) Graph B
c) Graph C
d) Graph D
e) Graph E

9. Imagine that Britt obtains a marginal utility of 150 after drinking the first glass of wine, a
marginal utility of 90 after drinking the second glass of wine, and a marginal utility of 5
after drinking the third glass of wine. What is Britt’s total utility when she drinks two
glasses of wine?

a. 90
b. 95
c. 155
d. 240
e. 245
 Quantity of Y

C
B

Quantity of X

10. On the above graph, point A represents a combination of goods X and Y …

a) that the consumer prefers to combination B.

b) that the consumer can afford.
c) that is less preferred than combination D.
d) where the marginal utility from good Y is relatively high.
e) that is less preferred than combination C.

11. Referring to the above graph, which of the following statements is false?

a) The utility-maximizing consumer will consume at combination B

b) The consumer can afford combination D
c) The consumer cannot afford combination A
d) Combinations B and D yield the same utility
e) Combination C is more expensive than combination D

12. Ranked in order from most preferred to least preferred, the consumer would prefer …

a) A to B, and B to D.
b) C to B, and B to D.
c) D to B, and B to C.
d) C to B, and B to A.
e) A to C, and C to D.
Use the following graph to answerhaircuts
Questions 13– 18. The graph shows the relation of hours of labor
input (on the x-axis) to the production of haircuts (on the y-axis)
30
27 28
25 26
23
Quantity of Haircuts

Total
20 19 Product
15
Curve
14
10
8
5
2
0 0
0 1 2 3 4 5 6 7 8

Labor (hours)

13. How many haircuts can be produced if a total of four labor hours are used?

a) 14
b) 19
c) 19  4
d) 19  4
e) You can’t tell from this graph.

14. During the fourth hour, how many haircuts are produced?

a) 14
b) 19
c) 4
d) 5
e) You can’t tell from this graph.

15. During the fifth hour, how many haircuts are produced?

a) 19
b) 23
c) 4
d) 5
e) You can’t tell from this graph.
16. Moving from three to five hours of labor input, this production process is characterized by …

a) diminishing marginal returns

b) constant marginal returns
c) increasing marginal returns
d) economies of scale
e) diminishing total product

17. Moving from zero to two hours of labor input, this production process is characterized by:

a) diminishing marginal returns

b) constant marginal returns
c) increasing marginal returns
d) economies of scale
e) diminishing total product

18. If it costs $15 per hour to pay workers, what is the total labor cost involved in producing 8 haircuts?

a) $2
b) $ 15
c) $ 30
d) $ 120
e) you can’t tell from this graph

19. Economics defines the “long run” as a time period where ...

a) fixed costs must be paid.

b) all but one input are variable.
c) all inputs are fixed.
d) output is variable.
e) all inputs are variable.

20. A seller in a perfectly competitive market is a…

a. monopolist.
b. monopsonist.
c. price taker.
d. price maker.
e. None of the above
Use the following table to answer Questions 21 – 24. The table describes the cost structure of a
flashlight producer. The blank columns are for you to use as workspace. .

Quantity of Fixed Variable

Flashlights Cost ($) Cost ($) Total cost

0 20

1 20 15

2 20 25

3 20 37

4 20 52

21. What is the total cost of producing 3 flashlights?

a) $20
b) $37
c) $57
d) = 60  $57
e) None of the above

22. How much more does it cost to produce 3 flashlights than to produce 2 flashlights?

a) $12
b) $15
c) $20
d) $37
e) None of the above

23. What is the marginal cost of producing the 4th flashlight?

a) $12
b) $15
c) $20
d) $37
e) None of the above
24. If the producer manufactures 3 flashlights, what is the average cost per unit, in dollars?

a) = 37  20
b) = 37  3
c) = 20  3
d) = 57  3
e) None of the above.

25. Automobile factories and universities tend to be large because of…

a. increasing marginal costs.

b. constant marginal costs.
c. economies of scale. (when it is good to produce in large amounts)
d. constant returns to scale.
e. diseconomies of scale. (better to produce in smaller numbes)

26. Costs that do not vary with the level of production are called …

f. variable costs
g. economic costs
h. fixed costs.
i. marginal costs.
j. accounting costs.

