ECON 251

Exam 2 Pink
Fall 2010 (Practice Exam #2A for Spring 2011)

Candy bars Bags of potato chips

Quantity Total Utility
0 0
1 10
2 16
3 18
4 19
5 19
Quantity Total Utility
0 0
1 8
2 14
3 18
4 21
5 23

1. Liz consumes two goods, candy bars and potato chips. Her budget is $4 per day. The
price of a candy bar is $1.00 and the price of a bag of chips is 50 cents. Her utility is in
the table above. What is Liz’s marginal utility from purchasing the 4th candy bar?
a. 1
b. 3
c. 19
d. 38

2. For Liz to maximize her utility given her budget, what combination of candy bars and
potato chips should she eat?
a. 4 candy bars and 0 bags of potato chips
b. 3 candy bars and 2 bags of potato chips
c. 2 candy bars and 4 bags of potato chips
d. 1 candy bar and 5 bags of potato chips

3. Elle has a weekly income of $100. She only consumes manicures and dresses. The price
of a manicure is $10 and the price of a dress is $20. What is the equation for Elle’s
budget line?
a. Qmanicures = 10 - 2Qdresses
b. 100 = 10Qmanicures - 20Qdresses
c. Qmanicures = 2Qdresses - 10
d. Qmanicures = 2Qdresses - 100

4. Elle has a weekly income of $100. She only consumes manicures and dresses. The price
of a manicure is $10 and the price of a dress is $20. What is her marginal rate of
substitution when she is maximizing her utility? (Assume that the quantity of dresses is
measured on the X-axis and the quantity of manicures is measured on the Y-axis.)
a. ½
b. 2
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 c. 10
d. 20

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 5. If the price of a good increases and, as a result, the quantity demanded of that good
increases:
a. we say the good is a Giffen good
b. the income effect of the price increase is greater than the substitution effect
c. the good must be an inferior good
d. all of the above

Use the graph above to answer the following question.

6. Based on the graph, the substitution effect of the decrease in the price of juice _______
the quantity of juice from __________.
a. Increases; 1 to 3
b. Increases; 3 to 4
c. Increases; 1 to 4
d. Decreases; 4 to 3

7. Gus consumes only pizza and Coke. Suppose both goods are normal goods for Gus. If the
price of pizza falls, then Gus’s real income and the income effect will make him to
consume pizzas.
a. increases; less
b. increases; more
c. decreases; less
d. decreases; more

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 8. Mary consumes two goods: good X (measured on the X axis) and good Y (measured on
the Y axis). If her marginal rate of substitution is 3 when she is maximizing her utility
given her budget, then, at that point,
a. The slope of Mary’s budget line is -1/3.
b. Mary is willing to give up 3 units of good Y for one unit of good X.
c. Mary is willing to give up 3 units of good X for one unit of good Y.
d. The price of good Y is three times the price of good X.

9. Which of the following is NOT true about indifference curves?

a. An indifference curve shows combinations of goods that generate the same level
of utility
b. Indifference curves farther from the origin represent a higher level of utility than
those closest to the origin
c. Indifference curves can cross
d. The slope of an indifference gets flatter as x increases

10. Which of the following is NOT true when a consumer is maximizing utility?
a. The consumer is spending all of his or her income.
b. The budget line is tangent to the indifference curve.
c. Marginal utilities per dollar are equal across all goods.
d. MRS = Py/Px

11. You spend all your money on food and clothing. If the marginal utility per dollar you’re
spending on clothes is equal to 8, and the marginal utility per dollar you’re spending on
food is equal to 10, what should you do to maximize your utility?
a. You should buy more clothing and less food.
b. You should buy more food and less clothing.
c. You should buy more food and more clothing.
d. Cannot be determined without information about the prices of clothing and food.

12. If marginal product is greater than average product we know average product is:
a. Increasing
b. Decreasing
c. Constant
d. At its maximum

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 Firm Sales
Xbus $200,000
Gbus $1,000,000
Vladmir Bus $1,500,000
Scott Coach $1,800,000
Hub Coach $500,000

13. The table above shows each firm’s annual sales in inter-city bus service industry. What
percentage of total industry sales does Scott Coach have?
a. 4%
b. 10%
c. 18%
d. 36%

14. What is the Herfindahl-Hirschman Index for the inter-city bus service industry above?
a. 1,212
b. 1,865
c. 2,712
d. 3,141

15. Which one of the following is NOT true?

a. The four-firm concentration ratio in a perfectly competitive industry is lower than
in a monopoly
b. The Herfindahl-Hirschman Index(HHI) in a perfectly competitive industry is
greater than the HHI in a monopoly industry
c. The higher the four-firm concentration ratio is, the less competitive an industry is.
d. A monopoly would have a Herfindahl-Hirschman Index equal to 10,000.

16. The table below represents the short run cost for a firm. The total fixed cost is
a. $50
b. $60
c. $30
d. $100
output ATC AVC AFC
1 100 40
2 80 30
3 55
4 85
5 88

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 17. Based on the same table, the total variable cost for producing 4 units of output is
a. $200
b. $240
c. $260
d. $280

18. Based on the same table, what is the average total cost of producing 5 units of output?
a. $3
b. $60
c. $88
d. $100

Output Marginal AVC

(bags per day) cost ($) ($)
150 1.80 1.90
200 1.70 1.85
250 1.80 1.80
300 2.00 1.90
350 2.40 2.10
400 3.00 2.20
450 4.00 3.00
500 5.50 3.20

19. The table the costs of production for each of 100 identical firms in the perfectly
competitive market for potato chips. Each has a total fixed cost of $400 a day. If the
market price of a bag of potato chips is $3 per bag, what is the marginal revenue a firm
earns from selling the 300th bag of potato chips?
a. $1.90
b. $2.40
c. $1.70
d. $3

