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ECC1000 Practise Multiple Choice Questions

Multiple Choice
Identify the choice that best completes the statement or answers the question.

Table 3-2

Labour hours needed to produce one unit of: Amount produced in 60 hours:
Butter (kg) Butter (kg Rice (kg) Rice (kg)
Lee 6 10 15 4
John 3 20 15 4

____ 1. According to Table 3-2:


A. Lee has an absolute advantage in neither goods, and John has a comparative advantage in
butter
B. Lee has an absolute advantage in rice, and John has a comparative advantage in butter
C. Lee has an absolute advantage in rice, and John has a comparative advantage in neither
goods
D. Lee has an absolute advantage in neither goods, and John has a comparative advantage in
rice

____ 2. According to Table 3-2:


A. Lee and John both could benefit by Lee specialising in butter, and John specialising in
rice
B. Lee and John both could benefit by Lee specialising in butter, and John specialising in
butter
C. Lee and John both could benefit by Lee specialising in rice, and John specialising in
butter
D. Lee and John both could benefit by Lee specialising in rice, and John specialising in rice

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Graph 3-2

These figures illustrate the production possibilities available to Amy and Jim with 8 hours of labour.

____ 3. According to Graph 3-2:


A. Amy has a comparative advantage in doughnuts, and Jim has an absolute advantage in
coffee
B. Amy has a comparative advantage in doughnuts, and Jim has an absolute advantage in
neither goods
C. Amy has a comparative advantage in coffee, and Jim has an absolute advantage in
doughnuts
D. Amy has a comparative advantage in coffee, and Jim has an absolute advantage in neither
goods

____ 4. According to Graph 3-2, if Amy and Jim devote half of their time (four hours) to the production of each
good, total production of coffee and total production of doughnuts by both would be ____ respectively.
A. 7 and 16
B. 16 and 7
C. 3.5 and 8
D. 8 and 3.5

____ 5. According to Graph 3-2, if Amy and Jim both specialise completely in the good in which they have a
comparative advantage, total production of coffee and total production of doughnuts will be ____
respectively.
A. 20 and 4
B. 4 and 20
C. 16 and 7
D. 7 and 16

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Table 3-3

Hours needed to make one unit of: Amount produced in 2400 hours:
Cars Aeroplanes Cars Aeroplanes
US 40 160 60 15
Europe 50 150 48 16

____ 6. Refer to Table 3-3. If the US and Europe trade according to the principle of comparative advantage:
A. the US will export cars and Europe will export aeroplanes
B. the US will export aeroplanes and Europe will export cars
C. the US will export cars and Europe will export cars
D. the US will export aeroplanes and Europe will export aeroplanes

____ 7. Refer to Table 3-3. If Europe and the US trade according to the principle of comparative advantage:
A. all individuals in both countries will gain
B. both countries can have more aeroplanes and cars
C. Europe will specialise in cars and the US will specialise in aeroplanes
D. both countries will consume on their own production possibilities frontier

Table 3-4

Labour hours needed to make one unit of: Amount Produced in 40 hours:
Cheese Bread Cheese Bread
England 3 2 13.3 20
Spain 1 5 40 8

____ 8. According to Table 3-4:


A. England has a comparative advantage in bread, and Spain has a comparative advantage in
cheese
B. England has a comparative advantage in cheese, and Spain has a comparative advantage
in bread
C. England has a comparative advantage in both goods, and Spain has a comparative
advantage in neither goods
D. England has a comparative advantage in neither goods, and Spain has a comparative
advantage in both goods

____ 9. Refer to Table 3-4. If England and Spain trade according to the principle of comparative advantage, Spain
will export which product to England?
A. bread
B. both bread and cheese
C. cheese
D. Spain cannot benefit from trade with England

____ 10. Refer to Table 3-4. If England imports cheese from Spain, who will benefit and who will lose?
A. the producers of bread will lose and the consumers of cheese will benefit
B. the producers of cheese will lose and the consumers of bread will benefit
C. the producers of bread will lose and the consumers of bread will benefit
D. the producers of cheese will lose and the consumers of cheese will benefit

