Name: __________________________ Date: _____________

1. 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.

Use the following to answer question 2:

Figure: Softella

2. (Figure: Softella) The figure above shows the market for Softella Medicated Tissues.
Assume that the only use for these tissues is to wipe one's hands to keep them clean.
When people use these tissues they prevent germs from spreading to other people. Thus
they are creating an external benefit to society. The market price of a box of these
tissues is $8. If the government were to subsidize the users of these tissues, what would
the efficient quantity in this market be?
A) 700
B) 500
C) 1,200
D) 200

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 3. Which of the following correctly describes what a Pigouvian subsidy is?
A) If the producers receive subsidies, these are called Pigouvian subsidies.
B) Pigouvian subsidies are so called when they are awarded to producers whose goods
have external benefits.
C) If producers of goods that create negative externalities are taxed, these are called
Pigouvian subsidies.
D) If producers pay lower amounts of corporate taxes, these are effectively known as
Pigouvian subsidies.

4. To maximize profit firms should keep producing as long as marginal revenue is:
A) greater than marginal cost.
B) equal to marginal cost.
C) less than marginal cost.
D) greater than total cost.

5. Which of the following statements is correct?

A) When the marginal cost curve is above the average cost curve, the average cost
curve must be rising.
B) When the marginal cost curve is below the average cost curve, the average cost
curve must be rising.
C) When MR = MC, the average cost curve is at its minimum point.
D) When MR = P, the average cost curve is at its minimum point.

Use the following to answer question 6:

Table: Barrels of Oil

Price of Oil =
Barrels of Oil Marginal Revenue Marginal Cost Change in Profit
0 $0 $0
1 $100 $20
2 $100 $40
3 $100 $60
4 $100 $80
5 $100 $100
6 $100 $120
7 $100 –$40

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 6. (Table: Barrels of Oil) Refer to the above table. The change in profit from producing the
second barrel of oil is ________, and the marginal cost from producing the seventh
barrel of oil is ________.
A) $140; $140
B) $100; $20
C) $60; $140
D) $140; $20

7. The oil industry is an increasing-cost industry because:

A) expanding output requires firms to use more expensive production methods to find
and extract oil from less desirable locations.
B) people buy more oil at lower prices.
C) because it is necessity good.
D) All of the answers are correct.

8. A firm should exit the industry if which of the following conditions apply?
A) TR > TC
B) P < AC
C) Lifetime expected profit is positive.
D) Prices are low now but expected to rise.

Use the following to answer question 9:

Figure: Costs

9. (Figure: Costs) Use the above figure. At a price of $20, the firm earns profit of:
A) $75.
B) $350.
C) $575.
D) $0, because P = MC at P = $20.

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 10. 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.

Use the following to answer question 11:

Table: Barrels of Oil

Barrel of Oil Produced Total Revenue Total Cost Price
1 $50 $4 $50
2 100 10 50
3 150 21 50
4 200 38 50
5 250 61 50
6 300 90 50
7 350 126 50
8 400 176 50
9 450 266 50
10 500 390 50

11. (Table: Barrels of Oil) Refer to the table above. The maximum profit available to the
company is:
A) $184
B) $210
C) $224
D) $266

12. 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 13:

Figure: Industry Firms

13. (Figure: Industry Firms) Use the above figures. The market for a normal good is
characterized by demand curve D2 and supply curve S2. A decrease in income will
cause:
A) the demand curve to shift D1 causing firms to earn economic profits. The supply
curve will not change, so price will rise and firms will earn normal profits.
B) the supply curve to shift D1 causing firms to earn economic profits. The supply
curve will decrease to S1 as firms exit the industry. Eventually the market price will
rise and firms will earn above normal profits.
C) the demand curve to shift D1 causing firms to earn economic losses. The supply
curve will decrease to S1 as firms exit the industry. Eventually the market price will
rise and firms will earn normal profits.
D) the supply curve to shift S1 causing firms to earn economic losses. The demand
curve will decrease to D1 as firms enter the industry. Eventually the market price
will fall and firms will earn normal profits.

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Use the following to answer question 14:

Figure: Maximum Willingness to Pay

14. (Figure: Maximum Willingness to Pay) Refer to the figure above. What is the profit that
the monopolist is earning?
A) $8,250
B) $5,625
C) $2,625
D) There is not enough information to answer the question.

15. A monopolist can sell 300 units of output for $29.00 per unit. Alternatively, it can sell
301 units of output for $28.25 per unit. The marginal revenue of the 301st unit of output
is:
A) –$196.75
B) –$0.75
C) $196.75
D) $28.25

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Use the following to answer question 16:

Figure: Deadweight Loss

16. (Figure: Deadweight Loss) Refer to the figure above. Deadweight loss caused by
monopoly pricing is represented by the area:
A) abd.
B) acdf.
C) bcdf.
D) def.

