ECON2113 L3 – Fall 2013 Practice Questions 

 
 
MULTIPLE CHOICE.    Choose the one alternative that best completes the statement or answers the question. 
 
Quantity  Marginal utility  Quantity  Marginal utility 
of DVDs  from DVDs  of pizza  from pizza 
1  150  1  200 
2  120  2  180 
3  100  3  150 
4  90  4  120 
5  60  5  100 
6  40  6  60 
 
1) Lisa spends all her income on pizzas and DVDs. The above table shows Lisaʹs marginal utility for pizza and marginal 
utility for DVDs. If the price of a pizza is $10, the price of a DVD is $5, and Lisa has $40 to spend on the two goods, what 
combination of pizza and DVDs will maximize her utility? 
A) 6 DVDs and 1 pizza  B) 2 DVDs and 3 pizzas 
C) 4 DVDs and 2 pizzas D) 5 DVDs and 4 pizzas 
 
2) Emma consumes only hot dogs and hamburgers. She is at her consumer equilibrium. Hot dogs and hamburgers have 
the same marginal utility. Thus 
A) her total utility from all the hot dogs eaten must be the same as her total utility from all the hamburgers eaten. 
B) she must be eating the same number of hot dogs and hamburgers. 
C) the price of a hot dog and the price of a hamburger must be the same. 
D) Both answers B and C are correct. 
 
3) The only goods you consume are pizza and soda. Both are normal goods. You consider pizza and soda to be substitutes. 
Which of the following will lead you to eat more pizza? 
A) The price of a pizza falls.  B) The price of a soda falls. 
C) The price of a soda rises.  D) Both answers A and C are correct. 
 
4) Both Diana and Sarah like jazz music and music by the Beatles. Diana likes music by the Beatles much better than
jazz music, whereas Sarah prefers jazz music to music by the Beatles. If we were to graph an indifference curve with
cds by the Beatles on the horizontal axis and jazz cds on the vertical axis, then
A) Diana and Sarah would have identical indifference curves
B) Diana’s indifference curve would be steeper than Sarah’s indifference curve
C) Sarah’s indifference curve would be steeper than Diana’s indifference curve
D) We do not have enough information to compare their indifference curves

5) When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that
the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs
A) along the highest attainable indifference curve
B) where the indifference curve is tangent to the budget constraint
C) where the marginal utility per dollar spent is the same for both X and Y
D) All of the above are correct

 
 
 
 
 
 
6) Suppose at the consumer’s current consumption bundle the marginal rate of substitution of cheese for wine is 1/2 bottle
of wine per pound of cheese. The price of one pound of cheese is $6, and the price of a bottle of wine is $10. The
consumer should increase his consumption of
A) wine, decrease his consumption of cheese, and move to a lower indifference curve
B) cheese, decrease his consumption of wine, and move to a higher indifference curve
C) wine, decrease consumption of cheese, and move to a higher indifference curve
D) cheese, decrease consumption of wine, and remain on the same indifference curve

 
 
7) In the above figure, which of the following statements is FALSE? 
A) The vertical gap between curves A and B is equal to average fixed cost. 
B) Total variable cost and total cost both increase as output increases. 
C) The total fixed cost curve is curve C. 
D) Marginal cost is equal to the slope of curve A. 
 
8) The cost of a variable input, such as the wage paid to workers, decreases. This decrease shifts the 
A) average variable cost curve downward.  B) marginal product of labor curve downward. 
C) total fixed cost curve downward.  D) marginal product of labor curve upward. 
 
9) Which of the following statements is correct?
A) For all firms, marginal revenue equals the price of the good
B) Only for competitive firms does average revenue equal the price of the good
C) Marginal revenue can be calculated as total revenue divided by the quantity sold
D) Only for competitive firms does average revenue equal marginal revenue

10) Which of the following is a characteristic of a natural monopoly?

