Spring 2008
Instructor: Xin Fang
ECON 218
UIC Department of Economics
Name SAMPLE FINAL EXAM
ID
There are two parts (8 Pages) in this exam, and you have two hours to
answer all of them. Good Luck!
Part I Multiple Choices (15 points)
1. Which of the following is an assumption for the model of perfect
competition?
A) The firms in the industry produce a homogeneous product.
B) The firms in the industry actively compete with each other by
advertising.
C) There are no natural impediments to entry, but there may be minor
artificial impediments such as licensing.
D) Firms have a decreasing short-run marginal cost curve.
2. The competitive firm is known as a price taker because
A) it accepts the highest price it can charge.
B) only competitors adhere to the survivor principle.
C) it produces a rate of output that makes marginal cost a minimum
value.
D) it accepts the market price as a given.
3. Which of the following is not an objection to the assumption of
profit maximization?
A) Owners of firms are interested in maximizing utility rather than
profits.
B) Profit maximization does not aid us in understanding how firms
select their optimal rate of output.
C) Owners of firms face uncertainty and do not know all that is
necessary to truly maximize profits.
D) Managers of large corporations make the business decisions, and they
have different objectives than the owners.
4. For a perfectly competitive firm, the demand curve
A) coincides with the marginal revenue curve.
B) coincides with the average revenue curve.
C) A and B are true.
D) Neither A nor B are true.
5. A perfectly competitive firm faces a horizontal demand curve, which
implies that
A) price never changes.
B) the firm cannot affect price by any action it takes.
C) the output rate of the firm is indeterminate.
D) the firm makes zero profits.
6. A competitive firm maximizes profit at the output level where
A) price minus average total cost is the largest.
Spring 2008
Instructor: Xin Fang
ECON 218
UIC Department of Economics
B) the slope of total revenue equals the slope of total cost.
C) average total cost equals marginal cost.
D) marginal revenue exceeds marginal cost by the greatest amount.
7. Assume that labor is the variable input. An increase in the wage rate
will cause (hint: Price doesn’t change, assume it
is a firm in perfect competition in short run)
A) average variable, average fixed, average total, and marginal costs to
all increase.
B) average variable and average total costs to increase, and profits to
decrease.
C) marginal cost and average total costs to increase, and output to
increase.
D) marginal cost and average variable costs to increase, and output,
price, and profits to increase
$/unit
Figure 1
R
$10
MC
E F G
AC AVC
Demand
W
S H
D T
O A B C K Output
8. At the profit-maximizing level of output in Figure 1, when price is
$10
A) the firm is earning economic profit equal to area RFHS.
B) the firm is earning economic profit equal to area RGZW.
C) the firm is earning economic profit equal to area RGCO.
D) the firm is earning negative economic profit (area not marked)
Z
V
Spring 2008
Instructor: Xin Fang
ECON 218
UIC Department of Economics
9. At output level OC in Figure 1, average fixed cost is equal to
A) ZV.
B) GZ.
C) ED.
D) VC.
10. The supply curve of a competitive firm in the short-run is its
A) marginal cost curve.
B) marginal cost curve above the minimum of average variable costs.
C) marginal cost curve about the minimum of average costs.
D) none of the above.
11. For a firm in perfect competition, if price falls, in the short
run, the firm will respond by
A) shutting down.
B) equating average variable cost to marginal revenue.
C) reducing output along its marginal cost curve as long as average
revenue exceeds average variable cost.
D) None of the above.
12. The short-run supply curve for a perfectly competitive industry is
A) upward sloping because of the law of diminishing marginal returns.
B) found by summing horizontally the marginal costs curves that lie
above the minimum of average variable cost of all firms in the industry.
C) perfectly elastic in the case of homogeneous products.
D) Only A and B are true.
56. A competitive industry, will be in long-run equilibrium when
A) each firm in the industry is earning zero economic profit.
B) no entry or exit occurs.
C) the total quantity produced at the prevailing price equals the total
quantity consumers want to purchase.
D) all of the above.
13. In a constant cost competitive industry, if market demand rises,
which of the following will occur as the industry attains a new long-run
equilibrium?
A) Number of firms in the industry won’t change.
