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Econ 1B03 F 2022 Exam v1 AG Practice Eexam Winter 2023

Introductory Microeconomics (McMaster University)

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Econ 1B03

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PRACTICE EXAMINATION

THIS EXAMINATION INCLUDES 17 PAGES AND 60 QUESTIONS. YOU ARE RESPON-

SIBLE FOR ENSURING THAT YOUR COPY OF THE PAPER IS COMPLETE. BRING
ANY DISCREPANCY TO THE ATTENTION OF YOUR INVIGILATOR.

Examination Duration: 120 minutes

Materials Permitted In The Exam Venue:
(No electronic aids are permitted e.g. laptops, phones, smart watches)
McMaster Standard Calculator (Casio FX-991MS/MS+)

Instructions To Students:
This test paper must be returned along with the scan sheet.

You must write your name and student number on the test paper and the scan
sheet.

You must bubble in your student number and version on the scan sheet.

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OMR EXAMINATION - STUDENT INSTRUCTIONS

NOTE: IT IS YOUR RESPONSIBILITY TO ENSURE THAT THE ANSWER SHEET IS PROPER-
LY COMPLETED.YOUR EXAMINATION RESULT DEPENDS UPON PROPER ATTEN-
TION TO THESE INSTRUCTIONS.
The scanner, which reads the sheets, senses the bubble-shaded areas by their non-reflection of
light. A heavy mark must be made, completely filling the circular bubble, with an HB pencil. Marks
made with a pen or felt-tip marker will NOT be sensed. Erasures must be thorough or the scanner
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1. On side 1 (red side) of the form, in the top box, in pencil, print your student number (NOTE:
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vided. Then you MUST sign in the space marked SIGNATURE.

2. In the second box, with a pencil, mark your student number, exam version number, and
course section number in the space provided and fill in the corresponding bubble numbers
underneath.

3. To indicate your answers, mark only ONE choice from the alternatives (1,2,3,4,5 or
A,B,C,D,E) provided for each question. If there is a True/False question, enter response of
1 (or A) as True, and 2 (or B) as False. The question number is to the left of the bubbles.
Make sure that the number of the question on the scan sheet is the same as the question
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4. Pay particular attention to the Marking Directions on the form.

5. Begin answering questions using the first set of bubbles, marked “1”.

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Instructions
Identify the choice that best completes the statement or answers the question.

1. A firm is considering buying one of two technologies. Each piece of technology will cost the firm
$13, 000. Technology A has an estimated marginal revenue product of capital of $5, 400 per year
and a lifespan of 3 years; Technology B has an estimated marginal revenue product of capital of $4,
100 per year and a lifespan of 4 years. The interest rate is constant at 5% annually. Which
technology should the firm purchase?
a. Technology A; it has a higher marginal revenue product than technology B.
b. Technology B; it has a longer lifespan than technology A.
c. Technology A; it has the highest present value
d. Technology B; it has the highest present value.

2. If firms in a monopolistically competitive market are earning economic profits, which of the following
scenarios would best reflect the change facing existing firms as the market adjusts to its new
equilibrium?
a. a decrease in demand
b. a downward shift in their marginal-cost curve
c. an upward shift in their marginal-cost curve
d. an increase in demand

The next four questions are related.

3. Market demand is given as QD = 250 – 0.5P. Market supply is given as QS = 2P + 200. Each
identical firm has MC = 0.5Q and ATC = 0.25Q + (6/Q) (ATC is at minimum when Q = 4.9). What
quantity of output will each firm produce?
a. 10
b. 50
c. 20
d. 40

4. Market demand is given as QD = 250 – 0.5P. Market supply is given as QS = 2P + 200. Each
identical firm has MC = 0.5Q and ATC = 0.25Q + (6/Q) (ATC is at minimum when Q = 4.9). What is
each firm’s profit?
a. $394
b. $500
c. $950
d. $2364

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5. Market demand is given as QD = 250 – 0.5P. Market supply is given as QS = 2P + 200. Each
identical firm has MC = 0.5Q and ATC = 0.25Q + (6/Q) (ATC is at minimum when Q = 4.9). How
many firms are there in the short-run?
a. 3
b. 6
c. 10
d. 20

6. Market demand is given as QD = 250 – 0.5P. Market supply is given as QS = 2P + 200. Each
identical firm has MC = 0.5Q and ATC = 0.25Q + (6/Q) (ATC is at minimum when Q = 4.9). When
will firms exit this industry?
a. When the price falls below $2.45
b. Firms will not exit because they are earning positive economic profit.
c. When the price falls below $4.90
d. When the price falls below $10

7. Which of the following is NOT true about firms trading with each other?
a. Trade is good for both firms.
b. Trade is based on absolute advantage.
c. Trade allows for specialization.
d. Trade allows individuals to consume more than they otherwise could.

