Name: __________________________ Date: _____________

1. Which of the following statements is TRUE?

A) Consumers are harmed while some suppliers benefit when trade barriers are
removed.
B) Consumers benefit while some suppliers are harmed when trade barriers are
removed.
C) Everyone benefits when trade barriers are removed.
D) Everyone is harmed when trade barriers are put into place.

Use the following to answer question 2:

Figure: Foreign Trade

2. (Figure: Foreign Trade) According to this foreign trade diagram, what is the dollar value
of the deadweight loss created as a result of prohibiting trade in this market?
A) $ 2,500
B) $ 12,500
C) $ 7,500
D) $ 5,000

3. A tariff is a:
A) tax credit for domestic exports.
B) tax on imports.
C) temporary grant of monopoly rights.
D) renewable subsidy to the energy industry.

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Use the following to answer question 4:

Figure: Foreign Trade with a Tariff

4. (Figure: Foreign Trade with a Tariff) In the figure Foreign Trade with a Tariff, a $1
tariff generates government revenue of:
A) $100 million.
B) $200 million.
C) $250 million.
D) $300 million.

5. Markets are often inefficient when external costs are present because:
A) externalities can be corrected without government regulation.
B) social costs exceed social benefits at the private market solution.
C) private costs exceed social costs at the private market solution.
D) production externalities lead to consumption externalities.

6. Government solutions to externality problems include:

A) taxing the consumption of goods that cause externalities.
B) subsidies.
C) allowing firms to trade the rights to create pollutants.
D) All of the answers are correct.

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 7. Social surplus is consumer surplus:
A) minus producer surplus.
B) plus producer surplus.
C) plus producer surplus minus everyone else's surplus.
D) plus producer surplus plus everyone else's surplus.

8. If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it
will:
A) emit a lower level of sulfur dioxide than is socially efficient.
B) emit a higher level of sulfur dioxide than is socially efficient.
C) emit an acceptable level of sulfur dioxide
D) not emit any sulfur dioxide in an attempt to avoid paying the entire cost.

9. An external benefit in a market will cause the market to produce:

A) more than the same market would produce in the presence of a negative
externality.
B) more than is socially desirable.
C) less than is socially desirable.
D) the socially optimal equilibrium amount.

10. Which of the following answer choices best explains how the market for tradeable
allowances in pollution works?
A) Firms are given a particular dollar subsidy value to clean up pollution, and they can
trade these subsidies between themselves if they fall below or surpass the limits.
B) Firms are taxed a particular percentage rate according to how much they pollute,
and they can trade the pollutants to reduce the effective tax rates they pay.
C) Firms are required to stick to particular production levels, and if they go beyond
these production levels, they are charged a percentage of their profits.
D) Firms are given a particular allowance amount of pollutants and if they fall below
or surpass these targets they can trade their available allowances with other firms.

11. In an increasing cost industry:

A) costs rise as industry output increases.
B) costs rise as industry output decreases.
C) the long-run supply curve is flat.
D) all firms will earn economic profits in the long run.

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 12. Profit is positive whenever price is greater than:
A) total cost.
B) average cost.
C) fixed cost.
D) marginal cost.

Use the following to answer question 13:

Table: Oil Production

Barrel of Oil
Produced Marginal Revenue Marginal Cost Average Costs
1 $50 $4 $34
2 50 6 40
3 50 11 17
4 50 17 17
5 50 23 18.20
6 50 29 20
7 50 36 22.29
8 50 50 25.75
9 50 90 32.89
10 50 124 42

13. (Table: Oil Production) Refer to the table above. What is the profit of producing 10
barrels of oil?
A) $80
B) $154
C) $180
D) $194

14. Profit is positive whenever:

A) P < AC.
B) P < MC.
C) P > MC.
D) P > AC.

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Use the following to answer question 15:

Table: Competitive Firm

Quantity (Units) Total Revenue ($) Total Cost ($)
0 0 50
1 90 80
2 180 120
3 270 170
4 360 230
5 450 300
6 540 380
7 630 470
8 720 570

15. (Table: Competitive Firm) The table above shows the total revenue and total cost
schedules for a competitive firm. The profit maximizing output for this firm is:
A) 4
B) 5
C) 6
D) 7

16. For a competitive firm, which of the following conditions describes the profit
maximization condition?
I. P = MC
II. MR = MC
III. TR = TC
A) II only
B) I and II
C) II and III
D) I, II, and III

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Use the following to answer question 17:

Figure: Profits and Competitive Firms

17. (Figure: Profits and Competitive Firms) Refer to the four panels in the figure above.
Which of the panels shows a competitive firm making a loss?
A) Panel A
B) Panel B
C) Panel C
D) Panel D

18. The elimination principle, a general feature of competitive markets, tells us that:
A) below normal profits may be permanent.
B) above normal profits may be permanent.
C) above normal profits are temporary.
D) above normal profits result in firms exiting the industry.

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Use the following to answer question 19:

Figure: Optimal Output

19. (Figure: Optimal Output) In the figure above, the socially optimal level of output is:
A) 40.
B) 50.
C) 80.
D) 100.

20. For a monopolist, MR is always less than P because:

A) when a monopolist lowers the price to sell more units, it must lower the prices of
all units sold.
B) MR is always less than P regardless of what type of firm we are discussing.
C) marginal revenue is always lower for the next unit sold.
D) when a monopolist needs to sell more units, it must lower marginal revenue in
order to do so.

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Use the following to answer question 21:

Figure: Monopoly Markup

21. (Figure: Monopoly Markup) In the figure above, the deadweight loss attributable to
monopoly is:
A) triangle abc.
B) triangle cef.
C) square bcde.
D) triangle adf.