Use the following to answer question 17:

Figure: Optimal Output

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

Use the following to answer question 18:

Figure: Maximum Willingness to Pay

18. (Figure: Maximum Willingness to Pay) Refer to the figure above. What is the profit
maximizing quantity?
A) 125
B) 110
C) 100
D) 75

19. If the quantity demanded for a hand-carved pineapple is 2 at a price of $16, and the
quantity demanded will increase to 3 if the seller lowers the price to $14, what is the
seller's marginal revenue from selling 3 units of pineapple?
A) 8
B) 9
C) 10
D) 11

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 20. Natural monopolies:
A) produce the optimal quantity of output, unlike other monopolies.
B) exist when one firm can produce the market output at a lower cost than two or
more firms.
C) generally experience large diseconomies of scale, leading to production
inefficiencies and work stoppages.
D) face market demand curves that are perfectly elastic.

21. To maximize profit GlaxoSmithKline wants to set a higher price for Combivir in Europe
than in Africa because demand curve in Africa is:
A) lower and more inelastic.
B) lower and more elastic.
C) higher and more inelastic.
D) higher and more elastic.

Use the following to answer question 22:

Figure: PPD

22. (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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 23. Arbitrage is ________ in one market and ________ in another market.
A) selling low; buying high
B) selling high; buying high
C) buying high; selling low
D) None of the answers is correct.

Use the following to answer question 24:

Table: Myrtle Beach Golf

Maximum Willingness to Pay for One-Night Stay and One Round of Golf
David John
One-Night Stay 50 110
Round of Golf 80 35

24. (Table: Myrtle Beach Golf) The table above shows David and John's maximum
willingness to pay for a one-night stay in a Myrtle Beach golf resort and one round of
golf. Assume that marginal costs of production are zero. If the resort bundles a one-
night stay with a round of golf, how much profit will it make on David and John?
A) $260
B) $380
C) $200
D) $220

25. Perfectly price discriminating monopolists charge:

A) each consumer his or her maximum willingness to pay, so consumer surplus is
zero.
B) all consumers the average of their willingness to pay, so consumer surplus is
maximized.
C) each consumer his or her maximum willingness to pay, so consumer surplus is
maximized.
D) all consumers the average of their willingness to pay, so consumer surplus is zero.

26. Which of the following would you NOT consider to be a network good?
A) cell phones
B) quiet study rooms
C) e-mail programs
D) online player versus player games

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 27. 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 question 28:

Table: Russia, Saudi Payoff Table

Suppose that the oil market is dominated by two large firms, Saudi Arabia and Russia. Both
Saudi Arabia and Russia have two choices or strategies: cooperate by cutting back production
or cheat by increasing production. The payoff table below shows the potential revenues
associated with each firm's strategies. For instance, if Saudi Arabia cheats and Russia
cooperates then the payoff to Saudi Arabia is $1000 and the payoff to Russia is $400.

28. (Table: Russia, Saudi Payoff Table) Refer to the table above. The dominant strategies
are:
A) Cheat for both Russia and Saudi Arabia.
B) Cooperate for both Russia and Saudi Arabia.
C) Cheat for Russia and Cooperate for Saudi Arabia.
D) Cooperate for Russia and Cheat for Saudi Arabia.

Use the following to answer question 29:

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

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

30. A strategy that has a higher payoff than any other strategy no matter what the other
player does is called a:
A) cartel strategy.
B) maximizing strategy.
C) valuable strategy.
D) dominant strategy.

31. Compared to private goods, the free market would ________ public goods.
A) overproduce
B) efficiently produce
C) underproduce
D) sometimes overproduce but most often underproduce

32. 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

33. Which of the following is the explanation for why wild animals are often hunted to the
point of extinction?
A) cost-benefit analysis
B) public goods
C) tragedy of the commons
D) The explanation is unknown.

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 34. Recall from your reading of the textbook that tuna fish is being driven to extinction
because of overfishing. If all the fishermen know about this, why don't they fish less to
slow down the extinction?
A) The kind of fishing equipment that is used does not allow for smaller catches.
B) A lack of property rights over the tuna fish stock in the sea.
C) The fishermen do not realize that the way of life will also become extinct.
D) Their governments have not considered tradable allowances as a solution.

Use the following to answer question 35:

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

35. (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

Use the following to answer question 36:

Table: Types of Goods

Excludable Nonexcludable
Rival 1 2
Nonrival 3 4

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36. (Table: Types of Goods) Use the above table. Which of the following statements are
true?
I. Section 1 may contain fruit, chicken, and underwear.
II. Section 2 may contain fish in the ocean, public roads, and public hunting grounds.
III. Section 3 may contain online games, Cable TV, and digital music.
IV. Section 4 may contain asteroid deflection, national defense, and radio.
A) I, II, and IV
B) III and IV
C) II only
D) I, II, III, and IV

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.

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

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