THE G.

RAYMOND CHANG SCHOOL OF CONTINUING EDUCATION CECN 104-Section 420 INTRODUCTORY MICROECONOMICS FINAL EXAM - FALL 2008

1. This final exam is 2.0 hours in length and consists of 55 multiple choice questions worth one mark each. 2. All work must be done on the bubble sheet provided. Please use only a pencil to fill in the bubbles. 3. Make sure to write your name and student number on the bubble sheet, and ALSO fill the bubbles relevant to your name and the student number. 4. Calculators are permitted but not cell phones. 5. This is a closed book exam. No unauthorized study aids are permitted. 6. The Ryerson Student Code of Academic Conduct expressly prohibits academic dishonesty resulting from: using materials or aids that have not been approved by the instructor accessing course content from any unauthorized source copying another person's answer(s) or allowing your answer(s) to be copied sharing answers or consulting with another person through any means submitting an answer to a test/exam question that was completed, in whole or in part, outside of the exam room (unless permitted by the exam format) having someone take a test for you or taking a test for someone else Best Wishes!

STUDENT NAME (please print):___________________________________________________ STUDENT NUMBER:___________________________________________________________ STUDENT SIGNATURE:_________________________________________________________

Ryerson University-Distance EducationFinal Examination Winter 2007

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1.

In the following diagram, curves 1, 2, and 3 represent:

(a) (b) (c) (d) 2.

average, marginal, and total product curves respectively total, marginal, and average product curves respectively total, average, and marginal product curves respectively marginal, average, and total product curves respectively

Assume that product Alpha and product Beta are both priced at $1 per unit and that Ellie has $20 to spend on Alpha and Beta. The marginal utility of Alpha is 40 and the marginal utility of Beta is 20. This indicates that: (a) Ellie should make no change in consumption (b) given another dollar, Ellie should buy an additional unit of Beta (c) in order to maximize utility, Ellie should buy more of Alpha and less of Beta (d) in order to maximize utility, Ellie should buy more of Beta and less of Alpha Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold $100,000 units of its output at $50 per unit, its: (a) economic losses were $500,000 (b) accounting profits were $100,000 and its economic profits were zero (c) accounting losses were $500,000 and its economic losses were zero (d) accounting profits were $500,000 and its economic profits were $1 million With fixed costs of $400, a firm has average total costs of $3 and average variable costs of $2.50. The firms output is: (a) 200 units (b) 400 units (c) 800 units (d) 1,600 units If a firm in a perfectly competitive industry is confronted with an equilibrium price of $5, its marginal revenue: (a) will be greater than $5 (b) will be less than $5 (c) may be either greater or less than $5 (d) will also be $5 -3-

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Ryerson University-Distance EducationFinal Examination Winter 2007

6.

A firm sells a product in a perfectly competitive market. The marginal cost of the product at the current output of 500 units is $1.50. The minimum possible average variable cost is $1.00. The market price of the product is $1.25. To maximize profit or minimize losses, the firm should: (a) shut down (b) continue producing 500 units (c) produce more than 500 units (d) produce less than 500 units Government must provide economically desirable public goods because: (a) private production of these goods would entail unacceptably high levels of external costs (b) the availability of such goods yields no benefits to individual consumers (c) the benefits yielded from such goods cannot be withheld from those who refuse to pay for them (d) their provision is necessary if we are to reduce unemployment and inflation A negative externality or external cost occurs when: (a) firms fail to achieve allocative efficiency (b) firms fail to achieve productive efficiency (c) price exceeds marginal cost (d) the total cost of producing a good exceeds the cost borne by the producer If a good that generates negative externalities was priced to take into account these negative externalities, then its: (a) price would decrease and its output would increase (b) output would increase but its price would remain constant (c) price would increase and its output would decrease (d) price would increase but its output would remain constant If some activity creates positive externalities, then economic theory suggests that the activity ought to be: (a) taxed (b) prohibited (b) subsidized (d) left alone The total amount paid to a factor of production is economic rent in the diagram below:

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(a) (b) (c) (d)

A B C D -4-

Ryerson University-Distance EducationFinal Examination Winter 2007

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The demand for farmland will increase if:

(a) (b) (c) (d) 13.

the demand for food decreases technological advances make land more productive the price of farm labour increases and the output effect exceeds the substitution effect the supply of farmland increases

Suppose the interest payments are $140 per year on a $1,000 loan, and $1,188 per year on a $8485 loan. The interest rates on the two loans are: (a) 14 percent and 20 percent respectively (b) 14 percent on both loans (c) 18.8 percent on both loans (d) 1.4 percent and 11.8 percent, respectively If you pay $2,640 annually on a $22,000 loan A, and pay $1,800 on a 12,000 loan B, then the interest rate is: (a) 12 percent on loan A and 18 percent on loan B (b) 10 percent on loan A and 15 percent on loan B (c) 12 percent on loan A and 15 percent on loan B (d) 15 percent on loan A and 12 percent on loan B The supply of loanable funds is an upward sloping curve because the: (a) higher the interest rate, the more households consume, and the more households save (b) higher the interest rate, the less households consume, and the more households save (c) lower the interest rate, the more households consume, and the more households save (d) lower the interest rate, the less households consume, and the more households save The XYZ Corporation can make a real (i.e., inflation adjusted) return on an investment of 9 percent. The nominal rate of interest is 13 percent and the rate of inflation is 7 percent. We can conclude that the : (a) investment will be profitable (b) investment will be unprofitable (c) real rate of interest is 4 percent (d) real rate of interest is 2 percent Other things equal, interest rates are: (a) higher on large loans than on smaller loans (b) higher on loans with tax-exempt interest rates (c) lower on less risky loans than on riskier loans (d) lower on short-term loans than on long-term loans

