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The following questions are based on the following matrix.

The payoff matrix below gives the profits associated with the strategic choices of two firms in an oligopolistic industry.
The first entry in each cell is the profit to Firm A and the second to Firm B.

1. If each firm simultaneously chooses its pricing strategy without collusion, Firm A’s and Firm B’s profits would be
which of the following?

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Firm A’s Profit Firm B’s Profit

(A)
$150 $ 50

Firm A’s Profit Firm B’s Profit

(B)
$100 $100

Firm A’s Profit Firm B’s Profit

(C)
$100 $150

Firm A’s Profit Firm B’s Profit

(D)
$ 50 $100

Firm A’s Profit Firm B’s Profit

(E)
$ 50 $ 50

2. If the two firms collude, Firm A’s and Firm B’s profits would be which of the following?

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Firm A Firm B
(A)
$150 $ 50

Firm A Firm B
(B)
$100 $100

Firm A Firm B
(C)
$100 $150

Firm A Firm B
(D)
$ 50 $100

Firm A Firm B
(E)
$ 50 $ 50

The following questions are based on the table below, which gives cost information for a perfectly competitive firm.

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3. If the product price is $85, how many units of output must the firm produce in order to maximize profits?
(A) 0
(B) 3
(C) 4
(D) 5
(E) 6

4. The average total cost to the firm of producing 2 units of output is

(A) $35.00
(B) $85.00
(C) $95.00
(D) $100.00
(E) $130.00

Refer to the following diagram and assume a perfectly competitive market structure.

5. In the short run, the firm will stop production when the price falls below

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(A) 0A
(B) 0B
(C) 0C
(D) 0D
(E) 0E

6.

Given the cost and demand schedules depicted above, if the firm increased output from q1 to q2, it would
(A) earn a normal profit
(B) experience an increase in profits
(C) experience a decline in profits
(D) increase revenues but not costs
(E) increase costs but not revenues

7.

Pam and Tara run two competing lemonade stands in a town. In the payoff matrix above, the first entry in each cell
shows the profits to Pam, and the second entry in each cell shows the profits to Tara. According to the information,
which of the following is true?

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(A) If Pam sets the high price, Tara will do best by charging the low price.
(B) If Pam sets the low price, Tara will do best by charging the high price.
(C) The dominant strategy for both is to charge the high price.
(D) The dominant strategy for Tara is to set the low price and for Pam is to set the high price.
(E) Neither Tara nor Pam has a dominant strategy.

8. Which of the following occurs if the price of oranges is below the equilibrium price?
(A) There is a surplus of oranges.
(B) The quantity supplied of oranges is greater than the quantity demanded.
(C) The quantity supplied of oranges is greater than the quantity sold.
(D) The quantity purchased of oranges is greater than the quantity sold.
(E) The quantity demanded of oranges is greater than the quantity supplied.

9. Assume the following utility schedule for Aaliyah’s ice cream consumption. If she consumes 6 units, what is the
value of her total utility from consuming ice cream?

Quantity Consumed Marginal Utility

1 8
2 6
3 4
4 2
5 0
6 -2
(A) 22
(B) 20
(C) 18
(D) 0
(E) -2

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10. Assume that Alpha and Beta are the only sellers of a product and they do not cooperate. Each firm has to decide
whether to raise the product price. The payoff matrix below gives the profits, in dollars, associated with each pair of
pricing strategies. The first entry in each cell shows the profits to Alpha, and the second, the profits to Beta.

Assuming both firms know the information in the matrix, which of the following correctly describes the dominant
strategy of each firm?

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Alpha Beta
(A)
Do not raise price Do not raise price

Alpha Beta
(B)
Do not raise price Raise price

Alpha Beta

(C)
Raise price No dominant strategy

Alpha Beta
(D)
Raise price Do not raise price

Alpha Beta
(E)
No dominant Strategy Raise price

11.
Country Opportunity Cost of 1 Ton of Apples Opportunity Cost of 1 Ton of Oranges
X 1 ton of oranges 1 ton of apples
Y 2 tons of oranges 0.5 ton of apples

The table above shows the opportunity costs of producing apples and oranges in Countries X and Y. Which of the
following can be concluded based on the data given in the table?

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(A) Country Y has an absolute advantage in producing both goods.

