Answers to multiple choice questions are to be done on the answer sheet. Choose the
correct answer in each case.
1) What happens when a country allows trade and becomes an exporter of a good?
Domestic producers gain, and domestic consumers lose.
Domestic producers lose, and domestic consumers gain.
Domestic producers and domestic consumers both gain.
Domestic producers and domestic consumers both lose.
2) The world price of yo-yos is $4.00 each. The pre-trade price of yo-yos in Taiwan is $3.50 each. What
would happen if Taiwan allows trade in yo-yos?
Taiwan will import yo-yos, and the price in Taiwan will be $4.00 each.
Taiwan will import yo-yos, and the price in Taiwan will be $3.50 each.
Taiwan will export yo-yos, and the price in Taiwan will be $4.00 each.
Taiwan will export yo-yos, and the price in Taiwan will be $3.50 each.
Figure 2-1
3) Figure 2-1 shows the domestic demand and supply for pencil sharpeners in China. Supposing China
engages in trade with world, what will China do?
import 100 pencil sharpeners
import 250 pencil sharpeners
export 250 pencil sharpeners
export 300 pencil sharpeners
4) Refer to Figure 2-1. If China chooses to trade, what would the price of pencil sharpeners in China be and
how many would be sold domestically?
$12 and 200 would be sold domestically
$16 and 200 would be sold domestically
$16 and 300 would be sold domestically
$16 and 450 would be sold domestically
5) Refer to Figure 2-1. What is producer surplus in China after trade?
3
$800
$1200
$1350
$2700
6) When do negative externalities occur?
when one person’s actions cause another person to lose money in a stock market
transaction
when one person’s actions cause his or her employer to lose business
when one person’s actions reveal his or her preference for foreign-produced goods
when one person’s actions adversely affect the well-being of a bystander who is not party
to the action
7) Which of the following is an example of a positive externality?
A college student buys a new car when she graduates.
The mayor of a small town plants flowers in the town park.
Local high school teachers have pizza delivered every Friday for lunch.
An avid fisherman buys new fishing gear for his next fishing trip.
8) How can the government internalize a positive externality?
by taxing production, which would decrease supply
by taxing production, which would increase supply
by subsidizing production, which would decrease supply
by subsidizing production, which would increase supply
9) What is the difference between a corrective tax and pollution permits?
A corrective tax sets the price of pollution, and permits set the quantity of pollution.
A corrective tax provides a more efficient outcome than permits.
A corrective tax sets the quantity of pollution, and permits set the price of pollution.
Permits provide a more efficient outcome than a corrective tax.
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Figure 2-2
This figure reflects the market for outdoor concerts in a public park surrounded by residential
neighbourhoods.
10) Refer to Figure 2-2. What price and quantity combination best represents the optimum price and
number of concerts that should be organized?
P1, Q1
P2, Q0
P3, Q1
P1, Q0
11) Refer to Figure 2-2. What is the total surplus derived from the most efficient outcome?
a + b
a + b + c + d
a + b + c + d + e + f
a + b + c + e + g
12) Two firms, A and B, each currently dump 50 tonnes of chemicals into the local river. The government
has decided to reduce the pollution and from now on will require a pollution permit for each tonne of
pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs
Firm A $100 for each tonne of pollution that it eliminates before it reaches the river, and it costs Firm B
$50 for each tonne of pollution that it eliminates before it reaches the river. Between the cost of permits
and the cost of additional pollution abatement, what is likely to happen?
Firm B will spend $3,000.
Firm B will spend $3,500.
Firm A will spend $4,000.
Firm A will spend $4,500.
13) How does one calculate personal income taxes?
It is based on a person’s taxable income and a tax schedule.
It is largely unaffected by deductions.
It is the person’s total income minus tax credits.
It is some constant fraction of income.
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14) What do most people agree about the tax system?
It should be both efficient and equitable.
It cannot raise enough revenue to cover government expenditures.
It could raise more revenue if tax rates were lowered.
It should be rewritten to require everyone to pay the same percentage of their income to
taxes.
15) If marginal tax rates increase, what results?
Average tax rates will increase then decrease
Deadweight loss from taxes will be reduced.
Deadweight loss from taxes will rise.
Average tax rates will decrease then increase.