A) Average cost exceeds marginal cost over large regions of output
B) Increasing the number of firms increases each firm’s average total cost
C) One firm can supply output at a lower cost than two firms
D) All of the above are correct

 
11) Suppose when a monopolist produces 50 units its average revenue is $8 per unit, its marginal revenue is $4 per unit, its marginal
cost is $4 per unit, and its average total cost is $3 per unit. What can we conclude about this monopolist?
A) The monopolist is currently maximizing profits, and its total profits are $200
B) The monopolist is currently maximizing profits, and its total profits are $250
C) The monopolist is not currently maximizing its profits; it should produce more units and charge a lower price to maximize profit
D) The monopolist is not currently maximizing its profits; it should produce fewer units and charger a higher price to maximize profit

12) The presence of external economies ________ each firmʹs total costs as the market output ________ and the presence of 
external diseconomies ________ each firmʹs total costs as market output ________. 
A) lower; increases; lower; decreases  B) raise; increases; lower; increases 
C) lower; increases; lower; increases  D) lower; decreases; lower; increases 
 
13) In the short run, a firm will 
A) produce and break even if its total revenue covers its total fixed cost but not its total variable cost. 
B) produce and incur an economic loss if its total revenue covers its total variable cost but not its total cost. 
C) produce and earn an economic profit if its total revenue is equal to its total cost. 
D) not produce if its total revenue does not cover its total cost. 
 
14) Dave and Andy are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all.
If they both advertise on TV, each will earn a profit of $4,000. If they both advertise on radio, each will earn a profit of $7,000. If
neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and other advertises on radio, then the one
advertising on TV will earn $6,000 and the other will earn $5,000. If one advertises on TV and the other does not advertise, then the
one advertising on TV will earn $11,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise,
then the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant strategy, then Dave
will
A) advertise on TV and earn $4,000. B) not advertise and earn $10,000.
C) advertise on TV and earn $11,000. D) advertise on radio and earn $7,000.
 
15) Which of the following represents a way that a government can help the private market to internalize an externality?
A) taxing goods that have negative externalities
B) subsidizing goods that have positive externalities
C) The government cannot improve upon the outcomes of private markets.
D) Both a and b are correct.
 
16) Suppose that electricity producers create a negative externality equal to $6 per unit. Further suppose that the government imposes
a $8 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal
quantity of electricity to be produced?
A) The after-tax equilibrium quantity is greater than the socially optimal quantity.
B) There is not enough information to answer the question.
C) They are equal.
D) The after-tax equilibrium quantity is less than the socially optimal quantity.
 
17) Monte owns a dog; the dog’s barking annoys Monte’s neighbor, Teresa. Suppose that the benefit of owning the dog is worth $200
to Monte and that Teresa bears a cost of $400 from the barking. Assuming Monte has the legal right to keep the dog, a possible private
solution to this problem is that
A) Teresa pays Monte $150 to give the dog to his parents who live on an isolated farm.
B) Teresa pays Monte $300 to give the dog to his parents who live on an isolated farm.
C) There is no private transaction that would improve this situation.
D) Monte pays Teresa $350 for her inconvenience.
 
 
 
 
 
 
  Dr. Smith 
    Advertise  Donʹt advertise
S:    $80  S:    $60 
  Advertise 
J:    $70  J:    $110 
Dr. Jones       
Donʹt  S:    $120  S:    $100 
 
advertise  J:    $60  J:    $90 
 
18) Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. 
The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following 
statements correctly describes Dr. Smithʹs strategy given what Dr. Jones may do? 
A) Dr. Smith should advertise no matter what Dr. Jones does. 
B) Dr. Smith should not advertise no matter what Dr. Jones does. 
C) Dr. Smith should advertise only if Dr. Jones doesnʹt advertise. 
D) Dr. Smith should advertise only if Dr. Jones advertises. 
 
 
  Gateway 
  Cut price  Hold price 
G:    $10  G:    $5 
  Cut price 
D:    $10  D:    $20 
Dell       
G:    $20  G:    $15 
  Hold price 
D:    $5  D:    $15 
 
19) Dell and Gateway must decide whether to lower their prices, based on the potential economic profits shown in the 
payoff matrix above. (The profits are in millions of dollars.) In the Nash equilibrium, 
A) both Dell and Gateway keep prices high. 
B) Dell keeps its prices high and Gateway lowers its prices. 
C) both Dell and Gateway lower prices. 
D) Gateway keeps its prices high and Dell lowers its prices. 
 
20) Which of the following is true of markets characterized by positive externalities?
A) Social value exceeds private value, and market quantity exceeds the socially optimal quantity.
B) Social value exceeds private value, and market quantity is less than the socially optimal quantity.
C) Social value is less than private value, and market quantity exceeds the socially optimal quantity.
D) Social value seldom exceeds private value; therefore, social quantity is less than private quantity.
 
1) C 
2) C 
3) D 
4) B 
5) D 
6) C 
7) A 
8) A 
9) D 
10) D 
11) B 
12) A 
13) B 
14) D 
15) D 
16) D 
17) B 
18) A 
19) C 
20) B