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Sample/practice exam March 2015, questions and answers

Prices and markets (RMIT)

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Prices & Markets

Sample Examination Questions (and answers)
1. When a market is in equilibrium,
(a) no shortages exist.
(b) quantity demanded equals quantity supplied.
(c) a price is established that clears the market.
(d) All the above.
2. If goods J and K are substitutes, an increase in the price of J causes
(a) quantity demanded of J to fall and the demand curve for K to shift toward the
origin.
(b) a decrease in quantity demanded for J and an outward shift of K's demand curve.
(c) quantity demanded of J remains constant, but the demand for K decreases.
(d) the demand curve for both J and K shift.
3. When a good is normal, an increase in income causes the
(a) supply curve of the good to shift to the right.
(b) demand curve of the good to shift to the left.
(c) prices of complementary goods to fall.
(d) demand curve of the good to shift to the right.
4. An improvement in overall technology that allows more output to be produced with
the same level of inputs causes
(a) a movement up the supply curve, resulting in both a higher equilibrium price and
quantity.
(b) no movement of the supply curve but a fall in price and an increase in quantity
supplied.
(c) a rightward shift of the supply curve so that more is offered for sale at every price.
(d) None of the above.
5. An increase in both demand and supply causes an
(a) increase in equilibrium price but a decrease in equilibrium quantity.
(b) increase in equilibrium quantity and either an increase or decrease in equilibrium
price.
(c) increase in equilibrium quantity but a decrease in equilibrium price.
(d) increase in equilibrium price and increase in equilibrium quantity.
6. In the circular-flow diagram,
(a) firms are sellers in the factors market and the goods market.

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(b) households are sellers in the factors market.

(c) firms are buyers in the goods market.
(d) spending on goods and services flow from firms to households.
7. Which of the following is an example of market failure?
(a) A firm becomes insolvent and is forced out of the market.
(b) A firms research and development fails to develop a new product.
(c) A firm closes down a factory due to poor sales.
(d) A firms pollution into a river reduces the number of fish that can be caught.
Price ($ per unit)
0.00
0.10
0.20
0.30
0.40
0.50
TABLE 1

Qd (units)
200
160
120
80
40
0

Qs (units)
0
0
40
80
120
160

8. This question is based on Table 1 above. At Qs of 120 units, the highest price
consumers are willing to pay is
(a) $0.20 per unit.
(b) $0.40 per unit.
(c) $0.30 per unit.
(d) $0.5 per unit.
9. Use the data in Table 1 above to answer this question. The equilibrium quantity is
(a) 40 units.
(b) 60 units.
(c) 80 units.
(d) 100 units.
10. In Figure 1 below, a price ceiling at P0 means that
(a) the market is in equilibrium because quantity demanded equals quantity supplied.
(b) there is a surplus in the market equal to the distance AB.
(c) there is a shortage in the market equal to the distance 0Q1.
(d) there is a shortage in the market equal to the distance Q1Q0.
11. In Figure 1 below, excess demand at the _________ of P1 is represented by the
distance AB. The missing words are
(a) price ceiling
(b) price floor
(c) minimum price
(d) consumer surplus

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FIGURE 1
12. If South Carolina experiences a late frost that damages the state's peach crop,
then we would expect
(a) the demand curve for peaches to shift downward and to the left.
(b) the supply curve for peaches to shift outward and to the right.
(c) the demand curve for peaches to shift upward and to the right.
(d) the price of nectarines, a substitute fruit, to rise.
13. One example of a centrally planned market is
(a) the toothbrush market.
(b) the market for Toyota cars.
(c) many self-interested agents making decisions.
(d) a law requiring flour to be sold at $3 per kg.
14. Gina, a photographer, decides to go to the movies with her friends on Saturday
instead of photographing a wedding for $1000. The opportunity cost she places on
photographing the wedding is
(a) the $1000 she would earn.
(b) the enjoyment of spending the day with her friends at the movies.
(c) the $1000 minus the enjoyment she would have received from being at the
movies with her friends.
(d) nothing, as she was not going to earn any money at the movies.
15. Suppose that an increase in the price of garden sheds from $650 to $850
prompts gardening shops to increase the quantity of the garden sheds that they offer
from 80 to 320. Using the midpoint method, what would be the elasticity of supply?
(a) 0.50.
(b) 4.5.

