Question Bank - Steven Stong

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Principles of Microeconomics Question Bank

Stong, Steven T
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Stong, S. T. (2021). Principles of Microeconomics Question Bank. University of Iowa.

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Principles of Microeconomics Question Bank
The following question bank is written by Steven Stong. These questions have been
using in a Principles of Microeconomics class that uses the OpenStax textbook
Principles of Microeconomics 2e by Steven A. Greenlaw and David Shapiro.
The question bank is licensed by Steven Stong under Creative Commons Attribution
License v4.0 CC-BY v4.0
Profit
1)
Quantity ATC
0 $7,000
1,000 $5,000
2,000 $4,000
3,000 $5,000
4,000 $8,000
Using the cost data in the table, what is the lowest price at which this profit maximizing
firm would not wish to exit the market?
Correct Answer
$4,000
$2,000
$3,000
$5,000
2)
Quantity ATC
0 $7
2 $5
4 $4
6 $5
8 $8
Correct Answer
$4
$2
$3
$5
3)
Quantity ATC
0 $21
50 $15
100 $12
150 $15
200 $24
Correct Answer
$12
$6
$9
$15
4)
Quantity of Output Total Cost
0 40
1 50
2 70
3 100
4 140
The cost data is for a firm in a perfectly competitive market. If the price of output is $15,
what is the level of output that will maximize the firm's profit in the short-run?
Correct Answer
4
5)
0 40
1 50
2 70
3 100
4 140
Correct Answer
4
6)
0 40
1 50
2 70
3 100
4 140
Correct Answer
7)
When would a firm wish to enter a market?
It believes it can make a positive accounting profit.
Correct Answer
It believes it can make a positive economic profit.
It believes it can make a negative accounting profit.

It believes it can make a negative economic profit.
8)
In a perfectly competitive market, CoronaCompany produces masks. At their current
level of production, their average variable cost is $5 and their average total cost is
$7. The market price for a mask is $4. What can we expect about the long run state of
this market if we assume other firms face similar costs?
Correct Answer
Firms will be exiting the market
Firms will be entering the market
The market is in long run equilibrium
No answer text provided.
9)
$6. The market price for a mask is $8. What can we expect about the long run state of
this market, if we assume other firms face similar costs?
Correct Answer

10)
$7. The market price for a mask is $10. What can we expect about the long run state
of this market, if we assume other firms face similar costs?
Correct Answer
11)
What can we infer about a market in which whenever demand permanently increases
price is higher in the long-run?
It is a decreasing cost industry
Correct Answer
It is an increasing cost industry
There are diseconomies of scale
Nothing, all markets behave this way.

12)
An increase in demand a results in a short term in increase in the price, and in the long-
run, the price is higher than before the increase in demand. What type of industry is
this?
Correct Answer
Increasing Cost
Decreasing Cost
Constant Cost
There is not enough information to know
13)
An increase in demand a results in a short term in increase in the price, and in the long-
run, the price is the same as before the increase in demand. What type of industry is
this?
Increasing Cost
Decreasing Cost
Correct Answer
Constant Cost

14)
An decrease in demand a results in a short term in decrease in the price, and in the
long-run, the price is lower than before the increase in demand. What type of industry is
this?
Correct Answer
Increasing Cost
Decreasing Cost
Constant Cost
15)
Is the market depicted in the above graph in a long run equilibrium?

Yes, because firms would like to enter the industry
Yes, because firms would like to exit the industry.
No, because firms would like to exit the industry.
Correct Answer
No, because more firms would like to enter the industry.
16)
Profit maximizing firms have an average total cost of $45. The price is currently $50.
What do you predict will happen in the long-run if there if free entry and exit?
Correct Answer
Firms will enter, and the price will decrease.
Firms will exit, and the price will decrease.
Firms will enter, and the price will increase.
Firms will exit, and the price will increase.
17)
Correct Answer

18)
Correct Answer
19)
Choose all that apply. What are choices that a firm can make in the short run?
Correct Answer
The amount of output to produce.
Correct Answer
The amount of variable inputs to use.
The amount of fixed inputs to use.
Whether to exit.
20)
The firm receives an order from a customer who would pay $45,000. The finance
department says that this order would increase the firm's costs by $35,000. What would
be in the best interest of a firm that is primarily concerned with financial gain?
Correct Answer
Accept the order
Reject the order

We cannot say unless we know the total costs and benefits for all previous orders.
21)
A firms in a competitive market finds that its marginal cost is increasing, but marginal
cost is still below the market price. What should the firm do to maximize profit?
Correct Answer
Increase output
Decrease output
Neither increase nor decrease profit
22)
AFC AVC ATC

Output MC($)
($) ($) ($)
0
1 10.00 50.00 60.00 20.00
2 5.00 30.00 35.00 10.00
3 3.33 26.67 30.00 20.00
4 2.50 27.50 30.00 30.00
5 2.00 30.00 32.00 40.00
A price taking firm has the above cost data. The price of output is $27. What level of
output should the firm choose to maximize profit in the short run?
Correct Answers
3.0
23)
AFC AVC ATC

Output MC($)
($) ($) ($)
0
1 10.00 50.00 60.00 20.00
2 5.00 30.00 35.00 10.00
3 3.33 26.67 30.00 20.00
4 2.50 27.50 30.00 30.00
5 2.00 30.00 32.00 40.00
A price taking firm has the above cost data. The price of output is $25. What level of
output should the firm choose to maximize profit in the short run?
Correct Answers
0.0
24)
A student is considering whether to enroll in another semester of college classes or to
graduate now and take a job in the same city where she is going to school. What would
be most likely to be important to consider when using marginal analysis to make this
decision? Select all that apply.
Correct Answer
Any additional tuition
The cost of housing for a semester
The cost of food for a semester
Correct Answer
The salary that she could receive during that semester from taking the job offer
25)
A firm has increasing marginal costs. The price is much higher than the marginal cost at
the current level of output. Would the firm increase its profit by increasing output?
Correct Answer
Yes the additional revenue will be greater than the additional cost.
No the marginal cost will increase which is bad for profit.
26)
_____________ is calculated by taking the quantity of everything that is sold and
multiplying it by the sale price.
Correct Answer
Total revenue
Total profit
Average profit margin

Total cost
27)
Which of the following would be things that a perfectly competitive firm can change in
the short run?
Correct Answer
The amount of variable inputs used
The amount of fixed inputs used
Correct Answer
The amount of output to produce
The market price
28)
The marginal revenue for a firm in perfect competition is increasing in the level of
output.
True
Correct Answer
False
29)
George discovers that he can sell gyros at the same price in Cedar Rapids as Iowa City.
George should not open in Cedar Rapids because there will me more costs.
George should open in Cedar Rapids because he can earn more revenue.
Correct Answer
George should compare the additional cost of a new Cedar Rapids location to the
additional revenue he will receive.
30)
A firm who wishes to maximize profit should shut down if
there is no quantity at which the price exceeds the average total cost.
Correct Answer
there is no quantity at which the price exceeds the average variable cost.
there is no quantity at which the price exceeds the average fixed cost.
31)
There is an increasing cost industry. What will be the short-run and long-run effect of an
increase in demand on the market price in that industry?
The price will decrease in the long-run and short-run.
There will be a short-run increase and a long-run decrease in the price.
Price will be higher in the short-run and long-run, but the long-run increase will be larger
than the short-run increase.
Correct Answer
Price will be higher in the short-run and long-run, but the long-run increase will be
smaller than the short-run increase.
32)
In a long-run equilibrium with free entry,
P>ATC
P<ATC
Correct Answer
P=ATC
33)
Before the coronavirus pandemic, Sergio's Sweaters was making an economic profit of
$1,000 per week. The local government has not required the firm to close. However,
due to the pandemic the firm's weekly revenue has temporarily decreased by $900 and
variable costs have increased by $200 per week. If the goal of Sergio's Sweaters is to
maximize profit, you predict that the firm will
stay open.
shut down temporarily.
exit the market.
Correct Answer
there's not enough information to say.
34)
Before the coronavirus pandemic, Alice's Apples was making an economic profit of
$1500 per week. The local government has not required the firm to close. However, due
to the pandemic the firm's weekly revenue has temporarily decreased by $1000 and
variable costs have increased by $600 per week. If the goal of Alice's Apples is to
maximize profit, you predict that the firm will
stay open.
exit the market.
Correct Answer

35)
Before the coronavirus pandemic, Al's Antiques was making an economic profit of $600
per week. The local government has not required the firm to close. However, due to the
pandemic the firm's weekly revenue has temporarily decreased by $500 and variable
costs have increased by $150 per week. If the goal of Al's Antiques is to maximize
profit, you predict that the firm will
stay open.
exit the market.
Correct Answer

36)
What is the lowest price at which this firm would not shut down?
P1
Correct Answer
P2
P3
P4
Basic Economic Model

1) Which of the following is not something that would be found in a typical
microeconomic model of behavior.
Correct Answer
a description of different emotional states
interaction between individuals
a description of the individuals' objectives
the scarcity that limits choices
2)
Which of the following statements could be answered with positive analysis alone?
The minimum wage in Iowa should increase to $10/hr
Correct Answer
An increase in the number of housing units in a city will decrease rental prices in that
city.
The best trade policy is free trade.
It is wrong for hotels to increases rates after a natural disaster.
3)
Select of all of the options below that would be considered economic explanations of
the observation that new memberships and visits to fitness clubs is highest in the
months of January, February, and March.
Correct Answer
Poor weather makes many other fitness activities less enjoyable.
Correct Answer
Many fitness clubs offer discounts at the beginning of the year.
The tradition of making goals at the beginning of a new year.
4)
Which of the following would an economist see as a major weakness of an economic
theory?
The theory is not what people are actually thinking when they make decisions.
The theory makes predictions that do not agree with a particular political view.
The theory leaves out some aspects of reality.
Correct Answer
The theory predicts behavior that is different from what we observe people doing.
5)
Which of the following are situations where decisions are affected by scarcity?`
Attending college
Running for public office
Adopting environmentally friendly technologies
Correct Answer
All of these.
6)
Which of the following are typically found in microeconomic models?
Correct Answer
A description of individuals' objectives