(B) Country Y has a comparative advantage in producing both goods.
(C) Country X has an absolute advantage in producing both goods.
(D) Country X has a comparative advantage in producing oranges.
(E) Country X has a comparative advantage in producing apples.

12.

According to the information in the table above, which of the following statements is true if both countries have the
same number of workers?
(A) Country A has both an absolute and a comparative advantage in manufactured goods.
Country A has an absolute advantage in manufactured goods but a comparative advantage in service
(B)
goods.
(C) Country B has a comparative advantage in service goods but no absolute advantage in either good.
Country A has an absolute advantage in service goods but a comparative advantage in manufactured
(D)
goods.
Country B has an absolute advantage in manufactured goods, but without more information, it is not
(E)
possible to tell in which product it has a comparative advantage.

13. Which of the following is true of the marginal revenue curve for a monopolistically competitive firm?
(A) It is the same as the demand curve because there are many firms in the market.
(B) It is the same as the demand curve because marginal revenue is always equal to price.
(C) It is upward sloping because total revenue increases as the quantity sold increases.
It lies below the demand curve because the firm must lower its price for all units in order to increase
(D)
sales.
(E) It lies below the demand curve because marginal revenue increases when price decreases.

14. A monopoly is producing the allocatively efficient output if, for the last unit produced,

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(A) price equals minimum average total cost

(B) price equals marginal cost
(C) marginal cost equals marginal revenue
(D) marginal cost equals average variable cost
(E) marginal revenue equals average variable cost

15. Josephine is buying candy and gum. If she is maximizing her utility for the combination of candy and gum she
buys, which of the following must hold?
(A) Marginal utility of candy price of candy marginal utility of gum price of gum
(B) Total utility of candy price of candy total utility of gum price of gum
(C) Marginal utility of candy total utility of candy marginal utility of gum total utility of gum
(D) Marginal utility of candy price of candy marginal utility of gum price of gum
(E) Total utility of candy price of candy total utility of gum price of gum

16. A firm produces 400 books and sells each book for $15. If the explicit cost of producing the books is $4,500 and the
implicit cost is $1,000, the firm’s economic profit is
(A) $0
(B) $500
(C) $1,000
(D) $1,500
(E) $5,000

17.

The table above shows a firm’s total cost of producing various units of output. What is the average variable cost of
producing three units?
(A) $4
(B) $7
(C) $10
(D) $17
(E) Cannot be determined from the given information

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18.

The table above shows the amount of labor required to produce a unit of corn and a unit of shoes in Brazil and
Spain. If both countries have equal numbers of workers, what pattern of international trade between Brazil and
Spain is most likely to emerge?
(A) Brazil will export both corn and shoes.
(B) Spain will export both corn and shoes.
(C) No mutually beneficial trade can occur.
(D) Brazil will export corn and import shoes.
(E) Brazil will import corn and export shoes.

19. A cartel is difficult to maintain for which of the following reasons?

(A) Consumers substitute away from the good when the price increases.
(B) Individual cartel members are tempted to cheat on the agreement.
Although the total gain to cartel members is positive, all members lose when everyone sticks to the
(C)
agreement.
(D) Some firms will reduce output in an effort to lower costs of production.
(E) Oligopolistic behavior is generally predictable.

20. What will happen to the price and quantity of footballs as a result of an increase in the price of leather used to make
footballs?
(A) Price will increase, and quantity will increase.
(B) Price will increase, and quantity will decrease.
(C) Price will decrease, and quantity will increase.
(D) Price will decrease, and quantity will decrease.
(E) Price will not change, and quantity will not change.

21. Marginal analysis suggests that an individual will consume one additional unit of a good if the
(A) sunk cost can be recovered
(B) total benefit is less than the total cost
(C) total benefit is greater than the total cost
(D) additional benefit is less than the additional cost
(E) additional benefit is greater than the additional cost

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22. The table below shows the long-run total cost function of a firm.

The firm’s cost function exhibits

(A) diseconomies of scale
(B) constant returns to scale
(C) economies of scale
(D) decreasing marginal cost
(E) increasing marginal cost

23. If growing corn becomes more profitable than growing wheat, which of the following will occur?
(A) The supply of corn will decrease.
(B) The price of wheat will decrease.
(C) The price of corn will decrease.
(D) The demand for wheat will increase.
(E) The demand for corn will increase.