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(c) 0.34.
(d) 1.08.
16. Income elasticity of demand allows us to distinguish between different kinds of
goods since
(a) inferior goods have a negative income elasticity.
(b) luxury goods have an income elasticity greater than 1.
(c) necessities have an income elasticity between 0 and 1.
(d) All of the above.
17. A recent government survey shows that when the price of cigarettes rises by
10%, the quantity demanded falls by 17%. The price elasticity of demand for
cigarettes is
(a) elastic.
(b) inelastic.
(c) unit elastic.
(d) There is not enough information to answer the question.
18. In comparison to the price a perfectly competitive firm charges, monopoly pricing
has the effect of causing
(a) the level of output to be higher.
(b) the price of output to be higher.
(c) consumer surplus to be larger.
(d) All of the above are correct.
19. Coordination of economic activity in a market economy is achieved by
(a) government regulations.
(b) banks and other financial intermediaries.
(c) planning agencies within government.
(d) prices.
20. The concept of opportunity cost is best represented by the
(a) shift of a production possibilities curve frontier.
(b) shift of a production possibilities frontier inwards.
(c) movement along a production possibilities frontier from one point to another.
(d) movement from point on a production possibilities frontier to a point inside the
same curve.
21. Singapore city council is trying to quantify the social cost of smoking in order to
determine the optimal value of a tax on smoking. What factors should they include
when calculating the social cost of smoking?
(a) The chewing gum costs of the smokers and the price consumers pay for
cigarettes.
(b) The price consumers pay for cigarettes and the costs to the bystanders affected
by the air pollution.

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(c) The costs to the bystanders affected by the air pollution only.
(d) The price consumers pay for the cigarettes.
22. The value of the marginal product of any input is equal to the marginal product of
that input multiplied by the
(a) marginal cost of the output.
(b) change in total profit.
(c) market price of the output.
(d) additional revenue.
23. Which of the following statements about costs is correct?
(a) When marginal cost is less than average total cost, average total cost is rising.
(b) The total cost curve is U-shaped.
(c) As the quantity of output increases, marginal cost eventually rises.
(d) All of the above are correct.
24. Whenever marginal cost is greater than average total cost,
(a) marginal cost is rising.
(b) marginal cost is falling.
(c) average total cost is rising.
(d) average total cost is falling.
25. The firms efficient scale is the quantity of output that minimizes
(a) average total cost.
(b) average fixed cost.
(c) average variable cost.
(d) marginal cost.
26. In a competitive market, the actions of any single buyer or seller will
(a) have a negligible impact on the market price.
(b) have little effect on overall production but will ultimately change final product
price.
(c) cause a noticeable change in overall production and a change in final product
price.
(d) adversely affect the profitability of more than one firm in the market.
27. Which of the following statements is correct?
(a) A competitive firm is a price maker and a monopoly is a price taker.
(b) A competitive firm is a price taker and a monopoly is a price maker.
(c) Both competitive firms and monopolies are price takers.
(d) Both competitive firms and monopolies are price makers.
28. Assuming that James Bicycle Shop operates in a competitive market for bicycles,
which of the following statements is/are true?
(i) He chooses the price at which he sells his bicycles.

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(ii) He chooses the quantity of bicycles that he supplies.

(iii) His market is characterised by one or more barriers to entry.
(a) (i) only.
(b) (ii) only.
(c) (i) and (ii) only.
(d) (ii) and (iii) only.
29. Carlo is a wholesale meatball distributor. He sells his meatballs to all the finest
Italian restaurants in town. Nobody can make meatballs like Carlo. As a result, his is
the only business in town that sells meatballs to restaurants. Assuming that Carlo is
maximising his profit, which of the following statements is true?
(a) Meatball prices will be less than marginal cost.
(b) Meatball prices will equal marginal cost.
(c) Meatball prices will exceed marginal cost.
(d) Meatball prices will be a function of supply and demand and will therefore
oscillate around marginal costs.
30. Australia exports cattle to Indonesia. If Australia puts an export subsidy on cattle
and the Australian supply of cattle is elastic while the demand for cattle in Indonesia
is inelastic then
(a) Australian sellers of cattle will enjoy most of the subsidys benefit.
(b) Indonesian buyers of cattle will enjoy most of the subsidys benefit.
(c) the benefit of the subsidy will be shared equally.
(d) it is impossible to determine how the burden of the tax will be shared.
31. Many species of animals are common resources and must be protected by law to
keep them from extinction. Why is the cow not one of these endangered species,
even though there is such a high demand for beef?
(a) Cows reproduce at a high rate and have adapted well to their environment.
(b) Public policies have been implemented to protect cows from predators and
diseases.
(c) Cows are privately owned and many endangered species are owned by no-one.
(d) There is a natural ecological balance between the birth rate of cows and human
consumption.
32. Which theory explains the fact that some firms may choose to pay their
employees more than they would normally earn?
(a) Human capital theory.
(b) Signalling theory.
(c) Efficiency wages theory.
(d) Superstar theory.
33. When an oligopoly market is in Nash equilibrium,
(a) market price will be different for each firm.
(b) firms will not behave as profit maximisers.