Correct Answer
A description of the scarcity that limits individual decisions
Correct Answer
A model of interaction between individuals
A description of the thought process people use to come to a decision

A description of how mood changes decisions
7)
You own a trucking company that ships goods across the US. You may buy another
truck for your business either by using your own money from a personal savings
account or by taking out a loan which will be paid back later with interest. In both cases,
the truck will generate income so that if your use your own money you will be paid back
over time, and if you take out a loan you will be able to pay it back. What is true about
the cost of buying the truck?
If you use your own money, there will be no cost because you do not have to pay any
loan interest.
Correct Answer
If your use your own money, you will still have a cost because you will not earn the
interest you would have made from your savings account.
8)
Which best characterizes the way that economists model the behavior of governments?
Governments will implement efficient economic policies.
Correct Answer
Governments are made up of people who pursue their own of objectives benevolent or
otherwise.
Governments are not relevant to economics.
Governments are populated by all-knowing benevolent beings.
9)
If the theory of rational ignorance is accurate,
Correct Answer
it is surprising that so many people vote.
it is surprising that more people do not vote.

everyone would vote.
no one would vote.
10)
What is needed for a model based on rationality to be useful?
Correct Answer
Actual behavior should match the behavior predicted by the model.
The individuals being modeled must be capable of complex mathematical computations.
The model must represent what is actually happening in people's heads.
The model must not be very simple.
11)
Which of the following would be an example of a behavior that is not rational?
Correct Answer
A person wants to quit smoking but continues to smoke.
An Iowa student who enjoys watching the Hawks, misses the first game of the season
to go to work.
A business spends money to reduce its environmental impact.
A grandparent helps a grandchild to pay for tuition.
Consumer Choice
1)
A consumer is spending her entire budget. She finds that another hat would give her 10
more units of utility and another watch would give her 15 more units of utility. The price
of a hat is $20 and the price of a watch is $45. How could she increase the utility she
gets from spending her budget?
Correct Answer
Buy more hats.
Buy more watches.
She already has the highest utility she can get.
She should buy more hats and watches.
2)
Finish the sentence. If a consumer experiences diminishing marginal utility of cookies,
Correct Answer
the first cookie will increase utility by more than the second cookie.
the first cookie will increase utility by less than the second cookie.
the second cookie will decrease utility.
the first cookie will decrease utility.
3)
Marginal
Quantity Willingness to
Pay ($)
1 10
2 8
3 6
4 4
Table above shows a consumer's marginal marginal willingness to pay for each
additional quantity of a good. If the market price is $9, how many would this consumer
buy?
Correct Answer
1
4)
Marginal
Pay ($)
1 10
2 8
3 6
4 4
buy?
Correct Answer
5)
Marginal
Pay ($)
1 10
2 8
3 6
4 4
buy?
Correct Answer
6)
If the above graph shows the budget constraint for a consumer, what is the opportunity
cost of buying one more Cracker starting at 5 crackers?
the value of 2 cheese
the price of a cracker
Correct Answer
7)
If the above graph shows the budget constraint for a consumer, what is the opportunity
cost of buying one more Cracker starting at 5 crackers?
the price of a cracker
Correct Answer
8)
A consumer with a limited budget can buy two goods, either bus trips or bicycles. A
bicycle costs $200 dollars, and a bus trip costs $2. Which of the following best
describes the opportunity cost of buying a bicycle?
$200
No cost because she really wants a bicycle.
100 bus trips
Correct Answer
The value to the consumer of 100 bus trips
9)
The budget constraint starts out at B0. If income increases, what will be the new budget
line?
B1
Correct Answer
B2
B3
10)
Which of the following economic ideas could explain the idiom "variety is the spice of
life"?
Correct Answer
the law of diminishing marginal utility
scarcity
sunk costs
law of supply
11)
A consumer has a budget of $200 for entertainment. The two things the consumer likes
to do are bowl and eat out. The price of a bowling game is $5 and the price of a
restaurant meal is $10. What would be a bundle on the budget line?
25 games and 10 meals
Correct Answer
12)
A consumer has a budget of $200 for entertainment. The two things the consumer likes
to do are bowl and eat out. The price of a bowling game is $5 and the price of a
restaurant meal is $10. What would be a bundle on the budget line?
Correct Answer
13)
If Simon had 2 more dollars, he would spend them to buy a walking taco. Does it then
follow that Simon would buy 10 more walking tacos if he had 20 more dollars?
No, because most people have increasing marginal utility he will probably buy more
than 10.
Yes, because of increasing marginal utility.
Correct Answer
No, because most people have decreasing marginal utility he will probably buy less than
10.
Yes, because of decreasing marginal utility.
14)
The income effect of a price increase is
Correct Answer
that consumers cannot buy as much as before the price increase
the opportunity cost of buying one more of the good has increased
the opportunity cost of buying one more of the good has decreased
15)
Which of the following are affects that would lead to behavior that follows the law of
demand? (Pick all correct answers.)
Correct Answer
Substitution effect
Correct Answer
Income effect (normal good)
Income effect (inferior good)
Mandela effect
16)
The amount that a person is willing to give up of good B in order to get one more good
A is
the marginal utility
the marginal cost
Correct Answer
the marginal rate of substitution
the marginal product
17)
The budget constraint starts out at B0. If the price of Good X decreases, what will be the
new budget line?
B1
Correct Answer
B2
B3
18)
What change in prices is illustrated by the shift in the consumer budget line from B1 to
B2?
An increase in the price of housing.
An increase in the price of food.
Correct Answer
A decrease in the price of food.

A decrease in the price of housing.
19)
What change in prices is illustrated by the shift in the consumer budget line from B1
Costs and Production
1)
Over the month of February, a Chipotle Mexican Grill restaurant sold 5,000 burritos.
Their monthly lease payment was $3,300, while their labor and ingredient costs for the
month was $27,000. What was their average variable costs and average fixed costs
over the month?
Answer is in form (AVC, AFC)
$6.06, $0.66
$0.66, $5.40
Correct Answer
$5.40, $0.66
4.74, $0.66
2)
over the month?
$6.73, $0.73
Correct Answer
$6.00, $0.73
$5.27, $0.73
$0.73, $6.00
3)
over the month?
$0.55, $4.50
$5.05, $0.55
$3.95, $0.55
Correct Answer
$4.50, $0.55
4)
If a firm is experiencing diseconomies of scale, how could it decrease average costs in
the long run?
Correct Answer
By decreasing the scale of the firm
By increasing the scale of the firm
By increasing the price
By decreasing the price
5)
Which of the following is the best explanation for why the marginal cost for most firms
will increase after a point?
Inelastic supply
Price taking
Correct Answer
The law of diminishing marginal product
Specialization
6)
A restaurant chain is deciding how many workers to hire to staff a fixed number of
restaurants.
Correct Answer
This is a short-run decision.
This is a long-run decision.
This is neither a short-run nor long-run decision.
This is both a short-run and long-run decision.
7)
Tesla is deciding how large of a factory, warehouse, and how much of other inputs to
use in battery production.
Correct Answer

8)
A beach resort in New Jersey is deciding whether to stay open during the winter
months.
Correct Answer

9)
A firm employs workers to produce jeans. The production function is shown in the graph
above. For this firm, the marginal product is
Correct Answer
decreasing.
increasing.
constant.
10)
If Pancheros has 4 workers, the store can produce 40 burritos in an hours. If Pancheros
hires a fifth worker, the store can produce 48 burritos in an hour. What is the marginal
product of the fifth worker?
Correct Answers
8.0
11) Which of the following always decreases with the quantity produced?
Correct Answer
Average fixed costs
Marginal cost
Total cost
Average variable cost
12)
Which of the following costs always increases with the quantity of output produced?
Fixed Costs
Correct Answer
Variable Costs
Average Costs
13)
The law of diminishing marginal product explains why __________ is eventually
increasing.
marginal product
Correct Answer
marginal cost
marginal utility
total cost
14)
The short run lasts
1 day.
1 month.
1 year.
Correct Answer
as long as some inputs are fixed.
15)
In the short-run you may increase or decrease the fixed costs.
True
Correct Answer
False
16)
The long-run average total cost is less than the short run average total cost.
Correct Answer
True
False
17)
A firm that increases its output can have lower average costs in the long-run. This firm
is experiencing ___________.
Correct Answer
Economies of Scale
Diseconomies of Scale
Constant Returns to Scale
Diminishing Marginal Product
18)
A firm that increases its output will have higher average costs in the long-run. This firm
is experiencing ___________.
Economies of Scale
Correct Answer
19)
A firm that increases its output will have the same average cost in the long-run. This
firm is experiencing ___________.
Economies of Scale
Correct Answer
to B2?
Correct Answer
An increase in the price of housing.
An increase in the price of food.
A decrease in the price of food.
A decrease in the price of housing.
Elasticity
1)
You observe that the when the price decreases by 3%, the quantity supplied decreases by 2%.
What elasticity of supply is consistent with this?
Correct Answer
.66
1.5
2)
You observe that the when the price decreases by 2%, the quantity supplied decreases by 3%.
.66
Correct Answer
1.5
3
2
3)
You observe that the when the price decreases by 1% the quantity supplied decreases by 2%.
.66
1.5
Correct Answer
4)
One of these supply curves shows how price changes will affect the quantity supplied after 1
month and the other shows the change after a year. Which one shows changes over a year?
S1
Correct Answer
S2
Either one is as likely
5)
One of these supply curves shows how price changes will affect the quantity supplied after 1
month and the other shows the change after a year. Which one shows changes over a month?
Correct Answer
S1
S2
Either one is as likely
6)
If sugar cereal is an inferior good, what will happen to the price and quantity of sugar cereal as
consumers' income increases?
The price would increase, and the quantity would decrease.
The price would increase, and the quantity would increase.
Correct Answer
The price would decrease, and the quantity would decrease.
The price would decrease, and the quantity would increase.
7)
If sugar cereal is an inferior good, what will happen to the price and quantity of sugar cereal as
consumers' income decreases?
Correct Answer
8)
Which of the following best describes the inefficiency associated with negative externalities in
competitive markets?
Correct Answer
The externality could be reduced at a cost that is less than the benefit from having less
externality.
The golden rule
External costs may be distributed unevenly in society.

