Complete the missing words in the following sentence:

A typical marginal cost curve first ( 1 ) and then ( 2 ) because at the start there are gains from ( 3 ) but after a while, ( 4 ) sets in. (Please choose one option for each of four blanks.)

1

(1) increase

(1) decrease

(2) increase

(2) decrease

(3) specialization

(3) the law of diminishing returns

(4) specialization

(4) the law of diminishing returns

2.

2

In order to maximize profits a firm should:

1

Sell as many units as it can possibly make.

Sell all units that generate positive marginal revenue.

Sell all units for which marginal cost exceeds marginal revenue.

Sell all units for which marginal revenue exceeds marginal cost.

3.

3

Which of the following holds in a perfectly competitive market?

I. There is free entry and exit.

II. Profits in the long run are zero.

III. Prices in the long run are determined by the demand for the good rather than by the costs of production.

1

Only I.

Only II.

Only III.

I and II.

II and III.

All three.

4.

4

Which of the following best describes the market power of the monopolistic firm?

1

It can choose to set any price it wants, disregarding the demand for the good.

It can set price equal to marginal revenue.

Profits are positive no matter what price it charges.

It can choose the market price, which implies price greater than marginal revenue.

5.

5

Suppose the monopolist is facing a market demand described by P=2000-5Q, which implies that MR=2000-10Q. We also know that MC=10Q.

What price will the firm set and how many units will it sell?

1

Q=100 P=2000

Q=133.33 P=$1333.33

Q=1500 P=$100

Q=100 P=$1500

6.

6

Which of the following statements is correct?

1

The monopoly is inefficient because it makes a profit in the long run.

The monopoly is inefficient as it fails to produces some units for which marginal benefit exceeds marginal cost.

The monopoly is inefficient as it produces units for which marginal cost exceeds marginal benefit.

The monopoly is efficient as long as it maximizes profit.

7.

7

Comparing the outcome under monopoly and perfect competition, which of the following is true?

I. Consumer surplus under perfect competition is larger than under monopoly.

II. Producer surplus under perfect competition is larger than under monopoly.

III. Total surplus under perfect competition is larger than under monopoly.

1

Only I.

Only II.

Only III.

I and II.

II and III.

I and III.

All three.

8.

8

Complete the missing words in the following sentence:

A Natural Monopoly is a case where marginal cost is ( 1 ) and average total cost is ( 2 ) so that one will produce at a ( 3 ) cost per unit than many smaller firms would. (Please choose one option for each of three blanks.)

1

(1) increasing

(1) constant

(2) raising

(2) falling

(3) lower

(3) higher

9.

9

Which of the following could decrease Dead Weight Loss in the case of a natural monopoly?

1

Setting a price ceiling above the monopolist's profit maximizing price.

Setting a price floor above the monopolist's profit maximizing price.

Setting a price ceiling below the monopolist's profit maximizing price.

Setting a price floor below the monopolist's profit maximizing price.

10.

10

As the ability of a firm to price discriminate between consumers increases, the total surplus generated by the economy will (increase/decrease) even though the consumer surplus (increases/decreases).

1

increase, increases

decrease, decreases

increase, decreases

decrease, increases

11.

11

Audrey claims that Apple is a monopolist, controlling the market for smartphones. Jonathan says that the market for smartphones is instead monopolistically competitive. Which of the following supports Audrey's claim?

1

Audrey knows that the market for smartphone's is inefficient.

Jonathan recently bought a Galaxy Phone rather than an iPhone.

She knows that Apple's marginal revenue is downward sloping.

Apple enjoys a profit in the long run.

12.

12

The building next door to yours is being painted. Which of the following is an example of a negative externality caused by this?

1

Painting the house costs a lot of money.

A newly painted house will look much nicer.

All three are correct.

The painters are making a lot of noise.

13.

13

Assume smoking creates a negative externality as it increases health care expenditures borne by the public healthcare system. This implies that:

1

There is Dead Weight Loss because people smoke too much for their own good.

There is NO Dead Weight Loss as long as private marginal cost is not higher than private marginal benefit.

There is Dead Weight Loss because people smoke too much in terms of society at large.

All three are correct.

14.

14

In the case of a negative externality, a Piguvian tax would:

1

Internalize the externality.

Increase total surplus.

All three are correct.

Decrease both consumer and producer surplus.

15.

15

The market for a particular vaccine is controlled by a single firm. You learn that the vaccine creates a positive externality of $5 per unit. You would recommend the government set a per unit subsidy of what size?

1

$5 a unit.

Zero.

More than $5 a unit.

Less than $5 a unit.

16.

16

Which of the following statements is correct about a pure public good?

I. Once created, providing it to an additional person is free.

II. The marginal benefit to society equals the benefit to the person who values it the most.

III. It is non excludable and non rival.

1

Only I.

Only II.

Only III.

Both I and II.

Both II and III.

Both I and III.

All three.

17.

17

The above table shows the marginal benefit from acres of park space for Konhee and Lucy, the only two citizens of a city. Once the park is built it will be free and open to both citizens. If each acre costs $120 to plant & maintain, how big should the park be?

1

Zero

1

2

3

4

5

18.

18

Dilip is thinking about booking a week's cruise in Greece for this coming summer, but knows there is a 15% chance that medical issues will not allow him to travel after all. The cruise costs $2,000 and he finds out that a cancellation insurance is $100. He decides to purchase the insurance. This is an example of (Adverse Selection/Moral Hazard) as only the (high risk/low risk) passengers purchase the insurance.

1

Moral Hazard, high risk

Adverse Selection, high risk

Adverse Selection, low risk

Moral Hazard, low risk

19.

19

The Patient Protection and Affordable Care Act, known popularly as Obamacare, included a 3.5% capital gains tax (a tax on gains from investments). Such a tax would shift the post-tax Lorenz curve ( 1 ) from the 45 degree line, ( 2 ) the post tax Gini coefficient and ( 3 ) the number of people living in poverty. (Please choose one option for each of three blanks.)

1

(1) closer to

(1) further away

(2) increase

(2) decrease

(3) raise

(3) lower

(3) not change

20.

20

In this course we learnt that though perfect markets achieve an efficient allocation of a particular good, the are various cases when the market produces too much or too little of a good. In such cases the government:

1

Should always intervene as it is sure to increase total surplus.

Should never intervene, as any intervention will always reduce the total surplus.

Has a potential of increasing surplus through careful intervention.