27. Suppose that some firms in a perfectly competitive market are making positive
economic profits. Which one of the following would not be expected to occur?

a) More firms would enter the market

b) All firms’ economic profits would eventually be driven to zero at equilibrium
c) The supply curve will shift to the right
d) The equilibrium price will fall
e) The equilibrium quantity sold will fall

28. A firm should continue to operate in the short-run as long as its revenues cover at least
its …

a) total costs.
b) marginal costs
c) fixed costs
d) variable costs
e) transaction costs.
29. In the graph above, there are economies of scale at…

a. point A.
b. point B.
c. point C.
d. point D.
e. point E.

30. In the graph above, there are diseconomies of scale at…

a. point A.
b. point B.
c. point C.
d. point D.
e. point E.

31. In a perfectly competitive market…

a. there are few buyers and sellers.

b. products are differentiated.
c. neither sellers nor buyers have market power.
d. outcomes are equitable.
e. externalities do not cause inefficiencies.
Use the following graph to answer Questions 32-35. The graph illustrates the marginal costs of a
thermometer producer facing a constant selling price of $1.00 per thermometer.

1.4

1.2
Marginal
Cost
Cost and Price ($)

1.00
1 Price

0.8

0.6
.50
0.4

0.2

0
0 20 40 60 80 100 120

Quantity of Thermometers

32. What level of output should the firm produce, based on marginal analysis?

a) 40 thermometers, because this is where the marginal cost is lowest

b) Somewhere between 40 and 100 thermometers, because in these cases it gets back $1 for
selling each thermometer, but produces each one at a marginal cost that is lower than $1
c) 100 thermometers, because in this case the last unit can be sold for exactly as much as it
cost to produce it
d) More than 100 thermometers—price-taking firms can sell all they want at the going price!
e) You can’t tell from this graph.

33. If the thermometer producer sells 40 thermometers (though this may not be a smart choice), what
will be its total revenues?

a) $ 0.50
b) $ 1.00
c) $ 20.00
d) $ 40.00
e) $100.00
34. If the thermometer producer sells 100 thermometers (though this may not be a smart choice), what
will be its total revenues?

a) $ 0.50
b) $ 1.00
c) $ 20.00
d) $ 40.00
e) $100.00

35. Suppose that to produce the level of output suggested by marginal analysis the thermometer
producer incurs fixed costs of $20 and variable costs of $72. What will be its level of profits if it produces
at this level?

a) $ - 52
b) $0
c) $8
d) $100
e) You can’t tell from this graph.

36. A firm’s economic profit is equal to its…

f. total revenue.
g. accounting profit.
h. total revenue minus accounting cost.
i. total revenue minus economic cost.
j. marginal revenue minus marginal cost.

37. In a perfectly competitive market, every individual seller is a price taker, which means
that …

a. each seller has no market power.

b. the price is determined by the interaction of market supply and demand.
c. if any seller raises its price above the market price, they will sell nothing.
d. they face a perfectly elastic demand curve.
e. All of the above

38. Which one of the following statements is false? In a perfectly competitive market, in the
long run…

a. firms earn zero economic profits.

b. firms may earn positive accounting profits.
c. there is no further incentive for entry or exit.
d. firms may make economic losses.
e. Marginal cost equals marginal revenue.
 Show All Your Work For The Following Problems

Use the following table to answer the questions below. The table represents the MPG
corporation's costs of making quarts of gasoline additive. Note that MPG has total fixed
costs of $7. Assume that the company can only produce whole numbers of output. Assume
that MPG is a price-taking firm.

Total Variable Average Variable Marginal Total Revenue Total Profit

Quantity Total Cost Marginal Cost
Cost Cost Revenue

0 7 0 TVC/Q MR=P PxQ TR-TC -7

16 9 9 9 11 11 -5
1
2 24 17 17/2= 8.5 11 22 -2
8
3 7 24 8 11 33 2
31
4 39 8 32 8 11 44 5

5 49 10 42 42/5=8.4 11 55 6

6 61 12 54 9 11 66 5

7 75 14 68 68/7=9.71 11 77 2

i. (16 points) Assume the selling price of the gasoline additive is $11 per
quart. Fill the table above.
ii. (3 points) At what level of output profit is maximized? When MC=MR, so
between 5 and 6
iii. (3 points) What is the maximum profit? 6$
iv. (3 points) When should the firm stop operating? Look at the minimum
AVC which is 8. They stop operating when market price falls below the
minimum AVC which is 8. In the long run, they would look at the
minimum average cost