Any external cost is too much.
9)
The income elasticity of demand is -.5.
Correct Answer
The good is an inferior good
The good is a normal good.
The good is a substitute
The good is a complement
10)
The income elasticity of demand is -1.1.
Correct Answer

11)
The income elasticity of demand is -.1.
Correct Answer
12)
A pharmaceutical company sells a patented drug. Market research shows that elasticity of
demand for the drug is 2 at the current price. If the company wants to increase revenue should
the firm increase or decrease the price?
Not enough information
Increase the price
Correct Answer
Decrease the price
13)
demand for the drug is .8 at the current price. If the company wants to increase revenue should
Correct Answer
Increase the price

Decrease the price
14)
demand for the drug is 1.5 at the current price. If the company wants to increase revenue, should
Increase the price
Correct Answer
Decrease the price
15)
Recently policy makers have increased efforts to regulate e-cigarettes. For instance, states have
implemented taxes on e-cigarettes similar to taxes on tobacco. Economists (Saffer, Dench,
Grossman, Dave 2020) have found that the cross price elasticity of tobacco prevalence in
Minnesota was .13. The e-cigarette cross price elasticity of tobacco prevalence is calculated as
the percentage change in the number of traditional combustible cigarette users divided by the
percentage change in the price of e-cigarettes.
What would be the expected size of the effect on smoking prevalence if a state increased the
price of cigarettes by 10%?
.13 % more smokers
.13% fewer smokers
Correct Answer
1.3% more smokers
1.3% fewer smokers
16)
Recently policy makers have increased efforts to regulate e-cigarettes. For instance, states have
implemented taxes on e-cigarettes similar to taxes on tobacco. Economists (Saffer, Dench,
Grossman, Dave 2020) have found that the cross price elasticity of tobacco prevalence in
Minnesota was .13. The e-cigarette cross price elasticity of tobacco prevalence is calculated as
the percentage change in the number of traditional combustible cigarette users divided by the
percentage change in the price of e-cigarettes.
Suppose that policy makers are concerned about the health of consumers. Why would this
elasticity be an import part of the discussion about whether to increase taxes on e-cigarettes?
Explain your answer.
17)
The income elasticity of demand for a good is .6. What can we say of that good?
It is a substitute.
The demand is elastic.
It is an inferior good.
Correct Answer
It is a normal good.
18)
If a word processor and spreadsheet software are complements, what will be true of their cross
price elasticities?
Correct Answer
Cross price elasticity is negative
Cross price elasticity is positive
Cross price elasticity is elastic
Cross price elasticity is inelastic
19)
The price elasticity of demand measures the:
responsiveness of quantity demanded to a change in quantity supplied.
responsiveness of price to a change in quantity demanded.
Correct Answer
responsiveness of quantity demanded to a change in price.
responsiveness of quantity demanded to a change in income.
20)
Demand is said to be when the quantity demanded is not very responsive to price.
Independent
Correct Answer
Inelastic
Elastic
Unit elastic
21)
Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a
15 percent decrease in the number of haircuts. What is the elasticity of demand facing Billy
Bob's Barber Shop?
.15
Correct Answer
3.0
.10
.05
22)
The price elasticity of demand for tickets to local baseball games is estimated to be equal to .89.
In order to boost ticket revenues, an economist would advise:
Correct Answer
increasing the price of game tickets because demand is inelastic.
not changing the price of game tickets because demand is unit elastic.
increasing the price of game tickets because demand is elastic.
decreasing the price of game tickets because demand is elastic.
23)
The income elasticity of demand for a good is .6. What can we say of that good?
It is a substitute.
The demand is elastic.

It is an inferior good.
Correct Answer
It is a normal good.
24)
If a word processor and spreadsheet software are complements, what will be true of their cross
price elasticities?
Correct Answer
Cross price elasticity is negative
Cross price elasticity is positive
Cross price elasticity is elastic
Cross price elasticity is inelastic

25)
A government is forecasting the revenue that will be generated by a new tax on tanning. If the
government uses the number of tans in the year before the tax to forecast tax revenue, ___.
Correct Answer
The government will likely overestimate tax revenue.
The government will on average get the correct tax revenue.
The government will likely underestimate the tax revenue.
26)
The price elasticity of demand measures the:
responsiveness of quantity demanded to a change in quantity supplied.
responsiveness of price to a change in quantity demanded.
Correct Answer
responsiveness of quantity demanded to a change in price.
responsiveness of quantity demanded to a change in income.
27)
Demand is said to be when the quantity demanded is not very responsive to
Independent
Correct Answer
Inelastic
Elastic
Unit elastic
28)
15 percent decrease in the number of haircuts What is the elasticity of demand facing Billy Bob's
Barber Shop?
.15
Correct Answer
3.0
.10
.05
29)
The price elasticity of demand for tickets to local baseball games is estimated to be equal to .89.
In order to boost ticket revenues, an economist would advise:
Correct Answer
increasing the price of game tickets because demand is inelastic.

not changing the price of game tickets because demand is unit elastic.
increasing the price of game tickets because demand is elastic.
decreasing the price of game tickets because demand is elastic.
30)
A government wants to raise revenue by taxing tanning. They ask you whether they will make
more revenue by taxing the salon or by taxing customers. What would be the best advice?
Tax salons if they have high elasticity of supply.
Tax consumers if they have a high elasticity of demand.
Tax salons if they have a low elasticity of supply.
Correct Answer
Which group is taxed will not affect the revenue collected.
31)
15 percent decrease in the number of haircuts What is the elasticity of demand facing Billy Bob's
Barber Shop?
.15
Correct Answer
3.0
.10
.05
32)
Suppose that the price elasticity of demand for hotel stays is .9. The price elasticity of supply is
1.2. If the city created a tax on hotel stays, who would bear the greater burden of the tax?
The burden of this tax will depend on whether the tax is collected from consumers or producers.
The greater burden of this tax will fall on producers.
Correct Answer
The greater burden of this tax will fall on consumers.
The burden of the tax will be evenly divided between consumers and producers.
33)
Suppose that the price elasticity of demand for hotel stays is 1.2. The price elasticity of supply is
.9. If the city created a tax on hotel stays, who would bear the greater burden of the tax?
The burden of this tax will depend on whether the tax is collected from consumers or producers.
Correct Answer
34)
Suppose that the price elasticity of demand for hotel stays is .8. The price elasticity of
supply is 1.4. If the city created a tax on hotel stays, who would bear the greater burden
of the tax?
The burden of this tax will depend on whether the tax is collected from consumers or
producers.
Correct Answer

Games
1)
Two companies are producing cellphones. Each one can decide whether to use an open standard or a
closed standard.
The strategies and payoffs are given in the table. The first number of the payoff pair is the payoff of Firm 1, and
the second is for Firm 2.
Firm 2
Open Closed
Firm 1 Open (2, 5) (1, 1)
Strategies Closed (1, 6) (5, 7)
Select each pair of actions that would be a Nash Equilibrium of the above game.
2)
Sally and Frank are a couple. Sally likes dancing and Frank enjoys playing the badminton. They planned to
spend the Saturday night together either going dancing or playing the badminton, but before the event they lost
contact with each other, and had to decide on his/her own whether to go to the dancing hall or the gym. If they
end up meeting in the dancing hall, Sally gets 2 utility while Frank gets 1 utility. If they end up meeting in the
gym, Sally gets 1 utility while Frank gets 2 utility. If they miss each other, both of them get 0 utility.
The strategies and payoffs are given in the table. The first number of the payoff pair is the utility gain of Sally,
and the second is of Frank.
Frank's Strategies
Dance Badminton
Sally's Dance (2, 1) (0, 0)

Strategies
Badminton (0, 0) (1, 2)
3)
Two companies are producing cellphones. Each one can decide whether to use an open standard or a
closed standard.
The strategies and payoffs are given in the table. The first number of the payoff pair is the payoff of Firm 1, and
the second is for Firm 2.
Firm 2
Open Closed
Firm 1 Open (1, 1) (2, 5)
Strategies Closed (5, 7) (1, 6)
4)
Sally and Frank live together. Both of them hate cleaning but enjoying cleanness. It’s been a month since they
last cleaned the house and now the house is a mess. Both of them have plans to clean it, but also want to free
ride. However, if the other person free rides, the one who cleaned the room would feel even worse than staying
in a dirty space.
Frank's Strategies
Clean Free Ride
Sally's Clean (6, 6) (-1, 5)

Strategies
Free Ride (5, -1) (1, 1)
5)
Sally and Frank drive their own car and meet in a junction without any traffic signs. They can either stop or go.
They don’t want a crash to happen but also don’t want to be a chick. If both of them go, there is a crash. If one
goes and the other stops, the latter feels bad like a chick. If both stop, they waste time.
Frank's Strategies
Go Stop
Sally's Go (-10, -10) (20, 0)
Strategies Stop (0, 20) (1, 1)
6)
Verizon
High Price Low Price
High Price 5, 5 0, 7
AT&T
Low Price 7, 0 2, 2
In a prisoner's dilemma such in the game described in the above game matrix, what is the dilemma.
7)
Player 2
Left right
up 5,8 8,1
Player 1
down 7,4 0,3
Find all the Nash equilibria of the above game. Remember that player 1's payoff is listed first in each square.
8)
The rush hour traffic game is played among people traveling home to a suburb from a big city during rush hour.
There are two routes which are the actions that each player receives. Players only care about the time spent
traveling. So, each player's payoff is higher if they spend less time traveling. What would be true if the players
of this game are playing a Nash Equilibrium?
Inequality and Poverty

1)
Which of the following are given in the textbook as plausible reasons for increasing inequality in the
United States?
Correct Answer
People with higher earnings are more likely to marry a spouse with higher earnings.
A more progressive tax system.
Correct Answer
Labor markets increasingly favor highly skilled labor.
Deregulation
2)
The above graph shows Lorenz curves for the income distribution in two countries. In which country
is income distributed most equally?
Correct Answer
Country A
Country B
You cannot tell from this graph.
3)
The above graph shows Lorenz curves for the income distribution in two countries. In which country
is income distributed least equally?
Country A
Correct Answer
Country B
You cannot tell from this graph.