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____ 11. According to Table 3-4, if the English government decided to impose a tariff on cheese imports, this
would:
A. make bread and cheese cheaper for English consumers
B. make bread and cheese more expensive for English consumers
C. make bread more expensive for English consumers
D. make cheese more expensive for English consumers

____ 12. If two countries have identical opportunity costs, then:


A. one country must be more productive in producing all goods than the other
B. the benefits resulting from trade are increased
C. there are no gains from specialisation and trade
D. each country should specialise in the production of a particular commodity

____ 13. If the demand curve is linear and downward-sloping, which of the following would NOT be correct?
A. the upper part of the demand curve is more elastic than the lower part
B. elasticity will change with a movement down the curve
C. the lower part of the demand curve will be less elastic than the upper part
D. elasticity and slope will both remain constant along the curve

____ 14. Suppose that after a five per cent increase in the price of timber, a forestry company increases its supply
of timber by 10 per cent in the next three months, and 15 per cent by 12 months. This means that the
elasticity of supply is ____.
A. 3 at three months and 2 at 12 months
B. 0.5 at three months and 0.3 at 12 months
C. 2 at three months and 3 at 12 months
D. 0.3 at three months and 0.5 at 12 months

____ 15. The development of a new, more productive hybrid wheat would tend to decrease the total revenue of
wheat farmers because:
A. the demand for wheat tends to be elastic
B. the supply of wheat tends to be elastic
C. the demand for wheat tends to be inelastic
D. the supply of wheat tends to be inelastic

____ 16. If law enforcement agencies prohibit the use of drugs such as heroin, cocaine and crack and the demand
for drugs is inelastic, it is possible that:
A. the price of drugs will fall and drug-related crime will fall
B. the price of drugs will fall and drug-related crime will increase
C. the price of drugs will rise and drug-related crime will increase
D. the price of drugs will rise and drug-related crime will fall

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Graph 5-5

____ 17. In Graph 5-5, which supply curve is most likely the long-run supply curve?
A. S1
B. S2
C. S3
D. all of the above are equally likely to be the long-run supply curve

Graph 6-7

____ 18. According to Graph 6-7, the price sellers receive after the tax is imposed is:
A. $8.00
B. $6.00
C. $5.00
D. $3.50

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____ 19. According to Graph 6-7, the amount of the tax that buyers would pay would be:
A. $1.00
B. $1.50
C. $2.00
D. $3.00

Graph 6-8

____ 20. According to Graph 6-8, the amount of the tax that sellers would pay would be:
A. $1.00
B. $1.50
C. $2.50
D. $3.00

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Graph 6-9

____ 21. Refer to Graph 6-9. In which market will the majority of a tax be paid by the buyer?
A. market a
B. market b
C. market c
D. all of the above

____ 22. Australia exports cattle to Indonesia. If Australia puts an export subsidy on cattle and the Australian
supply of cattle is elastic while the demand for cattle in Indonesia is inelastic then:
A. Australian sellers of cattle will enjoy most of the subsidy’s benefit
B. Indonesian buyers of cattle will enjoy most of the subsidy’s benefit
C. the benefit of the subsidy will be shared equally
D. it is impossible to determine how the burden of the tax will be shared

____ 23. If the demand for coffee and the supply of coffee are both elastic then:
A. coffee buyers will bear most of the burden of the tax
B. coffee sellers will bear most of the burden of the tax
C. the burden of the tax will be shared equally between buyers and sellers
D. it is impossible to determine how the burden of the tax will be shared

____ 24. If the cost of producing automobiles increases, consumer surplus will:
A. increase
B. decrease
C. remain constant
D. increase, then decrease

____ 25. The Health Ministry announces that eating chocolate increases tooth decay. As a result, the equilibrium
market price ____ and producer surplus of chocolate ____.
A. increases and increases
B. increases and decreases
C. decreases and decreases
D. decreases and increases

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Graph 8-1

____ 26. According to Graph 8-1, the tax caused a reduction in consumer surplus, it is represented by area:
A. A
B. B + C
C. D + E
D. F

____ 27. According to Graph 8-1, the tax caused a reduction in producer surplus, it is represented by area:
A. A
B. B + C
C. D + E
D. F

____ 28. According to Graph 8-1, the loss in total welfare resulting from the levying of the tax is represented by
area:
A. A + B + C
B. C + E
C. D + E + F
D. A + B + D + F

