Final Exam: Introductory Microeconomics, ECON1010

Student name:
Student ID:
Time: 100 minutes
(Students are allowed to bring a calculator and dictionary into the exam room)

A. Multiple Choice (30 marks)

1. Consider Mandy’s decision to go to college. If she goes to college, she will spend $20,000 on tuition,
$10,000 on room and board, and $2,000 on books. If she does not go to college, she will earn $18,000
working in a store and spend $8,000 on room and board. Mandy’s cost of going to college is
a. $32,000.
b. $42,000.
c. $50,000.
d. $58,000.

2. Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a
reduction in input prices. What would we expect to occur in this market?
a. Equilibrium price would decrease, but the impact on equilibrium quantity would be
ambiguous.
b. Equilibrium price would increase, but the impact on equilibrium quantity would be
ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price would be
ambiguous.
d. Equilibrium quantity would increase, but the impact on equilibrium price would be
ambiguous.

3. If consumers often purchase muffins to eat while they drink their lattés at local coffee shops, what
would happen to the equilibrium price and quantity of lattés if the price of muffins rises?
a. Both the equilibrium price and quantity would increase.
b. Both the equilibrium price and quantity would decrease.
c. The equilibrium price would increase, and the equilibrium quantity would decrease.
d. The equilibrium price would decrease, and the equilibrium quantity would increase.

4. What would happen to the equilibrium price and quantity of lattés if coffee shops began using a
machine that reduced the amount of labor necessary to produce steamed milk, which is used to make
lattés, and scientists discovered that coffee prevents heart attacks?
a. Both the equilibrium price and quantity would increase.
b. Both the equilibrium price and quantity would decrease.
c. The equilibrium price would increase, and the effect on equilibrium quantity would be
ambiguous.

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Introductory Microeconomics-Final exam

d. The equilibrium quantity would increase, and the effect on equilibrium price would be
ambiguous.

5. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline
demanded would fall substantially over a ten-year period because
a. buyers tend to be much less sensitive to a change in price when given more time to react.
b. buyers tend to be much more sensitive to a change in price when given more time to react.
c. buyers will have substantially more real income over a ten-year period.
d. the quantity supplied of gasoline increases very little in response to an increase in the price
of gasoline.

6. When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7,
the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of
demand is about
a. 0.22.
b. 0.67.
c. 1.33.
d. 1.50.

7. Suppose that 300 bottles of soda are demanded at a particular price. If the price of a bottle of soda
rises from that price by 6 percent, the number of bottles of soda demanded falls to 275. Using the
midpoint approach to calculate the price elasticity of demand, it follows that the
a. demand for bottles of soda in this price range is perfectly elastic.
b. price increase will increase the total revenue of soda sellers.
c. price elasticity of demand for bottles of soda in this price range is about 0.69.
d. price elasticity of demand for bottles of soda in this price range is about 1.45.

8. In which of the following situations would supply be the most elastic?

a. An auto parts manufacturer is operating at capacity.
b. A real estate developer in Boston is looking to build condos on the waterfront.
c. A furniture manufacturer is operating its factory 8 hours per day.
d. A hotel has all of its rooms booked for each night of the next 3 months.

9. If the government removes a binding price ceiling from a market, then the price paid by buyers will
a. increase, and the quantity sold in the market will increase.
b. increase, and the quantity sold in the market will decrease.
c. decrease, and the quantity sold in the market will increase.
d. decrease, and the quantity sold in the market will decrease.

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10. If a binding price floor is imposed on the video game market, then
a. the quantity of video games demanded will decrease.
b. the quantity of video games supplied will increase.
c. a surplus of video games will develop.
d. All of the above are correct.

11. Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are
required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket,
then the
a. demand curve will shift upward by $20, and the price paid by buyers will decrease by less
than $20.
b. demand curve will shift upward by $20, and the price paid by buyers will decrease by $20.
c. supply curve will shift downward by $20, and the effective price received by sellers will
increase by less than $20.
d. supply curve will shift downward by $20, and the effective price received by sellers will
increase by $20.

