5. A firm in a competitive labor market finds that the marginal product of labor of the last worker hired is 5 units, and the product price is $20. If the current market wage is $120, the firm should:
(A) Hire more workers to increase total revenue.
(B) Fire workers because the marginal revenue product is less than the wage.
(C) Maintain the current workforce because profit is being made.
(D) Increase the price of the product.

6. Consider a Duopoly where two firms (A and B) choose between "High Price" and "Low Price." If both choose High, they earn $100 each. If both choose Low, they earn $40 each. If one chooses Low while the other stays High, the Low-price firm earns $120 and the High-price firm earns $10. What is the Nash Equilibrium of this simultaneous game? (A) Both firms choose High Price. (B) Both firms choose Low Price. (C) Firm A chooses High; Firm B chooses Low. (D) There is no pure-strategy Nash Equilibrium.

7. The cross-price elasticity of demand between Product A and Product B is -1.5. If the price of Product B increases by 10%, what will happen to the demand for Product A and the nature of their relationship? (A) Demand for A increases by \( 15\% \); they are substitutes. (B) Demand for A decreases by \( 15\% \); they are complements. (C) Demand for A decreases by \( 1.5\% \); they are complements. (D) Demand for A increases by \( 15\% \); they are normal goods.

8. According to the Coase Theorem, private parties can solve the problem of externalities without government intervention if: (A) Transaction costs are low and property rights are clearly defined. (B) The government imposes a Pigovian tax equal to the marginal external cost. (C) The polluter is legally required to pay for all damages regardless of cost. (D) The number of affected parties is large enough to ensure a fair outcome.

9. If the provision of national defense were left entirely to the private market, it would be under-provided primarily because: (A) The marginal cost of providing defense to an additional citizen is extremely high, making it unprofitable for private firms. (B) The marginal social benefit of defense is the horizontal sum of all individual demand curves, which private firms cannot calculate. (C) The government possesses an absolute advantage in military technology, creating an insurmountable barrier to entry for private firms. (D) Individual willingness to pay cannot be captured by a market price, as consumers have no incentive to reveal their true valuation of the good.

10. Consider the market for "Inferior Good X." Assume the following three events happen simultaneously: ✓ Consumer average income levels significantly increase. ✓ A new production technology is adopted that reduces the marginal cost of producing Good X. ✓ The price of a complementary good for X decreases. Which of the following is true regarding the new equilibrium? (A) The equilibrium price will definitely decrease, but the effect on quantity is ambiguous. (B) The equilibrium quantity will definitely increase, but the effect on price is ambiguous. (C) The equilibrium price will definitely increase, but the effect on quantity is ambiguous. (D) Both the equilibrium price and quantity are ambiguous without knowing the magnitude of the shifts.

1. Unlike a perfectly competitive firm, for a monopolistically competitive firm (A) marginal revenue = marginal cost at the profit maximizing output. (B) price ≠ marginal revenue for all output levels. (C) price ≠ average revenue for all output levels. (D) price ≠ marginal cost for all output levels.

2. Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces many people that yearly CT scans are critical for good health. How will this affect a typical firm that remains in the industry? (A) The firm's supply curve shifts right and its marginal revenue curve shifts upwards as the market price rises and ultimately the firm starts making profits. (B) The firm's marginal revenue curve and average cost curve shift upwards in response to the increase in market price and advertising expenditure. The firm increases output until it starts breaking even. (C) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production and eventually starts making profits. (D) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production until it breaks even.

3. Suppose a monopolistically competitive firm sells 25 units at a price of $10. Calculate its marginal revenue per unit of output if it sells 5 more units of output when it reduced its price to $9. (A) $20 (B) $2.50 (C) $4 (D) $270

4. A Herfindahl-Hirschman Index is calculated by (A) Summing the amount of sales by the four largest firms and dividing by total industry sales. (B) Summing the advertising expenditures of the firms that want to merge by total industry advertising expenditures. (C) Dividing the number of firms wanting to merge by the total number in the industry. (D) Summing the squares of the market shares of each firm in the industry.

5. Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor? (A) The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same. (B) The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion. (C) The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact. (D) The advertisement is meant to suggest to consumers that the offered price is the lowest price available.

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