22. Airlines try to differentiate their customers by willingness to pay based on:
A) how long in advance a person books their flight.
B) a person's weight.
C) the ethnicity of a person's last name.
D) All of the answers are correct.

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 23. After a severe hurricane in South Carolina, the price of electric generators quadrupled.
People living outside of South Carolina purchased electric generators in their home
states and drove them to South Carolina to sell at a much higher price. What is this an
example of?
A) arbitrage
B) perfect price discrimination
C) price engorging
D) marginal-price geography

Use the following to answer question 24:

Table: Willingness to Pay

Maximum Willingness to Pay for Good A and Good B
John Mary
Good A $90 $35
Good B $30 $70

24. (Table: Willingness to Pay) Refer to the table above that shows data for John's and
Mary's maximum willingness to pay for two goods, A and B. If the firm were to engage
in bundling, its profits would increase by how much relative to setting individual prices
for each good?
A) $65
B) $225
C) $50
D) $210

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Use the following to answer question 25:

Figure: PPD

25. (Figure: PPD) In the above figure, a firm that perfectly price discriminates will sell:
A) “a” units of output.
B) “b” units of output.
C) “c” units of output.
D) “d” units of output.

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Use the following to answer question 26:

Figure: Monopolist

26. (Figure: Monopolist) The figure above shows the demand curves for a monopolist's
product in two different markets—Market A and Market B. What price should the
monopolist charge in Market A?
A) $5
B) $10
C) $7
D) any price higher than $10.

27. Which of the following lists of products and services would be the most difficult to
arbitrage?
A) computer software, movie tickets, consumer bleach
B) dental root canals, haircuts, and cosmetic surgery
C) computer hardware, full-service restaurant meals, and novels
D) computer software, computer hardware, and tickets to sporting events

28. To maximize profit the monopolist should set a:

A) lower price in markets with less elastic demand.
B) lower price in markets with more inelastic demand.
C) higher price in markets with more elastic demand.
D) higher price in markets with more inelastic demand.

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 29. Bundling and tying are:
A) the same practices, in essence.
B) different practices of price discrimination.
C) often done at the same time.
D) considered illegal in many countries.

30. Which of the following is NOT a reason why cartels collapse?

A) cheating by the cartel members
B) new entrants and demand response
C) government prosecution
D) increasing production costs

31. The prisoner's dilemma describes situations where the pursuit of:
A) all interests lead to a group outcome that is in the interest of no one.
B) all interests lead to a group outcome that is in the interest of everyone.
C) individual interest leads to a group outcome that is in the interest of no one.
D) individual interest leads to a group outcome that is in the interest of everyone.

Use the following to answer questions 32-33:

Table: Oil Output

Iran National Oil (profit in millions)
Restrict Oil Expand Oil
Output Output
Iraq National Oil Restrict Oil Output $78, $78 $60, $89
(profit in millions) Expand Oil Output $89, $60 $65, $65

32. (Table: Oil Output) Use the above table. If both countries abide by the cartel agreement
(i.e., not cheat):
A) each country earns $78.
B) each country earns $65.
C) Iraq earns $89 and Iran earns $60.
D) Iraq earns $60 and Iran earns $89.

33. (Table: Oil Output) Use the above table. The equilibrium outcome is:
A) $78, $78.
B) $65, $65.
C) $89, $60.
D) $60, $89.

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Use the following to answer question 34:

Figure: Competitive Market

34. (Figure: Competitive Market) Refer to the figure above. If all firms in the market form a
cartel, price and output in the market would be:
A) P1 and Q1.
B) P1 and Q2.
C) P2 and Q1.
D) P2 and Q2.

35. High prices maintained by a cartel usually make the cartel less successful because high
price of the good:
A) leads to more conservation.
B) motivates buyers to switch to substitutes of the goods
C) encourages a search for new supplies.
D) All of the answers are correct.

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Use the following to answer question 36:

Table: Example Goods

Watermelons
Sunshine
Smog Reduction
Online Video Games
Cable Internet Service
National Defense
Private Beaches
Public Beaches
Pencils
Soup Kitchen Meals
Chairs
Toll Highways
Public Roads

36. (Table: Example Goods) Refer to the table above. Which list below contains only the
common resources from the table above?
A) online video games, private beaches, toll highways, cable Internet service
B) public beaches, soup kitchen meals, public roads
C) national defense, sunshine, smog reduction
D) online video games, public beaches, soup kitchen meals, public roads

37. Overutilization and lack of conservation are more likely a problem for:
A) private goods.
B) material goods.
C) goods that are not owned.
D) cows and chickens.

38. Nonrival private goods are likely to have ________ fixed costs and ________ marginal
costs.
A) small; large
B) no; small
C) large; small
D) large; no

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39. Why is national defense a public good?
I. because it is expensive to produce
II. because people who don't pay for national defense still benefit from having it
III. because one person's use of national defense doesn't reduce anyone else's ability to
use it
IV. because it is provided by the government
A) I and IV
B) II and III
C) II, III, and IV
D) I, II, and III

40. The tragedy of the commons occurs when a good is:

A) rival in consumption and excludable.
B) rival in consumption and not excludable.
C) not rival in consumption and excludable.
D) neither rival in consumption nor excludable.

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Answer Key
1. B
2. D
3. B
4. A
5. B
6. D
7. D
8. B
9. C
10. D
11. A
12. B
13. A
14. D
15. D
16. B
17. A
18. C
19. C
20. A
21. B
22. A
23. A
24. C
25. B
26. B
27. B
28. D
29. B
30. D
31. C
32. A
33. B
34. C
35. D
36. B
37. C
38. C
39. B
40. B

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