The University of Alberta

Department of Economics
Economics 101
Midterm #2
Gordon Lee March 2022

You have 60 minutes to answer the following thrity multiple choice

questions. Choose the best answer to the questions.
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1. Which of the following statements about utility and preferences is false?

a. If Sidra prefers tea to coffee and coffee to hot chocolate, then she must prefer tea
to hot chocolate.
b. Preferences can be ranked.
c. If two individuals, Ingrid and Inez, each consume the same bundle of goods, then
both Inez and Ingrid
must receive the same utility from the bundle.
d. Utility cannot be compared across consumers.

2. Which of the following is not consistent with the law of diminishing marginal utility?
a. Newspaper vending machines are not as secure as soft drink machines.
b. A student selects to eat at an all-you-can-eat restaurant rather than at a restaurant
that charges for refills.
c. A student’s enjoyment of opera increases the more she listens to it.
d. A symphony has free throat lozenges in their lobby.

3. Consumers have to make trade-offs in deciding what to consume because

a. not all goods give the same amount of satisfaction.
b. the prices of goods vary.
c. they are limited by their income levels.
d. there not enough of all goods produced.

4. If the price of a good is zero, a consumer will

a. consume all units that have positive total utility.
b. consume an infinite quantity.
c. consume until total utility equals zero.
d. consume the entire amount supplied.
e. consume all units with a positive marginal utility.

5. Basil is maximizing his utility from consuming tea and crumpets. If the marginal
utility of the last crumpet was
32 units of utility and the price of tea and crumpets are $4 and $8 respectively, what
was the marginal utility of
the last cup of tea Basil consumed?
a. 16 units of utility.
b. 2 units of utility.
c. 12 units of utility.
d. $6.
e. 128 units of utility.

6. Anne Elke maximizes her utility by eating both pizzas and burritos. The price of a
pizza is $10 and the price of a burrito is $5. When Anne's utility is maximized, the
a. marginal utility of both goods is the same.
b. marginal utility of a burrito is larger than the marginal utility of a pizza.
c. good with a larger marginal utility cannot be determined without more
information.
d. marginal utility of pizza is larger than the marginal utility of burritos.
e. total utility of pizza consumption is larger than the total utility of burrito
consumption.

7. To derive the demand curve using utility analysis,

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a. change a consumer’s marginal utilities and note the effect of demand curve
changes on market prices.
b. change a consumer’s marginal utilities and note the effect of supply curve
changes on market prices.
c. change a consumer’s marginal utilities and note the effect of supply and demand
curve changes on
market prices.
d. note how the consumer’s utility-maximizing consumption bundle changes in
response to demand curve
shifts.
e. note how the consumer’s utility-maximizing consumption bundle changes in
response to price changes.
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8. The schedule below represents the willingness of a typical consumer to pay for wine
in a year. Suppose there are 10,000 identical consumers in the community.
Price per Bottle of Wine Bottles of Wine Consumed per Year
$ 50 1
$ 40 2
$ 30 3
$ 20 4
$ 10 5

Refer to the table above. If the market price was $30, the total consumers’ surplus
for the community equals;
a. $ 0.
b. $ 500,000.
c. $ 600,000.
d. $ 200,000.
e. $ 300,000.

9. An old canceled stamp of an upside down airplane is worth $80,000 but a new stamp
featuring
Elvis is worth only 29 cents. This paradox is explained by the fact that:
a. the more available the product, the higher the marginal utility and the lower the
price.
b. the scarcer the product, the higher the marginal utility and the higher the price.
c. the scarcer the product, the higher the marginal utility and the lower the price.
d. the scarcer the product, the higher the total utility and the higher the price.

10. Which of the following is a common mistake consumers commit when they make
decisions?
a. They take into account nonmonetary opportunity costs but ignore monetary costs
b. They are overly pessimistic about their future behaviour.
c. They fail to ignore sunk costs.
d. They sometimes value fairness too much.

11. A sole proprietorship form of business organization

a. has unlimited liability which means the owner’s personal property is at risk.
b. has unlimited liability but the owner’s personal property is not at risk.
c. has limited liability.
d. has unlimited access to money capital.
e. allows easy transferability of ownership by the trading of shares.

12. A business organization which has two or more owners who share decision making as
well as profits is called
a
a. single proprietorship.
b. partnership.
c. corporation.
d. non-profit organization.
e. joint stock company.

13. The advantages of the corporate form of business include:

a. the ability to operate without being taxed.
b. the fact that owners are subject to unlimited liability.
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c. guaranteed cooperation between management and owners.
d. the guarantee to shareholders of a positive return on their financial investments.
e. the ability to raise money by selling stocks and bonds.

14. When Patricia sells her General Motors common stock in the secondary market at the
same time that Brian purchases the same amount of General Motors stock in the
secondary market, General Motors receives
a. the dollar value of the transaction.
b. the present value of the dollar value of the transaction.
c. only the par value of the common stock.
d. the dollar amount of the transaction, less brokerage fees.
e. nothing.