8. Which of the following events would tend to lead to an increase in the supply of labour?
a. The price of a firm’s product increases.
b. A country experiences an increase in immigrant labour.
c. The wage rate increases.
d. Technology makes workers more productive.

9. Why is a perfectly competitive firm’s marginal-cost curve regarded as its supply curve?
a. The firm is aware that marginal revenue must exceed marginal cost in order for
profit to be maximized.
b. Among the various cost curves, the marginal-cost curve is the only one that
slopes upward.
c. The marginal cost curve determines the quantity of output the firm is willing to
supply at any price.
d. The position of the marginal-cost curve determines the price for which the firm
should sell its product.

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Figure 1

These figures illustrate the production possibilities available to Firm A and Firm B with eight hours
of labour.

10. Refer to Figure 1. What is the opportunity cost of one unit of good X for Firm A?
a. 3 X
b. 3 Y
c. 3/2 Y
d. 1/3 Y

11. Refer to Figure 1. What is the opportunity cost of one unit of good Y for Firm B?
a. 2/3 Y
b. 3/2 X
c. 1/3 X
d. 2/3 X

12. Refer to Figure 1. Who has an absolute advantage or comparative advantage in each product?
a. Firm A has an absolute advantage in good Y, and Firm B has a comparative
advantage in good X.
b. Firm A has an absolute advantage in neither good, and Firm B has a comparative
advantage good Y.
c. Firm A has an absolute advantage in good X, and Firm B has a comparative
advantage in both goods.
d. Firm A has an absolute advantage in both goods, and Firm B has a comparative
advantage in neither good.

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13. Refer to Figure 1. If Firm A and Firm B specialize in the product they have a comparative
advantage, what is the lowest price Firm A would take in order to agree to trade with Firm B?
a. 2/3 X
b. 3 X
c. 1/3 Y
d. 3/2 Y

Figure 2

14. Refer to Figure 2. If point B is the consumer’s optimum and the price of good Y is $4, what is the
|slope| of the budget constraint?
a. 1.5
b. 3
c. 0.5
d. 2

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15. Refer to Figure 2. Assume that the consumer depicted has an income of $200 and the price of
good X is $10. Which bundle of X and Y will the optimizing consumer choose to purchase?
a. bundle A
b. bundle D
c. bundle B
d. bundle C

16. Refer to Figure 2. Suppose the consumer is consuming a consumption bundle such that MRSxy <
Px/Py. How will the utility maximizing consumer respond?
a. by consuming more of both X and Y
b. by consuming less of both X and Y
c. by consuming more Y and less X
d. by consuming more X and less Y

17. Refer to Figure 2. What would cause a consumer to move from a consumption bundle at pt. B to a
consumption bundle at pt. A?
a. the substitution effect as a result of an increase in the price of good Y
b. the substitution effect as a result of an increase in the price of good X
c. the income effect as a result of an increase in the price of good Y
d. the income effect as a result of a decrease in income.

The next four questions are related.

18. Market demand is given as Qd = 750 – 2P. Market supply is given as Qs = 3P - 15. What is the
point elasticity of demand at the equilibrium price, and if the firm could change its price, would the
firm increase or decrease the price in order to increase total revenue?
a. 5.80, the firm will decrease the price
b. 0.69, the firm will decrease the price
c. 0.69, the firm will increase the price
d. 5.80, the firm will increase the price

19. Market demand is given as Qd = 750 – 2P. Market supply is given as Qs = 3P - 15. Suppose the
government imposes a tax of $5 on suppliers. What is the after-tax equilibrium price?
a. $156
b. $153
c. $151
d. $158

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20. Market demand is given as Qd = 750 – 2P. Market supply is given as Qs = 3P - 15. Suppose the
government imposes a tax of $5 on suppliers. What is the deadweight loss due to the tax?
a. $30
b. $6
c. $5
d. $15