____ 29. Assume that a tax is levied on a good and the government uses the revenue to clean up lethal toxic waste
that would cause irreparable harm to a large number of people. In this case there would be:
A. a decrease in consumer surplus to consumers of the taxed good
B. a decrease in producer surplus to producers of the taxed good
C. a probable increase in the total economic welfare of society
D. all of the above would occur

____ 30. According to the information provided, the total gain in welfare due to the transaction described here is:
A. $15 per week
B. $65 per week
C. $50 per week
D. $45 per week

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____ 31. Tax cuts and deregulation may cause output in an economy to increase by each of the following, except:
A. increasing the value of output by reducing deadweight tax burdens
B. luring the underground economy to the surface
C. increasing incentives to produce
D. reducing competition

Graph 9-9

____ 32. In Graph 9-9, producer surplus with free trade would be:
A. G
B. C + G
C. A + C + G
D. A + B + C + G

____ 33. In Graph 9-9, producer surplus after the tariff would be:
A. G
B. C + G
C. A + C + G
D. A + B + C + G

____ 34. In Graph 9-9, as a result of the tariff, deadweight loss would be:
A. E
B. B
C. D + F
D. B + D + E + F

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Graph 10-3

This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also
unintentionally kills honey bees.

____ 35. Refer to Graph 10-3. The producer surplus derived from the most efficient kiwifruit production levels is
represented by the area:
A. g
B. e + g
C. a + b
D. a + b + c

____ 36. Assume that your housemate is very messy. (There is no law against being messy.) Suppose she gets a
$100 benefit from being messy but imposes a $200 cost on you. The Coase theorem would suggest that an
efficient solution would be for you to:
A. pay your housemate at least $100 but no more than $200 to clean up after herself
B. pay your housemate at least $201 to clean up after herself
C. charge your housemate at least $100 to have you clean up after her
D. charge your housemate at least $200 but no more than $300 to keep you from
complaining about the mess

____ 37. Assume that your housemate is very messy. Suppose he gets a $200 benefit from being messy but imposes
a $100 cost on you. The Coase theorem would suggest that an efficient solution would be for you to:
A. pay your housemate at least $100 but no more than $200 to clean up after himself
B. pay your housemate at least $201 to clean up after himself
C. continue to live with your messy housemate until you are able to make other living
arrangements elsewhere
D. charge your housemate at least $100 to have you clean up after him

____ 38. Assume that your housemate is very messy. Suppose she gets a $100 benefit from being messy but
imposes a $200 cost on you. The Coase theorem would suggest that an efficient solution would be for you
to:
A. continue to live with your messy housemate until you are able to make other living
arrangements elsewhere
B. encourage your messy housemate to stop her messy habits or force her to move out
C. pay your housemate at least $100 but no more than $200 to clean up after herself
D. charge your housemate at least $100 but no more than $200 to have you clean up after
her

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____ 39. Assuming that everyone prefers to live in a society without poverty, which of the following statements are
true of private anti-poverty programs?
(i) people who don’t contribute still receive benefits from the general reduction in poverty
(ii) the socially optimal level of charitable donations is greater than those actually received, because of the
free-rider problem
(iii) there is no individual incentive to contribute to private anti-poverty programs since the government is
the sole supplier
A. (i) and (ii)
B. (i) and (iii)
C. (ii) and (iii)
D. (i), (ii) and (iii)

____ 40. The free-rider problem is a problem of:


A. too many people needing the same good
B. common resource goods not being subject to property rights
C. incentives
D. people not revealing their true preferences

____ 41. When an infinite value is placed on human life which of the following represents policymakers who rely
on cost–benefit analysis?
(i) they are forced to pursue any project in which a single human life is saved
(ii) they are likely to make decisions that optimally allocate society’s scarce resources
(iii) they are left with nonsensical results
A. (i) and (ii)
B. (ii) and (iii)
C. (i) and (iii)
D. (i), (ii) and (iii)

