Principles of Microeconomics CLEP PDF

X

Test InformationGuide:College-LevelExaminationProgram®

2011-12

Principles ofMicroeconomics

© 2011 The College Board. All rights reserved. College Board, College-Level ExaminationProgram, CLEP, and the acorn logo are registered trademarks of the College Board.

2

CLEP TEST INFORMATIONGUIDE FOR PRINCIPLES OFMICROECONOMICS

History of CLEP

Since 1967, the College-Level Examination Program(CLEP®) has provided over six million people withthe opportunity to reach their educational goals.CLEP participants have received college credit forknowledge and expertise they have gained throughprior course work, independent study or work andlife experience.

Over the years, the CLEP examinations have evolvedto keep pace with changing curricula and pedagogy.Typically, the examinations represent material taughtin introductory college-level courses from all areasof the college curriculum. Students may choose from33 different subject areas in which to demonstratetheir mastery of college-level material.

Today, more than 2,900 colleges and universitiesrecognize and grant credit for CLEP.

Philosophy of CLEP

Promoting access to higher education is CLEP’sfoundation. CLEP offers students an opportunity todemonstrate and receive validation of theircollege-level skills and knowledge. Students whoachieve an appropriate score on a CLEP exam canenrich their college experience with higher-levelcourses in their major field of study, expand theirhorizons by taking a wider array of electives andavoid repetition of material that they already know.

CLEP Participants

CLEP’s test-taking population includes people of allages and walks of life. Traditional 18- to 22-year-oldstudents, adults just entering or returning to school,homeschoolers and international students who needto quantify their knowledge have all been assisted byCLEP in earning their college degrees. Currently,58 percent of CLEP’s test-takers are women and52 percent are 23 years of age or older.

For over 30 years, the College Board has worked toprovide government-funded credit-by-examopportunities to the military through CLEP. Militaryservice members are fully funded for their CLEP examfees. Exams are administered at military installations

worldwide through computer-based testing programsand also — in forward-deployed areas — throughpaper-based testing. Approximately one-third of allCLEP candidates are military service members.

2010-11 National CLEP Candidates by Age*

These data are based on 100% of CLEP test-takers who responded to this survey question during their examinations.

*

Under 189%

18-22 years39%

23-29 years22%

30 years and older30%

2010-11 National CLEP Candidates by Gender

41%

58%

Computer-Based CLEP Testing

The computer-based format of CLEP exams allowsfor a number of key features. These include:

• a variety of question formats that ensure effectiveassessment

• real-time score reporting that gives students andcolleges the ability to make immediate credit-granting decisions (except College Composition,which requires faculty scoring of essays twice amonth)

• a uniform recommended credit-granting score of50 for all exams

• “rights-only” scoring, which awards one point percorrect answer

• pretest questions that are not scored but providecurrent candidate population data and allow forrapid expansion of question pools

3

CLEP Exam Development

Content development for each of the CLEP examsis directed by a test development committee. Eachcommittee is composed of faculty from a widevariety of institutions who are currently teachingthe relevant college undergraduate courses. Thecommittee members establish the test specificationsbased on feedback from a national curriculumsurvey; recommend credit-granting scores andstandards; develop and select test questions; reviewstatistical data and prepare descriptive material foruse by faculty (Test Information Guides) and studentsplanning to take the tests (CLEP Official Study Guide).

College faculty also participate in CLEP in otherways: they convene periodically as part ofstandard-setting panels to determine therecommended level of student competency for thegranting of college credit; they are called upon towrite exam questions and to review forms and theyhelp to ensure the continuing relevance of the CLEPexaminations through the curriculum surveys.

The Curriculum Survey

The first step in the construction of a CLEP exam isa curriculum survey. Its main purpose is to obtaininformation needed to develop test-contentspecifications that reflect the current collegecurriculum and to recognize anticipated changes inthe field. The surveys of college faculty areconducted in each subject every three to five yearsdepending on the discipline. Specifically, the surveygathers information on:

• the major content and skill areas covered in theequivalent course and the proportion of the coursedevoted to each area

• specific topics taught and the emphasis given toeach topic

• specific skills students are expected to acquire andthe relative emphasis given to them

• recent and anticipated changes in course content,skills and topics

• the primary textbooks and supplementary learningresources used

• titles and lengths of college courses thatcorrespond to the CLEP exam

The Committee

The College Board appoints standing committees ofcollege faculty for each test title in the CLEP battery.Committee members usually serve a term of up tofour years. Each committee works with contentspecialists at Educational Testing Service to establishtest specifications and develop the tests. Listedbelow are the current committee members and theirinstitutional affiliations.

Rae Jean Goodman,Chair

United States NavalAcademy, Annapolis

Robert Eisentadt University of Louisiana,Monroe

Kathryn Wilson Kent State University

Martha Zenns Jamestown CommunityCollege

The primary objective of the committee is to producetests with good content validity. CLEP tests must berigorous and relevant to the discipline and theappropriate courses. While the consensus of thecommittee members is that this test has high contentvalidity for a typical introductory Principles ofMicroeconomics course or curriculum, the validityof the content for a specific course or curriculum isbest determined locally through careful review andcomparison of test content, with instructional contentcovered in a particular course or curriculum.

The Committee Meeting

The exam is developed from a pool of questionswritten by committee members and outside questionwriters. All questions that will be scored on a CLEPexam have been pretested; those that pass a rigorousstatistical analysis for content relevance, difficulty,fairness and correlation with assessment criteria areadded to the pool. These questions are compiled bytest development specialists according to the testspecifications, and are presented to all the committeemembers for a final review. Before convening at atwo- or three-day committee meeting, the membershave a chance to review the test specifications andthe pool of questions available for possible inclusionin the exam.

4

At the meeting, the committee determines whetherthe questions are appropriate for the test and, if not,whether they need to be reworked and pretestedagain to ensure that they are accurate andunambiguous. Finally, draft forms of the exam arereviewed to ensure comparable levels of difficulty andcontent specifications on the various test forms. Thecommittee is also responsible for writing anddeveloping pretest questions. These questions areadministered to candidates who take the examinationand provide valuable statistical feedback on studentperformance under operational conditions.