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(c) a firm will choose its best pricing strategy, given the strategies that it observes
other firms taking.
(d) a firm will not take into account the strategies of competing firms.
34. The logic of self-interest causes the duopolys output level to be which of the
following?
(i) above the monopoly level
(ii) above the oligopoly level
(iii) below the competitive level
(a) (i) and (ii).
(b) (i) and (iii).
(c) (ii) and (iii).
(d) (i), (ii) and (iii).
35. Reduced competition through merging of companies
(a) may raise social welfare if the benefit from the synergies exceeds the social cost
of increased market power.
(b) may raise social welfare if the cost from the synergies exceeds the benefit of
increased market power.
(c) will always benefit society as a whole.
(d) will never benefit society as a whole.
36. Product differentiation causes the seller of a good to face what type of demand
curve?
(a) Downward sloping.
(b) Upward sloping.
(c) Horizontal.
(d) Vertical.
37. A monopolistically competitive firm chooses
(a) the quantity of output to produce, but the market determines price.
(b) the price, but competition in the market determines the quantity.
(c) price, but output is determined by a cartel production quota.
(d) the quantity of output to produce and the price at which it will sell its output.
38. In the long run, a profit-maximising firm in a monopolistically competitive market
operates at
(a) efficient scale.
(b) a level of output at which average total cost is rising.
(c) a level of output at which average total cost is falling.
(d) the level of output at which total revenue is maximised.
39. Long-run profit earned by a monopolistically competitive firm is driven to the
competitive level due to a
(a) change in the technology that the firm utilises.

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(b) shift of its demand curve.

(c) shift of its supply curve.
(d) None of the above.
40. Assume that the demand for salt is relatively inelastic and the demand for orange
juice is relatively elastic. Compared to the deadweight loss from the same
percentage tax on orange juice, the deadweight loss from imposing a tax on salt
would be
(a) greater.
(b) lesser.
(c) neither greater nor lesser.
(d) either greater or lesser.
41. The three countries of Ophir, Shem and Turan produce the entire world supply of
carbomite. They have signed an agreement to limit their production of carbomite in
order to act as a monopolist. Each country is deciding if it should honour the
agreement or if it should cheat. If all three countries honour the agreement, each will
earn $100 million. If all three countries cheat on the agreement, each will earn $30
million. If two of the countries honour the agreement and one cheats, then the two
honouring the agreement will each earn $80 million and the cheater will earn $120
million. If only one country honours the agreement and the other two cheat, then the
one honouring the agreement will earn $40 million and the two cheaters will each
earn $70 million. To make the most money, Ophir
(a) should honour the agreement, and will earn $100 million.
(b) should honour the agreement, and will earn $80 million.
(c) should cheat, and will earn $30 million.
(d) has no dominant strategy.
42. A monopolist faces the following demand curve:
Price ($)
51
47
42
36
29
21
12

Quantity demanded
1
2
3
4
5
6
7

The monopolist has total fixed costs of $60 and has a constant marginal cost of $18.
What is the profit-maximising level of production?
(a) 2 units.
(b) 3 units.
(c) 4 units.
(d) 5 units.

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Use the information below and in Table 2 to answer questions 43 to 46.

Teachers Helper is a small company that has a subcontract to produce instructional
modules for disabled children in public school districts. The owner rents several
small rooms in an office building in the suburbs for $600 a month and has leased
computer equipment that costs $480 a month.
Output
(Modules
per
Month)

Fixed
Costs

Variable
Costs

Total
Cost

0
1
2
3
4
5
6
7
8
9
10
TABLE 2

1,080
1,080

400

1,480

Average
Fixed
Cost

Average
Variable
Cost

Average
Total
Cost

965
1,350
1,900
2,500

Marginal
Cost

400
450

2,430
475
216
4,280

4,100
5,400
7,300

700
135

10,880

980

43. What is the marginal cost of creating the 10th instructional module in a given
month?
(a) $900.
(b) $1,250.
(c) $2,500.
(d) $3,060.
44. What is the average variable cost for the month if 6 instructional modules are
produced?
(a) $180.
(b) $533.33.
(c) $700.
(d) $713.33.
45. What is the average fixed cost for the month if 9 instructional modules are
produced?
(a) $108.
(b) $120.
(c) $150.
(d) $811.11.