____ 42. Cost–benefit analysis for a private good is facilitated by which of the following facts?
(i) buyers of a private good reveal the value they place on a good by the prices they are willing to pay
(ii) a private good cannot be rival
(iii) sellers of a private good are likely to purchase inputs in regulated markets
(iv) sellers of private goods reveal their costs by the prices they are willing to accept
A. (i), (ii), (iii) and (iv)
B. (i) and (iv) only
C. (ii) and (iii) only
D. (i), (ii) and (iv) only

____ 43. The Occupational Safety and Health Administration (OSHA) has determined that the probability of a
worker dying from exposure to a hazardous chemical used in the production of diet soft drinks is 0.0005.
The cost of imposing a regulation that would ban this chemical is $18 million. If each person saved has a
value equal to $10 million, how many people must the policy affect in order for benefits to exceed costs?
A. 3600
B. 1800
C. 600
D. 100

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____ 44. Four friends decide to meet at a Chinese restaurant for dinner. They decide that each person will order an
item from the menu and they will share all dishes. When the final bill for the meal comes, they decide that
they will split the cost evenly among each of the people at the table. In this particular case, a Tragedy of
the Commons problem is likely because:
A. each person has an incentive to eat as fast as possible, since their individual rate of
consumption will not affect their individual cost
B. there is a consumption externality associated with eating the food on the table
C. when one person eats, he may not take into account how his choice affects his friends
D. all of the above are true

____ 45. Which of the following factors are most important to the success of resource allocation policy?
(i) the policy must be well planned and well run
(ii) policymakers must have access to good information about the value of resources and how they affect
economic wellbeing
(iii) policymakers must have altruistic motives for helping society
A. (i) and (ii) only
B. (i) and (iii) only
C. (ii) and (iii) only
D. (i), (ii) and (iii)

Graph 13-4

____ 46. Refer to Graph 13-4. Which of the following can be inferred from the figure shown?
(i) marginal costs vary for different levels of output
(ii) diminishing marginal product does not occur directly after the first worker
(iii) marginal product of the second worker exceeds that of the first
A. (i) and (ii)
B. (ii) and (iii)
C. (i) and (iii)
D. (i), (ii) and (iii)

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Graph 13-6

This graph depicts average total cost functions for a firm that produces automobiles. Use the graph to
answer the following question(s).

____ 47. Refer to Graph 13-6. If the firm is currently operating on ATC B, what options does it have if it wants to
change its level of automobile production over the next couple of weeks?
A. The firm has no options. It cannot change output level in the short run.
B. it can operate at any level of output between points M and N
C. it can operate at any level of output, as long as it stays on ATC D
D. it can operate at any level of output as long as it stays on ATC B

____ 48. The long-run average total cost curve is:


A. steeper than the short-run average total cost curve as the firm incurs more fixed costs in
the long run
B. never steeper than short-run average total cost curves, as the firm can always choose the
same input combinations as the short-run
C. steeper or flatter than the short-run average cost curve, but it depends on the long-run
marginal cost curve
D. we cannot say without more detailed information on the firm’s costs

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Table 13-2
Adrienne’s Premium Boxing Service subcontracts with a chocolate manufacturer to box premium
chocolates for their mail order catalogue business. Adrienne rents a small room for $150 a week in the
downtown business district that serves as her factory. She can hire workers for $275 a week. Costs are in
dollars per week.

____ 49. Refer to Table 13-2. What is the marginal product of the fourth worker?
A. 40
B. 110
C. 260
D. 275

____ 50. Refer to Table 13-2. Adrienne has received an order for 3000 boxes of chocolates for next week. If she
expects that the trend in the marginal product of labour will continue in the same direction, it is most
likely that her best decision will be to:
A. hire about 12 new workers and hope she can satisfy the order
B. commit to meeting the order and then take three weeks to complete the job
C. not commit to meeting the order until she can move to a larger room and hire more
workers to box the chocolates
D. close her business until she is able to hire more productive workers

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Table 13-3
Consider the following firm which makes high-performance racing bicycles. All costs are given in dollars.
Output is shown on a monthly basis. The firm’s fixed costs include a rent of $800 and a lease cost of $400
per month.