Once the questions are developed and pretested,tests are assembled in one of two ways. In somecases, test forms are assembled in their entirety.These forms are of comparable difficulty and aretherefore interchangeable. More commonly,questions are assembled into smaller,content-specific units called testlets, which can thenbe combined in different ways to create multiple testforms. This method allows many different forms tobe assembled from a pool of questions.

Test Specifications

Test content specifications are determined primarilythrough the curriculum survey, the expertise of thecommittee and test development specialists, therecommendations of appropriate councils andconferences, textbook reviews and other appropriatesources of information. Content specifications takeinto account:

• the purpose of the test

• the intended test-taker population

• the titles and descriptions of courses the test isdesigned to reflect

• the specific subject matter and abilities to be tested

• the length of the test, types of questions andinstructions to be used

Recommendation of the AmericanCouncil on Education (ACE)

The American Council on Education’s CollegeCredit Recommendation Service (ACE CREDIT)has evaluated CLEP processes and procedures for

developing, administering and scoring the exams.Effective July 2001, ACE recommended a uniformcredit-granting score of 50 across all subjects, withthe exception of four-semester language exams,which represents the performance of students whoearn a grade of C in the corresponding collegecourse.

The American Council on Education, the majorcoordinating body for all the nation’s higher educationinstitutions, seeks to provide leadership and a unifyingvoice on key higher education issues and to influencepublic policy through advocacy, research and programinitiatives. For more information, visit the ACECREDIT website at www.acenet.edu/acecredit.

CLEP Credit Granting

CLEP uses a common recommended credit-grantingscore of 50 for all CLEP exams.

This common credit-granting score does not mean,however, that the standards for all CLEP exams arethe same. When a new or revised version of a test isintroduced, the program conducts a standard settingto determine the recommended credit-granting score(“cut score”).

A standard-setting panel, consisting of 15–20 facultymembers from colleges and universities across thecountry who are currently teaching the course, isappointed to give its expert judgment on the level ofstudent performance that would be necessary toreceive college credit in the course. The panelreviews the test and test specifications and definesthe capabilities of the typical A student, as well asthose of the typical B, C and D students.* Expectedindividual student performance is rated by eachpanelist on each question. The combined average ofthe ratings is used to determine a recommendednumber of examination questions that must beanswered correctly to mirror classroom performanceof typical B and C students in the related course. Thepanel’s findings are given to members of the testdevelopment committee who, with the help ofEducational Testing Service and College Boardpsychometric specialists, make a final determinationon which raw scores are equivalent to B and C levelsof performance.

*Student performance for the language exams (French, German and Spanish)is defined only at the B and C levels.

5

Principles of Microeconomics

Description of the Examination

The Principles of Microeconomics examinationcovers material that is usually taught in aone-semester undergraduate course in introductorymicroeconomics. This aspect of economics dealswith the principles of economics that apply to theanalysis of the behavior of individual consumersand businesses in the economy. Questions on thisexam require candidates to apply analyticaltechniques to hypothetical as well as real-worldsituations and to analyze and evaluate economicdecisions. Candidates are expected to demonstratean understanding of how free markets work andallocate resources efficiently. They shouldunderstand how individual consumers makeeconomic decisions to maximize utility, andhow individual firms make decisions to maximizeprofits. Candidates must be able to identify thecharacteristics of the different market structuresand analyze the behavior of firms in terms of priceand output decisions. They should also be able toevaluate the outcome in each market structure withrespect to economic efficiency, identify cases inwhich private markets fail to allocate resourcesefficiently, and explain how government interventionfixes or fails to fix the resource allocation problem.It is also important to understand the determinationof wages and other input prices in factor markets,and analyze and evaluate the distribution of income.

The examination contains approximately80 questions to be answered in 90 minutes. Someof these are pretest questions that will not be scored.Any time candidates spend on tutorials andproviding personal information is in addition to theactual testing time.

Knowledge and Skills Required

Questions on the Principles of Microeconomicsexamination require candidates to demonstrate oneor more of the following abilities.

• Understanding of important economic terms andconcepts

• Interpretation and manipulation of economicgraphs

• Interpretation and evaluation of economic data• Application of simple economic models

The subject matter of the Principles ofMicroeconomics examination is drawn from thefollowing topics. The percentages next to the maintopics indicate the approximate percentage of examquestions on that topic.

8%–14% Basic Economic ConceptsScarcity, choice and opportunity costsProduction possibilities curveComparative advantage, specialization

and tradeEconomic systemsProperty rights and the role of incentivesMarginal analysis

55%–70% The Nature and Functions of ProductMarkets15%–20% Supply and demand

• Market equilibrium• Determinants of supply

and demand• Price and quantity controls• Elasticity

• Price, income andcross-price elasticitiesof demand

• Price elasticity ofsupply

• Consumer surplus,producer surplus andmarket efficiency

• Tax incidence anddeadweight loss

5%–10% Theory of consumer choice• Total utility and marginal

utility• Utility maximization:

equalizing marginal utilityper dollar

• Individual and marketdemand curves

• Income and substitutioneffects

6

P R I N C I P L E S O F M I C R O E C O N O M I C S

10%–15% Production and costs• Production functions:

short and long run• Marginal product and

diminishing returns• Short-run costs• Long-run costs and

economies of scale• Cost minimizing input

combination25%–35% Firm behavior and market

structure• Profit:

• Accounting versuseconomic profits

• Normal profit• Profit maximization:

MR=MC rule• Perfect competition

• Profit maximization• Short-run supply and

shut-down decision• Firm and market

behaviors in short-runand long-run equilibria

• Efficiency and perfectcompetition

• Monopoly• Sources of market

power• Profit maximization• Inefficiency of

monopoly• Price discrimination

• Oligopoly• Interdependence,

collusion and cartels• Game theory and

strategic behavior• Monopolistic competition

• Product differentiationand role of advertising

• Profit maximization• Short-run and long-run

equilibrium• Excess capacity and

inefficiency

10%–18% Factor MarketsDerived factor demandMarginal revenue productLabor market and firms’ hiring of laborMarket distribution of income