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Ryerson University-Distance EducationFinal Examination or popcorn. can spend on either Coke Winter 2007

Please refer to the diagram below. Suppose you have a money income of $10 all of which you The prices of Coke and popcorn respectively are:

(a) (b) (c) (d) 19.

$0.50 and $1.00 $1.00 and $ 0.50 $1.00 and $2.00 $0.40 and $0.50

Refer to the production possibilities table below: A change from possibility C to B means that:

Product Steel Wheat

(a) (b) (c) (d) 20.

A 0 100

B 1 90

C 2 75

D 3 55

E 4 30

F 5 0

one unit of steel is given up to get 75 units of wheat two units of steel are given up to get 75 units of wheat 1 unit of steel is given up to get 15 more units of wheat two units of steel are given up to get 15 more units of wheat

Suppose a product entails substantial external costs. If the government adopts a policy which forces producers to pay these costs, the: (a) output of the product will decrease (b) output of the product will increase (c) price of the product will decrease (d) both the price and output will increase The simple circular flow model shows that: (a) households are on the demand side of both product and factor markets (b) businesses are on the supply side of both product and factor markets (c) households are on the supply side of the factor market and on the demand side of the product market (d) businesses are on the demand side of the product market and on the supply side of the factor market By an increase in demand, we mean: (a) that product price has fallen so consumers move down to a new point on the demand curve (b) the quantity demanded at each price in a set of prices is greater (c) the quantity demanded at each price in a set of prices is smaller (d) none of the above -6-

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If an increase in consumer incomes causes the demand curve for product Z to shift to the left, then it can be said that product Z is: Ryerson University-Distance EducationFinal Examination Winter 2007 (b) (a) a normal good a luxury good (c) an inferior good (d) an inexpensive good

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Which of the following statements is correct? (a) an increase in the price of C will decrease the demand for complementary good D (b) a decrease in income will increase the demand for a normal good (c) an increase in income will reduce the demand for a normal good (d) a decline in the price of X will increase the demand for substitute product Y Which of the following is correct? (a) if the demand is elastic, an increase in price will increase total revenue

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(b) (c) (d) 26.

if demand is elastic, a decrease in price will decrease total revenue if demand is elastic, a decrease in price will increase total revenue if demand is inelastic, an increase in price will decrease total revenue

Suppose the price elasticities of demand coefficients are 1.43, 0.67, 1.11, and 0.29 for products W, X, Y, and Z, respectively. A one percent decrease in price will increase total revenue in which of the following cases? (a) W and Y (b) Y and Z (c) X and Z (d) Z and W To maximize utility, a consumer should allocate money income so that the: (a) elasticity of demand on all products purchased is the same (b) marginal utility obtained from the last dollar spent on each product is the same (c) total utility derived from each product consumed is the same (d) marginal utility of the last unit of each product consumed is the same The basic difference between the short run and the long run is that: (a) all costs are fixed in the short run, but all costs are variable in the long run (b) the law of diminishing returns applies in the long run, but not in the short run (c) at least one factor of production is fixed in the short run, while all factors of production are variable in the long run (d) economies of scale may be present in the short run, but not in the long run The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is equal to the marginal cost of producing it is known as the: (a) output-maximizing rule (b) profit maximizing rule (c) shut-down rule (d) break-even rule -7-

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A monopolist that is non-discriminating must decrease price on all units of a product sold in order to sell additional units. This explains why: (a) there are barriers to entry in a monopoly (b) a monopoly has a perfectly elastic curve Ryerson University-Distance EducationFinal Examination Winter 2007 (c) marginal revenue is less than average revenue (d) total revenues are greater than total costs at the profit maximizing level of output

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A monopolist can sell 20 toys per day for $8.00 each. To sell 21 toys per day, the price must be cut to $7.00. The marginal revenue of the 21st toy is: (a) -$10 (b) -$13 (c) -$18 (d) -$21 Which set best describes the basic features of monopolistic competition? (a) easy entry, few firms, and standardized products (b) barriers to entry, few firms, and differentiated products (c) easy entry, many firms, and differentiated products (d) barriers to entry, many firms, and standardized products In the long run new firms will enter a monopolistically competitive industry: (a) provided economies of scale are being realized (b) even though losses are incurred in the short run (c) until minimum average total cost is achieved (d) until economic profits are zero Oligopolistic industries are characterized by: (a) a few dominant firms and substantial entry barriers (b) a few dominant firms and no barriers to entry (c) a large number of firms and low entry barriers (d) a few dominant firms and low entry barriers Oligopoly is difficult to analyze primarily because: (a) the number of firms is too large to make collusion understandable (b) the price and output decision of any one firm depend on the reactions of its rivals (c) output may be homogenous or differentiated (d) neither allocative nor productive efficiency is achieved Which type of merger is most likely to be the focus of competition law scrutiny and enforcement? (a) conglomerate (b) horizontal (c) vertical (d) natural -8-