____ 51. Refer to Table 13-3. What is the marginal cost of producing the tenth bicycle in a given month?
A. $300
B. $304
C. $321
D. $340

____ 52. Refer to Table 13-3. What is the average variable cost for the month if six bicycles are produced?
A. $200
B. $265
C. $465
D. $1590

____ 53. According to the information provided, what is the total opportunity cost that Amy incurred to spend her
time developing photographs?
A. $1250
B. $2500
C. $3500
D. $3750

____ 54. According to the information provided, Amy’s accountant would most likely figure the total cost of her
photograph developing to be:
A. $1250
B. $2500
C. $3500
D. $3750

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Graph 14-2

This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the
following question(s).

____ 55. Refer to Graph 14-2. When price falls from P 3 to P1, the firm finds that:
A. fixed cost is higher at a production level of Q 1 than it is at Q3
B. it is unwilling to produce any output
C. it should produce Q1 units of output
D. all of the above are true

____ 56. Refer to Graph 14-2. When price rises from P 3 to P4, the firm finds that:
A. average revenue exceeds marginal revenue at a production level of Q 4
B. fixed costs are lower at a production level of Q 4
C. it can earn profits by increasing production to Q 4
D. profits are maximised at a production level of Q3

____ 57. Refer to Graph 14-2. Which of the following statements best reflects the situation faced by the firm when
price falls from P4 to P2?
A. marginal revenue is lower than marginal cost at the previous level of output, so it
decreases production
B. marginal revenue is higher than marginal cost at the previous level of output, so it
increases production
C. average total cost is lower than at the previous level of output so it increases production
D. the firm will earn profit equal to (P4 – P2)  Q2

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Graph 14-3

This graph depicts the cost structure of a profit-maximising firm in a competitive market. Use the graph to
answer the following question(s).

____ 58. Refer to Graph 14-3. Which line segment best reflects the short-run supply curve for this firm?
A. ABC
B. BCD
C. CDE
D. DE

____ 59. Refer to table 14-3. Suppose the long-run market competitive equilibrium quantity is 1500 Whizzly Jigs.
How many firms are operating in the marketplace?
A. 300
B. 500
C. 750
D. 1500

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Graph 14-4

This graph depicts the cost structure of a profit-maximising firm in a competitive market. Use the graph to
answer the following question(s).

____ 60. Refer to Graph 14-4. Which line segment best reflects the long-run supply curve for this firm?
A. AB
B. CD
C. DE
D. none of the above; the long-run supply curve requires knowledge of the average variable
cost structure

Graph 14-6

This graph depicts the cost structure of a firm in a competitive market. Use the graph to answer the
following question(s).

____ 61. Refer to Graph 14-6. When market price is P 1, a profit-maximising firm’s total profit or loss can be
represented by which area?
A. (P3 – P1)  Q2; loss
B. P1  Q3; profit
C. (P2 – P1)  Q1; loss
D. we can’t determine it because we don’t know the fixed costs

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____ 62. Sarah places a $110 value on seeing the Richmond Tigers play in the Grand Final. She purchases a ticket
to the game for $60 but when she arrives at the game she discovers that her ticket is missing. A ticket
scalper outside the stadium is selling tickets for $76 dollars. If Sarah purchases a ticket from one of the
scalpers for $95, she is best demonstrating the principle that:
A. the assumption of rational behaviour does not easily apply to the purchase of football
game tickets
B. the price of tickets cannot be explained by economic principles
C. sunk costs are irrelevant to many personal decisions
D. rational consumers do not always respond to incentives.

____ 63. Suppose a competitive market consists of identical firms. The long-run and short-run supply curves will
be identical when:
A. price equals the minimum of ‘average total cost’ in the short-run
B. the firms’ marginal cost curves are constant (horizontal)
C. there is free entry and exit in the marketplace
D. they will never be identical, the short- and long-run supply curves always differ

Graph 14-7

In this graph, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b)
depicts the linear market supply curve for a market with a fixed number of identical firms. Use the graph
to answer the following question(s).