4)
Which of the following describes the basis for the poverty line that is commonly used in the United
States?
Correct Answer
3 times the cost of a nutritionally adequate diet.
The cost of a nutritionally adequate diet.
2 times the cost of a nutritionally adequate diet.
Half of median income.
5)
What does a poverty rate measure?
Correct Answer
The percentage of people with incomes below a certain level.
The percentage of people with consumption below a certain level.
The level of income inequality in a country.
The level of wealth inequality in a country.
6)
Which one of the following antipoverty policies would be least likely to create a poverty trap?
People who have an income below the poverty line are given an amount of money which decreases
by 50 cents for every dollar a person earns.
People with income below the poverty line are given just enough money to bring them above the
poverty line.
Correct Answer
Each person is given a fixed amount of money regardless of income.
7)
During the last couple of decades, income inequality has increased in the US. Which of the following
are explanations that the book gives for this trend? (Select all that apply.)
Correct Answer
A demographic shift in households in which high earners are more likely to marry high earners.
Correct Answer
Winner-take-all labor market conditions that favor stars.
Correct Answer
New technologies that favor high skilled labor.
A decrease in the number of single parent families.
8)
A government policy intended to help people in poverty provides health insurance to people who
have an income below the poverty line. Individuals with income above the poverty line receive no
insurance. Policymakers worry that this policy will create a "poverty trap". How could the policy be
changed to lessen this problem? Explain why it would help to avoid the poverty trap?
9)
What is a form of inequality that you would worry about if it is severe. How might you measure this in
a way that lets you see whether this inequality has improved or gotten worse?
10) What does the following measure? The fraction of people who have an income below three
time the cost of enough food to survive.
Correct Answer
poverty rate
income inequality
wealth inequality
Lorenz curve
Information
1)
Wally hires a financial advisor to invest his money. Which is the principle and which is the agent?
Wally is the agent and the financial advisor is the principle.
Wally and the financial advisor are both principles.
Correct Answer
Wally is the principle and the financial advisor is the agent.
Wally and the financial advisor are both agents.
2)
Which is an example of asymmetric information?
a motorist know more about her driving ability than the insurance company.
a dentist know more about what procedures are needed than a patient.
the seller of a used car knows more about the maintenance history than the buyer.
Correct Answer
all of these.
3)
That an insured individual may not take precautions to avoid an insured loss is called adverse
selection.
True
Correct Answer
False
4)
Which of the following features of a CEO's compensation are part of a solution to the principal-agent
problem between the CEO and stock holders. (Choose all that apply.)
Correct Answer
Stock awards
Correct Answer
Compensation based on performance relative to other similar companies.
A piece rate for each unit of output that the CEO produces in a day.
International Trade
1)
Corn Soybeans
Iowa 0 2000
Iowa 2000 0
Corn Soybeans
Wisconsin 0 2700
Wisconsin 900 0
The above table shows possible production points for Iowa and Wisconsin. Assume that
the PPF is a straight line.
Which country has a comparative advantage in corn? Which country has a comparative
advantage in Soybeans?
Correct Answer
Iowa has a comparative advantage in producing corn, and Wisconsin has a comparative
advantage in soybeans.
Iowa has a comparative advantage in producing soybeans, and Wisconsin has a

comparative advantage in corn.
Iowa has a comparative advantage in both corn and soybeans.
Wisconsin has a comparative advantage in both corn and soybeans.
2)
Corn Soybeans
Iowa 0 2000
Iowa 2000 0
Corn Soybeans
Wisconsin 0 2700
Wisconsin 900 0
Correct Answer


3)
Countries A and B have the PPFs labeled above. Which country has a comparative
advantage in cars? Which country has a comparative advantage in bread?
Country A has a comparative advantage in cars, and country B has a comparative

advantage in bread.
Correct Answer
Country A has a comparative advantage in bread, and country B has a comparative

advantage in cars.
Country A has a comparative advantage in both cars and bread.
Country B has a comparative advantage in both cars and bread.
4)
Brazil can can increase production of beef by 1,000 head of cattle but must decrease
tourist visits by 2,000 visits to do so. Argentina can can increase production of beef by
1,000 head of cattle but must decrease tourist visits by 1,000 visits to do so. Which
country has a comparative advantage in beef production?
Correct Answer
Argentina has a comparative advantage in beef production.
Brazil has a comparative advantage in beef production.
Neither has a comparative advantage.
Both have a comparative advantage.
5)
Brazil can can increase production of beef by 1,000 head of cattle but must decrease
tourist visits by 500 visits to do so. Argentina can can increase production of beef by
1,000 head of cattle but must decrease tourist visits by 1,000 visits to do so. Which
country has a comparative advantage in beef production?
Argentina has a comparative advantage in beef production.
Correct Answer
Brazil has a comparative advantage in beef production.
Neither has a comparative advantage.

Both have a comparative advantage.
6)
Corn Soybeans
Iowa 0 2000
Iowa 4000 0
Corn Soybeans
Wisconsin 0 1800
Wisconsin 600 0
the PPF is a straight line. What is the opportunity cost to Iowa of producing one unit of
corn?
Correct Answer
half a unit of soybeans
2 dollars
1 unit of soybeans
2 units of soybeans
7)
Corn Soybeans
Iowa 0 2000
Iowa 1000 0
Corn Soybeans
Wisconsin 0 1800
Wisconsin 1800 0
What is the opportunity cost to Wisconsin of producing 1 unit of corn?
Correct Answer
1 unit of soybeans
1 dollar
1 unit of corn
3 units of soybeans
8)
According to this PPF what is the opportunity cost of producing one more unit of forest if
you start from point B?
1 forest
1 unit of food crop
Correct Answer
2 units of food crop

9)
you start from point D?
1 forest
1 unit of food crop
Correct Answer
10)
you start from point E?
1 forest
1 unit of food crop
Correct Answer
11)
A country that has not traded steel has decided to open up the market for steel so that
steel producers and buyers can buy and sell steel on world markets. Under what
conditions will the country become a net exporter of steel?
Correct Answer
The world price exceeds the country's no trade price of steel.
The world price is less than the country's no trade price of steel.
12)
you start from point C?
1 forest
1 unit of food crop
Correct Answer
13)
Corn Soybeans
Iowa 0 2000
Iowa 1000 0
Corn Soybeans
Wisconsin 0 1800
Wisconsin 600 0
the PPF is a straight line. What is the opportunity cost to Iowa of producing one unit of
corn?
half a unit of soybeans
2 dollars
1 unit of soybeans
Correct Answer
2 units of soybeans
14)
Corn Soybeans
Iowa 0 2000
Iowa 1000 0
Corn Soybeans
Wisconsin 0 1800
Wisconsin 600 0
What is the opportunity cost to Wisconsin of producing 1 unit of corn?
Correct Answer
one third of a unit of soybeans
3 dollars
1 unit of soybeans
3 units of soybeans
15)
Corn Soybeans
Iowa 0 2000
Iowa 1000 0
Corn Soybeans
Wisconsin 0 1800
Wisconsin 600 0
Correct Answer

16)
If country A has a lower opportunity cost of producing a good than country B, we could
say that
Correct Answer
Country A has a comparative advantage in producing that good
Country B has a comparative advantage in producing that good
Country A has a absolute advantage in producing that good

Country B has a absolute advantage in producing that good
17)
A country that has not traded steel has decided to open up the market for steel so that
steel producers and buyers can buy and sell steel on world markets. Under what
conditions will the country become a net importer of steel?
The world price exceeds the country's no trade price of steel.

Correct Answer
The world price is less than the country's no trade price of steel.
18)
A trade restriction on sugar would only affect producers and consumers of sugar.
True
Correct Answer
False
19)
Economists would recommend that to increase employment a country should restrict
imports.
True
Correct Answer
False
20)
Countries A and B have the PPFs labeled above. Which country has a comparative
advantage in cars? Which country has a comparative advantage in bread?
Country A has a comparative advantage in cars, and country B has a comparative

advantage in bread.
Correct Answer
Country A has a comparative advantage in bread, and country B has a comparative

advantage in cars.
Country A has a comparative advantage in both cars and bread.
Country B has a comparative advantage in both cars and bread.
21)
The following statements are about the long-term impacts of free international trade on
labor markets in a country. Which of these statements would economists predict is
false?
International trade will increase average wages.
Correct Answer
International trade will reduce the number of people employed because consumers will
not buy as many domestic goods.
The wage of some worker will likely decrease while the wages of others will increase.
The number of people employed will increase in some industries and decrease in
others.
22)
Which of the following is not identified as an effect of intra-industry trade?
Lower costs due to economies of scale.
Greater competition.
Splitting up the value chain.
Correct Answer
Higher prices in the traded industry.
23)
A country that does not currently have international trade in bicycles has a domestic
price of bicycles that is lower than the price that bicycles are sold for on world markets.
If the country is opened up to international trade, who will benefit or lose from that
trade?
Both producers and consumer will benefit from international trade.
Correct Answer
Producers will benefit from international trade, and consumers will prefer no
international trade.
Producers will prefer no international trade, and consumers will benefit from
international trade.
Both consumers and producers will prefer that there is no international trade.
24)
Which best characterizes the benefits from trade based on comparative advantage?
Large countries will be able to benefit at a cost to smaller ones.
Correct Answer
By each country specializing in producing what it has a comparative advantage in, the
goods are produced where they will be produced at the lowest cost so each country can
consume more than if there where no trade.
Everyone within each country will be better off.
Industries that have economies of scale will achieve a larger scale through exports.
25)
A country will remove trade restrictions on trade in rare earth metals. Suppose that with
the trade restrictions in place the price of rare earth metals is lower within the country
than the price in international markets. After the country opens up to free trade how will
consumer, producer, and total surplus be affected.
Consumer surplus will increase, producer surplus will decrease, and total surplus will
decrease.
Consumer surplus will decrease, producer surplus will increase, and total surplus will
decrease.
Consumer surplus will increase, producer surplus will decrease, and total surplus will
increase.
Correct Answer
Consumer surplus will decrease, producer surplus will increase, and total surplus will
increase.
26)
Which of the following most closely represents the view of most economists regarding
restrictions on international trade?
International trade helps everyone equally and so should never be restricted.