B) Industry output will keep unchanged.
C) Input prices will rise.
D) Price will return to its original level.
14. Suppose an increasing cost competitive industry is in equilibrium at
a price of $100 and an output rate of 1000 units, and a price ceiling of
$80 is imposed which reduced the quantity sold to 800 units. Which of
the following is a true statement?
Spring 2008
Instructor: Xin Fang
ECON 218
UIC Department of Economics
A) Consumer surplus increases, producer surplus falls and total surplus
stays the same.
B) All consumers gain and all producers are harmed.
C) Some consumers are better off and some are worse off, producer
surplus falls, and total surplus falls.
D) Total surplus falls, consumer surplus falls, and producer surplus
falls.
15. Demand increases in a constant-cost industry which means that
producer surplus initially increases.
The surplus goes to
A) owners of the firms.
B) workers in the firms that enter the industry.
C) workers in the firms that were already in the industry.
D) none of the above. The long-run supply curve show no producer
surplus.
16. An excise tax levied on producers in a constant-cost competitive
industry will, in the long run,
A) harm consumers but not producers who continue to operate.
B) harm both consumers and producers.
C) harm producers but not consumers.
D) harm consumers and benefit producers.
17. The marginal revenue curve of a monopolist is
A) unrelated to its demand curve.
B) always downward-sloping.
C) is horizontal.
D) coincides with the demand curve.
Figure 11-1
Output
Total Revenue
Total Cost
1
12
22
2
26
26
3
38
32
4
48
40
5
50
51
6
50
66
7
48
86
8
38
112
9
26
142
18. What is the profit-maximizing level of output for the monopolist in
Figure 11-1?
A) 3
B) 4
C) 5
D) 0
Spring 2008
Instructor: Xin Fang
ECON 218
UIC Department of Economics
19. Using Figure 11-1, what will happen if the government imposes an
excise tax of $2 per unit?
A) Output will increase.
B) Output will decrease.
C) Output will remain constant.
D) The change in output is indeterminate.
20. All of the following are sources of monopoly power except
A) patents.
B) control of inputs.
C) economies of scale.
D) high prices.
21. Monopoly power possessed by any one firm is
A) less, the greater the number of firms.
B) less as the elasticity of supply by rival firms as a group
increases.
C) less as the elasticity of demand of other firms as a group
decreases.
D) None of the above.
Price Figure 1
I
A
B
O C E J Quantity
F
G
H
AC
Demand
MR
Spring 2008
Instructor: Xin Fang
ECON 218
UIC Department of Economics
22. The unregulated monopolist in Figure 11-2 will charge price
A) OA.
B) OB.
C) OI.
D) Not shown
23. If a monopolist set its profit maximizing price equal to 10,
Marginal Revenue is 5, then the elasticity of demand is:
A) -1/2
B) -2
C) -1.
D) 0.
24. A monopoly will never operate in the inelastic segment of its
demand curve because
A) average revenues are negative.
B) it would imply a marginal cost greater than marginal revenue.
C) total revenue is still rising.
D) none of the above.
25. Which of the following best describes the effect of a monopolist
reducing his output below the competitive level?
A) a reduction in producer surplus and a gain in consumer surplus
B) a transfer of consumer surplus to the monopolist as producer surplus
and a deadweight loss of consumer and producer surplus from the reduced
output
C) only a loss of consumer surplus
D) a transfer of all consumer surplus to the monopolist with no
deadweight loss of consumer surplus
26. When a monopoly is maximizing profits, which of the following
conditions generally holds?
A) MC = MR = AC = AR
B) MC = MR < AC
C) MC = MR = P > MR
D) MC = MR < AR
27. Which of the following statements about a monopoly in long-run
equilibrium is incorrect?
A) A monopoly has no supply curve.
B) A monopoly will never sell where the price elasticity of demand is
elastic.
C) A monopoly will not always make economic profits.
D) A monopoly's demand curve coincides with its average revenue curve.
28. In comparing a monopoly and a competitive firm in the long run,
which of the following statements is incorrect?
A) A monopoly does not need to produce output at the lowest possible
cost but a competitive firm must.