____ 64. Refer to Graph 14-7. When 200 identical firms participate in this market, at what price will 25 000 units
be supplied to this market?
A. $1.00
B. $1.25
C. $2.00
D. this cannot be determined from the information provided

____ 65. At the current level of output, a profit-maximising firm in a competitive market earns average revenue of
$30 and has an average total cost of $26. Suppose that the firm’s marginal cost curve is equal to its
average total cost curve at an output level of 30 units. How much profit is earned by the firm at its current
level of output?
A. more than $120
B. exactly $120
C. less than $120
D. none of the above is necessarily correct

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____ 66. A profit-maximising firm in a competitive market is able to sell its product for $6. At its current level of
output, the firm’s average total cost is $8. Its marginal cost curve crosses the marginal revenue curve at an
output level of 20 units. What is the total loss of this firm?
A. more than $40
B. exactly $40
C. less than $40
D. none of the above is necessarily correct

Graph 14-9

____ 67. Refer to Graph 14-9. Assume that the market starts in equilibrium at point A in panel (b). An increase in
demand from Demand0 to Demand1 will result in:
A. a new market equilibrium at point D
B. rising prices and falling profits for existing firms in the market
C. falling prices and falling profits for existing firms in the market
D. an eventual increase in the number of firms in the market and a new long-run equilibrium
at point C

____ 68. Refer to Graph 14-9. If the market starts in equilibrium at point C in panel (b), a decrease in demand will
ultimately lead to:
A. more firms in the industry, but lower levels of production for each firm
B. a new long-run equilibrium at point D in panel (b)
C. fewer firms in the market
D. none of the above

____ 69. According to the information provided, if Black Box Pay TV is able to price discriminate, what will be
the maximum amount of profit it can generate?
A. $1 525 000
B. $1 275 000
C. $1 350 000
D. $1 600 000

____ 70. According to the information provided, what is the deadweight loss associated with the
non-discriminating pricing policy compared to the price-discriminating policy?
A. not enough information is given to answer this question
B. $150 000
C. $525 000
D. $400 000

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____ 71. If the distribution of water is a natural monopoly, which of the following is true?
(i) allowing for competition among different firms in the water distribution industry is efficient
(ii) a single firm can serve the market at a lower average total cost
(iii) multiple firms will each have to pay large fixed costs to develop their own network of pipes
A. (i) and (ii)
B. (ii) and (iii)
C. (i) and (iii)
D. (i) only

Table 15-1

Quantity Price Total Average Marginal


revenue revenue revenue
1 47 47
2 88 44 41
3 41
4 29
5 35 23
6 192
7 29 11
8 5
9 207 23 -1
10 20 200

____ 72. Refer to Table 15-1. If the monopolist wants to maximise its revenue, how many units of its product
should it sell?
A. one
B. six
C. eight
D. ten

____ 73. Along with the monopoly firms’ cost curves, the shape and position of the demand curve determine which
of the following?
(i) the price the monopoly will charge for its good
(ii) the shape and position of the marginal-revenue curve
(iii) the profit-maximising quantity
A. (i) and (ii)
B. (ii) and (iii)
C. (i) and (iii)
D. (i), (ii) and (iii)

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Graph 15-3

This graph reflects the cost and revenue structure for a monopoly firm. Use the graph to answer the
following question(s).

____ 74. Refer to Graph 15-3. A profit-maximising monopoly would have a total cost equal to:
A. P0  Q1
B. P0  Q2
C. P0  Q3
D. (P1 – P0)  Q2

____ 75. Refer to Graph 15-3. A profit-maximising monopoly would have profit equal to:
A. (P3 – P0)  Q2
B. (P3 – P0)  Q4
C. P3  Q2
D. P2  Q4

____ 76. Refer to Graph 15-3. At the profit-maximising level of output, average revenue is equal to:
A. P3
B. P2
C. P1
D. P0

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Graph 15-5

This graph depicts the demand, marginal-revenue and marginal-cost curves of a profit-maximising
monopolist. Use the graph to answer the following question(s).

____ 77. Refer to Graph 15-5. Which of the following areas represents the deadweight loss due to monopoly
pricing?
A. rectangle ACDB
B. rectangle CFGD
C. triangle BDE
D. triangle BGE

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Graph 15-6

This graph depicts the demand, marginal-revenue and marginal-cost curves of a profit-maximising
monopolist. Use the graph to answer the following question(s).