12%–18% Market Failure and the Role ofGovernmentExternalities• Marginal social benefit and marginal

social cost• Positive externalities• Negative externalities• RemediesPublic goods• Public versus private goods• Provision of public goodsPublic policy to promote competition• Antitrust policy• RegulationIncome distribution• Equity• Sources of income inequality

7


Sample Test Questions

The following sample questions do not appear on anactual CLEP examination. They are intended to givepotential test-takers an indication of the format anddifficulty level of the examination and to providecontent for practice and review. Knowing the correctanswers to all of the sample questions is not aguarantee of satisfactory performance on the exam.

Directions: Each of the questions or incompletestatements below is followed by five suggestedanswers or completions. Select the one that is best ineach case.

1. Which of the following best states the law ofcomparative advantage?

(A) Differences in relative costs of productionare the key to determining patterns of trade.

(B) Differences in absolute costs of productiondetermine which goods should be tradedbetween nations.

(C) Tariffs and quotas are beneficial inincreasing international competitiveness.

(D) Nations should not specialize in theproduction of goods and services.

(E) Two nations will not trade if one is moreefficient than the other in the production ofall goods.

2. If a retail firm plans to increase the price of aproduct it sells, the firm must believe that

(A) the good is an inferior good(B) the price of complements will also increase(C) the price of substitutes will decrease(D) demand for the product is perfectly price

elastic(E) demand for the product is price inelastic

3. Assume that an economy produces two goods,consumer goods and military goods. If it werepossible to increase the output of both militarygoods and consumption goods, which of thefollowing statements about the economy wouldbe true?

(A) The economy is inefficient and inside theproduction possibilities curve.

(B) The economy is inefficient and on theproduction possibilities curve.

(C) The economy is efficient and on theproduction possibilities curve.

(D) The economy is efficient and inside theproduction possibilities curve.

(E) The economy is efficient and outside theproduction possibilities curve.

4. Which of the following would necessarily causea decrease in the price of a product?

(A) An increase in the number of buyers and adecrease in the price of an input

(B) An increase in the number of buyers and adecrease in the number of firms producingthe product

(C) An increase in average income and animprovement in production technology

(D) A decrease in the price of a substituteproduct and an improvement in productiontechnology

(E) A decrease in the price of a substituteproduct and an increase in the price of aninput

5. An effective price floor will most likely result in

(A) shortages of products if the price floor isabove the equilibrium price

(B) shortages of products if the price floor is atthe equilibrium price

(C) surpluses of products if the price floor isabove the equilibrium price

(D) surpluses of products if the price floor isbelow the equilibrium price

(E) a balance between quantity demanded andquantity supplied if the price floor is abovethe equilibrium price

8


6. The market equilibrium price of home heatingoil is $1.50 per gallon. If a price ceiling of $1.00per gallon is imposed, which of the followingwill occur in the market for home heating oil?

I. Quantity supplied will increase.II. Quantity demanded will increase.

III. Quantity supplied will decrease.IV. Quantity demanded will decrease.

(A) II only(B) I and II only(C) I and IV only(D) II and III only(E) III and IV only

7. Assume that a consumer finds that her totalexpenditure on compact discs stays the sameafter the price of compact discs declines. Whichof the following is true for this consumer overthe price range?

(A) Compact discs are inferior goods.(B) The consumer’s demand for compact discs

increased.(C) The consumer’s demand for compact discs is

perfectly price elastic.(D) The consumer’s demand for compact discs is

perfectly price inelastic.(E) The consumer’s demand for compact discs is

unit price elastic.

8. An improvement in production technology for acertain good leads to

(A) an increase in demand for the good(B) an increase in the supply of the good(C) an increase in the price of the good(D) a shortage of the good(E) a surplus of the good

9. If the demand for a product is price elastic,which of the following is true?

(A) An increase in the product price will have noeffect on the firm’s total revenue.

(B) An increase in the product price willincrease the firm’s total revenue.

(C) A decrease in the product price will increasethe firm’s total revenue.

(D) A decrease in the product price will decreasethe firm’s rate of inventory turnover.

(E) A decrease in the product price will decreasethe total cost of goods sold.

10. If an increase in the price of good X causes adecrease in the demand for good Y, good Y is

(A) an inferior good(B) a luxury good(C) a necessary good(D) a substitute for good X(E) a complement to good X

11. The demand curve for cars is downward slopingbecause an increase in the price of cars leads to

(A) an increased use of other modes oftransportation

(B) a decrease in the expected future price ofcars

(C) a decrease in the number of cars availablefor purchase

(D) an increase in the prices of gasoline andother oil-based products

(E) a change in consumers’ tastes for cars

9


12. Suppose that an effective minimum wage isimposed in a competitive labor market. If laborsupply in that market subsequently increases,which of the following will occur in that market?

(A) Unemployment will increase.(B) Quantity of labor supplied will decrease.(C) Quantity of labor demanded will increase.(D) Demand for labor will increase.(E) The market wage will increase.

13. Suppose that Pat buys all clothing from adiscount store and treats these items as inferiorgoods. Pat’s consumption of discount-storeclothing will

(A) increase when a family member wins thestate lottery

(B) increase when Pat gets a raise in pay at work(C) remain unchanged when Pat’s income

increases or decreases(D) decrease when Pat becomes unemployed(E) decrease when Pat experiences an increase in

income

14. The primary distinction between the short runand the long run is that in the short run

(A) firms make profits, but in the long run nofirm makes economic profits

(B) profits are maximized, but in the long runall costs are maximized

(C) some costs of production are fixed, but inthe long run all costs are fixed

(D) some costs of production are fixed, but inthe long run all costs are variable

(E) marginal costs are rising, but in the long runthey are constant

Questions 15–17 are based on the table below,which shows a firm’s total cost for different levels ofoutput.