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46. How many instructional modules are produced when marginal cost is $1,300?
(a) 4.
(b) 5.
(c) 7.
(d) 8.
47. Residents of Hangzhou, China, like seeing fireworks during their Chinese New
Year celebration. Each of the citys one million residents places a value of $1 on the
fireworks experience. The cost of providing the fireworks is $250,000. Which of the
following statements is most correct?
(a) Because the collective benefits exceed the cost, the private market will provide
an efficient number of fireworks.
(b) An entrepreneur in Hangzhou is likely to provide some amount of fireworks for
residents of the city and the provision level is likely to be efficient.
(c) Fireworks are not excludable so private markets will not produce an efficient
outcome.
(d) Because China is a communist country, market incentives are irrelevant to how
people behave.
48. Which of the following is the most accurate statement about economic models?
(a) Economic models attempt to mirror reality exactly.
(b) Economic models are useful, but should not be used for policymaking.
(c) Economic models cannot be used in the real world because they omit details.
(d) Economic models omit many details to allow us to see what is truly important.
49. Suppose supply is perfectly inelastic, while demand is relatively elastic. A tax of
$1 is levied on the buyers of the good. Which of the following statements is correct?
(a) The government will fail to raise any tax revenue.
(b) There will be a positive deadweight loss.
(c) There will be no deadweight loss.
(d) Government revenue will be less than the deadweight loss of the tax.
Use the information in the statement below to answer questions 50 and 51.
Suppose the before-trade domestic price of corn in Australia is $15 per kg. The world
price of corn is $8 per kg. Australia is a price-taker in the corn market.
50. According to this statement, if trade in corn is allowed, the price of corn in Australia
will be
(a) equal to $8 per kg.
(b) equal to $15 per kg.
(c) less than $15 per kg.
(d) greater than $8 per kg.

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51. According to this statement, if free trade in corn is allowed

(a) producers welfare will increase and consumers welfare will decrease.
(b) producers welfare will decrease and consumers welfare will increase.
(c) producers and consumers welfare will be unaffected.
(d) producers welfare will increase and consumers will suffer a deadweight loss.
52. Because the benefit each citizen receives from having an educated community is
a public good,
(a) the free-rider problem causes the private market to undersupply education to the
community.
(b) the government can potentially help the market reach a socially optimal level of
education.
(c) a tax increase to pay for education could potentially make the community better
off.
(d) All of the above are true.
53. Some shops may provide a lot of information to a customer at a high cost to the
store. If the customer then buys the product cheaper from a different store that does
not provide this information, a free-rider problem emerges. A possible solution to this
problem is
(a) resale price maintenance.
(b) cost-plus pricing.
(c) tying.
(d) marginal-cost pricing.
54. If one observes a profit-maximising firm decreasing employment, it is possible to
infer that the
(a) wage exceeds the value of the marginal product.
(b) firm is losing market share.
(c) firm is not likely to be minimising losses.
(d) value of the marginal product exceeds the market wage.
55. What happens to the labour supply in the pear picking market when apple
pickers get a wage rise?
(a) The labour supply will fall.
(b) The labour supply will stay constant until the wages paid to pear pickers change.
(c) The invisible hand of the market will cause an increase in supply.
(d) It may fall or rise, depending on the price of pears.
56. Suppose income was equally distributed across all families, then
(a) 60% of the families would receive exactly 60% of the income.
(b) the relative share of income would decline as the number of families are
increased.
(c) the relative share of income would increase as the number of families are
increased.

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(d) all families would more likely be rich than poor.

57. Adverse selection is a problem that arises in markets where
(a) the seller knows more about the attributes of the good being sold than the buyer
does.
(b) the buyer knows more about the attributes of the good being sold than the seller
does.
(c) only used cars are bought and sold.
(d) both buyers and sellers have the same knowledge about the attributes of the
good.
Use the information in Table 3 to answer questions 58 to 60.

USA
Europe
TABLE 3

Hours needed to make 1 unit of:

Cars
Aeroplanes
40
160
50
150

Amount produced in 2400 hours:

Cars
Aeroplanes
60
15
48
16

58. The opportunity cost of one aeroplane for Europe is

(a) four cars.
(b) three cars.
(c) 1/3 car.
(d) 1/4 car.
59. According to Table 3,
(a) Europe has a comparative advantage in
advantage in cars.
(b) Europe has a comparative advantage
advantage in aeroplanes.
(c) Europe has a comparative advantage
advantage in neither goods.
(d) Europe has a comparative advantage in
advantage in both goods.

aeroplanes, and USA has an absolute

in cars, and USA has an absolute
in cars, and USA has an absolute
aeroplanes, and USA has an absolute

60. In Table 3, if USA and Europe trade according to the principle of comparative
advantage,
(a) USA will export cars and Europe will export aeroplanes.
(b) USA will export aeroplanes and Europe will export cars.
(c) USA will export cars and Europe will export cars.
(d) USA will export aeroplanes and Europe will export aeroplanes.

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