ECON 251

Exam #2 Pink
Spring 2010 (Practice Exam #2B for Spring 2011)

1. Carolina consumers Gatorade and Cheerios. The above graph shows her budget line. Which
of the following could have caused the budget line to change as depicted in the above graph?
a. An increase in Carolina’s income
b. A decrease in the price of Gatorade and a decrease in the price of Cheerios
c. An increase in the price of Cheerios
d. A decrease in the price of Gatorade

2. If Gatorade is an inferior good for Carolina, we would expect the change in price of
Gatorade shown above to result in which of the following when Carolina maximizes her
utility?
a. An income effect that increases the quantity of Gatorade she chooses, and a substitution
effect that increases the quantity of Gatorade she chooses
b. An income effect that increases the quantity of Gatorade she chooses, and a substitution
effect that decreases the quantity of Gatorade she chooses
c. An income effect that decreases the quantity of Gatorade she chooses and a substitution
effect that increases the quantity of Gatorade she chooses
d. An income effect that decreases the quantity of Gatorade she chooses and a substitution
effect that decreases the quantity of Gatorade she chooses

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 Total Utility Total Utility
Quantity from Books from Pizza
1 20 10
2 28 19
3 34 25
4 38 30
5 39 32

3. Miles likes to consume books and pizza. What is the marginal utility Miles receives from the
3rd slice of pizza?
a. 25
b. 10
c. 6
d. 19

4. If Miles has an income of only $30 to spend on books and pizza, and pizza and books both
cost $5 each, what is the slope of Miles’ budget line?
a. -1
b. -6
c. -1/6
d. Cannot be determined without additional information

5. Again using the table above, and assuming Miles always spends his entire income, Miles
should consume ________ books and __________ pizzas when he maximizes his utility.
a. 5, 1
b. 1, 5
c. 3, 3
d. 4,2

6. Again using the information provided in the table above, what is the marginal utility per
dollar spent on the last pizza purchased?
a. 4
b. 6/5 = 1.2
c. 4/5 = 0.8
d. 10

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7. Gary spends $40 a month on movies and magazines. The price of a movie is $10 and the
price of a magazine is $5. When Gary maximizes his utility, the marginal utility from movies
is _____________ the marginal utility from magazines.
a. less than
b. equal to
c. half
d. twice

8. Based on the information in the problem above, which of the following points would be on
Gary’s budget line?
a. 3 magazines and 2 movies
b. 8 magazines and 2 movies
c. 6 magazines and 2 movies
d. 4 magazines and 2 movies

9. If the quantity of movies is measured on the X axis, what will the slope of Gary’s
indifference curve be when he is maximizing his utility given his income?
a. -2
b. -1/2
c. -4
d. -5

10. The income effect of a wage increase encourages an individual to spend ____ time in
leisure activities, and the substitution effect encourages an individual to spend in leisure
activities.
a. More; more
b. Less; less
c. More; less
d. Less ; more

11. Olivia spends all of her income consuming only iPods and iPads. Each iPod costs $150, and
each iPad costs $500. The marginal utility of the last iPod she purchased was 1,000, and the
marginal utility of the last iPad she purchased was 3,000. Based on this information, how
should Olivia change her consumption of iPods and iPads, if at all, to maximize her utility?
a. Olivia should buy more iPods and fewer iPads
b. Olivia should buy more iPads and fewer iPods
c. Olivia should buy fewer iPods and fewer iPads
d. Olivia should buy more iPods and more iPads

12. A key distinction between the short run and the long run, is that in the short run:
a. Profits are always positive
b. At least one input is fixed
c. All inputs are variable
d. Firms can easily vary their plant size

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13. When the marginal cost of production is below the average variable cost of production,
a. The average total cost of production must be rising
b. The average variable cost of production must be falling
c. The marginal product of labor must be falling
d. The average product of labor must be falling

14. Based on the table of labor productivity below, the marginal product of the 3rd worker is
equal to ______, which the average product of 3 workers is equal to _______.
Labor Output (total
product)

0 0

1 12

2 35

3 71

4 105

5 125

6 138

7 140

8 132

a. 36; 23.67
b. 23.67; 12
c. 71; 36
d. 36; 12

15. Diminishing returns first appear with the hiring of which unit of labor?
a. 2nd
b. 4th
c. 5th
d. 8th

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16. ABC Electric is a company that just expanded its scale of operations from an annual
production of 10,000 units of output to 20,000 units of output. As a result, the total costs of
production rose from $100,000 per year to $150,000 per year. This change indicates that
a. The company experienced economies of scale
b. The company experienced diseconomies of scale
c. The long run average cost of production is minimized at 20,000 units of output
d. Efficient scale was achieved at 10,000 units of output

17. There are 14 firms in an industry, and each of the four largest firms has 20% of the market.
The other 10 firms each have a total market share of 2%. The Herfindahl-Hirschman Index
(HHI) for this industry is
a. 1200
b. 1640
c. 1800
d. 2020

18. If the Herfindahl-Hirschman Index (HHI) is 10,000, what can we say about the industry?
a. It is perfectly competitive
b. It is a monopoly
c. It is an duopoly
d. It is an oligopoly

Use the below table to answer the following two questions.