16) Larry faces a progressive tax structure that has the following marginal tax rates: 0 percent on the first
$10000, 10 percent on the next $10000, 15 percent on the next $10000, 25 percent on the next $10000,
and 50 percent on all additional income. If Larry earns $75000, what is his average tax rate?
20 percent
25 percent
30 percent
36.67 percent
17) What is the marginal tax rate for a lump-sum tax?
always positive
always negative
zero
can take on any value, but must always lie above the average tax
18) In designing a tax system, what two objectives do policymakers have?
maximum revenue and the smallest cost to taxpayers
efficiency and the smallest cost to taxpayers
efficiency and equity
maximum revenue and debt reduction
19) What are vertical equity and horizontal equity associated with?
the benefits principle of taxation
the ability-to-pay principle of taxation
taxes that have no deadweight losses
falling marginal tax rates
20) What is an income tax in which the average tax rate is the same for all taxpayers?
a progressive tax
a regressive tax
a distortion-free tax
a proportional tax
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21) XYZ Corporation produced 300 units of output but sold only 275 of the units it produced. The average
cost of production for each unit of output produced was $100. Each of the 275 units sold was sold for a
price of $100. What would total revenue for XYZ Corporation be?
–$2500
$2500
$26125
$27500
22) How are explicit costs calculated?
They require an outlay of money by the firm.
They include all of the firm’s opportunity costs.
They include income that is forgone by the firm’s owners.
They include interest earned from abandoned investment opportunities.
Scenario 2-1
Joe wants to start his own business. The business he wants to start will require that he purchase a factory
that costs $300,000. To finance this purchase, he will use $100,000 of his own money, on which he has
been earning 10 percent interest per year. In addition, he will borrow $200,000, and he will pay 12
percent interest per year on that loan.
23) Refer to Scenario 2-1. For the first year of operation, what is the explicit cost of purchasing the factory?
$12000
$20000
$24000
$44000
24) Refer to Scenario 2-1. For the first year of operation, what is the opportunity cost of purchasing the
factory?
$10000
$20000
$24000
$34000
25) Suppose a certain firm is able to produce 160 units of output per day when 15 workers are hired. The
firm is able to produce 176 units of output per day when 16 workers are hired (holding other inputs
fixed). What is the marginal product of the 16th worker?
10 units of output
11 units of output
16 units of output
176 units of output
26) What is happening when marginal cost is less than average total cost?
Marginal cost must be falling.
Average variable cost must be falling.
Average total cost must be falling.
Marginal cost must be rising.
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27) When do economies of scale occur?
when long-run average total costs rise as output increases
when long-run average total costs fall as output increases
when average fixed costs are falling
when average fixed costs are constant
Table 2-2
Measures of Cost for ABC Inc. Widget Factory
Quantity
of Widgets
Variable
Costs
Total
Costs
Fixed
Costs
0 $0 $10 $10
1 $1 $11 $10
2 $3 $13 $10
3 $6 $16 $10
4 $10 $20 $10
5 $15 $25 $10
6 $21 $31 $10
28) Refer to Table 2-2. What is the average variable cost of producing four widgets?
$2.00
$2.50
$3.33
$5.00
29) Refer to Table 2-2. What is the marginal cost of producing the sixth widget?
$1.00
$3.50
$5.00
$6.00
30) In the long run, what happens to inputs?
Inputs that were fixed in the short run remain fixed.
Inputs that were fixed in the short run become variable.
Inputs that were variable in the short run will increase.
Inputs that were variable in the short run will decrease.
31) For a firm in a perfectly competitive market, what must the price of the good always be?
equal to marginal revenue
equal to total revenue
greater than average revenue
less than average revenue
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32) When a firm in a competitive market receives $500 in total revenue, it has a marginal revenue of $10.
What is the average revenue, and how many units were sold?
$5 and 100 units
$10 and 50 units
$10 and 100 units
$50 and 5 units
33) Which of the following explains the relationship between average revenue, marginal revenue, and price
in a competitive market?
Average revenue equals the price of the good, but marginal revenue is different.
Marginal revenue equals the price of the good, but average revenue is different.
Average revenue equals marginal revenue, but the price of the good is different.
Average revenue, marginal revenue, and the price of the good are all equal to one another.
Table 2-3
Quantity Total
Revenue
Total
Cost
0 $0 $4
1 20 14
2 40 26
3 60 40
4 80 56
5 100 74
6 120 94
7 140 116
8 160 140
9 180 166
34) Refer to Table 2-3. If this firm chooses to maximize profit, it will choose a level of output where
marginal cost is equal to what dollar amount?