Output Total Cost0 $24

1 33

2 41

3 48

4 54

5 61

6 69

15. Which of the following is the firm’s marginalcost of producing the fourth unit of output?

(A) $54.00(B) $13.50(C) $ 7.50(D) $ 6.00(E) $ 1.50

16. Which of the following is the firm’s average totalcost of producing 3 units of output?

(A) $48.00(B) $16.00(C) $14.00(D) $13.50(E) $ 7.00

17. Which of the following is the firm’s averagefixed cost of producing 2 units of output?

(A) $24.00(B) $20.50(C) $12.00(D) $ 8.00(E) $ 7.50

10


18. Marginal revenue is the change in revenue thatresults from a one-unit increase in the

(A) variable input(B) variable input price(C) output level(D) output price(E) fixed cost

19. In the short run, if the product price of aperfectly competitive firm is less than theminimum average variable cost, the firm will

(A) raise its price(B) increase its output(C) decrease its output slightly but increase its

profit margin(D) incur larger losses by continuing to produce

than by shutting down(E) incur smaller losses by continuing to

produce than by shutting down

20. Suppose that each business needs a license tooperate in a city. The license fee increases from$400 per year to $500 per year. What effect willthis increase have on a firm’s short-run costs?

MarginalCost

AverageTotal Cost

AverageVariable Cost

(A) Increase Increase Increase(B) Increase Increase No effect(C) No effect No effect No effect(D) No effect Increase Increase(E) No effect Increase No effect

21. Which of the following statements is true ofperfectly competitive firms in long-runequilibrium?

(A) Firm revenues will decrease if production isincreased.

(B) Total firm revenues are at a maximum.(C) Average fixed cost equals marginal cost.(D) Average total cost is at a minimum.(E) Average variable cost is greater than

marginal cost.

22. If an industry has been dumping its toxic wastefree of charge into a river, government action toensure a more efficient use of resources wouldhave which of the following effects on theindustry’s output and product price?

Output Price

(A) Decrease Decrease(B) Decrease Increase(C) Increase Decrease(D) Increase Increase(E) Increase No change

23. Assume that a perfectly competitive industry isin long-run equilibrium. A permanent increase indemand will eventually result in

(A) a decrease in demand because the price willincrease and people will buy less of theoutput

(B) a decrease in supply because the rate ofoutput and the associated cost will bothincrease

(C) an increase in price but no increase in output(D) an increase in output(E) a permanent shortage, since the quantity

demanded is now greater than the quantitysupplied

11


24. Economists are critical of monopoliesprincipally because monopolies

(A) gain too much political influence(B) are able to avoid paying their fair share of

taxes(C) are unfair to low-income consumers(D) lead to an inefficient use of productive

resources(E) cause international political tension by

competing with one another overseas forsupplies of raw materials

25. Which of the following statements must be truein a perfectly competitive market?

(A) A firm’s marginal revenue equals price.(B) A firm’s average total cost is above price

in the long run.(C) A firm’s average fixed cost rises in the

short run.(D) A firm’s average variable cost is higher

than price in the long run.(E) Large firms have lower total costs than

small firms.

26. A perfectly competitive firm produces in anindustry whose product sells at a market priceof $100. At the firm’s current rate of production,marginal cost is increasing and is equal to $110.To maximize its profits, the firm should changeits output and price in which of the followingways?

Output Price

(A) Decrease Increase(B) Decrease No change(C) No change Increase(D) Increase No change(E) Increase Decrease

27. The typical firm in a monopolisticallycompetitive industry earns zero economic profitin long-run equilibrium because

(A) advertising costs make monopolisticcompetition a high-cost market structurerather than a low-cost market structure

(B) there are no close substitutes for each firm’sproduct

(C) there are no significant restrictions onentering or exiting the industry

(D) the firms in the industry are unable toengage in product differentiation

(E) the firms in the industry do not operate at theminimum point on their long-run averagecost curves

28. In the long run, compared with a perfectlycompetitive firm, a monopolistically competitivefirm with the same costs will have

(A) a higher price and higher output(B) a higher price and lower output(C) a lower price and higher output(D) a lower price and lower output(E) the same price and lower output

29. Which of the following describes what willhappen to market price and quantity if firms inan oligopolistic market form a cartel?

Price Quantity

(A) Decrease Decrease(B) Decrease Increase(C) Increase Increase(D) Increase Decrease(E) Increase No change

12


30. The diagram above depicts cost and revenuecurves for a firm. What are the firm’sprofit-maximizing output and price?

Output Price

(A) Q1 P1

(B) Q4 P2

(C) Q3 P3

(D) Q2 P4

(E) Q1 P5

31. Imperfectly competitive firms may beallocatively inefficient because they produceat a level of output such that

(A) average cost is at a minimum(B) marginal revenue is greater than marginal

cost(C) price equals marginal revenue(D) price equals marginal cost(E) price is greater than marginal cost

32. In a market economy, public goods are unlikelyto be provided in sufficient quantity by theprivate sector because

(A) private firms are less efficient at producingpublic goods than is the government

(B) the use of public goods cannot be withheldfrom those who do not pay for them

(C) consumers lack information about thebenefits of public goods

(D) consumers do not value public goods highlyenough for firms to produce them profitably

(E) public goods are inherently too important tobe left to private firms to produce

33. Assume that both input and product markets arecompetitive. If capital is fixed and the productprice increases, in the short run firms willincrease production by increasing

(A) capital until marginal revenue equals theproduct price

(B) capital until the average product of capitalequals the price of capital

(C) labor until the value of the marginal productof labor equals the wage rate

(D) labor until the marginal product of laborequals the wage rate

(E) labor until the ratio of product price to themarginal product of labor equals the wagerate

13


34. In which of the following ways does the UnitedStates government currently intervene in theworking of the market economy?

