ECO 1001 – Principles of Microeconomics

Practice test

Trading Countries: Assume that Brazil and Chile can switch between producing beef and producing
wheat at a constant rate. The following table shows the pounds of beef or the bushels of wheat each country
can produce in one hour.

Output produced in one hour

bushels of wheat pounds of beef

Brazil 12 10

Chile 20 12

1. Trading Countries: Assume that Brazil and Chile can switch between producing beef and producing
wheat at a constant rate. The following table shows the pounds of beef or the bushels of wheat each
country can produce in one hour. Brazil’s opportunity cost of producing 1 pound of beef (up to 2 decimal
places) is
[a.] 0.60 bushel of wheat.
[b.] 0.83 bushel of wheat.
[c.] bushel of wheat.
[d.] 1.67 bushel of wheat

2. Trading Countries: Assume that Brazil and Chile can switch between producing beef and producing
wheat at a constant rate. The following table shows the pounds of beef or the bushels of wheat each
country can produce in one hour. Brazil has an absolute advantage in the production of
[a.] wheat and Chile has an absolute advantage in the production of beef.
[b.] beef and Chile has an absolute advantage in the production of wheat.
[c.] both goods and Chile has an absolute advantage in the production of neither good.
[d.] neither good and Chile has an absolute advantage in the production of both goods.

3. Trading Countries: Assume that Brazil and Chile can switch between producing beef and producing
wheat at a constant rate. The following table shows the pounds of beef or the bushels of wheat each
country can produce in one hour. Brazil should specialize in the production of
[a.] wheat and Chile should specialize in the production of beef.
[b.] beef and Chile should specialize in the production of wheat.
[c.] both goods and Chile should specialize in the production of neither good.
[d.] neither good and Chile should specialize in the production of both goods.

4. Trading Countries: Assume that Brazil and Chile can switch between producing beef and producing
wheat at a constant rate. The following table shows the pounds of beef or the bushels of wheat each
country can produce in one hour. Which of the following prices would both Brazil and Chile gain from
trade with each other?
[a.] 6 bushels of wheat for 3 pounds of beef.
[b.] 6 bushels of wheat for 4 pounds of beef.
[c.] 6 bushels of wheat for 6 pounds of beef.
[d.] None of the above prices.
 Calculating Canada

The graph below represents the domestic market for calculators in Canada, where the quantity is in
thousands of calculators. Currently, the world price of calculators is $7 and the government is considering
whether to impose a $2 tariff or a $2 consumption tax in this market.

25

20 Supply

15
Price ( $ )

10

Demand

0
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
quantity of calculators (in thousands)

5. Calculating Canada: The graph below represents the domestic market for calculators in Canada
where the quantity is in thousands of calculators. Currently the world price of calculators is $7 and the
government is considering whether to impose a $2 tariff or a $2 consumption tax in this market. With
free trade (no tariff) and no consumption tax
[a.] calculators are sold at $12 in Canada.
[b.] there is a shortage of 25000 calculators.
[c.] the domestic price is equal to the world price.
[d.] Canada will import 15 thousand calculators.
[e.] none of the above is true

6. Calculating Canada: The graph below represents the domestic market for calculators in Canada
where the quantity is in thousands of calculators. Currently the world price of calculators is $7 and the
government is considering whether to impose a $2 tariff or a $2 consumption tax in this market. With
free trade (no tariff) and no consumption tax Canada will
[a.] import 10 thousand calculators.
[b.] import 12 thousand calculators.
[c.] import 25 thousand calculators.
[d.] import 30 thousand calculators.
7. Calculating Canada: The graph below represents the domestic market for calculators in Canada
where the quantity is in thousands of calculators. Currently the world price of calculators is $7 and the
government is considering whether to impose a $2 tariff or a $2 consumption tax in this market. If the
government imposes the tariff instead of the consumption tax the amount of revenue collected by the
government is
[a.] $20000.
[b.] $28000.
[c.] $30000.
[d.] $56000.
[e.] $60000.

8. Calculating Canada: The graph below represents the domestic market for calculators in Canada
where the quantity is in thousands of calculators. Currently the world price of calculators is $7 and the
government is considering whether to impose a $2 tariff or a $2 consumption tax in this market. If the
government imposes the tariff instead of the consumption tax the amount of deadweight loss in the
market is
[a.] $0.
[b.] $6000
[c.] $10000
[d.] $12000
[e.] none of the above.