12. Sellers of a good bear the larger share of the tax burden when a tax is placed on a product for which
the
(i) supply is more elastic than the demand.
(ii) demand in more elastic than the supply.
(iii) tax is placed on the sellers of the product.
(iv) tax is placed on the buyers of the product.
a. (i) only
b. (ii) only
c. (i) and (iv) only
d. (ii) and (iii) only

13. Suppose that coal producers create a negative externality equal to $5 per ton of coal. What is the
relationship between the equilibrium quantity of coal and the socially optimal quantity of coal?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.

14. Suppose that a small county is considering adding a guard rail to a dangerous curve by a river. The
guard rail will cost $70,000. The average damage done to vehicles that slide off the road at the curve is
$10,000. It is expected that the guard rail will prevent 5 vehicles from sliding off the road during its
usable life. What should the county do?
a. Install the guard rail because safety is priceless.

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Introductory Microeconomics-Final exam

b. Install the guard rail because the benefits exceed the costs.
c. Do not install the guard rail because the costs exceed the benefits.
d. Do not install the guard rail at any cost because drivers can purchase private insurance for
their vehicles.

15. Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When
deciding to open her own business, she withdrew $20,000 from her savings, which earned 5 percent
interest. She also turned down three separate job offers with annual salaries of $30,000, $40,000, and
$45,000. What is Jacqui's economic profit from running her own business?
a. $-56,000
b. $-6,000
c. $4,000
d. $19,000

16. Katherine gives piano lessons for $15 per hour. She also grows flowers, which she arranges and
sells at the local farmer’s market. One day she spends 5 hours planting $50 worth of seeds in her
garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer’s market.
Katherine’s accounting profits are
a. $100, and her economic profits are $25.
b. $100, and her economic profits are $75.
c. $25, and her economic profits are $100.
d. $75, and her economic profits are $125.

17. Suppose that for a particular firm the only variable input into the production process is labor and
that output equals zero when no workers are hired. In addition, suppose that the average total cost when
5 units of output are produced is $30, and the marginal cost of the sixth unit of output is $60. What is
the average total cost when six units are produced?
a. $10
b. $25
c. $30
d. $35

18. The Wacky Widget company has total fixed costs of $100,000 per year. The firm’s average
variable cost is $10 for 10,000 widgets. At that level of output, the firm’s average total costs equal
a. $10
b. $15
c. $20
d. $25

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19. A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm
produces has a marginal cost of $22. Production of the 50th unit of output does not necessarily
a. increase the firm's total revenue by $20.
b. increase the firm's total cost by $22.
c. decrease the firm's profit by $2.
d. increase the firm’s average variable cost by $0.44.

20. Mrs. Smith operates a business in a competitive market. The current market price is $7.50. At her
profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is
$8.25. Mrs. Smith should
a. shut down her business in the short run but continue to operate in the long run.
b. continue to operate in the short run but shut down in the long run.
c. continue to operate in both the short run and long run.
d. shut down in both the short run and long run.

21. A monopoly firm can sell 150 units of output for $10 per unit. Alternatively, it can sell 151 units of
output for $9.90 per unit. The marginal revenue of the 151st unit of output is
a. -$5.10.
b. -$0.10.
c. $2.45.
d. $5.10.

22. A profit-maximizing monopolist charges a price of $12. The intersection of the marginal revenue
and marginal cost curves occurs where output is 10 units and marginal cost is $6. Average total cost for
10 units of output is $5. What is the monopolist’s profit?
a. $60
b. $70
c. $100
d. $120

23. If the government regulates the price that a natural monopolist can charge to be equal to the firm’s
marginal cost, the firm will
a. earn zero profits.
b. earn positive profits, causing other firms to enter the industry.
c. earn negative profits, causing the firm to exit the industry.
d. minimize costs in order to lower the price that it charges.