I. It specifies the amount of goods andservices businesses must produce.

II. It regulates the private sector in an effort toachieve a more efficient allocation ofresources.

III. It redistributes income through taxation andpublic expenditures.

(A) I only(B) II only(C) III only(D) II and III only(E) I, II, and III

35. If hiring an additional worker would increase afirm’s total cost by less than it would increase itstotal revenue, the firm should

(A) not hire that worker(B) hire that worker(C) hire that worker only if another worker

leaves or is fired(D) hire that worker only if the worker can raise

the firm’s productivity(E) reduce the number of workers employed by

that firm

36. If a firm wants to produce a given amount ofoutput at the lowest possible cost, it should useresources in such a manner that

(A) it uses relatively more of the less expensiveresource

(B) it uses relatively more of the resource withthe highest marginal product

(C) each resource has just reached the point ofdiminishing marginal returns

(D) the marginal products of each resource areequal

(E) the marginal products per dollar spent oneach resource are equal

37. If the firms in an industry pollute theenvironment and are not charged for thepollution, which of the following is true from thestandpoint of the efficient use of resources?

(A) Too much of the industry’s product isproduced, and the price of the product ishigher than the marginal social cost.

(B) Too much of the industry’s product isproduced, and the price of the product islower than the marginal social cost.

(C) Too little of the industry’s product isproduced, and the price of the product ishigher than the marginal social cost.

(D) Too little of the industry’s product isproduced, and the price of the product islower than the marginal social cost.

(E) The industry is a monopoly.

38. Using equal amounts of resources, Country Acan produce either 30 tons of mangoes or 10 tonsof bananas, and Country B can produce either10 tons of mangoes or 6 tons of bananas. Whichof the following relationships is consistent withthe information above?

(A) Country A Comparative advantage inproduction of mangoesCountry B Comparative advantage inproduction of bananas

(B) Country A Comparative advantage inproduction of bananasCountry B Comparative advantage inproduction of mangoes

(C) Country A Absolute advantage inproduction of mangoesCountry B Absolute advantage inproduction of bananas

(D) Country A Absolute advantage inproduction of bananasCountry B Absolute advantage inproduction of mangoes

(E) Country A Comparative advantage inproduction of bananasCountry B Absolute advantage inproduction of mangoes

14


39. The graph above shows the market forchocolates. Suppose that the governmentimposes a price floor equal to 0H. After theimplementation of the price floor, consumersurplus in this market will be equal to

(A) ABH(B) ACI(C) AE0(D) 0CE(E) 0IC

40. A firm in monopolistic competition CANNOTdo which of the following?

(A) Earn short-run profits(B) Advertise its product(C) Prevent new firms from entering the market(D) Compete by its choice of location(E) Set the price for its product

41. Which of the following is a necessary conditionfor a firm to engage in price discrimination?

(A) The firm faces a highly elastic demand.(B) The firm is able to set its own price.(C) The firm is maximizing its revenue.(D) Buyers are only concerned about product

quality.(E) Buyers are not fully informed about price.

42. Which of the following is true if total utility ismaximized?

(A) Marginal utility is equal to zero.(B) Marginal utility is positive.(C) Marginal utility is negative.(D) Average utility is maximized.(E) Average utility is minimized.

43. If the cross-price elasticity of demand betweengood A and good B is negative, then good A andgood B are

(A) substitutes(B) complements(C) unrelated(D) in high demand(E) in low demand

44. Assume that a firm in a certain industry hires itsworkers in a perfectly competitive labor market.As the firm hires additional workers, themarginal factor cost is

(A) decreasing steadily(B) increasing steadily(C) constant(D) decreasing at first, then increasing(E) increasing at first, then decreasing

45. A profit-maximizing monopolist will hire aninput up to the point at which

(A) marginal factor cost equals marginal revenueproduct

(B) marginal factor cost equals marginal revenue(C) average factor cost equals average revenue

product(D) average factor cost equals value of the

marginal product(E) average revenue equals marginal revenue

15


46. The pay-off matrix above gives the profitsassociated with the strategic choices of twooligopolistic firms. The first entry in each cell isthe profit to Firm A and the second to Firm B.Suppose that Firm A and Firm B agree to restrictoutput but have no power to enforce thatagreement. In the long run, each firm will mostlikely earn which of the following profits?

Firm A Firm B

(A) $10 $80(B) $30 $30(C) $50 $50(D) $80 $10(E) $80 $80

47. Suppose that the natural monopolist whose costand revenue curves are depicted above is subjectto government regulation. If the government’sobjective is to make this monopoly produce thesocially optimal level of output, it should setprice equal to

(A) P1

(B) P2

(C) P3

(D) P4

(E) P5

48. A production possibilities curve can be used toshow which of the following?

(A) Absence of trade-offs in the production ofgoods

(B) The limits on production due to scarcity ofresources

(C) The amount of investment spendingnecessary to reach full employment

(D) The labor-force participation rate(E) The average productivity of resources

Firm B’s ChoiceDo not

Restrict ResrictOutput Output

Firm A’sRestrict

$50, $50 $10, $80

Choice Output

Do notRestrict $80, $10 $30, $30Output

16


49. The total cost of producing 200 pumpkins is$2,400, and the total variable cost is $1,400. Theaverage fixed cost of producing 200 pumpkins is

(A) $1,200(B) $1,000(C) $ 12(D) $ 7(E) $ 5

50. Which of the following will cause the supply ofchocolate to increase?

(A) An increase in the price of cocoa butter, aby-product of the production of chocolate

(B) An increase in the price of chocolate(C) An increase in the price of cocoa beans, a

major input in the production of chocolate(D) A decrease in the price of butterscotch, a

substitute for chocolate(E) An effective price ceiling in the market for

chocolate

51. In long-run equilibrium, the price charged by amonopolistically competitive firm is

(A) greater than its average total cost but equalto its marginal cost

(B) less than its average total cost but equal to itsmarginal cost

(C) equal to its average total cost but less than itsmarginal cost

(D) equal to its average revenue but less than itsaverage total cost

(E) equal to its average total cost but greaterthan its marginal cost

52. Economists call a firm’s demand for labor aderived demand because

(A) the number of workers hired depends mainlyon the demand for the product the workersproduce

(B) workers must be at least sixteen years oldbefore they are considered part of the laborforce

(C) workers need the salaries they receive fromfirms to demand goods and services

(D) the federal government taxes workers toderive revenues needed to finance its budget

(E) the firm needs skilled workers to operate itsequipment

53. The imposition of an excise tax by thegovernment caused the shift of supply curveshown in the diagram above. Which area on thediagram represents the deadweight loss causedby the tax?