Restrictions on trade are the most effective solution to a variety of ills from pollution and
child labor to inequality.
Correct Answer
Trade restrictions are a relatively costly and often ineffective way to deal with many
problems such as inequality, pollution, and child labor relative to alternative policies that
are available.
27)
In the graph above Pa is the price if the country has no international trade and Pw is the
price on international markets. What area represents the total surplus with free trade?
(Select all that apply. Points are awarded for each correct selections and deleted for
incorrect selections.)
Correct Answer
Correct Answer
B
Correct Answer
Correct Answer
Correct Answer
Correct Answer
J
28)
(Select all that apply. Points are awarded for each correct selections and deleted for
Correct Answer
Correct Answer
Correct Answer
Correct Answer
E
F
Correct Answer
Correct Answer
29)
(Select all that apply. Points are awarded for each correct selection and deleted for
Correct Answer
Correct Answer
Correct Answer
Correct Answer
Correct Answer
Correct Answer
30)
Which areas of this graph are included in total surplus if there is no trade and the
domestic price is Pa? (Select all that apply.)
Correct Answer
Correct Answer
Correct Answer
F
31)
Correct Answer
Correct Answer
Correct Answer
E
F
32)
Correct Answer
Correct Answer
E
Correct Answer
33)
Which areas of this graph are included in total surplus if there is international trade and
the world price is Pw? (Select all that apply.)
Correct Answer
Correct Answer
Correct Answer
Correct Answer
D
34)
Correct Answer
Correct Answer
D
Correct Answer
Correct Answer
35)
Correct Answer
Correct Answer
B
C
Correct Answer
Correct Answer
F
Introduction
1)
What is true of the opportunity cost of producing one more unit of manufacturing goods starting at A
compared to starting at B?
This cannot be determined from the graph.
The opportunity cost of a unit of manufactured goods is greater at A than B.
Correct Answer
The opportunity cost of a unit of manufactured goods is greater at B than A.
The opportunity cost of a unit of manufactured goods is the same at A as at B.

2)
What is true of the opportunity cost of producing one more unit of manufacturing goods starting at A
compared to starting at B?
This cannot be determined from the graph.
Correct Answer
The opportunity cost of a unit of manufactured goods is greater at A than B.
The opportunity cost of a unit of manufactured goods is greater at B than A.
The opportunity cost of a unit of manufactured goods is the same at A as at B.
3)
Select all of the correct answers. What explains the fact that the slope of the PPF gets steeper as
output on the horizontal axis increases?
Correct Answer
Some resources are better suited to producing one good.
Correct Answer
the law of diminishing returns
supply and demand
globalization
4)
The opportunity cost of going to college is best represented by
Correct Answer
the value of the best alternative use of resources including time and financial resources
can only be measured in dollars
is only the financial expenses such as room and board, tuition, etc.
is zero for people who have a full tuition scholarship.

5)
Khalid is deciding how many hours to exercise in a week. Every hour of exercise will replace a
successively more valuable activity. The table below shows the marginal cost and benefit of an
additional hour of exercise.
Khalid has diminishing returns to exercise.

Correct Answer
True
False
6)
Using the table above, what is the optimal number of hours for Khalid to spend exercising in a week?
Correct Answer
6
Labor
1. The table below contains information about the production function of a firm.
# of workers Units of output

0 0
1 60
2 100
3 130
4 150
5 160
6 165
The firm is a price taker in the labor and output markets. The wage rate is $12.50, and the
price of output is $2. What amount of labor would maximize this firm's profit?
a. 0
b. 1
c. 2
d. 3
e. 4
*f. 5

0 0
1 30
2 50
3 65
4 75
5 80
6 82
price of output is $2. What amount of labor would maximize this firm's profit?
a. 0
b. 1
c. 2
d. 3
*e. 4
f. 5
0 0
1 60
2 100
3 130
4 150
5 160
6 165
price of output is $0.50. What amount of labor would maximize this firm's profit?
a. 0
b. 1
c. 2
*d. 3
e. 4
f. 5
4. A monopsony employer can hire workers with the supply of labor given below.
Units
Wage of
Labor
8 1
10 2
12 3
14 4
16 5
18 6
What is the marginal cost of hiring a fifth worker?
a. $16
*b. $24
c. $14
d. $20
5. A monopsony firm faces the following supply of labor.

Units
Wage of
Labor
4 1
6 2
8 3
10 4
12 5
What is marginal cost of hiring the fourth worker?
a. 10
b. 40
*c. 16
d. 12
e. 8
f. 20
Units
Wage of
Labor
4 1
6 2
8 3
10 4
12 5
What is marginal cost of hiring the third worker?
a. 10
b. 40
c. 16
*d. 12
e. 8
f. 20
Units
Wage of
Labor
4 1
6 2
8 3
10 4
12 5
What is marginal cost of hiring the fifth worker?
a. 10
b. 40
c. 16
d. 12
e. 8
*f. 20
Wage Units of Labor

4 1
6 2
8 3
10 4
12 5
If the value of the marginal product is always $13, how much labor should the monopsony
firm hire to maximize profit?
a. 1
b. 2
*c. 3
d. 4
e. 5
Wage Units of Labor

4 1
6 2
8 3
10 4
12 5
*a. 1
b. 2
c. 3
d. 4
e. 5
Wage Units of Labor

4 1
6 2
8 3
10 4
12 5
a. 1
*b. 2
c. 3
d. 4
e. 5
12. A house painting company has the following production function.
Labor Output
0 0
1 5
2 9
3 14
4 20
What is the marginal product of increasing labor from 2 to 3?
Correct Answer(s):
a. 5.0
13. A house painting company has the following production function.
Labor Output
0 0
1 5
2 9
3 14
4 20
What is the marginal product of increasing labor from 3 to 4?
Correct Answer(s):
a. 6.0
14. Jessica, the owner of a construction company, hires a foreman to supervise one of her
construction crews. Jessica wants the foreman to make sure that the crew keeps costs low
and does high quality work. Which of these best describes this situation?
*a. Jessica is the principal, and the foreman is the agent.

b. The foreman is the principal, and the Jessica is the agent.
15. Wally hires a financial advisor to invest his money. Which is the principle and which is
the agent?
a. Wally is the agent and the financial advisor is the principle.

b. Wally and the financial advisor are both principles.
*c. Wally is the principle and the financial advisor is the agent.
d. Wally and the financial advisor are both agents.
16. The following table shows the production function for a firm.
Labor Output
0 0
1 20
2 35
3 45
4 52
5 57
The firm sells output in a perfectly competitive market and hires labor in a perfectly
competitive labor market. The price of output is $2, and the wage rate is $12. How much
labor will this firm hire to maximize profit?
a. 0
b. 1
c. 2
d. 3
*e. 4
f. 5
17. Logan hires a mechanic to do car maintenance. This creates a principal-agent problem
because the mechanic is more knowledgeable about what maintenance is most important
and Logan relies on the mechanics advise. Who is the principle and who is the agent in this
situation?
a. Both Logan and the mechanic could be considered agents.

b. Logan is the agent and the mechanic is the principal.
c. Both Logan and the mechanic could be considered principals.
*d. Logan is the principal and the mechanic is the agent.
18. Based on data many economists believe that labor productivity measured by the
amount output per unit of labor has been growing faster than the real wage. Which of the
following could be an explanation of that fact?
*a. More market power for firms in the labor market.

b. A smaller labor force.
c. Less market power for firms in the labor market.
a. 2
b. 3
*c. 4
d. 5
20. What is the relationship between the value of the marginal product of labor and the
wage for a monopsony firm?
a. no relationship between them

b. VMP=w
c. VMP<w
*d. VMP>w
21. (From the text book) In the US economy, nearly half of all the workers employed by
private firms work at
a. 18,000 firms with fewer than 100 employees.