9. Calculating Canada: The graph below represents the domestic market for calculators in Canada
where the quantity is in thousands of calculators. Currently the world price of calculators is $7 and the
government is considering whether to impose a $2 tariff or a $2 consumption tax in this market. If the
government imposes the consumption tax instead of the tariff the amount of the revenue collected by
the government is
[a.] $20000.
[b.] $30000.
[c.] $32000.
[d.] $60000.
[e.] $64000.

10. Calculating Canada: The graph below represents the domestic market for calculators in Canada
where the quantity is in thousands of calculators. Currently the world price of calculators is $7 and the
government is considering whether to impose a $2 tariff or a $2 consumption tax in this market. If the
government imposes the consumption tax compared to imposing the tariff consumers are
[a.] no better off producers are worse off and the deadweight loss in the market is $6000
[b.] no better off producers are worse off and the deadweight loss in the market is $4000
[c.] no better off producers are better off and the deadweight loss in the market is $4000.
[d.] no better off producers are better off and the deadweight loss in the market is $6000.
[e.] no better off producers are no better off and the deadweight loss in the market is $6000.
External Forces: The graph shows the demand and supply for a good in a particular market.

11. External Forces: The graph shows the demand and supply for a good in a particular market. The
graph represents a market in which
[a.] the presence of an externality cannot be determined without additional information.
[b.] there is no externality.
[c.] there is a positive externality.
[d.] there is a negative externality

12. External Forces: The graph shows the demand and supply for a good in a particular market. What
are the socially optimal price and quantity?
[a.] $30 and 200
[b.] $46 and 200
[c.] $42 and 280
[d.] $26 and 280

13. External Forces: The graph shows the demand and supply for a good in a particular market. If the
government wanted to tax or subsidize this good to achieve the socially optimal level of output it would
[a.] introduce a subsidy of $16.
[b.] impose a tax of $16.
[c.] introduce a subsidy of $12.
[d.] impose a tax of $12.

14. External Forces: The graph shows the demand and supply for a good in a particular market. If the
government does not intervene in this market then the total surplus is equal to
[a.] $4000
[b.] $800
[c.] $4800
[d.] $7840
15. With a very strong steel industry in Bulgaria bicycles are produced and sold domestically. Since the
government in Bulgaria allowed trade in the late 1990s Bulgaria became an exporter of bicycles
[a.] domestic producers of bicycles are better off domestic consumers of bicycles are worse off and the total
welfare of the country increases.
[b.] domestic producers of bicycles are better off domestic consumers of bicycles are worse off and the total
welfare of the country decreases.
[c.] domestic producers of bicycles are worse off domestic consumers of bicycles are better off and the total
welfare of the country increases.
[d.] domestic producers of bicycles are worse off domestic consumers of bicycles are better off and the total
welfare of the country decreases.

16. In Fairlands a gated community in the tri-state area the leaf-blowers used daily by the maintenance
workers at the new 12-storey luxury condominium creates too much noise for the neighboring residents.
As a result
[a.] noise restrictions will force the neighboring residents to move out of the area.
[b.] a sense of social responsibility will cause the condominium owners to ask the maintenance workers to
reduce noise levels.
[c.] the city manager can raise economic well-being through noise-control regulations.
[d.] the city manager should avoid intervening because the market will allocate resources efficiently.

17. Under which of the following scenarios would a park be considered a public good?
[a.] Visitors can enter the park free of charge, but frequently all of the picnic tables are in use.
[b.] Visitors to the park must pay an admittance fee, but there are always plenty of empty picnic tables.
[c.] Visitors to the park must pay an admittance fee and frequently all of the picnic tables are in use.
[d.] Visitors can enter the park free of charge and there are always plenty of empty picnic tables.