(A) UWX(B) VWX(C) RSXW(D) STUV(E) UXZY

Y Z0 QUANTITY

TS

R

PR

ICE

W

V X

U

Demand

Tax

Supply After Tax

Supply Before Tax

17


54. Which of the following causes an increase in thedemand for labor?

(A) An increase in the wage rate(B) An increase in the price of the good that

labor is producing(C) A decrease in the marginal product of labor(D) A decrease in the demand for the good that

labor is producing(E) A decrease in the price of capital, a

substitute for labor

55. According to the law of demand, which of thefollowing increases as the price of a gooddecreases?

(A) The quantity demanded of the good(B) The demand for the good(C) The quantity demanded of a substitute good(D) The demand for a substitute good(E) The price of a substitute good

56. Which of the following is true of a pure publicgood?

(A) The government provides it at zero cost.(B) Nonpaying users can be excluded from

consuming it.(C) People willingly reveal their true preference

for it.(D) It is difficult to determine a person’s

marginal valuation of it.(E) One person’s consumption of it reduces its

availability to others.

57. Average total cost is equal to the sum of

(A) total fixed cost and total variable cost(B) marginal cost and average fixed cost(C) average fixed cost and average variable cost(D) marginal cost and average variable cost(E) marginal cost, average fixed cost, and

average variable cost

58. Compared to a perfectly competitive industry, aprofit-maximizing monopoly with identical costsof production will produce

(A) a lower quantity of output and charge ahigher price

(B) a higher quantity of output and charge alower price

(C) a lower quantity of output and charge alower price

(D) a higher quantity of output and charge ahigher price

(E) the same quantity of output and charge ahigher price

59. A production possibilities curve is typicallybowed outward because of the

(A) law of demand(B) law of increasing opportunity costs(C) substitution effect(D) income effect(E) principle of comparative advantage

60. A firm is currently producing at a level of outputwhere marginal cost is increasing and greaterthan average variable cost, and marginal revenueis greater than marginal cost. To maximizeprofits, this firm should

(A) decrease output(B) increase output(C) maintain its current output level(D) shut down(E) increase its price

18


Questions 61 and 62 refer to a firm’s productionfunction given in the table below. Assume that thefirm uses labor as the only variable input to produceits output.

Number ofWorkers Hired

Output per Day(units)

0 01 152 323 424 505 55

61. If the market wage rate is constant no matterhow many workers are hired, the marginal costof the firm is at a minimum after the

(A) first worker is hired(B) second worker is hired(C) third worker is hired(D) fourth worker is hired(E) fifth worker is hired

62. If the total fixed cost is $50 and each workerreceives a wage of $100 per day, then the totalcost and the average variable cost of producing50 units of output are which of the following?

Total Cost Average Variable Cost

(A) $550 $10(B) $500 $ 8(C) $450 $ 8(D) $400 $10(E) $150 $ 2

Questions 63 and 64 refer to the graph below,which shows the cost and output of a perfectlycompetitive firm.

63. If the market price is P4, the production of whichoutput level will maximize the firm’s profit?

(A) Q1

(B) Q2

(C) Q3

(D) Q4

(E) 0

64. If the market price is P2, then which of thefollowing is true?

(A) The firm will earn positive economic profits.(B) The firm will shut down and exit the

industry in the short run.(C) The firm will be in long-run equilibrium.(D) The firm will operate at a loss and continue

to produce in the short run.(E) The firm will lower its price to increase sales

and profit.

19


65. Suppose that the price elasticity of demand forgasoline is –0.1 in the short run and –0.6 in thelong run. If the price of gasoline increases by60 percent, which of the following shows thepercentage change in the quantity demanded ofgasoline in the short run and in the long run?

In the Short Run In the Long Run

(A) Increases by 10% Increases by 60%(B) Increases by 6% Decreases by 36%(C) Decreases by 6% Decreases by 6%(D) Decreases by 6% Decreases by 36%(E) Decreases by 10% Decreases by 60%

Quantityof X

MarginalUtility of X

Quantityof Y

MarginalUtility of Y

1 16 1 402 12 2 243 10 3 164 8 4 125 6 5 86 4 6 4

66. The table above shows the marginal utilities inutils that Samantha receives from purchasinggood X and good Y each week. The price ofgood X is $2 per unit, and the price of good Y is$4 per unit. Samantha has an income of $26 perweek, and she spends it all on the two goodseach week.

If Samantha maximizes her utility, whatcombination of good X and good Y will shepurchase?

Good X Good Y

(A) 1 6(B) 2 4(C) 3 5(D) 5 4(E) 6 5

67. If a firm experiences economies of scale inproduction, its long-run average total cost curve

(A) rises as output increases(B) falls as output increases(C) is horizontal(D) is the same as its marginal cost curve(E) lies above the short-run average total cost

curve

68. A perfectly competitive firm’s short-run supplycurve is

(A) downward sloping(B) horizontal at the market price(C) the rising portion of its average variable cost

curve above its marginal cost curve(D) the rising portion of its average total cost

curve above its marginal cost curve(E) the rising portion of its marginal cost curve

above its average variable cost curve

69. Which of the following is true of a firm’saverage fixed cost?

(A) It remains constant as output producedincreases.