24. Economies of scale can be illustrated by

(A) an increasing short-run marginal cost curve as a firm produces more output
(B) a decreasing short-run average total cost curve as a firm produces more output
(C) a downward-sloping long-run supply curve for an industry
(D) a decreasing long-run average total cost curve as a firm produces more output
(E) an increasing long-run average total cost curve as a firm produces more output

25. In a market with two firms, a firm that has a dominant strategy will do which of the following?

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(A) Maintain that strategy independent of the strategies chosen by its competitor.
(B) Adjust its strategies based on the strategies chosen by its competitor.
(C) Make the first move, and wait to see whether its competitor responds to the move.
(D) Keep its competitor guessing about its next move.
(E) Collude with its competitor to reduce uncertainty.

26. If a firm engages in perfect price discrimination, it charges

(A) each customer the highest price the customer is willing to pay
(B) each customer the average cost of the product
(C) each customer the lowest price the customer is willing to pay
(D) different prices to customers based on how old they are
(E) different prices to customers based on how many units of output they buy

27. For a rational consumer with diminishing marginal utility, the consumption of an additional unit of a good will
result in which of the following?
(A) Total utility will increase until it equals marginal utility.
(B) Total utility will increase while marginal utility will be negative.
(C) Total utility will increase while marginal utility will decrease.
(D) Total utility will decrease while marginal utility will be positive.
(E) Total utility will decrease while marginal utility will increase.

28.
Town Herald
Do Not Change Subscription Increase Subscription
Price Price
Do Not Change Subscription
Daily Price
Voice
Increase Subscription Price

The two major newspapers in a city, Daily Voice and Town Herald, are considering whether to raise the
subscription price. The first entries in the matrix above show the profits to Daily Voice, and the second entries show
the profits to Town Herald. Which of the following is consistent with the above payoff matrix?
(A) Do Not Change Subscription Price is a dominant strategy for Daily Voice.
(B) Do Not Change Subscription Price is a dominant strategy for Town Herald.
(C) Increase Subscription Price is a dominant strategy for Daily Voice.
(D) Increase Subscription Price is a dominant strategy for Town Herald.
(E) There are no dominant strategies in the above payoff matrix.

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The following questions refer to the monopoly graph below, where MC = marginal cost, ATC = average total cost,
D = demand, and MR = marginal revenue.

29. If the monopolist could engage in perfect price discrimination, the monopolist’s total output and the price charged
for the last unit of output sold would be
(A) Q1 and P1
(B) Q1 and P2
(C) Q1 and P4
(D) Q2 and P3
(E) Q3 and P2

30. The profit-maximizing combination of output and price for a single-price monopoly is
(A) Q1 and P1
(B) Q1 and P2
(C) Q1 and P4
(D) Q2 and P3
(E) Q3 and P2

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31.

Which of the following combinations of output, price, and economic profit is consistent for the profit-maximizing
monopolist depicted in the graph above?

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Output Price Economic Profit

(A)

Output Price Economic Profit

(B)

Output Price Economic Profit

(C)

Output Price Economic Profit

(D)

Output Price Economic Profit

(E)

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32.

In the diagram above, the deadweight loss from a profit-maximizing monopolist is represented by area
(A) FGK
(B) FHI
(C) IJK
(D) GHIK
(E) 0HIQ

33. A monopolistically competitive firm is currently producing the profit-maximizing level of output. If the price of a
variable input increases, which of the following will occur?
(A) The firm will increase its output to increase its revenue.
(B) The firm will increase the price of its output by the same amount.
(C) The firm’s average total cost and marginal cost curves will shift upward.
(D) The firm’s average fixed cost will decrease as it decreases production.
(E) The firm’s fixed cost will increase, but its output level will be unaffected.