21. Market demand is given as Qd = 750 – 2P. Market supply is given as Qs = 3P - 15. Suppose the
government imposes a tax of $5 on suppliers. Who bears a smaller burden of the tax and why?
a. Suppliers because the supply is more price inelastic
b. Consumers because the supply is more price elastic
c. Suppliers because the demand is more price inelastic.
d. Consumers because the demand is more price elastic

22. How is the marginal revenue product of labour calculated?

a. by multiplying the wage by the marginal product of labour
b. by multiplying the price of output by the marginal product of labour
c. by multiplying the price of output by the quantity of labour
d. by multiplying the wage by the quantity of labour

23. What does the free entry and exit of firms in a monopolistically competitive market guarantee?
a. Both economic profits and economic losses increase in the long run.
b. Both economic profits and economic losses are zero in the long run.
c. Both economic profits and economic losses can persist into the long run.
d. Both economic profits and economic losses decrease in the long run.

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Table 1

Janet consumes chicken wraps and coffee. The price of a one wrap is $10. The price of a cup of
coffee $5. She also likes to consume cinnamon buns. The price of a cinnamon bun is $5. Janet is
maximizing her utility given her income. The total utility Janet receives from consuming wraps and
coffee is outlined:

Quantity of Total Utility of Quantity of Total Utility of

Wraps Wraps Coffee Coffee
1 20 1 10
2 50 2 30
3 90 3 60
4 125 4 85
5 152 5 100
6 167 6 110

24. Refer to Table 1. If the marginal utility Janet receives from consuming a cinnamon bun is 20, what
is Janet’s optimal consumption bundle of wraps and coffee for the week?
a. 4 wraps and 5 coffees
b. 2 wraps and 1 coffee
c. 3 wraps and 2 coffees
d. 5 wraps and 5 coffees

25. Why are cartels difficult to maintain?

a. Collusion is tacit.
b. Competition laws are difficult to enforce.
c. Cartel agreements are conducive to monopoly outcomes.
d. There is temptation for firms to cheat on the agreement.

26. What does utility measure?

a. the satisfaction a consumer places on inferior goods
b. the satisfaction a consumer receives from consuming a bundle of goods
c. the satisfaction a consumer receives from her income
d. the satisfaction a consumer places on her budget constraint

27. Other things being equal, what happens when the price of a good rises?
a. The supply increases.
b. The quantity supplied of the good rises.
c. The quantity demanded of the good increases.
d. The demand curve shifts to the left.

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28. What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean
pickers fell and the price of tea fell?
a. price will fall and the effect on quantity is ambiguous
b. quantity will rise and the effect on price is ambiguous
c. price will rise and the effect on quantity is ambiguous
d. quantity will fall and the effect on price is ambiguous

29. What is an important difference between the situations faced by a profit-maximizing monopolistically
competitive firm in the short run and in the long run?
a. In the short run, price may exceed marginal revenue; in the long run, price equals
marginal revenue.
b. In the short run, price may exceed average total cost; in the long run, price equals
average total cost.
c. In the short run, price may exceed marginal cost; in the long run, price equals
marginal cost.
d. In the short run, price may exceed average variable cost; in the long run, price
equals average variable cost.

30. Once a cartel is formed, what in effect serves the market?

a. an oligopoly
b. monopolistic competition
c. perfect competition
d. a monopoly

31. Which of the following people has the highest opportunity cost of leisure?
a. a medical doctor who earns $210 per hour and who sleeps during his leisure time
b. a retail clerk who earns $15 per hour and who watches TV during her leisure time
c. a waiter who earns $12 per hour and who reads poetry during his leisure time
d. an attorney who earns $200 per hour and who plays golf during her leisure time

32. Which of the following explains the relationship between accounting profit and economic profit?
a. If accounting profit is zero, then economic profit must be zero.
b. If accounting profit is zero, then economic profit can be positive.
c. If economic profit is zero, then accounting profit can be positive.
d. If economic profit is zero, then accounting profit must be zero.

33. When a monopolist increases the amount of output that it produces and sells, what happens to its
average revenue and its marginal revenue?
a. Its average revenue decreases, and its marginal revenue increases.
b. Its average revenue increases, and its marginal revenue decreases.
c. Both its average revenue and its marginal revenue decrease.
d. Both its average revenue and its marginal revenue increase.