20. According to the same information, what level of potato chip production would maximize
profit for an individual firm when the price is $3 per bag?

a. 0
b. 300
c. 400
d. 500

21. What level of profit is each firm making when the price is $3 per bag?
a. $0
b. Negative $80
c. $240
d. $1,200

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 22. If the price in the market for potato chips above fell to $1.70 per bag, what level of
output would maximize profit for each firm in the market?
a. 0
b. 200
c. 300
d. 400

23. Which of the following statements about the difference between the short and long run is
NOT true?
a. In the long run, all inputs are variables but in the short run at least one input is
fixed
b. In perfect competition, firms make zero economic profit in the long run, but in the
short run firms can make a positive economic profit
c. In the short run, firms should shut-down if price is less than average total cost, but
in the long run firms should only shut-down if price is less than average variable
cost
d. In the long run, all costs are variable costs.

$ 
MC

ATC
2 
AVC
1.20 
1 

8,000  10,000 Output (pencils per day)

24. The figure above shows Flax Pencils' costs of producing pencils, where the total fixed
cost is $5,000 per day. What is the average total cost of producing 10,000 pencils?
a. $0.50
b. $1.20
c. $1.70
d. $2

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 25. Assume the pencil market (shown above) is perfectly competitive. If the market price of a
pencil is $2, then Flax will produce pencils per day and will earn a profit of
per day in the short-run.
a. 8,000; $10,000
b. 8,000; $2,000
c. 10,000; $8,000
d. 10,000; $3,000

26. A competitive market satisfies allocative efficiency because

a. the market produces where marginal cost equals average total cost.
b. the market produces where marginal benefit equals marginal cost.
c. the market produces where marginal cost equals average variable cost.
d. the market produces where marginal benefit equals marginal revenue.

27. Which one of the following is NOT true at the long-run equilibrium for that industry?
a. In a monopolistically competitive market, each firm has excess capacity.
b. Each firm in a perfectly competitive market earns zero profit.
c. Each firm in a monopolistically competitive market earns zero profit.
d. In a perfectly competitive market, each firm has excess capacity.

28. When firms in a perfectly competitive market earn positive profits in the short run, some
firms will the market in the long-run, the market supply ,and the equilibrium
price
a. Enter; increases; falls
b. Exit; decreases; rises
c. Enter; decreases; rises
d. Exit; increases; rises

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 $ 
40 

MC 

30 
24 

20 

10  D 

100  150  MR  Q 

29. Consider the graph above representing a monopoly. When the monopoly charges a single
price for its product and maximizes profit, it will charge for each unit of output and
produce _________ units of output.
a. $24; 150
b. $20; 100
c. $30; 100
d. $24; 100

30. When the monopolist above maximizes profit, consumer surplus is equal to
a. $1,200
b. $1,000
c. $500
d. $600

31. If the monopolist above can practice perfect price discrimination, then it will produce
_____ units of output and the consumer surplus is ________.
a. 150; $2,250
b. 100; $900
c. 100; $500
d. 150; $0

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 Price ($ per Quantity demanded (thousand
bottle) bottles)
9 1
8 2
7 3
6 4
5 5
4 6
3 7

32. The table above gives the demand schedule for water bottled by Spring Healthy Waters.
If it is a single price monopoly, what is the marginal revenue from selling the 5th bottle of
water?
a. $1
b. $24
c. $25
d. Negative $3

33. At which of the following points on the demand curve for Spring Healthy Waters is
demand inelastic and how do you know?
a. Demand is inelastic at the point (3, $7) because the marginal revenue from selling
the 3rd bottle of water is negative.
b. Demand is inelastic at the point (3, $7) because the marginal revenue from selling
the 3rd bottle of water is positive.
c. Demand is inelastic at the point (6,$4) because the marginal revenue from selling
the 6th bottle of water is negative.
d. Demand is inelastic at the point (7,$3) because the marginal revenue from selling
the 7th bottle of water is positive.

34. Which of the following is NOT true in a monopolistically competitive market?

a. There are no barriers to entry or exit in the market
b. Goods produced by firms are slightly differentiated
c. Demand curves facing each firm are more elastic than the market demand curve
would be
d. Each firm faces a perfectly elastic demand.

35. A firm in a monopolistically competitive industry is producing 300 units of output at a

price of $8 where the ATC is $4, the MC is $8, and the AVC is $2. Based on this
information, what should the monopolistically competitive firm do to maximize profit?
a. Expand production
b. Decrease production
c. Shut down
d. The firm is already making positive profit, so it should not change the level of
output it’s producing.

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 36. In the long run, firms in monopolistically competitive industries earn profit that is
________, implying that price is _______ average cost.
a. Zero; equal to
b. Positive; greater than
c. Negative; less than
d. Zero; greater than

37. A natural monopoly exists when there are

a. Diseconomies of scale
b. External diseconomies
c. Economies of scale
d. External economies

38. Profit is zero for a natural monopoly if the monopoly is regulated to produce where
a. Price equals average cost
b. Price equals marginal cost
c. Price equals marginal revenue
d. All of the above generate zero profit for a natural monopoly.

39. In a monopolistically competitive industry,

a. There is a small number of firms
b. Firms are identical
c. Firms can engage in advertising to differentiate their products
d. All of the above are true

40. Firms in monopolistic competition produce with “excess capacity”. This means that
a. Firms produce more than the efficient level of output
b. Firms produce the level of output that minimizes average costs in the long run
c. Firms produce less than the efficient scale
d. All of the above occur

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