34. Karen works part-time at a local convenience store and earns $10 per hour. She wants to spend next Saturday
afternoon attending a music concert. The full price of a concert ticket is $75, but Karen was able to get a discounted
price of $50 from a friend who purchased the ticket but has become unable to attend. If Karen took 4 hours off from
her job to attend the concert, what was her opportunity cost of attending the concert?
(A) $40
(B) $50
(C) $75
(D) $90
(E) $115

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35. When marginal utility from consuming a good is zero, the total utility from consuming the good is
(A) zero
(B) negative
(C) maximized
(D) rising at a constant rate
(E) equal to marginal utility per dollar spent on the good

36. In the short run, a profit-maximizing firm, faced with U-shaped average cost curves, is producing a level of output
at which the average total cost of production is minimized. At this level of output, which of the following is true for
the firm?
(A) Marginal cost equals average fixed cost.
(B) Marginal cost equals average variable cost.
(C) Marginal cost equals average total cost.
(D) Profit per unit equals average total cost.
(E) Profit per unit equals marginal cost.

37. Monopolistically competitive product markets are inefficient because

(A) price equals the marginal value to the buyer of the last item produced
(B) price is greater than marginal cost
(C) excessive competition prevents other firms from entering the market
(D) homogeneous goods are usually overpriced
(E) short-run economic profit-making opportunities exist

The following questions refer to the graph below.

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38. Which of the following is most likely to occur if the firm increases production beyond 10 units?
(A) Consumers would be willing to purchase more than 10 units at the price of $20 per unit.
(B) The firm would definitely experience a loss.
(C) The firm would have to lower its price to sell more than 10 units.
(D) The firm's average cost of production would initially increase.
(E) The firm's profits would increase.

39. Movement along a production possibilities curve shows which of the following?

(A) The trade-offs society faces

(B) The total amount of available resources
(C) The combination of inputs required for a given output
(D) The relationship between the price of an input and the quantity demanded
(E) The decrease in efficiency

40. When marginal utility is falling but positive, total utility will
(A) decrease at an increasing rate
(B) decrease at a decreasing rate
(C) remain constant
(D) increase at an increasing rate
(E) increase at a decreasing rate

41. Which of the following market structures results in allocative efficiency?

(A) Monopoly
(B) Monopolistic competition
(C) Perfect competition
(D) Natural monopoly
(E) Oligopoly

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The following question refers to the diagram below, which shows the demand and cost curves for a profit-
maximizing firm.

42. Which of the following statements best describes the graph?

(A) Economic losses are incurred, and the firm will increase price until no losses are incurred.
Economic losses are incurred, and exit of firms from the market will cause prices to increase in the long
(B)
run.
(C) Economic profits are earned, and costs will increase until no profits are earned.
Economic profits are earned, and entry of firms into the market will cause prices to decrease in the long
(D)
run.
(E) Economic profits are earned, and neither exit nor entry of firms will occur in the long run.

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43.

The graph provided shows the marginal revenue ( ), average variable cost (AVC), average total cost (ATC), and
marginal cost (MC) curves for a perfectly competitive firm. Which of the following is true if the firm is currently
producing Q* units of output?
(A) The firm can increase its economic profit by producing fewer units of output.
(B) The firm can increase its economic profit by increasing the price of its product.
(C) The firm is maximizing its economic profit at the current level of output.
(D) The firm can increase total revenue by producing fewer units of output.
(E) The firm can increase total revenue by decreasing the price of its product.

44. Assume that consumers consider potatoes to be an inferior good, but consider rice to be a normal good. An increase
in consumers’ incomes will most likely affect the equilibrium price and quantity of potatoes and rice in which of the
following ways?

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Potatoes Rice

(A) Price Quantity Price Quantity

Decrease Decrease Increase Increase

Potatoes Rice

(B) Price Quantity Price Quantity

Decrease Increase Increase Decrease

Potatoes Rice

(C) Price Quantity Price Quantity

Decrease Decrease Decrease Decrease

Potatoes Rice

(D) Price Quantity Price Quantity

Increase Increase Decrease Decrease

Potatoes Rice

(E) Price Quantity Price Quantity

Increase Decrease Increase Decrease

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45.

The graph provided shows the production possibilities curve for a country’s economy. The economy is currently
producing at point Z. What is the opportunity cost of changing production to point M?
(A) 3 units of Good Y
(B) 8 units of Good Y
(C) 3 units of Good X
(D) 4 units of Good X
(E) 2 units of Good X

46. Which of the following is a defining characteristic of a market economy?

(A) Private ownership of resources

(B) Equitable distribution of income
(C) Taxation of personal income
(D) Reliance on public goods
(E) Government-guided resource allocation

47. Which of the following is true of production in the long run?

(A) At least one factor of production is fixed.
(B) Only one factor of production is fixed.
(C) Some factors of production are fixed while others are variable.
(D) All factors of production are variable.
(E) All factors of production, except technology, are fixed.

