Principles of Microeconomics (Econ 002) Signature:
Drake University, Spring 2004
William M. Boal Printed name:
MIDTERM EXAMINATION #4 VERSION C
“Perfect and Imperfect Competition”
April 21, 2004
INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or
calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be correct to at least 3
significant digits. Point values for each question are noted in brackets. Maximum total points are 100.
I. Multiple choice: Circle the one best answer to each question. [1 pt each: 15 pts total]
(1) A perfectly competitive firm expects that if it
increases its output, this will cause the price to
a. increase.
b. stay the same.
c. decrease.
d. cannot be determined from information given.
(2) A firm that takes price as given believes its marginal
revenue from selling one more unit will be
a. equal to the price of that unit.
b. greater than the price of that unit.
c. less than the price of that unit.
d. equal to zero.
(3) If price is currently equal to long-run average cost in
a particular industry, in the long run, we should expect
a. neither entry nor exit of firms in the industry.
b. the demand curve to shift right.
c. entry of new firms into the industry.
d. some existing firms to leave the industry.
(4) Exit of firms from an industry
a. causes the short-run supply curve to become
downward-sloping.
b. has no effect on the short-run supply curve.
c. shifts the short-run supply curve left.
d. shifts the short-run supply curve right.
(5) In a perfectly competitive industry, economic profit
equals zero in the long run because
a. entry and exit of firms eliminate economic profit or
loss.
b. consumers know the average cost of the product
and refuse to pay more.
c. producers keep prices low to avoid accusations of
"gouging."
d. each firm sets output according to the rule
"price=average cost" to maximize profit.
(6) Suppose a pie is cut into four pieces and is to be
allocated between three people. Which allocation is not
Pareto-efficient?
a. Person #1 gets all four pieces, while Persons B and
C get none.
b. Person #1 gets one piece, Person #2 gets one piece,
Person #3 gets one piece, and the last piece is
discarded.
c. Person #1 gets one piece, Person #2 gets one piece,
and Person #3 gets two pieces.
d. All of the above are Pareto- efficient.
(7) If every consumer in the economy faces the same
prices, then every consumer
a. will choose combinations of goods where their
marginal rates of substitution are exactly identical.
b. has exactly the same income.
c. will choose exactly the same combinations, or
bundles, of goods.
d. has exactly the same budget line.
(8) Suppose an economy is at point A in the diagram
below of a production-possibility curve. Assume the
slope of the production-possibility curve is -3 at point
A. Meanwhile, the slope of every consumer's
indifference curve, with food on the vertical axis and
shelter on the horizontal axis, is also -3. This economy
could make consumers better off by producing
a. more shelter and less food.
b. more food and less shelter.
c. less shelter and less food.
d. Consumers cannot be made better off by changing
the mix of outputs.