Output TC ATC MC
0
1 20 10
2 15
3 55
4 21.25

19. What is the marginal cost of the 4th unit produced?

a. $30
b. $21.25
c. $20
d. $15

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20. What is the average variable cost of producing 3 units of output?
a. $11.67
b. $13
c. $15
d. $18.33

21. If the marginal cost curve is above the average total cost curve, average total cost is
_____________.
a. Increasing
b. Decreasing
c. Constant
d. None of the above

22. The table shows the production schedule of Terry’s T-Shirts. Terry’s pay $100 a day for each
sewing machine it rents and $50 a day for each worker it hires. In the long run, Terry’s can
rent 1, 2 or 3 sewing machines. What is the long-run average cost if Terry’s produces 160 T-
shirts a day?
a. $400/160 = $2.50
b. $300/160 = $1.88
c. $250/160 = $1.56
d. $350/160 = $2.19

Workers per Output (T-shirts per day)

day 1 machine 2 machines 3 machines
1 60 100 130
2 100 160 160
3 130 180 190
4 150 190 200
5 155 195 210

23. Which of the following is true at the long run equilibrium in a perfectly competitive market?
a. The equilibrium price is equal to the average cost
b. Firms make revenue equal to $0
c. Firms make accounting profit equal to $0
d. There is excess capacity

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Use the table below to answer the following 4 questions. The firm operates in a perfectly
competitive industry.
Quantity of
Surfboards Total Cost
0 100
1 120
2 160
3 220
4 300
5 400

24. What are the fixed costs of production for the firm, if any?
a. $50
b. $100
c. $150
d. There are not fixed costs of production because this firm is operating in the long run.

25. If the market for surfboards is perfectly competitive, and the market price for surfboards is
$60, what is marginal revenue from producing the 5th surfboard?
a. $12
b. $100
c. $240
d. $60

26. Based on the same information in the market for surfboards, what level of production
maximizes profit for the firm?
a. 0
b. 1
c. 3
d. 4

27. What are the firm’s profits when it is maximizing profit?

a. -$100
b. -$40
c. $0
d. $180

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28. In the short run, if price is below average variable cost, a perfectly competitive firm should
_____________ to maximize profits.
a. Increase production
b. Decrease production (but not shut down)
c. Shut down
d. Increase price

There are 100 identical firms producing sugar in a perfectly competitive market. The information
in the tables below shows the market demand and each firm’s costs in the short run. The total
fixed cost is $1,000 for each firm.

Market demand
Price Quantity demanded
($ per ton) (tons per year)
400 1000
500 900
620 800
840 700
1000 600
1140 500
1320 400

Each firm’s costs

Output Marginal cost Average variable cost
(tons per year) ($ per additional ton) ($ per ton)
2 500 550
3 525 525
4 620 540
5 840 600
6 1000 700
7 1320 820
8 1700 950

29. In the short run, the market equilibrium price and quantity are
a. $620 and 800 tons
b. $840 and 700 tons
c. $1000 and 600 tons
d. $1320 and 400 tons

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30. At the short run equilibrium, each firm makes a profit of
a. - $300
b. $ 0
c. $800
d. $1,800

31. When economic profit is negative for firms in a perfectly competitive industry,
a. Entry of additional firms will drive prices and profits further down
b. Price must be below the average variable cost
c. Accounting profit must also be negative
d. Market supply will decrease as firms exit the market in the long run

32. Sky Shuttle Helicopter is the only firm who provides helicopter shuttle services between
Hong-Kong and Macau. The table shows the demand and total cost schedules. If Sky Shuttle
is a single price monopoly, what is the marginal revenue for the 3rd ride?
a. $1,400
b. $1,500
c. $1,600
d. $1,700

Price Quantity demanded Total cost

($ per ride) (rides per day) ($)
2,000 0 1,000
1,900 1 2,150
1,800 2 3,350
1,700 3 4,600
1,600 4 5,900
1,500 5 7,250
1,400 6 8,650
1,300 7 10,150

33. Sky Shuttle is a single-price monopoly. We know that demand facing Sky Shuttle is
__________ at each of the prices shown in the table because marginal revenue is ________.
a. Unit elastic; zero
b. Elastic; negative
c. Elastic; positive
d. Inelastic; positive

34. To maximize profit, Sky Shuttle provides rides per day and makes a profit of
a. 4 ; $500
b. 4; $1,000
c. 5; $700
d. 7; $1,300

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35. If Sky Shuttle practices perfect price discrimination, then it will provide _____ rides per day
a. 0
b. 3
c. 4
d. 6

36. If Sky Shuttle practices perfect price discrimination,

a. Deadweight loss is maximized
b. Consumer surplus is maximized
c. Allocative efficiency is achieved
d. All of the above occur

37. ABC Electric is a natural monopoly currently producing where it maximizes its profit. If
this monopoly is then regulated to produce the efficient level of output, we would expect to
see
a. ABC’s profits to increase.
b. ABC produce where average cost is minimized.
c. ABC continue to produce where price is equal to marginal revenue.
d. ABC earn negative profits.

38. Which of the following is NOT true regarding the similarities and differences in monopolistic
competition and monopoly
a. The monopolistic competitor makes zero economic profits in the long run, while the
monopoly can earn positive economic profit in the long run.
b. Both the monopolist and the monopolistic competitors face downward sloping demand
curves
c. Both the monopolist and the monopolistic competitor charge a price greater than
marginal cost
d. Both the monopolist and the monopolistic competitor have no close substitutes.

39. In the long run, in monopolistic competition, which of the following is satisfied?
a. Allocative efficiency
b. Production efficiency
c. Both a and b
d. None of the above

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40. The graph below illustrates demand, marginal revenue, and marginal cost curves for a firm in
a monopolistically competitive industry. When this firm maximizes profit,
a. Profit is positive
b. Profit is negative
c. Production efficiency is achieved
d. Allocative efficiency is achieved

$
MC
18

12
ATC
10
8

4 D

2 3 MR q

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