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34. What are the outcomes of price controls?

a. Price controls are imposed by firms to promote an equitable outcome.
b. Price controls produce an efficient outcome.
c. Price controls lead to shortages or surpluses.
d. Price controls produce a better outcome for consumers.

35. What is one way in which monopolistic competition differs from oligopoly?
a. In oligopoly markets there are only a few sellers.
b. Strategic interactions between firms are rarely evident in oligopolies.
c. There are no barriers to entry in oligopolies.
d. All oligopoly firms eventually earn zero economic profits.

36. 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? Hint: try drawing it.
a. $4
b. $8
c. $12
d. $16

Table 2

Quantity Price per Item

1 $20
2 $20
3 $20
4 $20
5 $20
6 $20
7 $20
8 $20
9 $20

37. Refer to Table 2. The price and quantity relationship in the table is most likely faced by a firm in
which type of market?
a. a perfectly competitive market
b. a monopoly
c. an oligopoly
d. a monopolistically competitive market

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38. Refer to Table 2. What are average revenue (AR) and marginal revenue (MR)?
a. AR = $10, MR = $20
b. AR = $5, MR = $10
c. AR = $20, MR = $20
d. AR = $14, MR = $9

39. Which of the following explains the relationship among different cost functions?
a. The total variable cost of seven units equals the average variable cost of seven
units divided by seven.
b. The average total cost of seven units equals the average variable cost of the
seven units minus the average fixed cost of seven units.
c. The marginal cost of the fifth unit of output equals the total fixed cost of five units
minus the total fixed cost of four units.
d. The marginal cost of the fifth unit of output equals the total variable cost of five
units minus the total variable cost of four units.

Table 3

Measures of Cost for ABC Inc.

Quantity Variable Total
of Widgets Costs Costs
0 $9
1 $1
2 $3 $12
3 $6 $15
4 $10
5 $25
6 $21

40. Refer to Table 3. What is the marginal cost of producing the sixth widget?
a. $3.50
b. $5.00
c. $6.00
d. $1.00

41. What does diminishing marginal product suggest?

a. Additional units of output become less costly as more output is produced.
b. The firm is at full capacity.
c. Average product is rising.
d. Marginal cost is upward sloping.

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42. When does a natural monopoly occur?

a. when the firm is characterized by a rising marginal-cost curve
b. when production requires the use of free natural resources, such as water or air
c. when there are economies of scale over the relevant range of output
d. when the product is sold in its natural state (such as water or diamonds)

43. If the relative price Good X is three times the price Good Y, what is the opportunity cost of Good X?
a. the slope of the budget constraint
b. the intercept on the x-axis
c. the intercept on the y-axis
d. the slope of the indifference curve

44. What effect on the production function does diminishing marginal product serve to have?
a. The production function slopes downward.
b. The slope of the production function decreases as the quantity of input increases.
c. The production function is zero beyond a certain quantity of input.
d. The production function becomes steeper as the quantity of input increases.

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Table 4

Two discount superstores (Dollar Saver and Penny Saver) in a growing urban area are interested in
expanding their market share. Both are interested in expanding the size of their store and parking
lot to accommodate potential growth in their customer base. The following game depicts the
strategic outcomes that result from the game. Growth-related profits of the two discount superstores
under two scenarios are reflected in the table below.

Table 4
Penny Saver
Increase the size of Do not increase the size
store of
and parking lot store and parking lot
Dollar Increase the
Saver size Penny Saver = $50 Penny Saver = $25
of store and Dollar Saver = $65 Dollar Saver = $275
parking lot
Do not increase
the size of store Penny Saver = $250 Penny Saver = $85
and parking lot Dollar Saver = $35 Dollar Saver = $135

45. Refer to Table 4. For which store is the dominant strategy to increase the size of its store and
parking lot?
a. Dollar Saver, but not Penny Saver
b. both Dollar Saver and Penny Saver
c. neither Dollar Saver or Penny Saver
d. Penny Saver, but not Dollar Saver

46. Refer to Table 4. When this game reaches a Nash equilibrium, what will the dollar value of
growth-related profits be?
a. Dollar Saver $275 and Penny Saver $25
b. Dollar Saver $35 and Penny Saver $250
c. Dollar Saver $65 and Penny Saver $50
d. Dollar Saver $135 and Penny Saver $85

47. As one moves down a typical indifference curve, how does the marginal rate of substitution
change?
a. It is constant.
b. It increases.
c. It decreases.
d. It switches from positive to negative.

