MacroEconomic – Subject Matter Experts Only Please!




1.         There are a large number of firms in perfect competition.  What is the significance of that?


a.         Each firm has great deal of discretion in setting prices.


b.         Whether there are 100 or 101 firms in the industry, the market price will be the same.


c.         That automatically makes goods the same (homogenous).


d.         That makes necessary a good deal of communication and coordination among firms.  Therefore there tend to be strong trade associations in perfectly competitive industries.




2.         In perfect competition, the marginal revenue line is the same as the _________, and is a _______ line.


a.         price – negative


b.         price – positive


c.         average cost curve – vertical line


d.         price – horizontal line




3.         In short-run equilibrium, a perfectly competitive firm produces 150 pencils at an average cost of 12 cents each and receives $30 from selling them.  Which of the following statements is INCORRECT?


            a.         The firm’s average revenue equals 20 cents.


            b.         The firm’s economic profit equals $12


            c.         The firm’s price is greater than its average cost.


            d.         The firm’s total cost equals $16.




4.         Profits are maximized where MR = MC.  However, sometimes MR = MC shows where losses are minimized.


            a.         true


            b.         false




5.         A firm is still in the increasing returns portion of its short-run marginal cost curve.  Therefore it has in this region


a.         an increasing marginal cost curve.


b.         a decreasing marginal cost curve.


c.         a constant marginal cost curve.


d.         an inverted average total cost curve.




6.         In a pure monopoly, there are


            a.         many firms selling the same product.


            b.         barriers to entry.


            c.         always economic profits, even if no one wants the good.


            d.         all of the above.


            e.         both b) and c) are correct.




7.         The marginal revenue curve in monopoly is __________.  The implication of this is that ________.


            a.         constant —  there are the possibility of economic profits


            b.         constant – there are no economic profits, only normal profits


            c.         downward sloping —  there are the possibility of economic profits


d.         downward sloping – the monopoly industry will produce less than the perfectly competitive industry




8.         Imagine a monopoly firm is making economic profits to start with.  Then the average total cost curve shifts upward, but the demand curve does not shift.  The cost curve shifts so far up that now Price = Average Total Cost.  Now the monopoly firm, which still has barriers to entry


a.         is still making an economic profit since it is a monopoly.


b.         is no longer making an economic profit but is now making a normal profit


c.         is now a perfectly competitive firm.


d.         both b) and c) are correct.




9.         In a famous antitrust case, the government charged the DuPont Company with attempting to monopolize the cellophane industry.  The company argues that, while it was the major producer of cellophane, it was competing in the broader market of “Flexible packaging”, a very competitive industry.  Waxed paper, glassine, and aluminum foil all had sizable shares of the flexible packaging market.  To determine whether DuPont was, in fact, competing in the flexible wrap industry, one would be interested in determining


            a.         evidence of collusion between flexible wrap producers.


            b.         the per unit cost as a function of output for cellophane.


            c.         the price elasticity of demand for cellophane.


d.         whether other potential flexible wraps were actually good substitutes for cellophane.




10.       A monopoly


            a.         allocates resources in a socially optimal way.


            b.         encourages greater income equality.


            c.         adheres to the marginal cost equals price standard.


            d.         encourages greater efficiency.


            e.         produces less than if it adheres to the marginal cost equals price standard.




11.       Firms shut down in the short-run when the price cannot cover


            a.         fixed costs.


            b.         average variable costs.


            c.         average total cost.


            d.         total cost.




12.       Gasoline stations are generally considered to be monopolistic competitors rather than perfect competitors because


            a.         gasoline is a homogeneous good.


            b.         retail gasoline stations are typically very small businesses.


            c.         consumers seem to view stations as differentiated by the services they offer and by


                        the brands of gasoline they sell.


            d.         the gasoline station industry in most locations has little or no excess capacity.




13.       Which of the following is NOT a characteristic of the monopolistic competition market structure?


a.         many sellers, each small in size relative to the overall market.


b.         few sellers.


c.         differentiated product.


d.         easy, low-cost entry and exit.




