Name: __________________________ Date: _____________ 1. If the marginal rate of substitution of cookies for brownies equals the relative price of cookies in terms of brownies when the consumer is on the budget line, the consumer: A) is maximizing total utility. B) should consume more cookies and fewer brownies to maximize total utility. C) should consume fewer cookies and more brownies to maximize total utility. D) may or may not be maximizing total utility. 2. The number of seats in a football stadium is fixed at 70,000. The city decides to impose a tax of $10 per ticket. In response, the team management raises the ticket price from $30 to $40 and still sells all 70,000 tickets. The tax caused a change in the consumer surplus of ________, a change in the producer surplus of ________, and a deadweight loss of ________. A) –$10; $0; $10 B) –$700,000; $0; $700,000 C) –$10; $0; $0 D) –$700,000; $0; $0 Use the following to answer question 3: Figure: Consumer Equilibrium III Page 1 3. (Figure: Consumer Equilibrium III) Look at the figure Consumer Equilibrium III. Given the indifference curves in the figure, which of the following statements is true? A) Q4 indicates the price of placemats. B) Q8 indicates the price of tamales. C) Points A and E represent the same level of total utility. D) Kurt is better off at point E than at point A. Use the following to answer question 4: Figure: The Market for Blue Jeans 4. (Figure: The Market for Blue Jeans) Look at the figure The Market for Blue Jeans. The government recently levied a $10 tax on the producers of blue jeans. What area or areas in the graph identify deadweight loss? A) a + b + c B) b + d C) c + e D) d + e + f 5. When all of a firm’s inputs are doubled and this results in the firm’s level of production more than doubling, a firm is operating: A) on the upward-sloping portion of its LRATC curve. B) on the downward-sloping portion of its LRATC curve. C) at the minimum of its LRATC curve. D) on the upward-sloping portion of its MC curve. Page 2 6. Suppose a perfectly competitive industry with constant costs is initially in long-run equilibrium. Demand for the product produced in this industry increases due to a change in tastes and preferences. In the short run this will result in A) the product selling for a higher price, each firm producing more of the good, and positive economic profits for the firms in the industry. B) the product selling for a higher price; each firm in the industry producing the same level of the good as they did initially, since their capital is fixed; and each firm earning positive economic profit. C) the product selling for a higher price initially, but the industry will attract new firms, which will cause the price to fall back to its original level. D) the price staying constant, since the firms in this industry are price takers, and the output of each firm increasing; therefore each firm will earn positive economic profit. Use the following to answer question 7: Figure: A Market with a Tax 7. (Figure: A Market with a Tax) Look at the figure A Market with a Tax. The excise tax imposed on this good is equal to: A) P1 – P2. B) P1 – P3 C) P2 – P3. D) P1 – P5. Page 3 Use the following to answer question 8: Figure: The Market for Lattes 8. (Figure: The Market for Lattes) If an excise tax of $1.50 is assessed on each latte, government revenue will be: A) $400 B) $600 C) $800 D) $1,200 Use the following to answer question 9: Figure: The Optimal Quantity Page 4 9. (Figure: The Optimal Quantity) Look at the figure The Optimal Quantity. If the demand for lawn-mowing increased, the ________ curve in the figure would shift to the ________ and the optimal quantity would be ________ five lawns mowed. A) marginal benefit; right; more than B) marginal cost; right; fewer than C) marginal benefit; left; fewer than D) marginal cost; left; more than Use the following to answer question 10: 10. (Table: Cost Data) Look at the table Cost Data, which shows data for a designer purse factory. The average fixed cost of producing 4 purses is: A) $12.50 B) $47.50 C) $50 D) $82.50 11. If a consumer purchases a combination of coffee and football tickets such that MUCoffee/PCoffee = 20 and MUFootball tickets/PFootball tickets = 10, to maximize utility, the consumer should buy: A) less coffee and more football tickets. B) more coffee and fewer football tickets. C) more coffee and more football tickets. D) less coffee and fewer football tickets. Page 5 Use the following to answer question 12: Figure: Budget Lines for Oranges and Apples 12. (Figure: Budget Lines for Oranges and Apples) Look at the figures Budget Lines for Oranges and Apples. For some time, Antonio has had $5 per month to spend on oranges and apples. The price of an orange is $0.50 and the price of an apple is $0.25. Which of the charts shows what will happen to his budget line if his income increases to $6? A) Chart A B) Chart B C) Chart C D) Chart D 13. In the short run, if P < AVC, a perfectly competitive firm: A) produces output and earns an economic profit. B) produces output and incurs an economic loss. C) does not produce output and earns an economic profit. D) does not produce output and incurs an economic loss. Page 6 14. The average total cost of producing cell phones in a factory is $20 at the current output level of 100 units per week. If fixed cost is $1,200 per week: A) average fixed cost is $20. B) total cost is $3,200. C) variable cost is $2,000. D) average variable cost is $8. 