24. In a monopolistically competitive market,

a. entry by new firms is impeded by barriers to entry; thus, the number of firms in the market is
never ideal.

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Introductory Microeconomics-Final exam

b. entry by new firms is impeded by barriers to entry, but the number of firms in the market is
nevertheless always ideal.
c. free entry ensures that the number of firms in the market is ideal.
d. there may be too few or too many firms in the market, despite free entry.

25. A firm has the following cost structure:

Output 2 4 6 8 10 12 14
Total Cost ($) 60 64 72 84 100 126 154

If this firm is in a typical perfectly competitive market, in the long run it will likely produce
a. 8 or fewer units of output.
b. 10 units of output.
c. more than 10 units of output.
d. None of the above are necessarily correct because there is not enough information to tell.

26. Suppose executives at an art museum know that 100 adults are willing to pay $12 for admission to
the museum on a weekday. Suppose the executives also know that 200 students are willing to pay $8 for
admission on a weekday. The cost of operating the museum on a weekday is $2,000. How much profit
will the museum earn if it engages in price discrimination?
a. $800
b. $1,200
c. $1,600
d. $2,800

27. Which of the following statements is correct?

a. If duopolists successfully collude, then their combined output will be equal to the output that
would be observed if the market were a monopoly.
b. Although the logic of self-interest decreases a duopoly’s price below the monopoly price, it
does not push the duopolists to reach the competitive price.
c. Although the logic of self-interest increases a duopoly’s level of output above the monopoly
level, it does not push the duopolists to reach the competitive level.
d. All of the above are correct.

Table 1
The information in the table below shows the total demand for premium-channel digital cable TV
subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of
$200,000 (per year) to provide premium digital channels in the market area and that the marginal cost
of providing the premium channel service to a household is zero.

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 Quantity Price (per year)
0 $180
1500 $165
3,000 $150
4,500 $135
6,000 $120
7500 $105
9,000 $90
10,500 $75
12,000 $60
13,500 $45
15,000 $30
16,500 $15
18,000 $0

28. Refer to Table 1. If there is only one digital cable TV company in this market, what price would it
charge for a premium digital channel subscription to maximize its profit?
a. $30
b. $60
c. $90
d. $150

29. Refer to Table 1. Assume there are two profit-maximizing digital cable TV companies operating in
this market. Further assume that they are not able to collude on the price and quantity of premium
digital channel subscriptions to sell. How many premium digital channel cable TV subscriptions will be
sold altogether when this market reaches a Nash equilibrium?
a. 6,000
b. 9,000
c. 12,000
d. 15,000

30. Because each oligopolist cares about its own profit rather than the collective profit of all the
oligopolists together,
a. they are unable to maintain the same degree of monopoly power enjoyed by a monopolist.
b. each firm's profit always ends up being zero.
c. society is worse off as a result.
d. Both a and c are correct.

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Introductory Microeconomics-Final exam

B. Problem soving (10 marks)

1. Thien Long Company sells Basic pens, which can be produced at constant marginal cost of $500 per
thousand. Management thinks that annual demand for Basic pens can be approximated by: PB = 2,500 -
10QB
where PB = price of 1,000 Basic pens in dollars, and QB denotes Basic pens (in thousands).
a. Determine the optimal quantity and price of Basic pens for Thien Long (2 marks)
b. Thien Long Company is considering bringing out a new line of Nice pens. These are identical to
Basic pens, except for the color of the plastic barrel and the packaging, and can be produced at the
same cost as Basic pens. If the new pen is introduced, the marketing department thinks that the relevant
demand curves will be: PB = 2,000 - 10QB and PN = 1,500 - 10QN
where PN = price of 1,000 Nice pens in dollars, and QN = units of Nice pens in thousands. Thien Long
Company is free to charge different prices for the pens. What are the optimal prices and quantities for
the two pens? (4 marks)
2. Describe how government is involved in creating a monopoly. Why might the government create one?
Give an example (4 marks)