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Industry A is composed of four large firms that hold market shares of 60, 20, 10, and 10. The Herfindahl index for this industry is: (a) 1,800 (b) 3,800 (c) 4,200 Ryerson University-Distance EducationFinal Examination Winter 2007 (d) 5,500

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Social regulation differs from industrial regulation: (a) in that social regulation is involved in the details of the production process, while industrial regulation is not (b) in that social regulation applies to virtually all industries, while industrial regulation applies to restricted number (c) in that social regulation has expanded more rapidly in recent years than has industrial regulation (d) in all of the above ways The marginal revenue product of any inputs is the: (a) cost of an additional unit of that input (b) added profits resulting from the use of one more unit of that input (c) additional output resulting from the use of one more unit of that input (d) additional revenue resulting from the use of one more unit of that input Increases in the productivity of labour results partly from: (a) the law of diminishing returns (b) improvements in technology (c) reductions in wage rates (d) increases in the quantity of labour If the nominal wage increases by less than the price level, the real wage: (a) will increase (b) will decrease (c) may either increase or decrease (d) none of the above Which is a valid explanation for real wage growth (a) the rising cost of capital accumulation (b) a contraction of employment in service industries (c) an increase in the quantity of labour (d) an increase in the rate of productivity growth Critics of the minimum wage argue that an increase in the minimum wage rate above the equilibrium rate of a perfectly competitive labour market would: (a) increase unemployment in the labour market (b) increase the firms demand for labour (c) decrease the supply of labour (d) cause firms to substitute labour for capital

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-944. The real wage will rise if the nominal wage: (a) falls more rapidly than the general price level (inflation) (b) increases at the same rate as labour productivity (c) rises more rapidly than the general price level (d) rises less rapidly than the general price level Other things equal, the monopolistic employer will pay a: workers than will a perfectly competitive employer (b) higher wage rate but hire fewer workers than will a perfectly competitive employer

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Ryerson University-Distance EducationFinalwage rate and hire fewer (a) lower Examination Winter 2007

(c)

(d)
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lower wage rate but hire a larger number of workers than will a perfectly competitive employer higher wage rate and hire a larger number of workers than will a perfectly competitive employer

Marginal revenue product measures the: (a) amount by which the extra production of one more worker increases a firms total revenue (b) decline in product price which a firm must accept to sell the extra output of one more worker (c) increase in total cost resulting from the hire of one extra unit of a factor (d) increase in total revenue resulting from the production of one more unit of a product Assume labour is the only variable input and that an additional input of labour increases total output from 72 to 78 units. If the product sells for $6 per unit in a perfectly competitive market, the MRP of this additional worker is: (a) $6 (b) $12 (c) $36 (d) $72 If two factors are highly substitutable for one another: (a) a decrease in the price of one will increase unit costs of production (b) an increase in the price of one will increase the demand for the other (c) an increase in the price of one will reduce the demand for the other (d) a decline in the price of one will increase the demand for the other The major problem with an unregulated monopoly is that the monopolist will produce: (a) less output and sell at a higher price than would be the case in pure competition (b) more output and sell at a higher price than would be the case in pure competition (c) more output and sell at a lower price than would be the case in pure competition (d) less output and sell at a lower price than would be the case in pure competition Industry A is composed of four large firms that hold market shares of 60, 20, 10, and 10 percent respectively. The Herfindahl index for this industry is: (a) 1,800 (b) 3,800 (c) 4,200 (d) 5,500 - 10 -

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Which set best describes the basic features of monopolistic competition? (a) easy entry, few firms, and standardized products (b) barriers to entry, few firms, and differentiated products (c) easy entry, many firms, and differentiated products (d) barriers to entry, many firms, and standardized products

The monopolistic competition model predicts that: (a) allocative efficiency will be achieved (b) productive efficiency will be achieved Ryerson University-Distance EducationFinal Examination in non-price competition (c) firms will engage Winter 2007 (d) firms will realize economic profits in the long run

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For the monopolistically competitive firm depicted below, it can be said that the firm is:

(a) (b) (c) (d) 54.

making economic profit in the long run making economic profit in the short run earning only normal profit in the long run earning only normal profit in the short run

Product differentiation is present in: (a) perfectly competitive markets only (b) monopolistically competitive markets only (c) oligopolistic markets only (d) both monopolistically competitive and oligopolistic markets Suppose that total sales in an industry in a particular year are $600 million, and sales by the top four sellers are $200 million, $150 million, $100 million, and $50 million, respectively. We can conclude that: (a) price leadership exists in this industry (b) the concentration ratio is more than 80 percent (c) this industry is a differentiated oligopoly (d) the firms in this industry face a downward sloping demand curve

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Ryerson University-Distance EducationFinal Examination Winter 2007