14.       The firm with external costs will produce ________ goods for allocative efficiency in an unfettered market.  Once the externalities are internalized, the firm will produce _______ goods at a ________ price.


            a.         too many – less – lower


            b.         too few—less- higher


            c.         too many – less—higher


            d.         too many – more – higher




15.       Which of the following is the best example of an external cost?


            a.         flu vaccines


            b.         public schools


            c.         noise from your next door neighbor


            d.         a privacy fence built by your neighbor




16.       John Stossel, the commentator of the health care video said the delivery of health care will be improved by ________ market based solutions.


            a.         more


            b.         less


            c.         about the same as now




17.       If insurance pays for medical care, it creates an illusion to the consumer.  Which of the following describes the illusion?


            a.         Insurance hides the fact that medical care, like any other good, is scarce.


            b.         Insurance only works in the private sector, not the public sector.    


            c.         Insurance only works if there is a perfectly inelastic demand for medical care.


            d.         Both a) and b) are correct.




18.       The current employer provided health insurance may be inefficient but two events help explain the history.  Which two?


a.         the U.S. tax code and a misguided paper written about the benefits of it by two economists in the 1950s


b.         an AMA resolution to make health care delivery more efficient and a statement by the President to make health care delivery more equitable


c.         the U.S. tax code and the need for getting around WWII wage controls


d.         a resolution by economists to make the U.S. system more like the Canadian system and the determination made by economists that health care has a perfectly inelastic demand       




19.       A plan is offered through your employer for $200 year which guarantees two checkups a year by a dentist and one by an M.D.  It does not pay for anything other than the checkups.  Is this a good example of insurance in the sense of socializing risk?


            a.         yes                             


            b.         no




          20.   20.     A monopolist faces the following demand curve:























The monopolist has total fixed costs of $60 and has a CONSTANT marginal cost of $15. What is the profit-maximizing level of production?



2 units


3 units


4 units


5 units




21.       Which of the two conditions combined would imply that the firm is producing the allocatively efficient amount of a good where price equals marginal cost?


            a.         no externalities and imperfect competition


            b.         external benefits and perfect competition


            c.         external costs and pure monopoly


            d.         no externalities and perfect competition




22.       If externalities are internalized, then


a.         more of the good will be produced.


b.         less of the good will be produced since externalities imply market failure.


c.         the optimal portion of the good will be produced where marginal private costs equals the price under conditions of perfect competition.


d.         a greater or lower quantity of the good will be produced depending on whether the externalities are respectively external benefits or external costs.




For the following three questions, consider the following:  John quits his job as a teacher, which paid $40,000 a year, in order to start the XYZ firm.  The firm has sales of $100,000 for the 1st year and rent on a building of $20,000.  John also puts 100,000 of his own savings into inventory and forgoes 3 percent annual interest.  He also borrows 100,000 from his uncle and pays him 3 percent annual interest on the money.




23.       What is his economic profit?


a.         $80,000


b.         $77,000


c.         $37,000


d.         $34,000




24.       What is his accounting profit?


a.         $80,000


b.         $77,000


c.         $37,000


d.         $34,000




25.       John _______ be financially better off by staying in business.  This is determined by looking at his _______ profit.


a.         will – economic


b.         will not – economic


c.         will – accounting


d.         will not – accounting






Go to for the next 3 questions:




26.       Comparative advantage is the ability of a country to produce a good at a ____________ opportunity cost relative to other countries. It ____ possible to have a comparative advantage even if the country does not have an absolute advantage in producing anything.


a.         higher // is


b.         lower // is


c.         equivalent // is not


d.         higher // is not




Use the following information for the next two questions: the U.S. can produce 4 tons of potatoes per day or 2 tons of wheat per day.  Ireland can produce 3 tons of potatoes per day or one ton of wheat.


27.       The U.S. has an absolute advantage in producing


            a.         potatoes.


            b.         wheat.


            c.         both.


            d.         neither.




28.       The U.S. has a comparative advantage on producing


            a.         potatoes.


            b.         wheat.


            c.         both.


            d.         neither.




The next four questions are based on  (This is the You Tube video on oligopoly behavior)


29.       The kinked demand curve, which is associated with ________ shows that  prices  ______.


            a.         oligopoly – change very little


            b.         oligopoly – are constantly changing to meet the competitor’s price changes


            c.         monopoly – change very little


            d.         perfect competition —  are constantly changing to meet the competitor’s price



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