____ 78. Refer to Graph 15-6. If the monopoly firm perfectly price discriminates, what will the consumer surplus
be?
A. ABC
B. ADF
C. CEF
D. consumer surplus will equal zero

____ 79. Refer to Graph 15-6. What is the deadweight loss equal to when the monopolist does NOT price
discriminate?
A. ABC
B. ADF
C. CEF
D. deadweight loss will equal zero

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Graph 17-1

____ 80. Refer to Graph 17-1. If a firm in a monopolistically competitive market was producing the level of output
depicted as Qd in panel d, it would:
A. be minimising its losses
B. be losing market share to other firms in the market
C. be operating at excess capacity
D. not be maximising its profit

Graph 17-4

____ 81. Refer to Graph 17-4. Which of the panels shown could not characterise a short-run equilibrium for a firm
in a monopolistically competitive market?
A. panel a
B. panel b
C. panel c
D. panel d

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____ 82. For which of the following reasons is the existence of business-stealing externalities and product-variety
externalities unique to profit-maximising firms in a monopolistically competitive market?
(i) there are few firms in the market, but each firm produces several different varieties of the product
(ii) there are many firms in the market, each with a different variety of the product
(iii) profit-maximising price exceeds marginal cost
A. (i) and (iii) only
B. (ii) and (iii) only
C. (i) only
D. (ii) only

____ 83. In differentiated product markets that are characterised by advertising, evidence suggests that which of the
following statements are true?
(i) markets are less efficient
(ii) consumers make better choices
(iii) in general, firms are less profitable
A. (ii) only
B. (i) and (iii) only
C. (ii) and (iii) only
D. (i), (ii) and (iii)

____ 84. According to the information provided, as a result of this new advertising strategy, economists would be
likely to predict that the Computer Hardware Manufacturers Association will:
A. vow to fight any restrictions on the right to advertise
B. seek to dismantle the ‘gentleman’s agreement’ through aggressive price competition
C. do nothing
D. encourage the Premier to ban billboard advertising of computer hardware

____ 85. According to the information provided, advertising of computer hardware on billboards will most likely:
A. increase the profitability of existing firms and increase barriers to entry
B. increase the incidence of computer-related addictions in middle-aged professionals
C. reduce market efficiency
D. reduce the collective profitability of firms that manufacture computer hardware

____ 86. Refer to the information provided. Under what circumstances will both firms choose to advertise?
A. if advertising lead to 2.5 million customers trying product A once
B. if marginal costs lowered to $0.50
C. if there was more competition in the industry
D. if advertising costs lowered to $15 million

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Table 16-1

The table below shows the total demand for viewing a rare penguin species at a local reserve. Ecotour
companies have to build discreet viewing hides for tourists to view the penguins. Each ecotour company
has to pay a fixed fee of $5000 for the right to build on the reserve. Assume that hides can be supplied to
tourists at zero marginal cost. Tickets are sold to tourists to use the viewing hides.

Quantity (Visits) Price ($ ticket)


0 48
2000 36
4000 24
6000 12
8000 8
10 000 4
12 000 0

Quantity (Visits) Price ($ ticket) Revenue


0 12 0
1000 10 10k
2000 8 16k
3000 6 18k
4000 4 16k
5000 2 10k
6000 0 0

Any firm can change tickets by steps of 500 only. Any 500 step of quantity is assumed to be sold at the
midpoint of the two prices (eg. 3500 tickets would be sold for $5)

____ 87. Refer to Table 16-1. If there is only one ecotourist company in this market, what ticket price would it
charge for its hides to maximise its profit?
A. $2
B. $4
C. $6
D. $8

____ 88. Refer to Table 16-1. Assume that there are two ecotourist companies operating in this market. If they are
able to collude on the price of tickets to sell, what price will they charge, and how many tickets will they
collectively sell?
A. $2 and 5000 tickets
B. $4 and 4000 tickets
C. $6 and 3000 tickets
D. $8 and 2000 tickets

____ 89. Refer to Table 16-1. Assume that there are two profit-maximising ecotourist companies operating in this
market. Further assume that they are not able to collude on price and quantity of the tickets they sell. How
many tickets will be sold by each firm when this market reaches a Nash equilibrium?
A. 1000
B. 2000
C. 3000
D. 4000

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____ 90. Refer to Table 16-1. Assume that there are two profit-maximising ecotourist companies operating in this
market. Further assume that they are not able to collude on the price and quantity of tickets they sell. How
much profit will each firm earn when this market reaches a Nash equilibrium?
A. $0
B. $8000
C. $3000
D. each firm will incur economic losses in a Nash equilibrium