15. A consumption bundle that lies inside the individual’s budget line is a consumption bundle that A) does not maximize the individual’s utility given their tastes, income, and the price of the goods. B) does not exhaust the individual’s income. C) the individual can afford. D) Answers (a), (b), and (c) are all true. Use the following to answer question 16: Figure: The Market for Music Downloads 16. (Figure: The Market for Music Downloads) Look at the graph The Market for Music Downloads. If the government imposes a tax of $3 in this market, the government will receive tax revenue of: A) $20. B) $30. C) $60. D) $75. Page 7 17. Consumers buy both alcoholic and nonalcoholic beverages. If the government tries to discourage people from drinking alcoholic beverages by imposing an excise tax on them but gives consumers an income subsidy to keep the consumers on their original indifference curves, what will happen to consumption of alcoholic and nonalcoholic beverages? A) The same amount of both goods will be consumed. B) Fewer alcoholic and more nonalcoholic beverages will be consumed. C) More alcoholic and fewer nonalcoholic beverages will be consumed. D) It is impossible to determine what will happen to the consumption of alcoholic and more nonalcoholic beverages. 18. When a fine caterer produces 30 catered meals, its marginal cost and average variable cost each equal $10. Therefore, assuming normally shaped cost curves, at 29 meals: A) its marginal cost is greater than $10 and its average variable cost is less than $10. B) its marginal cost is less than $10 and its average variable cost is more than $10. C) its marginal cost and its average variable cost are each greater than $10. D) its marginal cost and its average variable cost are each equal to $10. Use the following to answer question 19: Figure: Income and Substitution Effects Page 8 19. (Figure: Income and Substitution Effects) Look at the figure Income and Substitution Effects. Carlos is originally consuming his optimal consumption bundle at point A in the figure when the price of gasoline falls. The movement from K1 to K2 reflects: A) the total change in quantity demanded due to the decrease in the price of gasoline. B) the income effect of the price decrease of gasoline. C) the substitution effect of the price decrease of gasoline. D) the income effect of the price decrease of gasoline and the substitution effect of the price decrease of gasoline. 20. If total utility is rising as more salsa is consumed, we can definitely say that marginal utility is: A) falling. B) constant. C) rising. D) greater than zero. 21. A principle suggesting that people with more income or wealth should pay more taxes is the: A) ability-to-pay principle. B) regressive tax principle. C) progressive tax principle. D) benefits principle. Use the following to answer question 22: Figure: A Firm’s Cost Curves Page 9 22. (Figure: A Firm’s Cost Curves) Look at the figure A Firm’s Cost Curves. The curve labeled V represents the firm’s ________ curve. A) total cost B) average total cost C) marginal cost D) average variable cost 23. LaToya sees honey and sugar as perfect substitutes. She is always willing to substitute 1 teaspoon of honey for 2 teaspoons of sugar. If honey is three times as expensive as sugar, LaToya will use: A) only honey. B) only sugar. C) some honey and some sugar. D) a lot of sugar and a little honey. Use the following to answer question 24: Figure: Long-Run Average Cost 24. (Figure: Long-Run Average Cost) Look at the figure Long-Run Average Cost. This firm has ________ in the output region from 0 to A. A) decreasing returns to scale B) constant returns to scale C) increasing returns to scale D) negative costs of production 25. You own a small deli that sells sandwiches, salads, and soup to the community. Which of the following is an implicit cost of the business? A) wages paid to part-time employees B) the job offer you did not accept at a local catering service C) bread, meat, and vegetables used to produce the items on your menu D) your monthly utility bill Page 10 26. If the demand curve is downward sloping and supply is perfectly elastic, then the burden of an excise tax is: A) borne entirely by consumers. B) borne entirely by producers. C) shared by consumers and producers, with the burden falling mainly on consumers. D) shared by consumers and producers, with the burden falling mainly on producers. Use the following to answer question 27: Figure: A Perfectly Competitive Firm in the Short Run 27. (Figure: A Perfectly Competitive Firm in the Short Run) Look at the figure A Perfectly Competitive Firm in the Short Run. The firm’s total cost of producing its most profitable level of output is: A) BS. B) DK. C) 0FKD. D) 0ESB. Page 11 Use the following to answer question 28: Scenario: Betty’s Cookie Shop Betty runs a cookie shop where she sells cookies for $1 each. In order to run the business, she employs five people, each of whom worked a total of 500 hours last year; she paid them a wage of $10 per hour. Her costs of equipment and raw materials add up to $75,000. Her business ability is legendary, and other companies have offered to pay Betty $100,000 if she would come to work for them. She also knows she could sell her cookie shop for $150,000. The bank in town currently pays an annual interest rate of 3% on all funds deposited with it. Assume there is no capital depreciation at this point. 