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The next two questions are related.

48. A monopolist faces market demand given by P = 120 – Q. For this market, MR = 120 – 2Q and MC
= 4Q. What price will the monopolist charge in order to maximize profits?
a. $96
b. $100
c. $40
d. $104

49. A monopolist faces market demand given by P = 120 – Q. For this market, MR = 120 – 2Q and MC
= 4Q. What is the value of producer surplus? Hint: Draw it.
a. $800
b. $2000
c. $1600
d. $1200

50. When a perfectly competitive firm makes a decision to temporarily shut down, which is most likely?
a. Price is below the minimum of average variable cost.
b. Price is below the minimum of average total cost.
c. Marginal cost is above average total cost.
d. Fixed costs exceed variable costs.

51. If the price of t-shirts falls, what will happen to the demand curve for workers who make t-shirts?
a. The slope of the demand curve will decrease.
b. It will shift to the right.
c. The slope of the demand curve will increase.
d. It will shift to the left.

52. Assume that your roommate, Donna, is very messy, and according to campus policy, you have a
right to live in an uncluttered apartment. Suppose she gets a $200 benefit from being messy but
imposes a $100 cost on you. What would the Coase theorem suggest would be an efficient solution
for your roommate?
a. to demand payment of at least $100 but no more than $200 to clean up after
herself
b. to demand payment of $200 to clean up after herself
c. to pay you $99.99 to live with the clutter
d. to pay you at least $100 but less than $200 to live with the clutter

53. When do economies of scale arise?

a. when an economy is self-sufficient in production
b. when fixed costs are large relative to variable costs
c. when workers are able to specialize in a particular task
d. when individuals in a society are self-sufficient

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54. Sam’s Pita is a small street vendor business that sells pitas/wraps. Sam is trying to get a better
understanding of his costs by categorizing them as fixed or variable. Which of the following costs
are most likely to be considered fixed costs?
a. the cost of pitas
b. the cost of his loan on the truck which is used to operate his business
c. the cost of chicken
d. the cost of wages paid to workers that sell pitas

55. What costs do firms that shut down in the short run still have to pay?
a. marginal cost
b. fixed costs
c. variable costs
d. total cost

56. Which of the following statements explains the relationship between indifference curves and
consumer preferences?
a. A consumer prefers indifference curves with positive slopes.
b. A consumer is generally unable to assign utility to all consumption bundles on an
indifference curve.
c. A consumer is equally satisfied with any indifference curve.
d. A consumer prefers higher indifference curves to lower indifference curves.

57. Which of the following best describes a monopolist?

a. A monopolist is a price setter, and therefore it has no supply curve.
b. A monopolist is a price taker, and therefore it has no supply curve.
c. A monopolist is a price taker, and therefore it has no demand curve.
d. A monopolist is a price setter, and therefore it has no demand curve.

58. When externalities exist, what do buyers and sellers do and how do their actions affect market
equilibrium?
a. They neglect the external effects of their actions, but the market equilibrium is still
efficient.
b. They do not neglect the external effects of their actions, and the market
equilibrium is efficient.
c. They neglect the external effects of their actions, and the market equilibrium is not
efficient.
d. They do not neglect the external effects of their actions, and the market
equilibrium is not efficient.

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59. When an industry has many firms, the industry may be which of the following?
a. It is an oligopoly if the firms sell differentiated products; it is monopolistically
competitive if the firms sell identical products.
b. It is monopolistically competitive if the firms sell differentiated products; it is
perfectly competitive if the firms sell identical products.
c. It is perfectly competitive if the firms sell differentiated products; it is
monopolistically competitive if the firms sell identical products.
d. It is an oligopoly if the firms sell differentiated products; it is perfectly competitive if
the firms sell identical products.

Table 5

Number of Marginal
Workers Output Product Wage
of Labour
0 0
1 120 $300
2 80
3 60
4 280
5 10

60. Refer to Table 5. Suppose the firm sells widgets at a market price of $5 each. How many workers
will the firm hire in order to maximize profit?
a. 2
b. 3
c. 4
d. 5

END OF EXAMINATION

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