(B) It increases as output produced increases.(C) It decreases at first, and then it increases as

output produced increases.(D) It decreases continuously as output produced

increases.(E) It is zero if the firm shuts down in the short

run.

70. The Lorenz curve is a useful device for studying

(A) the extent of poverty in an economy(B) inequality in the distribution of income(C) the extent of job losses because of free trade(D) the opportunity cost of investing in human

capital(E) settlement patterns of families in a

geographic region

20


71. Suppose that the government decides to impose a10 percent excise tax on all sugar-based softdrinks. Under which of the following scenarioswill buyers pay the LEAST amount of this tax?

Demand Supply

(A) Elastic Elastic(B) Elastic Inelastic(C) Perfectly inelastic Perfectly elastic(D) Inelastic Elastic(E) Inelastic Inelastic

72. If a nationwide automobile workers’ unionsuccessfully negotiates for a wage increase in itsnew labor contract, this will most likely cause

(A) the demand curve for automobiles to shift tothe left

(B) the demand curve for automobiles to shift tothe right

(C) the equilibrium price of automobiles to fall(D) the equilibrium price of automobiles to rise(E) the supply curve for automobiles to shift to

the right

73. If negative externalities exist in an industry whenproducing a good, which of the following mustbe true?

(A) Firms in the industry can earn only normalprofits.

(B) The industry underallocates resources to theproduction of the good.

(C) Firms in the industry ignore their marginalprivate costs in choosing their output levels.

(D) The market price fails to reflect the full costof production.

(E) The industry needs a government subsidy toproduce the efficient level of output.

Output Total Cost0 2001 3002 4103 5304 6605 8006 950

74. Given the information in the table above, whatare the average fixed cost and average variablecost for 4 units of output?

(A) The average fixed cost is 200 and theaverage variable cost is 165.

(B) The average fixed cost is 200 and theaverage variable cost is 115.

(C) The average fixed cost is 50 and the averagevariable cost is 115.

(D) The average fixed cost is 50 and the averagevariable cost is 165.

(E) They cannot be determined from theinformation given.

Output Quantity of Labor0 0

10 119 227 334 440 5

75. The table above shows output levels andcorresponding quantities of labor for a perfectlycompetitive firm. What is the marginal physicalproduct of the fifth worker?

(A) 5(B) 6(C) 7(D) 8(E) 40

21


Study Resources

Most textbooks used in college-level introductorymicroeconomics courses cover the topics in theoutline given earlier, but the approaches to certaintopics and the emphases given to them may differ.To prepare for the Principles of Microeconomicsexam, it is advisable to study one or more collegetextbooks, which can be found in most collegebookstores. When selecting a textbook, check thetable of contents against the knowledge and skillsrequired for this test.

There are many introductory economics textbooksthat vary greatly in difficulty. Most books arepublished in one-volume editions, which cover bothmicroeconomics and macroeconomics; some arepublished in two-volume editions, with one volumecovering macroeconomics and the othermicroeconomics. A companion studyguide/workbook is available for most textbooks.The study guides typically include brief reviews,definitions of key concepts, problem sets andmultiple-choice test questions with answers. Manypublishers also make available companion websites,links to other online resources, or computer-assistedlearning packages.

To broaden your knowledge of economic issues,you may read relevant articles published in theeconomics periodicals that are available in mostcollege libraries — for example, The Economist,The Wall Street Journal and the New York Times,along with local papers, may also enhance yourunderstanding of economic issues.

Visit www.collegeboard.org/clepprep for additionalmicroeconomics resources. You can also findsuggestions for exam preparation in Chapter IV ofthe Official Study Guide. In addition, many collegefaculty post their course materials on their schools’websites.

Answer Key

1. A 2. E 3. A 4. D 5. C 6. D 7. E 8. B 9. C 10. E 11. A 12. A 13. E 14. D 15. D 16. B 17. C 18. C 19. D 20. E 21. D 22. B 23. D 24. D 25. A 26. B 27. C 28. B 29. D 30. E 31. E 32. B 33. C 34. D 35. B 36. E 37. B 38. A

39. A 40. C 41. B 42. A 43. B 44. C 45. A 46. B 47. B 48. B 49. E 50. A 51. E 52. A 53. A 54. B 55. A 56. D 57. C 58. A 59. B 60. B 61. B 62. C 63. C 64. D 65. D 66. D 67. B 68. E 69. D 70. B 71. B 72. D 73. D 74. C 75. B

22


Test Measurement Overview

Format

There are multiple forms of the computer-basedtest, each containing a predetermined set of scoredquestions. The examinations are not adaptive. Theremay be some overlap between different forms of atest: any of the forms may have a few questions,many questions, or no questions in common. Someoverlap may be necessary for statistical reasons.

In the computer-based test, not all questionscontribute to the candidate’s score. Some of thequestions presented to the candidate are beingpretested for use in future editions of the tests andwill not count toward his or her score.

Scoring Information

CLEP examinations are scored without a penalty forincorrect guessing. The candidate’s raw score is simplythe number of questions answered correctly. However,this raw score is not reported; the raw scores aretranslated into a scaled score by a process that adjustsfor differences in the difficulty of the questions on thevarious forms of the test.

Scaled Scores

The scaled scores are reported on a scale of 20–80.Because the different forms of the tests are notalways exactly equal in difficulty, raw-to-scaleconversions may in some cases differ from form toform. The easier a form is judged to be, the higherthe raw score required to attain a given scaled score.Table 1 indicates the relationship between numbercorrect (raw score) and scaled score across all forms.

The Recommended Credit-GrantingScore

Table 1 also indicates the recommendedcredit-granting score, which represents theperformance of students earning a grade of C in thecorresponding course. The recommended B-levelscore represents B-level performance in equivalentcourse work. These scores were established as theresult of a Standard Setting Study, the most recenthaving been conducted in 2005. The recommendedcredit-granting scores are based upon the judgmentsof a panel of experts currently teaching equivalent

courses at various colleges and universities. Theseexperts evaluate each question in order to determinethe raw scores that would correspond to B and Clevels of performance. Their judgments are thenreviewed by a test development committee, which, inconsultation with test content and psychometricspecialists, makes a final determination. Thestandard-setting study is described more fully in theearlier section entitled “CLEP Credit Granting” onpage 4.