28. (Scenario: Betty’s Cookie Shop) Given the information provided, Betty’s implicit and explicit costs are equal to: A) $80,000. B) $184,500. C) $204,500. D) $100,000. 29. Consider a perfectly competitive firm in the short run. Assume that it is sustaining economic losses but continues to produce. At the profit-maximizing (loss-minimizing) output, all of the following statements are correct except: A) marginal cost is less than average total cost. B) marginal cost is equal to marginal revenue. C) price is equal to marginal cost. D) marginal cost is less than average variable cost. 30. The term diminishing returns refers to: A) a falling interest rate that can be expected as one’s investment in a single asset increases. B) a reduction in profits caused by increasing output beyond the optimal point. C) a decrease in total output due to the firm hiring uneducated workers. D) a decrease in the extra output due to the use of an additional unit of a variable input when all other inputs are held constant. 31. According to the marginal decision rule, if the marginal benefit is: A) more than marginal cost, an activity should be reduced. B) less than marginal cost, an activity should be reduced. C) equal to marginal cost, an activity should be reduced. D) more than marginal cost, net benefit is maximized. Page 12 32. Faruq spends all of his income on two goods: tacos and milkshakes. His income is $100, the price of tacos is $10, and the price of milkshakes is $2. If Faruq purchases 10 milkshakes, he can purchase ________ tacos. A) 10 B) 50 C) 8 D) 18 33. Higher indifference curves represent: A) less utility than lower indifference curves. B) more utility than lower indifference curves. C) the same level of utility as lower indifference curves. D) unknown levels of utility compared to lower indifference curves. 34. In the short run, as the level of total production for a firm increases, the firm’s total product curve A) increases but at a decreasing rate. B) increases but at an increasing rate. C) decreases but at a decreasing rate. D) decreases but at an increasing rate. 35. Which of the following is an example of an excise tax? A) a tax of $0.41 per gallon of gas B) a tax of 12.4% of your wages C) a tax on the value of your property D) a one-time local government tax of $50 36. Suppose Governor Meridias initiates a payroll tax of 10% on all income up to $50,000. Any income above $50,000 is not taxed. This payroll tax will be: A) progressive. B) proportional. C) regressive. D) structural. 37. The income tax in Tinseltown is a flat tax that requires everyone to pay 10% of their income to the government no matter what their level of income. This tax is A) efficient. B) proportional. C) regressive. D) based on the ability-to-pay principle. E) based on the benefit principle. Page 13 38. Ian is such a big Braves fan that his benefit of seeing a Braves’ game is $200. He pays $100 for a ticket to see one of their playoff games. Unfortunately, he left the ticket in his jeans when he laundered them and the ticket is destroyed. According to marginal analysis, Ian should: A) not go to the game. B) buy another ticket for $100 and attend the game. C) buy another ticket and attend the game only if he can buy the ticket for less than $100. D) watch the game on TV. 39. Chuck spends all of his income on two goods: tacos and milkshakes. His income is $100, the price of tacos is $10, and the price of milkshakes is $2. If the price of each good doubles and Chuck’s income doubles, which of the following statements is correct? A) Chuck’s budget line will be unaffected. B) Chuck’s budget line will shift out. C) Chuck’s budget line will shift in. D) Chuck will now be able to buy more of both goods. 40. Tax incidence analysis seeks to determine: A) who actually sends the tax payment to the government. B) who actually pays the extra cost imposed by a tax. C) who ultimately gets the tax revenue. D) whether a tax is in the benefits-received category or the ability-to-pay category. 41. In which of the following cases will an increase in the tax rate most likely decrease tax revenue? A) The elasticity of demand is 3.3 and the elasticity of supply is 2.1. B) The elasticity of demand is 3.3 and the elasticity of supply is 0.5. C) The elasticity of demand is 0.2 and the elasticity of supply is 2.1. D) The elasticity of demand is 0.2 and the elasticity of supply is 0.5. 42. Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total cost of producing candy canes by $0.05; there are no other changes in production costs. Based on the information given, we can conclude that in the long run we will observe: A) firms leaving the industry. B) firms entering the industry. C) some firms entering and some firms leaving. D) neither entry nor exit from the industry. Page 14 43. For a perfectly competitive firm in the short run: A) if the firm produces the quantity at which P > ATC, then the firm is profitable. B) if the firm produces the quantity at which P < ATC, then the firm breaks even. C) if the firm produces the quantity at which P = ATC, then the firm incurs a loss. D) if the firm produces the quantity at which P < ATC, then the firm is profitable. 44. A tax that takes a _______ percentage of income as income rises is _______. A) higher; proportional B) lower; an ability tax C) higher; progressive D) lower; a marginal tax 45. Sarah’s Autoshop reports that their marginal cost, no matter their level of production, is always equal to $10. This implies that the marginal cost curve for Sarah’s Autoshop is A) a vertical line. B) a horizontal line. C) initially downward sloping as output increases, but then eventually it is upward sloping. D) initially upward sloping as output increases, but then eventually it is downward sloping. 46. Joseph consumes pizza and soda. He is currently consuming three units of pizza and two units of soda. The price of pizza is $5 and the price of soda is $1. If he is consuming the optimal consumption bundle and his marginal utility of pizza is 50, then his marginal utility of soda is: A) 50. B) 10. C) 5. D) impossible to determine unless you know Joseph’s income. 47. Marginal analysis is relevant for: A) both “either–or” and “how much” decisions. B) only “either–or” decisions. C) only “how much” decisions. D) only those situations where the time value of money is involved. Page 15 48. If personal income up to and including $30,000 is not taxed, income of $30,001 to $60,000 is taxed at 10%, and income over $60,000 is taxed at 25%, then a family earning an income of $100,000 will pay ________ in personal taxes. A) $6,000 B) $10,000 C) $13,000 D) $25,000 49. A total product curve indicates the relationship between: A) a variable input and price. B) a variable input and variable cost. C) a variable input and output. D) output and price. 50. You have rented your first apartment, signing a lease that commits you to pay $500 each month for 12 months. You have an opportunity to take a trip to Europe during the entire month of June and you will spend $2,000 traveling. Your apartment will be vacant, but because of your lease, you must still pay the rent. The cost of taking the trip to Europe is: A) $2,000, because the $500 for your June rent is a sunk cost. B) $2,500, because this is your total spending during the month of June. C) $1,500, because the June rent is an opportunity cost of traveling that must be deducted from the explicit cost of the trip. D) $2,500, because the June rent is an opportunity cost of traveling and must be added to the explicit cost of the trip. 51. A perfectly competitive firm’s short-run supply curve is its: A) average variable cost curve above the marginal cost curve. B) marginal cost curve above the average fixed cost curve. C) marginal cost curve above the average total cost curve. D) marginal cost curve above the average variable cost curve. 52. The marginal cost curve intersects the average variable cost curve at: A) its lowest point. B) its maximum. C) its end point. D) no point; the curves don’t intersect. Page 16 Use the following to answer question 53: Figure: Long-Run and Short-Run Average Cost Curves 53. (Figure:Long-Run and Short-Run Average Cost Curves ) Look at the figure Long-Run and Short-Run Average Cost Curves. If a firm is producing at point C on the ATC2 but anticipates increasing output to 225,000 units in the long run, the firm will build a ________ plant and have ________. A) smaller; economies of scale B) smaller; diseconomies of scale C) bigger; economies of scale D) bigger; diseconomies of scale Use the following to answer question 54: Page 17 54. (Table: Production Function for Soybeans) The table shows a production function for soybeans. Assume that the fixed input, capital, is 10 acres of land and a tractor, which have a combined cost of $150 per day. The cost of labor is $100 per worker per day. The variable cost of producing 45 bushels of soybeans is: A) $100 B) $200 C) $350 D) $4500 55. Steven consumes only two goods, both of which are normal goods. He is currently maximizing his utility in consumption of both goods. Now assume the price of one of the goods falls. As he adjusts to this event: A) the marginal utility of the good whose price changed will rise, and the marginal utility of the other good will fall. B) the marginal utility of the good whose price changed will rise, and the marginal utility of the other good will also rise. C) the marginal utility of the good whose price changed will fall, and the marginal utility of the other good will also fall. D) the marginal utility of the good whose price changed will fall, and the marginal utility of the other good will rise. Page 18

 

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