*b. 18,000 large firms that employ more than 500 workers.
c. 26,000 firms with fewer than 100 employees.
d. 26,000 large firms that employ more than 300 workers.
22. The following table contains information about the production function of a firm.
# of Units of
Workers Output
1 5
2 12
3 18
4 22
The price of a unit of output is $2. What is the value of the marginal product added by hiring
the third worker?
a. 18
b. 36
c. 6
*d. 12
# of Units of
Workers Output
1 5
2 11
3 16
4 19
the third worker?
a. 15
*b. 10
c. 5
d. 11
# of Units of
Workers Output
1 5
2 12
3 18
4 22
the third worker?
*a. 18
b. 36
c. 6
d. 12
25. Why does a firm's demand for labor slope downward, a lower wage leads to a larger
quantity demanded of labor?
*a. The law of diminishing marginal product.

b. The income effect
c. Increasing opportunity cost.
d. Negative externalities.
Monopoly
1)
Patents are an example of
returns to scale.
price discrimination.
Correct Answer
barriers to entry.
2)
Control of a scarce resource is an example of
returns to scale.
Correct Answer
barriers to entry.
3)
Large economies of scale is an example of
predatory pricing
Correct Answer
barriers to entry.
4)
Suppose a government has the ability to create barriers that can preserve the market power of
individual firms. Firms would then have the incentive to lobby or bribe government official to
create such barriers. The spending that goes into influencing the government in this way is
referred to as
Correct Answer
rent seeking
marginal analysis
intellectual property
shortage
5)
A firm with market power can distinguish between two groups of consumers and can prevent
resale between the two groups. The monopolist maximizes profit by charging a higher price to
Group A and a lower price to Group B. What can we say about the elasticity of demand for these
two groups?
The price elasticity of demand is the same for both groups.
There is not enough information to answer this.
The price elasticity of demand is greater for Group A.
Correct Answer
The price elasticity of demand is greater for Group B.

6)
A firm with market power can distinguish between two groups of consumers and can prevent
resale between the two groups. The monopolist maximizes profit by charging a lower price to
Group A and a higher price to Group B. What can we say about the elasticity of demand for
these two groups?
The price elasticity of demand is the same for both groups.
There is not enough information to answer this.
Correct Answer
The price elasticity of demand is greater for Group A.
The price elasticity of demand is greater for Group B.
7)
As the owner of the only gas station in a small, rural town, far away from other gas stations, you
observe the following demand (gal/mo) at various prices ($/gal) that you charge:
P ($/gal) Q (thous. gal / mo)
3.10 0
3.00 1
2.90 2
2.80 3
2.70 4
2.60 5
What is the marginal revenue from increasing output from 1 to 2?
$2.90
Correct Answer
$2.80
$2.60
$3.00
8)
2.60 0
2.50 1
2.40 2
2.30 3
2.20 4
2.10 5

$2.40
Correct Answer
$2.30
$2.10
2.80
9)
2.10 0
2.00 1
1.90 2
1.80 3
1.70 4
1.60 5
$2.80
$2.10
Correct Answer
$1.40
$1.70
10)
You graduated with a fashion design degree. You plan to turn down a job offer of $4,000
monthly salary from a famous clothing company, and to open your design studio. First, you need
to loan $10,000 from the bank to purchase a professional sewing machine. The annual loan
interest rate is 12%. The machine can be sold with no value loss any time after the purchase.
Then, you need to hire two staffs to help with studio operation. The market salary is $1,500 per
worker. Last, fabric and other materials for making clothes will cost you around $3,000 per
month.
If the monthly revenue of the studio is $16,000, will you enter the business?
Correct Answer
Yes. Because it covers all economic costs.
Yes, and the clothing company job offer should not be considered as part the economic cost.
No. Because after deducting other costs, the revenue cannot cover the cost of the sewing
machine.
None of the options above is correct.

11)
month.
If one piece of your clothes sells at $200, how many clothes do you need to sell each month for
you to enter the business?
Correct Answer
55.
105.
100.
35.
12)
month.
If you can sell 100 pieces of your clothes each month, what is the lowest price per piece for you
to enter the market?
Correct Answer
$110.
$210.
$200.
$70.
13)
Which of the following best represents the decision that monopoly makes?
Choose the quantity given the market price.
Simultaneously choose whatever price and quantity the monopoly desires
Correct Answer
The more the monopoly sells the lower its price must be.
The more the monopoly sells the higher the price it can set.
14)
If this monopolist is maximizing profit, what price will it charge?

Correct Answer
P1
P2
P3
15)
What is the monopolist's marginal revenue if it is maximizing profit?
P1
P2
Correct Answer
P3
16)
What is the monopolist's marginal cost if it is maximizing profit?
P1
P2
Correct Answer
P3
17)
Monopolists are not allocatively efficient because;
Correct Answer
They produce quantity of output at which P > MC
They produce quantity of output at which P = MC
They produce quantity of output at which p < MC
They produce more than what market demands
18)
Quantity Price
0 $10
1 $8
2 $6
3 $4
4 $2
5 $0
The above data is the perceived demand for a firm with market power. The firm can produce
output at a margin cost of $5. What level of output will maximize the firm's profit?
Correct Answer
4
19)
Quantity Price
0 $15
1 $13
2 $11
3 $8
4 $5
5 $2
output at a constant margin cost of $3. What level of output will maximize the firm's profit?
Correct Answer
20)
Quantity Price
0 $10
1 $8
2 $6
3 $4
4 $2
5 $0
output at a margin cost of $3. What level of output will maximize the firm's profit?
1
Correct Answer
21)
Quantity Price
0 $15
1 $13
2 $11
3 $10
4 $8
5 $6
output at a constant margin cost of $3. What level of output will maximize the firm's profit?
Correct Answer
5
22)
Quantity Price
0 $10
1 $8
2 $6
3 $4
4 $2
5 $0
output at a margin cost of $0. What highest level of output that will maximize the firm's profit?
Correct Answer
4
23)
Price ($) Quantity
4.00 10
3.50 20
3.00 30
2.50 40
2.00 50
1.50 60
1.00 70
If a monopoly faces the demand schedule given in the table and has a constant marginal and
average cost of $1 per unit of providing the product, what is the level of output that would
maximize its profits?
Correct Answers
40.0
24)
Why would it never be profitable for a perfectly competitive firm to charge different prices to
different customers? Select all that apply. (Two correct answers)
People all have the same willingness to pay.
Correct Answer
Perfectly competitive sellers can sell as much as they choose at the market price.
Correct Answer
If one firm charges a price higher than the market price, consumers can instead go to a
competitor.
Perfectly competitive firms are not sophisticated enough to use this type of price strategy.
25)
Which of the following is not needed for group pricing to be a profitable price discrimination
strategy?
Ability to distinguish between different groups of customers
Market power
Resale/arbitrage between groups is difficult
Correct Answer
Economies of scale
26)
A monopolist conducts market research and finds that there are three segments of customers that
they sell to. If Group A has a price elasticity of demand of 1, Group B has a price elasticity of
demand of 0.4, and Group C has a price elasticity of demand of 1.4, which group will the
monopolist charge the highest price?
Correct Answer
Group B
Group C
Group A

27)
monopolist charge the lowest price?
Correct Answer
Group C
Group A
Group B
28)
monopolist charge the highest price?
Correct Answer
Group C
Group A
Group B
29)
A college football team would like to price discriminate by charging a different price to students.
What would make this price discrimination more successful? Select all that apply.
Correct Answer
The ability to distinguish who is a student and who is not.
Correct Answer
Ability to prevent students from selling tickets to others.
Correct Answer
Market power
Correct Answer
Information about the demand of students and others.
30)
A museum can distinguish between residents of the city where the museum is located and
visitors from outside of the city. Through market research the museum finds that the price
elasticity of demand for people from the city is .7 and the elasticity of demand for people visiting
the city is .5. If the museum maximizes profit, which group will pay the highest price for
admission?
locals from the city
Correct Answer
visitors from outside the city
Both will pay the same price.

31)
A monopolist that charges the same price to all consumers will produce at a level where there are
some consumer who would not pay the price the Monopolist is charging. Some of those
consumers would be willing to pay more than what it costs the firm to produce more. Why
doesn't the monopolist sell to those consumer?
Monopolists do not care about the extra profit.
In order to sell more, the monopolist would be raising the price paid by everyone.
Correct Answer
In order to sell more, the monopolist would be reducing the price paid by everyone.
Monopolists are generally more self interested than competitive firms.
32)
Why can a monopolist make profits in the long run?
Correct Answer
Barriers to entry
The monopolist sets MC=MR.
Free entry
The monopolist has no variable costs.

33)
Quantity
Price
Demanded
5 0
4 1
3 2
2 3
1 4
Use demand information in the table. What is the most revenue that a monopolist can earn if it
produces 2 units of output?
Correct Answer
8
34)
Quantity
Price
Demanded
5 0
4 1
3 2
2 3
1 4
Use the table above. What is the marginal revenue from selling another unit of output if the
monopolist is currently producing 2 units of output?
Correct Answer
0
35)
What condition must be true if a monopolist is maximizing profit?
P=MC
Correct Answer
MR=MC
P=ATC
MR=ATC
36)
If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost,
then
the firm's perceived demand will shift to the left.

Correct Answer
the firm should keep expanding production.
each marginal unit adds profit by bringing in less revenue than its cost.
the firm is now earning zero for profit.
37)
A monopolist finds that at the current level of output, the marginal revenue is $20 and the
marginal cost is $30. What can the monopolist do to increase profit?
Correct Answer
Reduce output and increase the price.
Increase output and reduce the price.
Nothing, the monopolist is already maximizing profit.
38)
Which of the following is a barrier to entry?
Large economies of scale
Patent protection
Government restriction on entry
Correct Answer
All of these
Oligopoly
1) Calculate the industry concentration Index, HHI, for the grocery market in the
United States when market shares for the leading food retailers Walmart, Kroger,
Ahold, Whole Foods, and Target are 26%, 10%, 4%, 3%, 2%, respectively.
Correct Answer
805
43
45
814
2)
Calculate the industry concentration Index, HHI, for the grocery market in the United
States when market shares for the leading food retailers Walmart, Kroger, Ahold, Whole
Foods, and Target are 26%, 10%, 5%, 3%, 2%, respectively.
Correct Answer
814
44
46
805
3)
Calculate the industry concentration Index, HHI, for the grocery market in the United
States when market shares for the leading food retailers Walmart, Kroger, Ahold, Whole
Foods, and Target are 26%, 10%, 4%, 3%, 1%, respectively.
Correct Answer
802
43
44
805
4)
Saudi Arabia and Russia are two countries where the state controls much of the oil
production. If these countries attempt to collude they will agree to
Correct Answer
reduce output in order to keep prices high.
reduce output in order to keep prices low.
raise output in order to keep prices high.
raise output in order to keep prices low.
5)
Autos Inc and Cars ‘R’ Us both sell cars. Which of the following would make it more
likely that Autos Inc and Cars ‘R’ Us collude to charge a high price?
Correct Answer
The firms both adopt a policy that they will match the other’s price if a consumer asks
for it.
The government does not require firms to reveal information about sales and prices.
A new firm enters the market.