Panel members participating in the most recent studywere:

Stephen Baker Capital UniversityRichard Brunelle Fitchburg State CollegeCharles Callahan SUNY BrockportKelly Chaston Davidson CollegePaul Copley Lewis and Clark CollegeGeorge Davis Lincoln Memorial UniversityEric Dodge Hanover CollegeAbdelaziz Farah SUNY OrangeTammy Feldman Carleton CollegePatricia Herrmann Coastal Bend CollegeMiren Ivankovic Southern Wesleyan UniversityJean Kiekel McPherson CollegeMichael Kimmitt University of Hawaii at ManoaAndrew Kohen James Madison UniversityJessica McCraw Texas Christian UniversityDiego Mendez-

CarbajIllinois Wesleyan University

Lawrence Moore Potomac State CollegeOdili Onianwa Alabama A & M UniversityGregory Rabb Jamestown Community CollegeDenise Robson University of Wisconsin —

OshkoshPamela Schmitt U.S. Naval AcademyKristin Vangaasbeck California State University —

Sacramento

To establish the exact correspondences between rawand scaled scores, a scaled score of 50 is assigned tothe raw score that corresponds to the recommendedcredit-granting score for C-level performance. Thena high (but in some cases, possibly less than perfect)raw score will be selected and assigned a scaledscore of 80. These two points — 50 and 80 —determine a linear raw-to-scale conversion for thetest.

23

Table 1: Principles of Microeconomics Interpretive Score Data

American Council on Education (ACE) Recommended Number of Semester Hours of Credit: 3

Course Grade Scaled Score Number Correct80 7079 6978 6877 6776 6675 6574 6473 6372 6271 6170 6069 5968 5867 5766 5665 55

B 64 5463 5362 5261 5160 5059 4958 4857 4756 4655 4554 4453 43-4452 42-4351 41-42

C 50* 40-4149 39-4048 38-3947 37-3846 36-3745 35-3644 34-3543 33-3442 32-3341 31-3240 30-3139 29-3038 28-2937 27-2836 26-2735 25-2634 24-2533 23-2432 22-2331 21-2230 20-2129 19-2028 18-1927 17-1826 16-1725 14-1624 13-1523 12-1422 12-1321 11-1220 0-11

*Credit-granting score recommended by ACE.Note: The number-correct scores for each scaled score on different forms may vary depending on form diffi culty.

24


Validity

Validity is a characteristic of a particular use of thetest scores of a group of examinees. If the scores areused to make inferences about the examinees’knowledge of a particular subject, the validity of thescores for that purpose is the extent to which thoseinferences can be trusted to be accurate.

One type of evidence for the validity of test scores iscalled content-related evidence of validity. It isusually based upon the judgments of a set of expertswho evaluate the extent to which the content of thetest is appropriate for the inferences to be madeabout the examinees’ knowledge. The committeethat developed the CLEP Principles ofMicroeconomics examination selected the content ofthe test to reflect the content of the generalPrinciples of Microeconomics curriculum andcourses at most colleges, as determined by acurriculum survey. Since colleges differ somewhat inthe content of the courses they offer, facultymembers should, and are urged to, review thecontent outline and the sample questions to ensurethat the test covers core content appropriate to thecourses at their college.

Another type of evidence for test-score validity iscalled criterion-related evidence of validity. Itconsists of statistical evidence that examinees whoscore high on the test also do well on other measuresof the knowledge or skills the test is being used tomeasure. Criterion-related evidence for the validityof CLEP scores can be obtained by studiescomparing students’ CLEP scores with the gradesthey received in corresponding classes, or othermeasures of achievement or ability. At a college’srequest, CLEP and the College Board conduct thesestudies, called Admitted Class Evaluation Service, orACES, for individual colleges that meet certaincriteria. Please contact CLEP for more information.

Reliability

The reliability of the test scores of a group ofexaminees is commonly described by two statistics:the reliability coefficient and the standard error ofmeasurement (SEM). The reliability coefficient isthe correlation between the scores those examineesget (or would get) on two independent replicationsof the measurement process. The reliabilitycoefficient is intended to indicate thestability/consistency of the candidates’ test scores,and is often expressed as a number ranging from.00 to 1.00. A value of .00 indicates total lack ofstability, while a value of 1.00 indicates perfectstability. The reliability coefficient can be interpretedas the correlation between the scores examineeswould earn on two forms of the test that had noquestions in common.

Statisticians use an internal-consistency measure tocalculate the reliability coefficients for the CLEPexam. This involves looking at the statisticalrelationships among responses to individualmultiple-choice questions to estimate the reliabilityof the total test score. The formula used is known asKuder-Richardson 20, or KR-20, which is equivalentto a more general formula called coefficient alpha.The SEM is an index of the extent to which students’obtained scores tend to vary from their true scores.1

It is expressed in score units of the test. Intervalsextending one standard error above and below thetrue score (see below) for a test-taker will include68 percent of that test-taker’s obtained scores.Similarly, intervals extending two standard errorsabove and below the true score will include 95 percentof the test-taker’s obtained scores. The standard errorof measurement is inversely related to the reliabilitycoefficient. If the reliability of the test were 1.00 (ifit perfectly measured the candidate’s knowledge),the standard error of measurement would be zero.

Scores on the CLEP examination in Principles ofMicroeconomics are estimated to have a reliabilitycoefficient of 0.89. The standard error of measurementis 2.81 scaled-score points.1 True score is a hypothetical concept indicating what an individual’s score on a

test would be if there were no errors introduced by the measuring process. It isthought of as the hypothetical average of an infinite number of obtained scoresfor a test-taker with the effect of practice removed.

89771-007758 • PDF911

Documents

Principles of Microeconomics CLEP PDF