15. Which of the following statements best describes the economic short run?
a. It is a period of one year or less.
b. It is a period during which firms are free to vary all of their inputs.
c. It is a period during which at least one of the firm’s inputs is fixed.
d. It is a period during which fixed inputs become variable inputs because of
depreciation.

16. Diminishing marginal product of labour occurs when

a. adding another unit of labour increases output, but not by as large a margin as the
last unit of labour
employed.
b. the average product of labour begins to rise.
c. adding another unit of labour increases output by a larger margin than the last unit
of labour employed.
d. all inputs are varied simultaneously in the same proportion.

17. An important and often ignored opportunity cost is the

a. cost of accounting services.
b. cost of missed market opportunities when funds are invested in a firm.
c. cost of interest paid to bondholders by the firm.
d. cost of utilities used by the firm.

18. Fixed costs are best defined as:

a. costs that do not vary with output.
b. costs that vary with output.
c. the sum of all marginal costs.
d. the change in total costs when one more unit of output is produced.

19. If the total cost of producing 10 units is $100 and the marginal cost of the 11 th unit is
$21, then
a. variable costs of 11 units are $121.
b. fixed costs are $79.
c. the marginal cost of the 10th unit is more than $11.
d. the average total costs of 12 units are $12.
e. the average total costs of 11 units are $11.

20. Refer to Table 8-2. A firm expanding from producing 1,000 to 2,000 kilograms of
blueberries in the long
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run is experiencing
Table 8-2
The long-run total cost schedule of a perfectly competitive firm that produces
blueberries is as follows:

Kilograms of Blueberries 1,000 2,000 3,000 4,000

5,000 6,000
Total Cost $3,000 $5,500 $7,500 $8,000
$11,000 $15,000

a. Diseconomies of Scale.
b. Economies of Scale.
c. An increasing marginal product.
d. Positive economic profits.
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21. Which of the following is a characteristic of a perfectly competitive market?

a. The products sold by the firms in the market are heterogeneous.
b. It is easy for firms to enter or leave the market.
c. Each firm is a price searcher.
d. There are few buyers and sellers in the market.

22. The horizontal demand curve facing an individual firm in a perfectly competitive
market:
a. violates the law of demand which states that demand curves are downwards
sloping.
b. is a reflection of the firm’s small size relative to the total market.
c. is maintained only with the help of high barriers to entry.
d. is a reflection of the inelastic demand for the product.

23. If the market price is $25 in a perfectly competitive market, the marginal revenue
from selling the fifth unit is
a. $12.50.
b. $5.
c. $25.
d. $125.
e. There is not enough information to determine an answer.

24. A firm in a perfectly competitive industry is producing a quantity where price

exceeds marginal cost. It
follows that producing one more unit of output will cause the firm’s
a. profits to increase.
b. total cost to decrease.
c. profits to decrease.
d. profits to remain unchanged.
e. total revenue to fall.

25. Refer to Table 74-6. Fixed costs equal $40. Suppose the market price is $12, a
perfectly competitive firm
will produce
Table 74-6
Output Total Costs Output Total Costs
100 $ 400 106 $ 427
101 $ 402 107 $ 435
102 $ 405 108 $ 445
103 $ 409 109 $ 457
104 $ 414 110 $ 471
105 $ 420 111 $ 490
a. 0.
b. 105.
c. 107
d. 109.
e. 111.

26. For a perfectly competitive firm, when MC is less than MR,

a. the firm will have an incentive to expand output.
b. the firm will have an incentive to decrease output.
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c. the producer will have no incentive to change production.
d. economic profits must be positive.
e. a and d.

27. For a perfectly competitive firm in a short run equilibrium, if the price is between AVC
and AC, which of the
following will be true?
a. Economics profits will be negative.
b. Accounting profits will be negative.
c. The loss will be equal to total fixed costs.
d. The firm will not produce.

28. Croakie’s Cookies is a perfectly competitive firm that faces average total costs of $8
and a price of $6 for every kilogram of cookies she produces. Which of the following
is least likely to occur?
a. Croakie leaves the industry.
b. Other firms leave and the equilibrium price rises to $8, allowing Croakie to
continue production.
c. The cost curve will shift downward, allowing Croakie to remain in business.
d. Supply decreases.

29. A perfectly competitive firm in a constant cost industry produces 3,000 units of a
good at a total cost of
$36,000. The prevailing market price is $15. What will happen to the number of
firms in the market and the market in the long run?
a. The number of firms remains constant and the market’s output increases.
b. The number of firms and the industry’s output increase.
c. The number of firms remains constant and the market’s output decreases.
d. The number of firms and the market’s output decrease.

30. An unregulated perfectly competitive industry;

a. maximizes consumer surplus.
b. maximizes producer surplus.
c. maximizes the sum of producer
and consumer surplus.
d. has a greater consumer surplus
than it would if the government imposed an effective price floor
upon it.
e. c and d.
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Question Number Answer

1 D
2 C
3 C
4 E
5 A
6 D
7 E
8 E
9 B
10 C
11 A
12 B
13 E
14 E
15 C
16 A
17 B
18 A
19 E
20 B
21 B
22 B
23 c
24 A
25 D
26 A
27 A
28 C
29 B
30 E