Spring 2008
Instructor: Xin Fang
ECON 218
UIC Department of Economics
B) A monopoly will always earn economic profit but a competitive firm
will not.
C) A monopoly does not need to operate at the minimum point on its
average cost curve but a competitive firm will.
D) A monopoly will produce less than the efficient output but a
competitive firm will always produce the efficient level of output.
29. Assume that Bost, Incorporated sells game cartridges that can be used
in a popular home video system. Bost currently sells 300 cartridges per
week and earns $500 in profit. Bost's production manager calculates
that the marginal cost of the next unit is $5, while marginal revenue
for one additional unit is $10. Based upon this information we would
conclude that:
A) Bost should reduce their output.
B) Bost's profit would rise to $510 by increasing output 1 unit.
C) Bost's profit would rise to $505 by increasing output 1 unit.
D) Insufficient information.
30. For a monopolist, marginal revenue is greater than zero when _
A) elasticity of demand is equal to zero.
B) demand is elastic.
C) demand is inelastic.
D) demand is unit-elastic.
*Note: The following questions will not necessarily show up in Final
Exam since we are not sure whether we can get to Chapter 13.
(31. The monopolistically competitive firm is in many ways like the
competitive firm. However, it is unlike the competitive firm in that
A) it might make a profit in the short-run, but not in the long-run.
B) it might make a profit in the long-run and the short-run.
C) entry into the industry is not unrestricted.
D) it sells a differentiated product, whereas the competitive firm does
not
32. The demand curve that a monopolistically competitive firm faces is
A) downward sloping but fairly inelastic.
B) downward sloping but fairly elastic.
C) horizontal.
D) everywhere unitary-elastic.
33. Monopolistically competitive firms operating in long-run
equilibrium have been criticized for having excess capacity. This
criticism relates to the fact that
A) the firm does not operate at the minimum of average cost.
B) the firm does not operate at the minimum of marginal cost.
C) marginal cost is below average revenue at minimum average cost.
D) average cost is below average revenue at minimum average cost.
Spring 2008
Instructor: Xin Fang
ECON 218
UIC Department of Economics
2
34. Long-run equilibrium in monopolistic competition is characterized by
A) an output rate associated with a tangency between the demand curve
and the average cost curve.
B) positive but small economic profits.
C) price equal to marginal cost.
D) price greater than average cost.)
Part II Problems (20 pionts)
Please label your graphs carefully and write down each step of your
calculations.
1. (10 points) A constant-cost, perfectly competitive industry is
composed of identical firms with TC(qi) = 2qi + 6qi + 18, where qi is
firm i’s output. Marginal cost of each firm is given by MC(qi)= 4qi + 6.
(a) Suppose industry demand is P=33-1/20QD, where P is the market price
of the product. What are the long-run equilibrium price and output of
the industry? How many firms can this market support in long run
equilibrium?
(b) What is the equation of the short run supply curve of the industry?
(c) If there is an excise tax of $2.00 for each unit the firms sell,
from your calculation or graph, will the price increase by full tax
in the short run? What will be the new equilibrium price in this
market in long run?
(d) What will happen to this industry if the demand increases, draw the
graph and describe the whole process carefully.
2. (10 points) Assume that a monopoly is faced by the market demand
P=12-Q/50, and the TC(Q)= 6Q+Q2/50, MC=6+Q/25 then what is the profit
maximizing price and quantity for this firm?
(a) What is the monopoly profit maximizing price and quantity? What is
the monopoly profit?
(b) What is the Lerner Index under the monopoly market structure? What
is the dead weight loss of the monopoly?
(c) If there is an excise tax of $2.00 for each unit the monopoly sell,
then how will the answer change for monopoly’s price? What will be the
burden on producers?
(d) Calculate the Lerner Index for the monopoly before and after tax.
Will the tax increase or decrease the monopoly power?
(e) Suppose the monopoly is threatened by entry, and potential entrants
can produce at a constant marginal cost of $ 10.00, draw the demand
curve and marginal cost curve faced by the monopoly, what will be the
price charged by the monopoly, how much will it produce? Is it more
efficient for the society? Explain.
Spring 2008
Instructor: Xin Fang
ECON 218
UIC Department of Economics
.End of Exam!