6)
Which industry characteristic would make it easier for firms to collude/cooperate?
Correct Answer
Repeated interaction between firms.
The ability to hide behavior from competitors.
Laws that prohibit cooperation between firms.
Infrequent interaction between firms.
7)
Maps Co. and You Are Here! both sell maps. Which of the following would make it more
likely that the firms collude to charge a high price?
Correct Answer
for it.
8)
Tread Lightly and Grace’s Laces both sell hiking boots. Which of the following would
make it more likely that the firms collude to charge a high price?
Correct Answer
for it.

9)
The market shares for search engine use is close to Google 93%, Bing 3%, Yahoo! 2%,
Baidu 1%, Duckduckgo 1%, and Yandex 1%. What is the Herfindahl-Hirschman Index
(HHI) for this industry?
Correct Answers
8665.0
10)
The market shares for search engine use is close to Google 94%, Bing 3%, Yahoo! 2%,
Baidu 1%, and Duckduckgo 1%. What is the Herfindahl-Hirschman Index (HHI) for this
industry?
Correct Answers
8850.0
11)
The Federal Trade Commission (FTC) is reviewing a merger between two health food
stores. The FTC is most concerned about the effect that the merger will have on
consumers of health food. Which of the following evidence would likely be most helpful
for the FTC to decide whether the merger will negatively impact consumers?
Internal records of communication between the CEO and board of directors.
A measure of industry concentration in the market for premium health food.
Correct Answer
Pricing data that shows how the prices change when the two firms compete in a local
market.
A game matrix.
12)
The idea that firms can cooperate in repeated interactions relies on the idea that the
firms can reward each other for cooperation now by cooperating in the future. And not
cooperating now can be punished by not cooperating in the future. If this type of
collusion is a primary concern in an industry, which of the following would make
collusion easier in the industry?
The ability to conceal from competitors the price that is being charged to consumers.
Correct Answer
A policy that requires all firms to publicly reveal the price charged to each consumer.
Restrictions on the communication between firms.
Law that forbid some contracts between firms.
13)
What type of model would be most useful for studying the result of a merger between
two cellphone manufacturers?
Monopoly
Perfect Competition
Correct Answer
Oligopoly
Compensating differential
14)
detergent manufacturers?
Monopoly
Perfect Competition
Correct Answer
Oligopoly
15)
two search engines?
Monopoly
Perfect Competition
Correct Answer
Oligopoly
16)
The world market for crude oil is characterized by a few firms that produce an identical
product. Some large producers can impact the world price of oil. Which type of model
discussed in this class would be most useful in understanding interactions between
firms in this market.
perfect competition
monopoly
Correct Answer
oligopoly
17)
An industry consists of 6 firms. Two larger firms have 30% market share each. The
remaining firms have 10% market share. What is the HHI of this industry?
Correct Answers
2200.0
18)
There are two firms in a market, they have a choice to cooperate and keep their quantity
low and price high or they can compete with one another to maximize their quantity. If
Firm A and Firm B cooperate, they will both earn $16,000. If one firm chooses to
cooperate and the other chooses not to, the cooperative firm earn $0 and the other firm
will earn $20,000. If neither firm chooses to cooperate, each firm will earn
$3,000. What can we expect in this market?
Correct Answer
The firms will compete
The firms will cooperate
Firm A will be altruistic and Firm B will not
Firm B will be altruistic and Firm A will not

19)
The world market for crude oil is characterized by a few firms that produce an identical
product. Some large producers can impact the world price of oil. Which type of model
discussed in this class would be most useful in understand interactions between firms in
this market.
perfect competition
monopoly
Correct Answer
oligopoly
20)
Firm A and Firm B cooperate, they will each earn $14,000. If one firm chooses to
cooperate and the other chooses not to, the cooperative firm will earn $0 and the other
firm will sell earn $28,000. If neither firm chooses to cooperate, each firm will earn
Correct Answer
Firm A will be altruistic and Firm B will not
Firm B will be altruistic and Firm A will not

21)
In the Whole Foods and Wild Oats merger, those in favor of the merger argued that the
relevant market for identifying competition included grocery stores that sell organic food.
Those opposed to the merger argued that the relevant market was stores that sell
primarily premium organic food. This disagreement illustrates one of the weaknesses of
one of the following approaches to analyzing mergers. Which approach does the
weakness apply most to?
Correct Answer
Approaches that rely on measures of market concentration.
Approaches that attempt to predict how behavior will change after the merger.
Approaches that identify barriers to entry.
22)
Shopping malls typically lease retail space to a large number of clothing When this
group of retailers competes to sell similar but not identical products, they engage in
what economists call ______.
a cartel
collusion
Correct Answer
monopolistic competition
perfect competition
23)
Which of the following would be classified as a differentiated product produced by a
monopolistic competitor?
natural gas
Correct Answer
Channel No. 5
electricity
tap water
24)
1. Monopolistic competitors can make a in the short-run, but in the long run,
will drive these firms toward .

Correct Answer
profit or loss; entry and exit; a zero-profit outcome
loss; exit; losses on their earnings
profit or loss; exit; economic profits
profit; entry; a price that lies at the very bottom of the AC curve
25)
Oligopoly firms would like to coordinate to keep prices high. However, if one firm
believes that other firms will keep the agreement, that firm would be tempted to
Correct Answer
increase output to take advantage of high prices.
reduce output
exit the market

26)
Company Sales (in millions)

A 15
B 40
C 6
D 10
E 2
F 20
G 8
Calculate the Four - Firm Concentration Ratio from the above table.
Correct Answers
84%
27)

A 10
B 14
C 9
D 18
E 16
F 18
G 15
Correct Answers
67%
28)

A 20
B 18
C 25
D 17
E 23
F 25
G 11
Correct Answers
67%
29)
Firm A and Firm B cooperate, they will each earn $10,000. If one firm chooses to
cooperate and the other chooses not to, the cooperative firm will earn $0 and the other
firm will earn $16,000. If neither firm chooses to cooperate, each firm will earn
Correct Answer
Firm A will cooperate and Firm B will not
Firm B will cooperate and Firm A will not

Price Control
1) The price of bottled water is regulated by setting a price ceiling that is below the
competitive equilibrium price. What does the supply and demand model predict
will be the outcome of this policy relative to perfect competition?
All consumers will be better off.
Some consumers will be better off, and producers will be better off.
Correct Answer
Producers will be worse off, and less water will be supplied.
All consumers will be worse off.
2)
A price floor is set above the equilibrium price. What is the effect?
There is a shortage
There is excess demand
There will be no change
Correct Answer
There is a surplus
3)
If regulators are able to set the price of gasoline to be below the equilibrium price, what
will happen in the market for gasoline?
Correct Answer
Consumers will want to purchase more gasoline than producers will choose to provide.
Consumers will want to purchase less gasoline than producers will want to provide.
The amount of gasoline consumers actually purchase will increase.

Public Goods
1) What is the reason that tornado siren installation in residential areas is mostly paid for by
local governments rather than private entities?
Correct Answer
The free rider problem
Negative externalities
Economies of scale
The principal-agent problem

2) Which of the following are proposed as ways to encourage innovation?
Prizes for the first people able to achieve an innovation.
Patents
Government subsidies for research and development.
Correct Answer
All of these.
3) Which of the following goods is furthest from the definition of a nonrival good?
Correct Answer
Healthcare visits
National Defense
Firework shows
Street lights
4) Which of the following would be most likely to result in a positive externality?
Steel production
Correct Answer
Receiving a vaccination
Eating ice cream
Streaming music on headphones
5) Is public transportation such as buses a public good?

Correct Answer
No, because people can be excluded from using it.

Yes, because in some cases such as the Cambus no one is excluded from using the service.
Yes, because it has the word public in the name.
Yes, because it is often paid for with public funds.
6) Which best explains why a market will produce too little of a Positive externality?
The person creating the positive externality does not take into account some of the cost but
does take into account the benefits.
The person creating the positive externality does not take into account some of the costs.
Correct Answer
The person creating the positive externality does not take into account some of the benefit but
does take into account the costs.
7) Which characteristic of a public good makes it so that a public good can be used by
many people at once without diminishing how much people can enjoy it.
Correct Answer
nonrival
nonexcludable
price taking
asymmetric
8)
Which characteristic of a public good makes it so that people who do not pay for the good can
still benefit from it?
nonrival
Correct Answer
nonexcludable
price taking
asymmetric
9) Which of the following best fit the definition of a public good?