____ 91. Refer to Table 16-1. Assume that there are two profit-maximising ecotourist companies operating in this
market. Further assume that they are not able to collude on the price and quantity of tickets they sell.
What price will the tickets be sold at when this market reaches a Nash equilibrium?
A. $0
B. $4
C. $6
D. from the information given in the table, we can’t determine price in a Nash equilibrium

Table 16-3

Imagine a small town in which only two residents, Robert and John, own wells that produce water for safe
drinking. Each Saturday, Robert and John work together to decide how many litres of water to pump,
bring the water to town, and sell it at whatever price the market will bear. To keep things simple, suppose
that Robert and John can pump as much water as they want without cost; therefore, the marginal cost of
water equals zero.

The weekly town demand schedule and total revenue schedule for water are shown in the table.

Weekly quantity (in litres) Price ($) per litre Weekly total revenue (and
total profit) ($)
0 12 $0
5 11 55
10 10 100
15 9 135
20 8 160
25 7 175
30 6 180
35 5 175
40 4 160
45 3 135
50 2 100
55 1 55
60 0 0

____ 92. Refer to Table 16-3. If the market for water was perfectly competitive instead of monopolistic, how many
litres of water would be produced and sold?
A. 30
B. 35
C. 50
D. 60

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____ 93. Refer to Table 16-3. As long as Robert and John operate as a profit-maximising monopoly, what will their
weekly revenue be?
A. $100
B. $135
C. $175
D. $180

____ 94. Refer to Table 16-3. The socially efficient level of water supplied to the market would be:
A. 15 litres
B. 30 litres
C. 45 litres
D. 60 litres

Table 16-6

Two pita-bread stores (Pita Pan and Pita Wrapbit) have both recently opened up in a new suburb and are interested
in expanding their market share. Both are considering advertising in the surrounding area to entice more customers
to come to their stores. The following table depicts the strategic outcome that results from the game. The profits of
the two pita-bread stores under two advertising scenarios are shown.

Pita Wrapbit

Advertise Do Not Advertise

Advertise Pita Pan = $750 Pita Pan = $2950

Pita Wrapbit = $400 Pita Wrapbit = $350


Pita Pan
Do Not Advertise Pita Pan = $250 Pita Pan = $1450

Pita Wrapbit = $2600 Pita Wrapbit = $950

____ 95. Refer to Table 16-6. Non-cooperative outcomes typically imply an outcome:
A. that is worse for both parties to the ‘game’
B. that is better for both parties to the ‘game’
C. in which society is always worse off
D. in which society is always better off

____ 96. The Nash equilibrium for a game can be a sub-optimal outcome for players when:
A. defection is likely to be individually rational
B. self-interest is likely to be individually irrational
C. defection is likely to be collectively rational
D. self-interest is likely to be collectively irrational

____ 97. The theory of oligopoly provides another reason that free-trade can benefit all countries for which of the
following reasons?
(i) as the number of firms within a given market increases, the price of the good falls
(ii) increased competition leads to lower deadweight losses
(iii) profit increases directly with competition for oligopoly firms
A. (i) and (ii)
B. (ii) and (iii)
C. (i) and (iii)
D. (ii) only

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____ 98. According to the information provided, if Irun fails to live up to the production agreement and
overproduces, Urun will be:
A. better off producing more than the agreed-upon quantity
B. better off producing less than the agreed-upon quantity
C. worse off producing more than the agreed-upon quantity
D. better off producing the agreed-upon quantity

____ 99. According to the information provided, if Irun fails to live up to the production agreement and
overproduces, which of the following statements will be true of Urun’s condition?
A. Urun’s profit will be maximised by holding its production constant
B. Urun will be hurt more if it follows suit and increases production
C. Urun will invariably be worse off than before the agreement was broken
D. Urun will counter by decreasing its production in order to maintain price stability

____ 100. According to the information provided, what is PM Inc.’s dominant strategy?
A. to advertise
B. to advertise only if Brown Inc. advertises
C. to advertise only if Brown Inc. does not advertise
D. to not advertise

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