18. Private markets fail to reach a socially optimal equilibrium when negative externalities are present
because
[a.] social costs equal private costs at the private market solution
[b.] private costs exceed social costs at the private market solution
[c.] social costs exceed private costs at the private market solution
[d.] they internalize externality

19. Maudlyne and Annette are neighbors in a residential area. As a member of the local gardening club
Maudlyne loves to maintain a well-manicured lawn with beautiful flowers. However Annette who
works long hours and is hardly at home places a low value on having a well-manicured lawn. When
Annette’s lawn is neglected and the grass gets long Maudlyne will mow the lawn for Annette. This is an
example of
[a.] a situation in which the Coase theorem fails to explain the lawn care arrangement.
[b.] an improper allocation of resources.
[c.] a private solution to a negative externality problem.
[d.] an exploitation of a common resource.

20. Peter lives in an apartment building in Brooklyn. According to the co-op agreement residents have a
right to quiet hours (no parties or loud music) from 2:00 a.m. to 6:00 a.m. during the week. Suppose
Peter’s neighbor Thomas gets an $300 benefit from having his friends over for Thursday night parties
but this imposes a $200 cost on Peter (he is always late for work on Friday). The Coase Theorem would
suggest that an efficient solution would be for Thomas to
[a.] stop having parties on Thursday nights or else leave the building.
[b.] pay Peter at least $200 but less than $300 to live with the parties on Thursday nights.
[c.] continue to have parties on Thursday nights and force Peter to move out.
[d.] demand payment of at least $200 from Peter but no more than $300 to stop having parties on Thursday
nights.
21. In Manhattan 23rd street between 3rd avenue and 9th avenue is
[a.] always a public good whether or not it is congested.
[b.] a public good when it is congested but it is a common resource when it is not congested.
[c.] a common resource when it is congested but it is a public good when it is not congested.
[d.] always a common resource whether or not it is congested.

22. Goods that are not rival in consumption include both

23. Piotr is the owner of a local bakery and his store is located on east side of a mid-sized town. He is
considering including a few addition items on his regular menu. With information on his costs in the
short run Piotr is able to sketch his short run cost curves. If we look at his graph which curve would
you expect to see intersect the minimum point of the average total cost curve?
[a.] The marginal product of labor curve.
[b.] The marginal cost curve.
[c.] The average variable cost curve.
[d.] The average fixed cost curve.
[e.] None of the above.

24. A firm has fixed costs

25. Janet is opening her own court-reporting business. She financed the business by with drawing money
from her personal saving account. When she closed the account the bank representative mentioned
that she would have earned $300 in interest next year. If Bev hadn’t opened her own business she would
have earned a salary of $25000. In her first year Bev’s revenues were $30000 and she spent $1000 on
materials and supplies. Which of the following statements is correct?
[a.] Janet’s total explicit costs are $26300.
[b.] Janet’s total implicit costs are $300.
[c.] Janet’s accounting profits exceed her economic profits by $300.
[d.] Janet’s economic profit is $3700.

26. Moonlite Coffee House is a firm producing 2000 coffee drinks per day with an average total cost of $5
and a marginal cost of $2. If it were to increase production to 2001 coffee drinks per day which of the
following must occur?
[a.] Marginal cost would decrease.
[b.] Marginal cost would increase.
[c.] Average total cost would decrease.
[d.] Average total cost would increase.

27. Consider that the government imposes a $1.50 per unit fee on all the pizza produced at all pizza
restaurants. As a result which cost curves shift?
[a.] Average total cost and marginal cost.
[b.] Average total cost and average fixed cost.
[c.] Average variable cost and average fixed cost.
[d.] None of the above combination.
28. The total cost to the firm of producing zero units of output is
[a.] zero in both the short run and the long run.
[b.] its fixed cost in the short run and zero in the long run.
[c.] its fixed cost in both the short run and the long run.
[d.] its variable cost in both the short run and the long run.

29. If for a firm the long run average total cost decreases as the quantity of output increases the firm is
experiencing
[a.] economies of scale.
[b.] diseconomies of scale.
[c.] coordination problems arising from the large size of the firm.
[d.] fixed costs being much greater than variable costs.

30. Ava operates a small bakery in a southern rural town. In her first year of operation she has a fixed cost
of $500. When she produces 100 pounds of cookies it costs her $45 on average in total. She knows
that the marginal cost of producing 101 pounds of cookies is $300. From this information we can tell
her that the total cost of producing 101 pounds of cookies is
[a.] $46.50
[b.] $345
[c.] $800
[d.] $4800
[e.] $5300