Correct Answer
Tornado sirens
Public housing
Correct Answer
National defence
Food assistance
Correct Answer
clearing snow off the roads downtown

Supply and Demand
1)
The number of nursing homes increases. What would be the impact on the price and
quantity nursing home service?
Correct Answer

Supply and Demand
1)
The number of nursing homes decreases. What would be the impact on the price and
quantity nursing home service?
Correct Answer
2)
In economics, the demand for a good refers to the amount of the good that
people:
would like to have if the good were free
Correct Answer
will buy at various prices
need to achieve a minimum standard of living
will buy at alternative incomes
3)
Use the table below which shows the supply and demand schedules for a market. What
will be the equilibrium price.
Quantity Quantity
Price ($)
Demanded Supplied
1 600 0
2 500 0
3 300 50
4 100 100
5 0 300
Correct Answer
4)
Marginal Willingness
Quanity
to Pay ($)
1 10
2 8
3 6
4 4
buy?
1
2
Correct Answer
4
5)
If an increase in the price of Good X causes a decrease in the demand for Good Y, we
can conclude that
the price of Good Y will increase.
Goods X and Y are normal goods.
Goods X and Y are substitute goods.
Correct Answer
Goods X and Y are complement goods.
6)
Which of the following would reduce the supply of microcomputers?
a technological improvement that lowers the cost of producing the computers?
Correct Answer
higher wage rates for the workers that assemble the computers
a reduction in the price of computer chips used to produce the computers
a reduction in the price of microcomputers.
7)
The assumption behind a demand curve or a supply curve is that no relevant economic
factors, other than the product’s price, are changing. This assumption is called:
Correct Answer
ceteris paribus
normal good
inferior good
factors of production
8)
Which of the following could contribute to low prices of oil? Select all that apply.
Correct Answer
low demand for oil
high demand for oil
Correct Answer
high supply of oil
low supply of oil
9)
Ramen noodles is an inferior good for a consumer.
The consumer will have a greater demand for ramen noodles if the consumer has more
income.
Correct Answer
The consumer will have a greater demand for ramen noodles if the consumer has less
income.
The consumer will have a great quantity demand for ramen noodles if the price
increases.
The consumer will have a greater quantity demand for ramen noodles if the price
decreases.
10)
Fareway finds that by raising the price of generic Cola demand for Coca-Cola
increases. What does this imply about Cola and Coca-Cola?
Both are normal goods.
Coca-cola is a normal good, but Cola is an inferior good.
Correct Answer
Coca-Cola and Cola are substitutes.
Coca-Cola and Cola are complements.
11)
What will happen to the price and quantity restaurant meals if the wage of restaurant
workers increases?
Correct Answer
12)
What will happen to the price and quantity restaurant meals if the wage of restaurant
workers decreases?
Correct Answer

Consumer Surplus and Efficiency (Welfare)
1) Why do excise taxes create inefficiency in the market that is taxed?

Correct Answer
There are some consumers and producers who would benefit from buying and selling to
each other only if they didn't have to pay the tax.
Economists are politically opposed to taxes
A tax on consumers will increase the amount that is sold in the market.
What represents the producer surplus in this graph if the market is in equilibrium?
Correct Answer
VXW
VXWTU
TU
T
G
GHJ
IK
GHJIK
2)
What represents the consumer surplus in this graph if the market is in equilibrium?
VXW
VXWTU
Correct Answer
TU
G
GHJ
IK
GHJIK
3)
What represents the consumer surplus in this graph if the market is in equilibrium?
VXW
VXWTU
TU
Correct Answer
GHJ
IK
GHJIK
4)
What best characterizes the effect of a price ceiling on consumer and producer surplus?
Correct Answer
Producers are worse off, the consumers that get the good may be better off, and those
who would have purchased in equilibrium but cannot are worse off.
Producers are better off and consumers are worse off.
All consumers are better off and some producers are worse off.
Everyone is worse off.
5)
If the output is 15,000, what is the total surplus?
TUVWX
TU
Correct Answer
TVX
VWX
6)
There are six consumers in a market for motorized scooters. Each consumer is willing
to pay for at most one scooter. The willingness to pay is in the table below.
Bob Jill Pat Miguel Matt Patel
WTP ($) 2000 1500 1200 900 600 500
If the market is at a competitive equilibrium with a price of $1,000, what is the consumer
surplus in the market? (leave off the dollar sign)
Correct Answers
1700.0
7)
WTP ($) 2000 1500 1200 900 600 500
If the market is at a competitive equilibrium with a price of $1,100, what is the consumer
Correct Answers
1400.0
8)
WTP ($) 2000 1500 1200 900 600 500
If the market is at a competitive equilibrium with a price of $900, what is the consumer
Correct Answers
2000.0
Additional Questions
1) In three or fewer words, what comes to mind when you hear the word economics?
2) Which of these will affect the scarcity or constraints faced by people who are deciding whether to
go to college?
A) The expected salary of college graduates
B) How much the person enjoys school
C) The price of tuition
D) The value the person places on spending time with family and friends
3) Which of the following would go against the law of demand if it where to occur?
a) The government "supports" the price of milk through policies that increase milk prices at
stores. As a result consumers purchase more milk.
b) Walmart charges less for doughnuts which leads to shoppers buying more doughnuts.
c) Consumers have more income which leads to a lower price for intercity bus service and fewer
people using the service.
4) In Iowa, most farmers either plant corn or soybeans. If the price of soybeans increases, what will
happen to the supply of corn and the supply of soybeans.
a) The supply of soybeans will increase, and the supply of corn will increase.
b) The supply of soybeans will neither increase nor decrease, and the supply of corn will de-
crease.
c) The supply of soybeans will increase, and the supply of corn will decrease.
5) A city experiences a hurricane. What will be the effect of the hurricane on the price and quantity of
hotel rooms rented out in that city? (Justify your answer using a supply and demand diagram.)
a) The price will increase and the quantity will decrease
b) The price will increase and the quantity will increase
c) The price will decrease and the quantity will increase
d) The price will decrease and the quantity will decrease
6) The government imposes a price control on gasoline by setting a price that is below the equilib-
rium price. If the control is effective, what will be the impact relative to no price controls.
a) The quantity supplied will increase
b) The quantity supplied will decrease
c) The quantity demanded will decrease
7) Due to good weather, farmers have a large harvest of corn. Demand for corn is inelastic. How will
good weather affect total farmer revenue relative to normal weather?
a) It is ambiguous because the price will decrease, and the quantity will increase.
b) It will increase because farmers have more sales.
c) It will decrease.
8) The government will collect a tax on tanning. To minimize the burden on consumers, how should
the tax be collected?
a) The tax should be collected from the tanning salons.
b) The tax should be collected from consumers.
c) It will not matter whether the tax is collected from consumers or producers.
9) Jaqui is spending her entire budget. She has a marginal utility of 200 for a doctor visit and a mar-
ginal utility of 10 for spaghetti. If the price of a hamburger is $2 and the price of a doctor visit is $50,
is she maximizing her utility?
a) Yes
b) No she should buy more spaghetti
c) No she should buy more doctor visits
10) A consumer can borrow or save at an interest rate of 5%. If the consumer does not borrow or save,
her marginal utility for a dollar spent now is 50 and her marginal utility for a dollar spent next year
is 55. How could this consumer increase her utility?
a) Borrow more.
b) Save more.
c) Keep consuming exactly her current income.
11) A consumer starts with Budget line B0. Which line would represent a decrease in the price of Good
X?
a) B0
b) B1
c) B2
d) B3
12) What is the marginal product of the fourth burrito technician?

a) 60
b) 50
c) 15
d) 10
13) A small for-profit university has 8,000 students. The average cost to the university of accommodat-
ing a student is $17,000. The university may admit 10 more students who will pay $25,000 in tui-
tion. If they do admit the students, the average cost per student will increase to $17,010. Will ad-
mitting the students increase the school’s profit?
a) Yes
b) No
14) A firm is producing where price equals marginal cost at a price of $3.00. At that amount of output
ATC=$3.25 and AVC=$2.75. Will this firm be better off shutting down in the short-run?
a) Yes
b) No
15) At a price of $6 how much output should this firm produce?

a) Shut down/produce 0.
b) produce 70
c) produce 10
d) produce 90
16) If demand increase in the market, what will be the short-run impact on the price? What will be the
long-run impact?
a) Increase in price; increase in price
b) Decrease in price; decrease in price
c) Increase in price; not enough information
17)
Quantit
Price
y
0 $10
1 $8
2 $6
3 $4
4 $2
5 $0
The above data is the perceived demand for a firm with market power. The firm can
produce output at a marginal cost of $3. What level of output will maximize the firm's profit?
a. 1
*b. 2
c. 3
d. 4

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Principles of Microeconomics Question Bank

Stong, S. T. (2021). Principles of Microeconomics Question Bank. University of Iowa.

It believes it can make a positive accounting profit.

It believes it can make a positive economic profit.

It believes it can make a negative accounting profit.

Firms will be exiting the market

Firms will be entering the market

The market is in long run equilibrium

No answer text provided.

Firms will be entering the market

Firms will be exiting the market

The market is in long run equilibrium

No answer text provided.

Firms will be entering the market

Firms will be exiting the market

The market is in long run equilibrium

No answer text provided.

It is a decreasing cost industry

It is an increasing cost industry

There are diseconomies of scale

Nothing, all markets behave this way.

There is not enough information to know

There is not enough information to know

There is not enough information to know

Is the market depicted in the above graph in a long run equilibrium?

Yes, because firms would like to exit the industry.

No, because firms would like to exit the industry.

No, because more firms would like to enter the industry.

Firms will enter, and the price will decrease.

Firms will exit, and the price will decrease.

Firms will enter, and the price will increase.

Firms will exit, and the price will increase.

Firms will enter, and the price will decrease.

Firms will exit, and the price will decrease.

Firms will enter, and the price will increase.

Firms will exit, and the price will increase.

Firms will enter, and the price will decrease.

Firms will exit, and the price will decrease.

Firms will enter, and the price will increase.

Firms will exit, and the price will increase.

The amount of fixed inputs to use.

Accept the order

Reject the order

Neither increase nor decrease profit

AFC AVC ATC

AFC AVC ATC

Any additional tuition

The cost of housing for a semester

The cost of food for a semester

No the marginal cost will increase which is bad for profit.

Average profit margin

The amount of variable inputs used

The amount of fixed inputs used

The amount of output to produce

The market price

The price will decrease in the long-run and short-run.

There will be a short-run increase and a long-run decrease in the price.

shut down temporarily.

exit the market.

there's not enough information to say.

shut down temporarily.

exit the market.

there's not enough information to say.