48. If both supply and demand for wheat increase, the equilibrium price and quantity of wheat will most likely change
in which of the following ways?

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Price Quantity
(A)
Decrease Decrease

Price Quantity
(B)
Decrease Increase

Price Quantity
(C)
Indeterminate Increase

Price Quantity
(D)
Increase Decrease

Price Quantity
(E)
Increase Indeterminate

49. Scarcity leads to which of the following?

(A) Unemployed resources
(B) Absolute advantage
(C) Opportunity cost
(D) Efficiency
(E) Monopolies

50. The study of economics exists because people are confronted with the basic problem of

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(A) elasticity
(B) negative externality
(C) scarcity
(D) overabundance
(E) monopoly

51. An outward shift of a production possibilities curve can be caused by

(A) planting a more profitable farm crop
(B) improving technology
(C) using idle resources
(D) changing consumer preferences
(E) increasing the minimum wage

52. Which of the following is an example of physical capital?

(A) Earnings from a job
(B) Fish in the ocean
(C) Money in a person’s wallet
(D) An unskilled worker
(E) A tractor used in farming

53. For consumers, assume that fish sticks and tacos are substitutes. Which of the following graphs illustrates the effect
on the taco market if the price of fish sticks increases?

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(A)

(B)

(C)

(D)

(E)

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54. Which of the following would most likely result in a decrease in the equilibrium price of oranges?
(A) The weather during this orange-growing season is not as good as it was last year.
(B) The price of apples, a substitute for oranges, is higher this year than last year.
(C) New studies suggest that oranges contain traces of cancer-causing substances due to pesticide residue.
(D) A tree-killing fungus spreads through orange orchards across the country.
(E) Firms in the orange industry launch an effective advertising campaign.

55. Assume that labor is the only variable input. If a firm’s short-run marginal cost is increasing as output rises, which
of the following must be true?
(A) Average product of labor is constant.
(B) Average product of labor is increasing.
(C) Marginal product of labor is greater than average product of labor.
(D) Marginal product of labor is decreasing.
(E) Total product of labor is decreasing.

56. If the marginal product of an input is positive and increasing, total product is
(A) decreasing at an increasing rate
(B) increasing at an increasing rate
(C) increasing at a decreasing rate
(D) decreasing at a decreasing rate
(E) increasing at a constant rate

57. If the output of a firm doubles when the firm doubles all of its inputs, the firm must be experiencing
(A) economies of scale
(B) increasing returns to scale
(C) constant returns to scale
(D) decreasing returns to scale
(E) diseconomies of scale

58. Raheem is currently working as a financial analyst earning a year and is considering quitting his current
job to start an art gallery. The estimated annual revenue from the art gallery is . The annual cost of labor,
advertising, and acquiring the art inventory is . What are Raheem’s accounting and economic profits if he
opens the art gallery?

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(A) Accounting profit is , and economic profit is .

(B) Accounting profit is , and economic profit is .
(C) Accounting profit is , and economic profit is .
(D) Accounting profit is , and economic profit is .
(E) Accounting profit is , and economic profit is .

59. Instead of being employed at a printing company at a salary of $25,000 per year, Sally starts her own printing firm.
Rather than renting a building that she owns to someone else for $10,000 per year, she uses it as the location for her
company. Her costs for workers, materials, advertising, and energy during her first year are $125,000. If the total
revenue from her printing company is $155,000, her total economic profit is

(A) -$5,000
(B) $5,000
(C) $20,000
(D) $30,000
(E) $120,000

60. Let P = price, MR = marginal revenue, MC = marginal cost, and ATC = average total cost. In monopolistic
competition, which of the following most accurately describes the long-run equilibrium conditions for a firm?
(A) P > ATC, MR = MC, and P > MC
(B) P > ATC, MR > MC, and P = MC
(C) P = ATC, MR = MC, and P > MC
(D) P = ATC, MR = MC, and P = MC
(E) P = ATC, MR > MC, and P > MC

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