$14
$16
$18
$20
35) Refer to Table 2-3. What is the maximum profit available to this firm?
$20
$24
$26
$28
36) Refer to Table 2-3. If the firm finds that its marginal cost is $24, what should it do?
It should reduce fixed costs by lowering production.
It should increase production to maximize profit.
It should decrease production to maximize profit.
It should reduce variable costs by lowering production.
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Figure 2-3
37) Refer to Figure 2-3. When price falls from P3 to P1, which of the following does the firm find?
It should produce Q1 units of output.
It should produce Q3 units of output.
Fixed cost is higher at a production level of Q1 than it is at Q3.
It is unwilling to produce any output.
38) Refer to Figure 2-3. When price rises from P3 to P4, which of the following does the firm find?
Profit is maximized at a production level of Q3.
Fixed costs are lower at a production level of Q4.
It can earn a positive profit by increasing production to Q4.
Average revenue exceeds marginal revenue at a production level of Q4.
39) Shrimp Galore, a shrimp harvesting business in British Columbia, has a 30-year loan on its shrimp
harvesting boat. The annual loan payment is $25 000 and the boat has a market (salvage) value that
exceeds its outstanding loan balance. Prior to the 2013 shrimp harvesting season, Shrimp Galore’s
accountant predicted that at expected market prices for shrimp, Shrimp Galore would have a net loss of
$75 000 after paying all 2013 expenses (including the annual loan payment). In this case, what should
Shrimp Galore do?
It should produce nothing and experience a loss of $25 000.
It should produce nothing and experience a loss of $75 000.
It should continue to operate even though it predicts a loss of $25 000.
It should continue to operate even though it predicts a loss of $75 000.
40) When firms have an incentive to exit a competitive market, which of the following effects will their exit
have?
It will lower market price.
It will necessarily raise the costs of firms that remain in the market.
It will raise profits for firms that remain in the market.
It will shift the market supply curve to the right.
41) Assume a firm is producing 800 units of output and that it sells each unit for $6. Its average total cost is
$4. What is its profit?
–$3200
–$1600
$1600
$3200
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42) What type of monopoly are patent and copyright laws major sources of?
natural monopolies
government-created monopolies
resource monopolies
product monopolies
43) When a single firm can supply a product to an entire market at a smaller cost than could two or more
firms, what is the industry called?
a resource industry
an exclusive industry
a government monopoly
a natural monopoly
44) When a monopolist increases the amount of output that it produces and sells, what happens to its average
revenue and its marginal revenue?
Both its average revenue and its marginal revenue increase.
Its average revenue increases, and its marginal revenue decreases.
Its average revenue decreases, and its marginal revenue increases.
Both its average revenue and its marginal revenue decrease.
45) A monopoly firm can sell 150 units of output for $12.00 per unit. Alternatively, it can sell 151 units of
output for $11.95 per unit. What is the marginal revenue of the 151st unit of output?
–$11.95
–$4.45
$4.45
$11.95
46) Let P = price, MR = marginal revenue, and MC = marginal cost. For a profit-maximizing monopolist,
which of the following relationships holds?
P > MR = MC
P = MR = MC
P > MR > MC
MR < MC < P
47) If a monopolist sells 100 units at $8 per unit and realizes an average total cost of $6 per unit, what is the
monopolist’s profit?
$200
$400
$600
$800
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48) Consider a profit-maximizing monopoly pricing under the following conditions: the profit-maximizing
price charged for goods produced is $16; the intersection of the marginal-revenue and marginal-cost
curves occurs where output is 10 units and marginal cost is $8; and the socially efficient level of
production is 12 units. The demand curve and marginal-cost curves are linear. What is the deadweight
loss?
$4
$8
$12
$16
Scenario 2-2
A monopoly firm maximizes its profit by producing 500 units output (so Q = 500). At that level of output,
its marginal revenue is $30, its average revenue is $40, and its average total cost is $34.
49) Refer to Scenario 2-2. What is the firm’s maximum profit?
$2000
$3000
$4000
$6000
50) Refer to Scenario 2-2. At Q = 500, what is the firm’s total cost?
$15 000
$17 000
$20 000
$22 500